<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 28, 1996
REGISTRATION NO. 33-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-14
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
[X]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. [_]
(Check appropriate box or boxes)
----------------
PRUDENTIAL WORLD FUND, INC.
(FORMERLY PRUDENTIAL GLOBAL FUND, INC.)
(Exact name of registrant as specified in charter)
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292-1025
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 214-1250
S. JANE ROSE, ESQ.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(Name and Address of Agent for Service of Process)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE ON JULY 29, 1996
PURSUANT TO RULE 488 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
NO FILING FEE IS REQUIRED BECAUSE, PURSUANT TO RULE 24F-2 UNDER THE
INVESTMENT COMPANY ACT OF 1940, REGISTRANT PREVIOUSLY HAS REGISTERED AN
INDEFINITE NUMBER OF SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE,
PURSUANT TO A REGISTRATION STATEMENT ON FORM N-1A (FILE NO. 2-89725). THE
REGISTRANT WILL FILE A NOTICE UNDER RULE 24F-2 FOR ITS FISCAL YEAR ENDING
OCTOBER 31, 1996 ON OR ABOUT DECEMBER 30, 1996.
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<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 481(A) UNDER THE SECURITIES ACT OF 1933)
<TABLE>
<CAPTION>
N-14 ITEM NO. PROSPECTUS/PROXY
AND CAPTION STATEMENT CAPTION
------------- -----------------
PART A
<C> <S> <C>
Item 1. Beginning of Registration Statement
and Outside Front Cover Page of
Prospectus.......................... Cover Page
Item 2. Beginning and Outside Back Cover
Page of Prospectus.................. Table of Contents
Item 3. Fee Table, Synopsis Information and
Risk Factors........................ Synopsis; Principal Risk
Factors
Item 4. Information about the Transaction... Synopsis; The Proposed
Transaction
Item 5. Information about the Registrant.... Synopsis; Special Meeting of
the World Fund Shareholders;
Information about World Fund;
Miscellaneous
Item 6. Information about the Company Being
Acquired............................ Synopsis; Information about
International
Stock Fund; Miscellaneous
Item 7. Voting Information.................. Synopsis; Voting Information
Item 8. Interest of Certain Persons and
Experts............................. Synopsis; Miscellaneous
Item 9. Additional Information Required for
Reoffering by Persons Deemed to be
Underwriters........................ Not Applicable
PART B STATEMENT OF ADDITIONAL
INFORMATION CAPTION
-----------------------
Item 10. Cover Page.......................... Cover Page
Item 11. Table of Contents................... Cover Page
Item 12. Additional Information about the
Registrant.......................... Preliminary Statement of
Additional Information of
Prudential World Fund, Inc. as
filed with the SEC on June ,
1996
Item 13. Additional Information about the
Company Being Acquired.............. Not Applicable
Item 14. Financial Statements................ Financial statements as noted
in the Statement of Additional
Information
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C of this Registration Statement.
<PAGE>
PRELIMINARY COPY
THE PRUDENTIAL INSTITUTIONAL FUND--INTERNATIONAL STOCK FUND
21 PRUDENTIAL PLAZA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
----------------
To Our Shareholders:
Notice is hereby given that a Special Meeting of Shareholders (Meeting) of
the International Stock Fund (International Stock Fund), a portfolio of The
Prudential Institutional Fund, will be held at 9:00 a.m., eastern time, on
September 6, 1996, at Prudential Plaza, 751 Broad Street, Newark, New Jersey
07102-3777, for the following purposes:
1. To approve an Agreement and Plan of Conversion and Liquidation whereby
all of the assets of International Stock Fund will be transferred to the
International Stock Series of Prudential World Fund, Inc. (International
Stock Series) in exchange solely for Class Z shares of International Stock
Series and International Stock Series's assumption of all of the
liabilities, if any, of International Stock Fund; and
2. To consider and act upon any other business as may properly come
before the Meeting or any adjournment thereof.
Only holders of shares of beneficial interest of International Stock Fund of
record at the close of business on July 12, 1996, are entitled to notice of
and to vote at this Meeting or any adjournment thereof.
S. Jane Rose
Secretary
Dated: July , 1996
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE SIGN AND PROMPTLY
RETURN THE ENCLOSED PROXY IN THE ENCLOSED STAMPED SELF-ADDRESSED ENVELOPE.
IN ORDER TO AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE ASK
YOUR COOPERATION IN MAILING IN YOUR PROXY PROMPTLY.
<PAGE>
PRUDENTIAL WORLD FUND, INC.--INTERNATIONAL STOCK SERIES
PROSPECTUS
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292-1025
(800) 225-1852
AND
THE PRUDENTIAL INSTITUTIONAL FUND--INTERNATIONAL STOCK FUND
PROXY STATEMENT
21 PRUDENTIAL PLAZA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
(800) 225-1852
----------------
The Prudential Institutional Fund (PIF) is an open-end, diversified
management investment company consisting of seven separate portfolios, one of
which is the International Stock Fund (International Stock Fund). Prudential
World Fund, Inc. (World Fund) also is registered as an open-end, diversified
management investment company and consists of two series, one of which is the
newly created International Stock Series (the Portfolio). Both PIF and World
Fund are managed by indirect wholly owned subsidiaries of The Prudential
Insurance Company of America. International Stock Fund is managed by
Prudential Institutional Fund Management, Inc. World Fund is managed by
Prudential Mutual Fund Management, Inc. The Portfolio presently holds no
portfolio securities and has not yet begun investment operations. If approved
by the International Stock Fund shareholders, and pending the issuance of an
exemptive order from the Securities and Exchange Commission (SEC), the
Portfolio will acquire the International Stock Fund's assets and assume its
liabilities and will adopt the investment objective and policies of the
International Stock Fund. The International Stock Fund seeks to achieve long-
term growth of capital through investment in equity securities of foreign
companies. Income is a secondary objective.
This Prospectus and Proxy Statement is being furnished to shareholders of
International Stock Fund in connection with the solicitation of proxies by
PIF's Board of Trustees for use at a special meeting of International Stock
Fund Shareholders to be held on September 6, 1996, at 9:00 a.m., eastern time,
and at any adjournment thereof (Meeting). The primary purpose of the Meeting
is to vote on an Agreement and Plan of Conversion and Liquidation (the Plan),
whereby the Portfolio will acquire all of the assets of International Stock
Fund and assume all of the liabilities, if any, of International Stock Fund.
If the Plan is approved by International Stock Fund's shareholders, all such
shareholders will be issued Class Z shares of the Portfolio in exchange for
the shares of International Stock Fund held by them, and International Stock
Fund will be liquidated.
This Prospectus and Proxy Statement sets forth concisely information about
the Portfolio that prospective investors should know before investing. A
Statement of Additional Information (SAI), dated July 22, 1996, relating to
the Plan has been filed with the SEC and is incorporated herein by reference.
The Preliminary Prospectus and SAI of the Portfolio, each dated June , 1996,
have been filed with the SEC and are incorporated herein by reference. A
Prospectus of PIF dated February 1, 1996, including a May 30, 1996 Supplement
thereto, and an SAI for PIF dated February 1, 1996, also have been filed with
the SEC and are incorporated by reference herein. The Portfolio's Preliminary
SAI is available without change upon written request to World Fund at the
address or toll-free number shown above. The PIF Prospectus and SAI are
available without charge upon request to PIF at the address or toll-free
number shown above.
Investors are advised to read and retain this Prospectus and Proxy Statement
for future reference.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Prospectus and Proxy Statement is July , 1996.
<PAGE>
PRUDENTIAL WORLD FUND, INC.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292-1025
THE PRUDENTIAL INSTITUTIONAL FUND
21 PRUDENTIAL PLAZA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
----------------
PROSPECTUS AND PROXY STATEMENT DATED JULY , 1996
----------------
SYNOPSIS
The following synopsis is a summary of certain information contained
elsewhere in this Prospectus and Proxy Statement and the Agreement and Plan of
Conversion and Liquidation (the Plan) and is qualified by reference to the
more complete information contained herein as well as in the Prospectus of The
Prudential Institutional Fund (PIF)--International Stock Fund (International
Stock Fund) and the Preliminary Prospectus of Prudential World Fund, Inc.
(World Fund)--International Stock Series (the Portfolio). Shareholders should
read the entire Prospectus and Proxy Statement carefully. (The International
Stock Fund and the Portfolio are sometimes referred to herein individually as
a Series and collectively as the Series).
GENERAL
This Prospectus and Proxy Statement is furnished by the Board of Trustees of
PIF in connection with the solicitation of proxies for use at a Special
Meeting of Shareholders of International Stock Fund (the Meeting) to be held
at 9:00 a.m., eastern time, on September 6, 1996 at Prudential Plaza, 751
Broad Street, Newark, New Jersey 07102-3777, PIF's principal executive office.
The purpose of the Meeting is to approve the Plan, pursuant to which all of
the assets of International Stock Fund will be acquired by, and all of the
liabilities of International Stock Fund, if any, will be assumed by, the
Portfolio and to transact such other business as may properly come before the
Meeting or any adjournment thereof. The Plan is attached to this Prospectus
and Proxy Statement as Appendix A. The transactions contemplated by the Plan
are described herein and in summary provide that the Portfolio will acquire
all of International Stock Fund's assets, in exchange solely for Class Z
shares of the Portfolio and the Portfolio's assumption of all of the
liabilities, if any, of International Stock Fund. The Class Z shares of the
Portfolio will thereafter be distributed to the former shareholders of
International Stock Fund and International Stock Fund will liquidate.
Approval of the Plan requires the affirmative vote of a majority of the
shares of International Stock Fund voted at the Meeting, provided a quorum is
present.
THE PROPOSED CONVERSION AND LIQUIDATION
The Board of Trustees of PIF, on behalf of International Stock Fund, and the
Board of Directors of World Fund, on behalf of the Portfolio (each, a Board),
have approved the Plan, which provides for the transfer of all of the assets
of International Stock Fund to the Portfolio in exchange solely for Class Z
shares of the Portfolio and the assumption by the Portfolio of all of the
liabilities, if any, of International Stock Fund. If the Plan is approved by
the International Stock Fund shareholders, and if an order of exemption
(Exemptive Order) from certain provisions of the Investment Company Act of
1940 (the Investment Company Act) is received from the
2
<PAGE>
Securities and Exchange Commission (SEC), Class Z shares of the Portfolio will
be distributed to shareholders of International Stock Fund, and International
Stock Fund will be liquidated. (All of the foregoing transactions are
sometimes referred to herein as the Conversion.) It is expected that the
Conversion will become effective on or about September 20, 1996 (Closing
Date). EACH INTERNATIONAL STOCK FUND SHAREHOLDER WILL RECEIVE THE NUMBER OF
FULL AND FRACTIONAL CLASS Z SHARES OF THE PORTFOLIO (ROUNDED TO THE THIRD
DECIMAL PLACE) EQUAL TO THE NUMBER OF SUCH SHAREHOLDER'S SHARES OF
INTERNATIONAL STOCK FUND AS OF THE CLOSING DATE.
For the reasons set forth below under "--Reasons for the Proposed
Conversion" and "The Proposed Transaction--Reasons for the Conversion," each
Board, including those Trustees/Directors who are not "interested persons" (as
that term is defined in the Investment Company Act) of PIF or World Fund
(Independent Trustees/Directors), has determined that the Conversion is in the
best interests of International Stock Fund and the Portfolio, respectively,
and that the interests of the existing shareholders of International Stock
Fund will not be diluted as a result of the Conversion. ACCORDINGLY, PIF'S
BOARD RECOMMENDS APPROVAL OF THE PLAN.
REASONS FOR THE PROPOSED CONVERSION
The Board of PIF has concluded, based on information presented by
International Stock Fund's manager, Prudential Institutional Fund Management,
Inc. (PIFM), that the Conversion is in the best interests of the International
Stock Fund and its shareholders. The following are among the reasons for the
Conversion.
. THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (PRUDENTIAL) HAS CONSOLIDATED
ITS ASSET MANAGEMENT BUSINESS INTO ONE UNIT, THE MONEY MANAGEMENT GROUP. The
Money Management Group was formed in November 1995 as part of a major
corporate restructuring initiated by Arthur Ryan, Chairman and Chief Executive
Officer of Prudential. All of Prudential's money management businesses are
part of this group, which will develop products and manage assets for all of
Prudential's fee-based, marketable securities businesses, including mutual
funds, annuities, defined contribution and benefit plans, guaranteed products
and retirement administration.
One goal of the Money Management Group is to present one group of mutual
funds to the marketplace, i.e., a "brand" identity. Another goal is to achieve
cost savings. In light of these goals, the Money Management Group undertook a
broad review of the Prudential Mutual Fund Family to see if any changes were
advisable. The consolidation of certain mutual funds that were substantially
similar appeared consistent with attaining the above stated goals, as well as
beneficial to the funds and shareholders involved.
.THE PROPOSED CONVERSION IS SUITABLE FOR EACH SERIES BECAUSE OF THE GREAT
SIMILARITIES BETWEEN THEM. Each is, or will be, a portfolio of an open-end,
diversified management investment company. The Portfolio will be a newly
created series of World Fund, and its operations will be modeled after those
of International Stock Fund. Accordingly, the Portfolio will substantially
mirror the investment objective and policies of International Stock Fund. The
Portfolio has not yet begun investment operations. If the Plan is approved by
the International Stock Fund shareholders, and subject to the issuance of the
Exemptive Order, the Portfolio will acquire all of International Stock Fund's
assets and assume all of its liabilities and will adopt the investment
objective and policies of the International Stock Fund.
3
<PAGE>
Mercator Asset Management, L.P. (Mercator) serves as the subadviser to the
International Stock Fund and will manage the portfolio securities acquired by
the Portfolio from International Stock Fund. Peter F. Spano, the sole
shareholder of a general partner of Mercator, is responsible for the day-to-
day management of the International Stock Fund's portfolio securities. Mr.
Spano has managed the portfolio of the International Stock Fund since its
inception in November 1992 and has been employed as a portfolio manager with
Mercator since its founding in 1984. Prudential Mutual Fund Services, Inc.
(PMFS) serves as transfer agent and dividend disbursing agent to International
Stock Fund and will serve as such to the Portfolio. State Street Bank and
Trust Company serves as Custodian to International Stock Fund and will serve
as such to the Portfolio.
. ALTHOUGH EACH SERIES CURRENTLY INCURS DIFFERENT EXPENSES, PMF BELIEVES
THAT SHOULD THE PROPOSED CONVERSION BE APPROVED, THE TOTAL OPERATING EXPENSES
OF THE PORTFOLIO'S CLASS Z SHARES WILL BE LOWER THAN THE TOTAL OPERATING
EXPENSES CURRENTLY INCURRED BY INTERNATIONAL STOCK FUND. International Stock
Fund was established to meet the needs of institutional investors looking for
long-term growth of capital through investment in equity securities of foreign
companies. The Portfolio was created for the express purpose of acquiring the
assets and assuming the liabilities of International Stock Fund and currently
holds no portfolio securities. Thus, the proposed Conversion will not result
in any immediate economies of scale that would be derived from a merger of two
established and operating securities portfolios. However, the fact that the
Portfolio will offer Class A, Class B, and Class C shares to retail investors,
in addition to the Class Z shares to be offered to shareholders of
International Stock Fund and certain other institutional investors, may result
in a larger asset base and attendant economies of scale. Although Mercator
will manage the portfolio securities of the Portfolio in the same manner that
it currently manages International Stock Fund, the management fee will be
reduced from an annual fee of 1.15% of average daily net assets to 1.00%
thereof. This reduction will bring the Portfolio's management fee into parity
with other mutual funds advised by PMF and also may, result in additional
revenues to Mercator and Prudential Mutual Fund Management, Inc. (PMF) through
growth in the International Stock Fund's assets that might otherwise not have
occurred. See also "The Proposed Transaction--Reasons for the Conversion"
below.
With respect to the International Stock Fund, PIFM has agreed to bear any
expenses, including management fees through September 30, 1996, that would
cause the ratio of total operating expenses payable by International Stock
Fund to exceed 1.60%. As of September 30, 1995, other expenses were .49%, of
which PIFM subsidized .04%. Total operating expenses after such reduction were
1.60%. Estimated total operating expenses for the Class Z shares of the
Portfolio for the fiscal year ending October 31, 1996 are 1.48% of its average
daily net assets.
STRUCTURE OF THE SERIES
PIF is authorized to issue unlimited shares of beneficial interest. Each
share issued with respect to International Stock Fund has a pro rata interest
in its assets and has no interest in the assets of any other series of PIF.
International Stock Fund bears its own liabilities and its proportional share
of the general liabilities of PIF and is not responsible for the liabilities
of any other series of PIF. PIF's Board is empowered by PIF's Declaration of
Trust and By-Laws to establish additional series and classes of shares.
World Fund is authorized to issue one billion shares of common stock, $.01
par value per share, divided into two series. Shares of the Portfolio will be
divided into four classes of shares designated Class A, Class B, Class C, and
Class Z shares. There are 125 million authorized shares allocated to each of
the four classes of shares in each series of the World Fund. Each class of
shares will represent an interest in the same assets of the Portfolio and will
be identical in all respects except that (i) each class will be subject to
different sales charges and distribution and/or service fees (except for Class
Z shares, which will not be subject to any distribution
4
<PAGE>
and/or service fee), which may affect performance, (ii) each class will have
exclusive voting rights on any matter submitted to shareholders that relates
solely to its distribution arrangements and will have separate voting rights
on any matter submitted to shareholders in which the interests of one class
differ from the interests of any other class, (iii) each class will have
different exchange privileges, and (iv) only Class B shares will have a
conversion feature. Since Class B and Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds payable to
shareholders of those classes are likely to be lower than those payable to
Class A shareholders and Class Z shareholders whose shares are not subject to
any distribution and/or service fee. In accordance with World Fund's Articles
of Incorporation and PIF's Declaration of Trust, the Board may authorize the
creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Board may determine. Except for the conversion feature applicable to Class B
shares (which convert to Class A shares after approximately seven years),
there are no conversion, preemptive or other subscription rights. In the event
of liquidation of the Portfolio or International Stock Fund, each share
thereof is entitled to its portion of that Series's assets after all of that
Series's debt and expenses have been paid.
The Board of each Fund may increase or decrease the number of authorized
shares without shareholder approval. Shares of each Series, when issued are
fully paid, non-assessable, fully transferable and redeemable at the option of
the holder. Shares also are redeemable at the option of each Series under
certain circumstances. Neither Series' shares have cumulative voting rights
for the election of Trustees/Directors.
INVESTMENT OBJECTIVES AND POLICIES
International Stock Fund seeks to achieve long-term growth of capital
through investment in equity securities of foreign companies. Income is a
secondary objective. The Portfolio will have an identical investment objective
and substantially identical investment policies to that of International Stock
Fund. For a discussion of these investment objectives and policies, see
"Information about World Fund--Investment Objectives and Policies" provided
below.
CERTAIN DIFFERENCES BETWEEN THE SERIES
While the investment objective of the Portfolio will be identical, and the
investment policies of the Portfolio will be substantially identical, to those
of International Stock Fund, there are a few differences between the Series.
First, although the Portfolio will have the same subadviser as International
Stock Fund, it will have a different manager. PIFM, whose principal business
address is 30 Scranton Office Park, Moosic, Pennsylvania 18507-1789, is
manager of the International Stock Fund. PIFM was incorporated in May 1992
under the laws of the Commonwealth of Pennsylvania and is an indirect wholly
owned subsidiary of Prudential. PMF, whose principal business address is One
Seaport Plaza, New York, New York 10292-1025, will be manager of the
Portfolio. PMF was incorporated in May 1987 under the laws of the State of
Delaware and also is an indirect wholly owned subsidiary of Prudential. As of
June 30, 1996, PMF served as the manager or administrator to investment
companies, including mutual funds, with aggregate assets of approximately
$ billion. If the proposed Conversion is approved, International Stock
Fund's assets would be transferred to the Portfolio and would be managed by
PMF; however, Mercator will continue as subadviser to International Stock
Series and Peter F. Spano will continue as portfolio manager.
Second, the management fee to be paid to PMF by the Portfolio will be .15%
of average daily net assets lower than the management fee currently charged by
PIFM to the International Stock Fund. Pursuant to a
5
<PAGE>
management agreement between PMF and World Fund, the Portfolio will pay an
annualized management fee of 1.00% of its average daily net assets. Pursuant
to the management agreement between PIFM and PIF, the International Stock Fund
currently pays an annualized management fee of 1.15% of its average daily net
assets.
Third, the Portfolio will have different transfer agency and administrative
expenses than International Stock Fund. Pursuant to an agreement with PMF, PIF
currently pays a single, asset-based fee for administrative, transfer agency,
and other services. The Portfolio will have no such agreement with PMF and
will pay no administrative fee. These fees are provided for in the management
agreement between PMF and World Fund. Shareholders of the Portfolio will pay
transfer agency fees pursuant to a transfer agency agreement between World
Fund and PMFS that are different from those borne by shareholders of the
International Stock Fund. Specifically, the Portfolio will pay to PMFS an
annual fee per shareholder account of $9.50, a new account set-up fee for each
manually-established account of $2.00, and a monthly inactive zero balance
account fee per shareholder account of $0.20. PMFS also will be reimbursed for
its out-of-pocket expenses, including postage, stationery, printing, allocable
communications expenses, and other costs. Existing shareholders of
International Stock Fund will not be subject to the $2.00 manual establishment
fee with respect to any account established in connection with the Conversion.
FEES AND EXPENSES
MANAGEMENT FEES. PIFM, the manager of International Stock Fund, is
compensated pursuant to a management agreement with PIF, at an annual rate of
1.15 of 1% of the average daily net assets of International Stock Fund. PMF,
the manager of the Portfolio, is compensated, pursuant to a management
agreement with the World Fund, at an annual rate of 1% of the average daily
net assets of the Portfolio.
Under a subadvisory agreement between PIFM and Mercator, Mercator manages
the portfolio securities of International Stock Fund and is compensated at an
annual rate of .75 of 1% of the average daily net assets of the International
Stock Fund up to and including $50 million, .60 of 1% of the average daily net
assets of the International Stock Fund between $50 million and $300 million
and .45 of 1% of the average daily net assets in excess of $300 million. Under
a separate subadvisory agreement between PMF and Mercator, Mercator will
manage the portfolio securities of the Portfolio and will be compensated at an
annual rate of .75 of 1% of the average daily net assets of the Portfolio up
to and including $50 million and .60 of 1% of the average daily net assets of
the Portfolio in excess of $50 million and up to and including $300 million,
and .45 of 1% of the Portfolio average daily net assets in excess of $300
million. This fee will be computed daily and paid monthly. PIFM and PMF will
continue to have responsibility for all investment advisory services pursuant
to their respective management agreements and supervise Mercator's performance
of its services.
Pursuant to a subadvisory agreement between PMF and The Prudential
Investment Corporation (PIC), PMF has retained PIC to provide investment
advisory services to the Portfolio with respect to (i) the management of
short-term assets, including cash, money market instruments and repurchase
agreements and (ii) the lending of portfolio securities in connection with the
management of the Portfolio. For these services, PMF will reimburse PIC for
reasonable costs and expenses incurred by PIC determined in a manner
acceptable to PMF. PIC is an indirect, wholly owned subsidiary of Prudential.
DISTRIBUTION FEES. Prudential Retirement Services, Inc. (PRSI), 751 Broad
Street, Newark, New Jersey 07102, an affiliate of PIFM and a corporation
organized under the laws of New Jersey, serves at no fee as the distributor of
shares of International Stock Fund.
6
<PAGE>
PSI, One Seaport Plaza, New York, New York 10292, serves as the distributor
of Class Z shares of the Portfolio. PSI is a wholly owned subsidiary of
Prudential and a corporation organized under the laws of the State of
Delaware. No distribution or service fees will be paid to PSI in respect of
the Portfolio's Class Z shares.
ADMINISTRATION FEES. PIF has entered into an administration, transfer agency
and service agreement with PMF, which provides that PMF furnishes to
International Stock Fund such services as International Stock Fund may require
in connection with the administration of its business affairs. Under the
Administration Agreement, PIF pays PMF a monthly fee at an annual rate of .17%
of the average daily net assets of PIF up to $250 million and .15% of its
average daily net assets in excess of $250 million. PMF also provides
International Stock Fund with transfer agent and dividend disbursing services
for no additional fee through its wholly owned subsidiary, Prudential Mutual
Fund Services, Inc., Raritan Plaza One, Edison, New Jersey 08837.
The Portfolio incurs no separate fee for administrative services, but does
use PMFS to furnish transfer agent and dividend disbursing services. PMFS
provides customary transfer agency services to the Portfolio, 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 also is reimbursed for its out-of-pocket
expenses, including postage, stationery, printing, allocable communications
expenses and other costs.
OTHER EXPENSES. Each Series also pays certain other expenses in connection
with its operation, including accounting, custodian, reports to shareholders,
legal, audit and share registration expenses.
FEE WAIVERS AND SUBSIDY. PIFM and PMF each may from time to time waive all
or a portion of its management fee and subsidize all or a portion of the
operating expenses of each Series. Fee waivers and expense subsidies will
increase a Series' yield and total return. Any fee waiver or subsidy may be
terminated at any time without notice, after which a Series' expenses will
increase and its yield and total return will be reduced.
EXPENSE RATIOS. For the fiscal year ended September 30, 1995, total expenses
stated as a percentage of average net assets of International Stock Fund were
1.64% before reduction of expenses by PIFM and 1.60% after reduction of
expenses. PIFM has agreed, until September 30, 1996, to bear any expenses that
would cause the ratio of expenses payable by International Stock Fund to
exceed 1.60%. Expenses paid or assumed by PIFM are subject to recoupment by
PIFM in later years, provided that (a) no recoupment will be made, in any
year, if it would result in International Stock Fund's expense ratio exceeding
1.60% and (b) no recoupment will be made after December 31, 1996.
Estimated total operating expenses for the Portfolio Class Z shares for the
fiscal year ending October 31, 1996 as a percentage of average net assets are
1.48%.
Each Series' Shareholder Transaction Expenses are shown below. Note that the
International Stock Fund and Portfolio Class Z shares Shareholder Transaction
Expenses are the same. There will not be any fee payable in connection with
the Conversion.
<TABLE>
<CAPTION>
INTERNATIONAL STOCK THE PORTFOLIO
FUND CLASS Z SHARES
------------------- --------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load Imposed on Purchases (as
a percentage of offering price)........... None None
Maximum Sales Load or Deferred Sales Load
Imposed on Reinvested Dividends........... None None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)............. None None
Redemption Fees............................ None None
Exchange Fee............................... None None
</TABLE>
7
<PAGE>
Set forth below is a comparison of each Series' operating expenses that, in
the case of International Stock Fund Z shares are for the fiscal year ended
September 30, 1995, and in the case of the Portfolio, are estimated for the
fiscal year ending October 31, 1996. International Stock Fund's other expenses
were .49%, of which PIFM subsidized .04%, thereby reducing the total operating
expenses to 1.60% for the fiscal year ended September 30, 1995. Following the
Conversion, the actual expense ratios of the Portfolio are expected to be
lower than those for the fiscal year ended September 30, 1995 for the
International Stock Fund.
<TABLE>
<CAPTION>
THE PORTFOLIO
ANNUAL SERIES OPERATING INTERNATIONAL -------------
EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS) STOCK FUND CLASS Z
------------------------------------------------ ------------- -------------
<S> <C> <C>
Management Fees................................... 1.15% 1.00%
12b-1 Fees........................................ None None
Other Expenses.................................... .49 .48%(a)
---- ----
Total Fund Operating Expenses (Before Reduction).. 1.64% 1.48%
==== ====
Total Fund Operating Expenses (After Reduction)... 1.60%(b)
====
</TABLE>
- --------
(a) "Other Expenses" include estimated operating expenses of the Class Z
shares of the Portfolio for the fiscal year ending October 31, 1996, such
as Directors' and professional fees, registration fees, reports to
shareholders, transfer agency and custodian (domestic and foreign) fees
(but excludes foreign withholding taxes).
(b) In the interest of limiting the expenses of International Stock Fund, PIFM
has agreed, until September 30, 1996, to bear any expenses that would
cause the ratio of expenses payable by International Stock Fund to exceed
1.60%. Expenses paid or assumed by PIFM are subject to recoupment by PIFM
in later years, provided that (a) no recoupment will be made, in any year,
if it would result in International Stock Fund's expense ratio exceeding
1.60% and (b) no recoupment will be made after December 31, 1996.
Set forth below is an example that shows the expenses that an investor in
the Portfolio's Class Z shares would pay on a $1,000 investment, based upon
the estimated ratios set forth above.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS
- ------- ------ -------
<S> <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: $15 $47
</TABLE>
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 an investor in understanding the various types of
costs and expenses that an investor in the Portfolio will bear, whether
directly or indirectly.
PURCHASES AND REDEMPTIONS
International Stock Fund shares are offered exclusively to retirement
programs and arrangements (Programs) through their plan sponsors, to
individual retirement accounts (IRAs) and to certain institutional investors.
Sponsors of a Program or their agents are referred to as "Program Sponsor(s),"
individual employees participating in a Program are referred to as
"Participant(s)," and individual investors who separate from a Program are
referred to as "Continuing Participant(s)." Endowments, foundations, insurance
companies and other institutional investors are referred to as "Other
Institutional Investors." The term "shareholders" with respect to
International Stock Fund refers to each or all of these categories as well as
to IRAs, as appropriate.
Shares of International Stock Fund may be purchased through a Program
Sponsor's recordkeeper or directly from PMFS. There is no minimum initial
investment requirement and there are no sales charges associated with the
purchase or redemption of International Stock Fund shares. The purchase price
for International Stock Fund
8
<PAGE>
shares is the net asset value per share next determined following acceptance
of a purchase order by the Program Sponsor's recordkeeper or PMFS.
Purchases of Class Z shares of the Portfolio are currently offered
exclusively to Participants in PSI's 401 (k) Plan, on or before the Closing
Date, Class Z shares will be made through PSI Pruco Securities Corporation
(Prusec), an affiliated broker/dealer, or directly from PMFS, at the net asset
value per share next determined after receipt of a purchase order by PMFS,
Prusec or PSI. Class Z shares are available for purchase by (i) pension,
profit sharing or other employee benefit plans qualified under section 401 of
the Internal Revenue Code, deferred compensation and annuity plans under
sections 457 and 403(b)(7) of the Internal Revenue Code, and non-qualified
plans for which the Portfolio is an available option (Benefit Plans), provided
such plans (in combination with other plans sponsored by the same employer or
group of related employers) have at least $50 million in defined contribution
assets or make a single investment in a single Prudential Mutual Fund of $10
million or more, (ii) investors who make a single investment in a single
Prudential Mutual Fund of $10 million or more in a single account (or who have
$10 million or more invested in shares of the Portfolio held in a single
account), (iii) participants in the Fund Advisory Program (a mutual fund
allocation program sponsored by PSI) for which the Portfolio is an available
option, and (iv) investors who are or have executed a letter of intent to
become, stockholders of PIF at the time of the Conversion or who at that time
have exchangeability into PIF. After a Benefit Plan qualifies to purchase
Class Z shares, all subsequent purchases will be for Class Z shares. Other
investors who qualify to purchase Class Z shares by virtue of having made a
single investment of $10 million or more or having accumulated at least $10
million in shares of the Portfolio will continue to so qualify unless the
value of their investments should fall below $10 million due to a redemption.
In such cases, investors may continue to have dividends and other
distributions earned on their remaining Class Z shares automatically
reinvested in Class Z shares. Such investors will not, however, otherwise
qualify to make additional purchases of Class Z shares unless they bring their
total investment in shares of the Portfolio (held in a single account) back to
at least $10 million through a single transaction. There are no sales charges
associated with the purchase or redemption of the Portfolio's Class Z shares.
Shares of each Fund may be redeemed at any time at the net asset value next
determined after the Program Sponsor's recordkeeper in the case of Income
Fund, or PSI or PMFS in the case of the Portfolio, receives the redemption
request in proper form. No sales charges will be imposed in connection with
the Conversion.
EXCHANGE PRIVILEGES
Shareholders of International Stock Fund have an exchange privilege with
other available funds (depending upon the provisions of the Program) by
request through the Program's recordkeeper at the net asset value next
determined after receipt by PMFS or the Program Sponsor's recordkeeper of an
exchange request in good order. Exchanges of International Stock Fund shares
currently are permitted at no charge, subject to any minimum investment
requirements, or any general limitations of the fund into which an exchange is
sought. Currently, there are no such requirements or limitations.
Class Z shareholders of the Portfolio have an exchange privilege with Class
Z shares of certain other Prudential Mutual Funds, including one or more
specified money market funds, subject to the minimum investment requirements
of such funds. Class Z shares of the Portfolio may be exchanged for Class Z
shares of another fund on the basis of relative net asset value. No sales
charge will be imposed at the time of the exchange.
An exchange of shares of either Series for shares of another Prudential
Mutual Fund will be treated as a redemption of the Series shares and purchase
of the other fund's shares for tax purposes. Each Series' exchange privilege
may be modified or terminated at any time on sixty days' notice.
9
<PAGE>
DIVIDENDS AND OTHER DISTRIBUTIONS
The Portfolio expects to distribute at least annually to its shareholders
dividends from all of its net investment income and distributions of any net
capital gains. International Stock Fund pays dividends from net investment
income and makes distributions of net capital gains, if any, at least
annually. Shareholders of International Stock Fund receive, and shareholders
of the Portfolio will receive, dividends and other distributions in additional
shares of the Series. However, Portfolio shareholders will be able to elect in
writing not less than five business days prior to the record date to receive
dividends and other distributions in cash. Dividends paid by the Portfolio
with respect to each class of its shares, to the extent any 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
expenses, generally resulting in lower dividends for Class B and Class C
shares. Distributions of net capital gains, if any, will be paid in the same
amount for each class of the Portfolio's shares.
FEDERAL INCOME TAX CONSEQUENCES OF THE PROPOSED CONVERSION
PIF and World Fund have received an opinion of Kirkpatrick & Lockhart LLP to
the effect that the proposed Conversion will constitute a tax-free
reorganization within the meaning of section 368(a)(1)(F) of the Internal
Revenue Code of 1986, as amended (the Internal Revenue Code). Accordingly, no
gain or loss will be recognized to either Series on the transfer to the
Portfolio of all of International Stock Fund's assets and the assumption of
all of its liabilities, if any, or to shareholders of International Stock Fund
on their receipt of Class Z shares of the Portfolio. The tax basis for such
shares of the Portfolio received by an International Stock Fund shareholder
will be the same as the shareholder's tax basis for the shares of
International Stock Fund to be constructively surrendered in exchange
therefor. In addition, the holding period of the Portfolio shares to be
received by a shareholder pursuant to the Conversion will include the period
during which the shares of International Stock Fund to be constructively
surrendered in exchange therefor were held, provided the latter shares were
held as capital assets by the shareholder on the date of the Conversion. See
"The Proposed Transaction--Federal Income Tax Considerations" below.
PRINCIPAL RISK FACTORS
Given that the Portfolio will have an investment objective that is identical
to and investment policies that are substantially identical to those of
International Stock Fund, the risks of investing in the Portfolio will be
substantially the same as the risks associated with International Stock Fund.
A complete discussion of the risks attendant to an investment in the Portfolio
is provided under "Information about World Fund--Investment Objectives and
Policies" provided below.
SPECIAL MEETING OF WORLD FUND SHAREHOLDERS
It is anticipated that a special meeting of the World Fund shareholders will
be held in October 1996. It is intended that at such meeting World Fund
shareholders will consider: (i) electing World Fund's Board (information on
the nominated slate of Directors for the World Fund is attached hereto as
Appendix C), (ii) ratifying the Board's selection of Deloitte & Touche LLP,
World Fund's independent public accountants, (iii) deleting as fundamental a
policy with respect to the Global Series of World Fund's limitation regarding
investment in unseasoned issuers (the Global Series of World Fund would
continue, as a matter of operating policy, however, to not purchase any
security if as a result the Global Series of World Fund would then have
10
<PAGE>
more than 5% of its total assets (determined at the time of the investment)
invested in securities of companies--including predecessors--less than three
years old, except that the Global Series of World Fund may invest in the
securities of any U.S. Government agency or instrumentality, and in any
security guaranteed by such an agency or instrumentality), and (iv) increasing
from 5% to 10% the percentage of total assets Global Series may invest in the
securities of other investment companies.
Approval of these proposals by the shareholders of World Fund is not a
condition to completion of the Conversion. In addition, there can be no
assurance that any or all of these proposed modifications will be approved by
the shareholders of World Fund.
THE PROPOSED TRANSACTION
AGREEMENT AND PLAN OF CONVERSION AND LIQUIDATION
The terms and conditions under which the Conversion may be consummated are
set forth in the Plan. Significant provisions of the Plan are summarized
below; however, this summary is qualified in its entirety by reference to the
Plan, a copy of which is attached as Appendix A to this Prospectus and Proxy
Statement.
The Plan contemplates (i) the Portfolio's acquiring all of the assets of
International Stock Fund in exchange solely for Class Z shares of the
Portfolio and the assumption by the Portfolio of all of International Stock
Fund's liabilities, if any, as of the Closing Date and (ii) the constructive
distribution on the Closing Date of such Class Z shares to the shareholders of
International Stock Fund and the liquidation of International Stock Fund.
The assets of International Stock Fund to be acquired by the Portfolio shall
include all cash, cash equivalents, securities, receivables (including
interest and dividends receivable), claims and rights of action, rights to
register shares under applicable securities laws, books and records, deferred
and prepaid expenses shown as assets on International Stock Fund's books, and
other property owned by International Stock Fund on the Closing Date. The
Portfolio will assume from International Stock Fund all of its debts,
liabilities, obligations and duties of whatever kind or nature. In exchange
for the transfer by International Stock Fund of all those assets to the
Portfolio and the assumption of all those liabilities, the latter will issue
and deliver to International Stock Fund full and fractional Class Z shares
equal in number to the number of full and fractional shares of PIF's
International Stock Fund then outstanding.
As soon as practicable after the Closing Date, International Stock Fund will
distribute pro rata to its shareholders of record, determined as of the close
of business on the Closing Date, the Class Z shares of the Portfolio received
by International Stock Fund in exchange for such shareholders' shares of
International Stock Fund. Such distribution will be accomplished by opening
accounts on the books of the Portfolio in the names of the International Stock
Fund shareholders and by transferring thereto the Class Z shares of the
Portfolio previously credited to the account of International Stock Fund on
those books. Each shareholder account shall be credited with the respective
pro rata number of the Portfolio's Class Z shares due to the shareholder in
whose name the account is established. Fractional shares of the Portfolio will
be rounded to the third decimal place.
Accordingly, every shareholder of International Stock Fund will own full and
fractional Class Z shares of the Portfolio immediately after the Conversion
equal in number (and value) to the total number (and value) of that
shareholder's full and fractional shares of International Stock Fund
immediately prior to the Conversion. Thus, the Conversion will not result in a
dilution of the value of any shareholder account.
11
<PAGE>
Any transfer taxes payable upon issuance of shares of the Portfolio in a
name other than that of the registered holder of the International Stock Fund
shares constructively exchanged therefor shall be paid by the person to whom
such Portfolio shares are to be issued, as a condition of such transfer.
The consummation of the Conversion is subject to a number of conditions set
forth in the Plan, some of which may be waived by either Board. Consummation
of the Conversion also is conditioned upon the SEC's issuance of the Exemptive
Order. The Plan may be terminated and the Conversion abandoned at any time
prior to the Closing Date, before or after approval by the shareholders of
International Stock Fund. In addition, the Plan may be amended in any mutually
agreeable manner, except that no amendment may be made subsequent to the
Meeting that would detrimentally affect the value of the Portfolio shares to
be distributed.
REASONS FOR THE CONVERSION
The Board of PIF, including a majority of the Independent Trustees, has
determined that the interests of International Stock Fund shareholders will
not be diluted as a result of the proposed Conversion and that the proposed
Conversion is in the best interests of International Stock Fund. In addition,
the Board of World Fund, including a majority of the Independent Directors,
has determined that the proposed Conversion is in the best interests of the
Portfolio.
The reasons for the proposed Conversion are summarized above under
"Synopsis--Reasons for the Proposed Conversion." Each Board based its decision
to approve the Plan on an inquiry into a number of factors, including the
following:
(1) the compatibility of the investment objectives, policies and
restrictions of the Series;
(2) the costs of the Conversion, which will be paid for by each series in
proportion to its respective net asset level;
(3) the tax-free nature of the Conversion to each Series and its
shareholders; and
(4) the potential benefits to the shareholders of the International Stock
Fund.
If the Plan is not approved by the International Stock Fund shareholders,
the PIF Board may consider other appropriate action, such as the liquidation
of International Stock Fund or a merger or other business combination with an
investment company other than the Portfolio.
DESCRIPTION OF SECURITIES TO BE ISSUED
Class Z shares of the Portfolio will be issued to International Stock Fund
shareholders on the Closing Date. World Fund is authorized to issue one
billion shares of common stock, $.01 par value per share, divided into two
series, the Global Series and the Portfolio. The Portfolio is authorized to
issue 125 million shares of Class Z common stock. Each Class Z share will
represent an equal and proportionate interest in the same assets of the
Portfolio.
FEDERAL INCOME TAX CONSIDERATIONS
PIF and World Fund have received an opinion from Kirkpatrick & Lockhart LLP,
PIF's counsel, substantially to the effect that: (1) the proposed Conversion
will constitute a reorganization within the meaning of section 368(a)(1)(F) of
the Internal Revenue Code, and each Series will be a "party to a
reorganization"
12
<PAGE>
within the meaning of section 368(b) of the Internal Revenue Code; (2) a
shareholder of International Stock Fund will recognize no gain or loss on the
constructive exchange of all of its shares of International Stock Fund solely
for Class Z shares of the Portfolio pursuant to the Conversion (Internal
Revenue Code section 354(a)(1)); (3) no gain or loss will be recognized to
International Stock Fund on the transfer of its assets to the Portfolio in
exchange solely for Portfolio shares and the assumption by the Portfolio of
International Stock Fund's liabilities, if any, and the subsequent
distribution of those shares to International Stock Fund's shareholders in
complete liquidation thereof (Internal Revenue Code sections 361(a) and
357(a)); (4) no gain or loss will be recognized to the Portfolio on the
acquisition of such assets in exchange solely for the Portfolio shares and its
assumption of International Stock Fund's liabilities, if any (Internal Revenue
Code section 1032(a)); (5) the Portfolio's basis for the assets received
pursuant to the Conversion will be the same as the basis thereof in
International Stock Fund's hands immediately before the Conversion, and the
Portfolio's holding period for those assets will include International Stock
Fund's holding period therefor (Internal Revenue Code sections 362(b) and
1223(2)); (6) an International Stock Fund shareholder's basis for the Class Z
shares of the Portfolio to be received by it pursuant to the Conversion will
be the same as its basis for the shares of International Stock Fund to be
constructively surrendered in exchange therefor (Internal Revenue Code section
358(a)(1)); (7) the holding period of the shares of the Portfolio to be
received by a shareholder of International Stock Fund pursuant to the
Conversion will include the period during which the shares of International
Stock Fund constructively surrendered in exchange therefor were held, provided
the latter shares were held as capital assets by the shareholder on the date
of the exchange (Internal Revenue Code section 1223(1)); and (8) for purposes
of section 381 of the Internal Revenue Code, the Portfolio will be treated as
if there had been no Conversion.
Shareholders of International Stock Fund should consult their tax advisers
regarding the effect, if any, of the Conversion in light of their individual
circumstances. Because the foregoing discussion only relates to the federal
income tax consequences of the Conversion, those shareholders also should
consult their tax advisers as to state and local tax consequences, if any, of
the Conversion.
CERTAIN COMPARATIVE INFORMATION ABOUT THE FUNDS
ORGANIZATION. World Fund is a Maryland corporation, and the rights of its
shareholders are governed by its Articles of Incorporation, its By-Laws and
applicable Maryland law. PIF is a Delaware business trust, and the rights of
its shareholders are governed by its Declaration of Trust and its By-Laws and
applicable Delaware law.
CAPITALIZATION. The World Fund is authorized to issue one billion shares of
common stock, $.01 par value per share, divided into two series. The
Portfolio's shares will be divided into four classes, designated Class A,
Class B, Class C, and Class Z, each consisting of 125 million authorized
shares. PIF is authorized to issue an unlimited number of full and fractional
shares of beneficial interest, par value $.001 per share. International Stock
Fund offers one class of shares.
In addition, the Board of each Series may authorize an increase in the
number of authorized shares and may reclassify unissued shares to authorize
additional classes of shares having terms and rights determined by the
respective Board without shareholder approval.
SHAREHOLDER MEETINGS AND VOTING RIGHTS. Generally, neither Series is
required to hold annual meetings of its shareholders. Each Series is required
to call a meeting of shareholders for the purpose of voting upon the question
of removal of a Director/Trustee when requested in writing to do so by the
holders of at least 10% (25% in the case of the World Fund) of the Series'
outstanding shares entitled to vote. In addition, each Series is
13
<PAGE>
required to call a meeting of shareholders for the purpose of electing
Directors/Trustees if, at any time, less than a majority of the
Directors/Trustees holding office were elected by shareholders.
Shareholders of PIF are entitled to vote on all matters submitted to a vote
of its shareholders under its Declaration of Trust, which includes the power
to vote (i) for the election or removal of Trustees as provided in the
Declaration of Trust and (ii) with respect to such additional matters relating
to PIF as may be required by applicable law, the Declaration of Trust, its By-
Laws or any registration of the PIF with the SEC (or any successor agency) or
any state, or as the Board may consider necessary or desirable. Each whole
share is entitled to one vote as to any matter on which it is entitled to vote
and each fractional share is entitled to a proportionate fractional vote.
Shareholders of the Portfolio are entitled to one vote for each share on all
matters submitted to a vote of its shareholders under Maryland law. Approval
of certain matters, such as an amendment to the Articles of Incorporation,
merger, consolidation or transfer of all or substantially all assets, or a
dissolution generally requires the affirmative vote of a majority of the votes
entitled to be cast at a meeting at which a quorum is present (except as
otherwise provided by statute).
PIF's Agreement and Declaration of Trust states that except when a larger
quorum is required by applicable law, by PIF's By-Laws or by the Declaration
of Trust, forty percent (40%) of the shares entitled to vote will constitute a
quorum for the transaction of business at a shareholders' meeting. The World
Fund's By-laws provide that the presence in person or by proxy of the holders
of record of one-third of the shares of the Fund's common stock issued and
outstanding and entitled to vote shall constitute a quorum at a shareholders'
meeting, except as otherwise provided in the Articles of Incorporation.
SHAREHOLDER LIABILITY. Under Maryland law, shareholders of World Fund have
no personal liability for World Fund's acts or obligations. Under Delaware
law, International Stock Fund's shareholders similarly have no personal
liability for International Stock Fund's act or obligations.
LIABILITY AND INDEMNIFICATION OF DIRECTORS/TRUSTEES. Under World Fund's
Articles of Incorporation and Maryland law, a Director or officer of the Fund
is not liable to the Fund or its shareholders for monetary damages for breach
of fiduciary duty as a Director or officer except to the extent such exemption
from liability or limitation thereof is not permitted by law, including the
Investment Company Act. Generally, under PIF's Declaration of Trust, no
Trustee or officer of PIF shall be liable to International Stock Fund or its
shareholders for any action or failure to act except for his own bad faith,
willful misfeasance, gross negligence or reckless disregard of his duties and
is not liable for errors of judgment or mistakes.
Under the Investment Company Act, a Director/Trustee may not be protected
against liability to a Series and its security holders to which he would
otherwise be subject as a result of his willful misfeasance, bad faith or
gross negligence in the performance of his duties or by reason of reckless
disregard of his obligations and duties. The staff of the SEC interprets the
Investment Company Act to require additional limits on indemnification of
Directors/ Trustees and officers.
The foregoing is only a summary of certain differences between PIF, its
Declaration of Trust, its By-Laws and Delaware law, and World Fund, its
Articles of Incorporation, its By-Laws and Maryland law.
14
<PAGE>
PRO FORMA CAPITALIZATION AND RATIOS
The following table shows the capitalization of each Fund as of March 31,
1996 and the pro forma combined capitalization of both Funds as if the
reorganization had occurred on that date.
<TABLE>
<CAPTION>
WORLD FUND
(INTERNATIONAL STOCK SERIES)
INTERNATIONAL STOCK ----------------------------
FUND CLASS Z
------------------- ----------------------------
<S> <C> <C>
Net Assets (000)............... $ $
Net Asset Value per share......
Shares Outstanding (000).......
</TABLE>
The following table shows the ratio of expenses to average net assets and
the ratio of net investment income to average net assets of International
Stock Fund for the fiscal year ended September 30, 1995, and the estimated
ratio of expenses to average net assets and ratio of net investment income to
average net assets of World Fund (International Stock Series) for the fiscal
year ending October 31, 1996. No historical financial information yet exists
for shares issued by the World Fund's International Stock Series.
<TABLE>
<CAPTION>
WORLD FUND
(INTERNATIONAL STOCK SERIES(B))
INTERNATIONAL STOCK -------------------------------
FUND (A) CLASS Z
------------------- -------------------------------
<S> <C> <C>
Ratio of expenses to aver-
age net assets............ 1.60% %
Ratio of net investment in-
come to average net as-
sets...................... 1. % %
</TABLE>
- --------
(a) Net of expenses for the International Stock Fund.
(b) Estimated expenses for the International Stock Series.
INFORMATION ABOUT WORLD FUND
GENERAL
World Fund was incorporated in Maryland on February 28, 1984. World Fund is
an open-end, diversified management investment company.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Portfolio is to achieve long-term growth of
capital through investment in equity securities of foreign companies. Income
is a secondary objective. There can be no assurance that the Portfolio will
achieve its investment objective.
The Portfolio investment objective is a fundamental policy and, therefore,
may not be changed without the approval of the holders of a majority of the
Portfolio outstanding voting securities as defined in the Investment Company
Act of 1940 (the Investment Company Act). The investment policies and
practices of the Portfolio, however, are not fundamental. Portfolio policies
that are not fundamental may be modified by the Board of Directors.
The Portfolio will, under normal circumstances, invest at least 65% of the
value of its total assets in common stocks and preferred stocks of issuers
located in at least three foreign countries. The Portfolio will invest
primarily in seasoned companies (i.e., companies with an established operating
record of 3 years or greater) that
15
<PAGE>
are incorporated, organized, or that do business primarily outside the United
States. The Portfolio will invest in securities of such foreign issuers
through direct market purchases on foreign stock exchanges and established
over-the-counter markets as well as through the purchase of ADRs, EDRs or
other similar securities.
The Portfolio intends to broadly diversify its holdings among issuers
located in developed and developing countries having national financial
markets. Mercator believes that broad diversification provides a prudent means
of reducing volatility while permitting the Portfolio to take advantage of the
potentially different movements of major equity markets. While the Portfolio
may invest anywhere outside the United States, it expects that most of its
investments will be made in securities of issuers located in developed
countries in North America, Western Europe, and the Pacific Basin. In
allocating the Portfolio investments among different countries and geographic
regions, Mercator will consider such factors as relative economic growth,
expected levels of inflation, government policies affecting business
conditions, and market trends throughout the world. In selecting companies
within those countries and geographic regions, Mercator seeks to identify
those companies that are best positioned and managed to benefit from the
factors listed above.
Investing in securities of foreign issuers generally involves greater risks
than investing in the securities of domestic companies. These risks are often
heightened for investments in emerging or developing countries.
The Portfolio does not currently expect to invest 25% or more of its net
assets in any one country. For temporary defensive purposes, the Portfolio may
invest up to 100% of its assets in common stocks, preferred stocks and other
equity-related securities of U.,S. issuers.
The Portfolio may invest up to 35% of the value of its total assets in: (i)
other equity-related securities of foreign issuers; (ii) common stocks,
preferred stocks and other equity-related securities of U.S. issuers;
(iii) investment grade debt securities of domestic and foreign corporations,
governments, governmental entities,
and supranational entities (such as the Asian Development Bank, the European
Coal and Steel Community, the European Economic Community, and the
International Bank for Reconstruction and Development (the "World Bank")); and
(iv) high-quality domestic money market instruments and short-term fixed
income securities. The Fund's use of money market instruments and short-term
debt securities generally will reflect the Investment subadviser's overall
measure of optimism relating to the global equity markets, and the Portfolio
will use such securities to reduce downside volatility during uncertain or
declining market conditions.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for hedging or return enhancement purposes, the Portfolio may:
(i) enter into repurchase agreements, when-issued, delayed- delivery and
forward commitment transactions; (ii) lend its portfolio securities; and (iii)
purchase and sell put and call options on any securities in which it may
invest and options on any securities index based on securities in which the
Portfolio may invest. In order to attempt to reduce risks associated with
currency fluctuations, the Portfolio may (i) purchase and sell currency spot
contracts; (ii) purchase and sell currency futures contracts and currency
forward contracts; and (iii) purchase and sell put and call options on
currencies and on foreign currency futures contracts. See "Hedging and Return
Enhancement Strategies".
The Portfolio may hold a portion of its assets in money market instruments
in amounts designed to pay expenses, to meet anticipated redemptions, pending
investments or to margin its purchases and sales of futures contracts in
accordance with its objective and policies. These instruments may be purchased
on a forward commitment, when-issued or delayed-delivery basis. In addition,
the Portfolio may for temporary defensive purposes invest, without limitation,
in high-quality money market instruments. The Portfolio may also purchase non-
investment grade fixed income securities and retain investment grade fixed
income securities that have been
16
<PAGE>
downgraded to non-investment grade provided that no more than 5% of the
Portfolio's net assets is invested in non-investment grade fixed income
securities, which are considered to be high risk securities, i.e. "junk"
bonds. See "Fixed Income Securities" below.
EQUITY-RELATED SECURITIES. The Portfolio may invest in equity-related
securities. Equity-related securities are common stock, preferred stock,
rights, warrants and debt securities or preferred stock which are convertible
or exchangeable for common stock or preferred stock.
With respect to equity securities, the Portfolio may purchase ADRs. ADRs are
U.S. dollar-denominated certificates issued by a U.S. bank or trust company
and represent the right to receive securities of a foreign issuer deposited in
a domestic bank or foreign branch of a United States bank and traded on a
United States exchange or in an over-the-counter market. Generally, ADRs are
in registered form. There are no fees imposed on the purchase or sale of ADRs
when purchased from the issuing bank or trust company in the initial
underwriting, although the issuing bank or trust company may impose charges
for the collection of dividends and the conversion of ADRs into the underlying
securities. Investment in ADRs has certain advantages over direct investment
in the underlying foreign securities since: (i) ADRs are U.S. dollar-
denominated investments that are registered domestically, easily transferable,
and for which market quotations are readily available; and (ii) issuers whose
securities are represented by ADRs are usually subject to auditing,
accounting, and financial reporting standards comparable to that of domestic
issuers.
FIXED INCOME SECURITIES. Fixed income securities are considered high-
quality if they are rated at least AA/Aa by S&P or by Moody's or an equivalent
rating by any NRSRO or, if unrated, are determined to be of comparable
investment quality by the Adviser. High-quality fixed income securities are
considered to have a
very strong capacity to pay principal and interest. Fixed income securities
are considered medium quality if they are rated, for example, at least BBB/Baa
by S&P or by Moody's or an equivalent rating by any NRSRO or, if not rated,
are determined to be of comparable investment quality by the Adviser. Medium
quality fixed income securities are regarded as having an adequate capacity to
pay principal and interest. Securities rated in the lowest category of
investment grade debt have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher
grade bonds.
Investment grade fixed income securities are securities rated BBB or better
by S&P or Baa or better by Moody's (or an equivalent rating by any NRSRO) or,
if not rated, are deemed by the Adviser to be of comparable investment
quality.
Non-investment grade securities are rated lower than BBB/Baa (or an
equivalent rating by any NRSRO) or, if not rated, are deemed by Mercator to be
of comparable investment quality and are commonly referred to as high risk or
high yield securities, i.e. "junk" bonds. High yield securities are generally
riskier than higher quality securities and are subject to more credit risk,
including risk of default, and are more volatile than higher quality
securities. In addition, such securities may have less liquidity and
experience more price fluctuation than higher quality securities.
The maturity of debt securities may be considered long (ten plus years),
intermediate (three to ten years) or short term (three years or less). In
general, the principal values of longer-term securities fluctuate more widely
in response to changes in interest rates than those of shorter-term
securities, providing greater opportunity for capital gain or risk of capital
loss. A decline in interest rates usually produces an increase in the value of
debt securities, while an increase in interest rates generally reduces their
value.
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U.S. GOVERNMENT SECURITIES. The Portfolio may invest in fixed income
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Obligations of the U.S. Government consist of various types
of marketable securities issued by the U.S. Treasury, i.e., bills, notes and
bonds, and are direct obligations of the U.S. Government. Obligations of
agencies and instrumentalities of the U.S. Government are not direct
obligations of the U.S. Government and are either: (i) guaranteed by the U.S.
Treasury (e.g., Government National Mortgage Association ("GNMA") mortgage-
backed securities); (ii) supported by the issuing agency's or
instrumentality's right to borrow from the U.S. Treasury at the discretion of
the U.S. Treasury (e.g., Federal National Mortgage Association ("FNMA")
Discount Notes); or (iii) supported by only the issuing agency's or
instrumentality's credit (e.g., each of the Federal Home Loan Banks).
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE PORTFOLIO MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN. These strategies include the purchase and sale of put and call
options on any security in which the Portfolio may invest and options on any
securities index based on securities in which the Portfolio may invest. In
order to reduce the risks associated with currency fluctuation, the Portfolio
may (i) purchase and sell currency spot contracts; (ii) purchase and sell
currency futures contracts and currency forward contracts; and (iii) purchase
and sell put and call options on currencies and on foreign currency contracts.
Mercator will use such techniques as market conditions warrant. The
Portfolio'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. New financial products
and risk management techniques continue to be developed and the Portfolio may
use these new investments and techniques to the extent consistent with its
investment objective and policies.
Options Transactions
OPTIONS ON SECURITIES AND SECURITIES INDICES. The Portfolio may purchase and
sell put and call options on any securities in which it may invest or options
on any securities index based on securities in which the Portfolio may invest.
The Portfolio is also authorized to enter into closing purchase and sale
transactions in order to realize gains or minimize losses on options sold or
purchased by the Portfolio.
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 Portfolio writes a call option, the
Portfolio 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.
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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 Portfolio as the writer of a put option
might, therefore, be obligated to purchase underlying securities for more than
their current market price.
The Portfolio would normally purchase call options to attempt to hedge
against an increase in the market value of the type of securities in which the
Portfolio may invest. The purchase of a call option would entitle the
Portfolio, in return for the premium paid, to purchase specified securities at
a specified price, upon exercise of the option, during the option period. The
Portfolio would ordinarily realize a gain if, during the options period, the
value of such securities exceeds the sum of the exercise price, the premium
paid and transaction costs; otherwise, the Portfolio would realize a loss on
the purchase of the call option. The Portfolio may also write a put option,
which can serve as a limited long hedge because increases in value of the
hedged investment would be offset to the extent of the premium received for
writing the option. However, if the security depreciates to a price lower than
the exercise price of the put option, it can be expected that the option will
be exercised and the Portfolio will be obligated to buy the security at more
than its market value.
The Portfolio would normally purchase put options to hedge against a decline
in the market value of securities in its portfolio ("protective puts"). The
purchase of a put option would entitle the Portfolio, in exchange for the
premium paid, to sell specified securities at a specified price, upon exercise
of the option, during the option period. Gains and losses on the purchase of
protective puts would tend to be offset by countervailing changes in the value
of underlying Portfolio securities. The Portfolio would ordinarily realize a
gain if, during the option period, the value of the underlying securities
decreases below the exercise price sufficiently to cover the premium and
transaction costs; otherwise, the Portfolio would realize a loss on the
purchase of the put option. The Portfolio may also write a call option, which
can serve as a limited short hedge because decreases in value of the hedged
investment would be offset to the extent of the premium received for writing
the option. However, if the security appreciates to a price higher than the
exercise price of the call option, it can be expected that the option will be
exercised and the Portfolio will be obligated to sell the security at less
than its market value.
OPTIONS ON SECURITIES INDICES ARE SIMILAR TO OPTIONS ON EQUITY SECURITIES
EXCEPT THAT, rather than the right to take or make delivery of the securities
at a specified price, an option on a securities 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 securities 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 Portfolio may purchase and sell put and call options on securities
indices for hedging against a decline in the value of the securities owned by
the Portfolio or against an increase in the market value of the type of
securities in which the Portfolio may invest. Securities index options are
designed to reflect price fluctuations in a group of securities or segment of
the securities market rather than price fluctuations in a single security.
Options on securities indices are similar to options on securities, except
that the exercise of securities index options requires cash payments and does
not involve the actual purchase or sale of securities. Purchasing or selling
securities index options is subject to the risk that the value of its
portfolio securities may not change as much as or more than the index because
the Portfolio investments generally will not match the composition of the
index.
OVER-THE-COUNTER OPTIONS. THE PORTFOLIO MAY ALSO PURCHASE AND WRITE
(I.E., SELL) PUT AND CALL OPTIONS ON EQUITY AND DEBT SECURITIES AND ON STOCK
INDICES IN THE OVER-THE-COUNTER MARKET (OTC OPTIONS).
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Unlike exchange-traded options, OTC options are contracts between the
Portfolio 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 Portfolio'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.
Risks of Hedging and Return Enhancement Strategies
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS INVOLVES INVESTMENT RISKS
AND TRANSACTION COSTS TO WHICH THE PORTFOLIO WOULD NOT BE SUBJECT ABSENT THE
USE OF THESE STRATEGIES. If Mercator's prediction of movements in the
direction of the securities markets is inaccurate, the adverse consequences to
the Portfolio may leave the Portfolio in a worse position than if such
strategies were not used. Risks inherent in the use of options 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
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
Portfolio 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 Portfolio to
sell a portfolio security at a disadvantageous time, due to the need for the
Portfolio to maintain "cover" or to segregate securities in connection with
hedging transactions.
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.
When the Portfolio invests in foreign securities, the Portfolio may enter
into forward contracts in several circumstances to protect the value of its
portfolio. The Portfolio 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 Portfolio may
enter. However, the Portfolio'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 Portfolio generally arising in
connection with the purchase or sale of its portfolio securities and accruals
of interest or dividends receivable and Portfolio expenses. Position hedging
is the sale of a foreign currency with respect to portfolio security positions
denominated or quoted in that currency. The Portfolio will not speculate in
forward contracts. The Portfolio 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 Portfolio enters into a contract for the purchase or sale of a
security denominated in a foreign currency, or when the Portfolio anticipates
the receipt in a foreign currency of dividends or interest payments on a
security which it holds, the Portfolio may desire to "lock in" the U.S. dollar
price of the security or the U.S.
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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 Portfolio 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 Portfolio 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 Portfolio denominated in such
foreign currency. Requirements under the Internal Revenue Code for
qualification as a regulated investment company may limit the Portfolio's
ability to engage in transactions in forward contracts.
Futures Contracts On Foreign Currencies and Options On Futures Contracts
THE PORTFOLIO 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 TO PROTECT AGAINST THE EFFECT OF ADVERSE
CHANGES ON FOREIGN CURRENCIES. The Portfolio 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 Portfolio 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 Portfolio's
providing or receiving cash that reflects any decline or increase in the
contract's value, a process known as "marking to market".
THE PORTFOLIO 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 PORTFOLIO IS SUBJECT OR TO WHICH THE
PORTFOLIO 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 PORTFOLIO ALSO INTENDS TO ENGAGE IN SUCH
TRANSACTIONS WHEN THEY ARE ECONOMICALLY APPROPRIATE FOR THE REDUCTION OF RISKS
INHERENT IN THE ONGOING MANAGEMENT OF THE PORTFOLIO.
Options On Foreign Currencies
THE PORTFOLIO 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 Portfolio has the right to take or make
delivery of a specified amount of foreign currency, rather than stock.
THE PORTFOLIO MAY PURCHASE AND WRITE OPTIONS TO HEDGE THE PORTFOLIO'S
PORTFOLIO SECURITIES DENOMINATED IN FOREIGN CURRENCIES. IF THERE IS A DECLINE
IN THE DOLLAR VALUE OF A FOREIGN CURRENCY IN WHICH THE PORTFOLIO'S PORTFOLIO
SECURITIES ARE DENOMINATED, THE DOLLAR VALUE OF SUCH SECURITIES WILL DECLINE
EVEN THOUGH THE FOREIGN CURRENCY VALUE REMAINS THE SAME. TO HEDGE AGAINST THE
DECLINE OF THE FOREIGN CURRENCY, THE PORTFOLIO 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
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DECLINE WOULD HAVE ON THE VALUE OF THE PORTFOLIO SECURITIES. ALTERNATIVELY,
THE PORTFOLIO 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 PORTFOLIO 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 Portfolio 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 Portfolio 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 PORTFOLIO'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 Portfolio
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 Portfolio's net income would be
less than if the Portfolio 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 Portfolio purchases these
instruments to hedge against currency advances before it invests in securities
denominated in such currency and the currency market declines, the Portfolio
might incur a loss on the futures contract. The Portfolio's ability to
establish and maintain positions will depend on market liquidity. The ability
of the Portfolio 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.
OTHER INVESTMENT PRACTICES
Repurchase Agreements
The Portfolio may enter into repurchase agreements, whereby the seller of a
security agrees to repurchase that security from the Portfolio at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Portfolio's
money is invested in the security. The Portfolio'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 if the
value of the instruments declines, the Portfolio will require additional
collateral. In the event of bankruptcy or default of certain sellers of
repurchase agreements, the Portfolio could experience costs and delays in
liquidating the underlying security held as collateral and might incur a loss
if such collateral declines in value during this period. The Portfolio may
participate in a joint repurchase account managed by Prudential Mutual Fund
Management, Inc.
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SEGREGATED ACCOUNTS. The Portfolio will establish a segregated account with
its Custodian in which it will maintain cash, U.S. Government securities or
other liquid high-grade debt obligations equal in value to its obligations in
respect of potentially leveraged transactions including forward contracts,
when-issued and delayed-delivery securities, repurchase and reverse repurchase
agreements, forward rolls, dollar rolls, futures contracts, written options
and options on futures contracts (unless otherwise covered). The assets
deposited in the segregated account will be marked-to-market daily.
FORWARD ROLLS, DOLLAR ROLLS AND REVERSE REPURCHASE AGREEMENTS. The Portfolio
may commit up to 20% of the value of its net assets to investment techniques
such as dollar rolls, forward rolls and reverse repurchase agreements. A
forward roll is a transaction in which the Portfolio sells a security to a
financial institution, such as a bank or broker-dealer, and simultaneously
agrees to repurchase the same or similar security from the institution at a
later date at an agreed-upon price. With respect to mortgage-related
securities, such transactions are often called "dollar rolls." In dollar roll
transactions, the mortgage-related securities that are repurchased will bear
the same coupon rate as those sold, but generally will be collateralized by
different pools of mortgages with different prepayment histories than those
sold. During the roll period, the Portfolio forgoes principal and interest
paid on the securities and is compensated by the difference between the
current sales price and the forward price for the future purchase as well as
by interest earned on the cash proceeds of the initial sale. A "covered roll"
is a specific type of dollar roll for which there is an offsetting cash
position or a
cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction.
Reverse repurchase agreements involve sales by the Portfolio of portfolio
securities to a financial institution concurrently with an agreement by the
Portfolio to repurchase the same securities at a later date at a fixed price.
During the reverse repurchase agreement period, the Portfolio continues to
receive principal and interest payments on these securities.
Reverse repurchase agreements, forward rolls and dollar rolls involve the
risk that the market value of the securities purchased by the Portfolio with
the proceeds of the initial sale may decline below the price of the securities
the Portfolio has sold but is obligated to repurchase under the agreement. In
the event the buyer of securities under a reverse repurchase agreement,
forward roll or dollar roll files for bankruptcy or becomes insolvent, the
Portfolio's use of the proceeds of the agreement may be restricted pending a
determination by the other party, or its trustee or receiver, whether to
enforce the Portfolio's obligations to repurchase the securities. The staff of
the SEC has taken the position that reverse repurchase agreements, forward
rolls and dollar rolls are to be treated as borrowings for purposes of the
percentage limitations discussed in the section entitled "Borrowings" below.
The Portfolio expects that under normal conditions most of the borrowings of
the Portfolio will consist of such investment techniques rather than bank
borrowings.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed-delivery basis. When the Portfolio
purchases securities on a when-issued or delayed-delivery basis, the price of
such securities is fixed at the time of the commitment, but delivery and
payment for the securities may take place up to 120 days after the date of the
commitment to purchase. The securities so purchased are subject to market
fluctuation, and no interest accrues to the purchaser during this period.
When-issued and delayed-delivery securities involve a risk of loss if the
value of the security to be purchased declines prior to the settlement date or
increases in value and there is a failure to deliver the security.
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LIQUIDITY PUTS. The Portfolio may purchase instruments together with the
right to resell the instruments at an agreed-upon price or yield, within a
specified period prior to the maturity date of the instruments. This
instrument is commonly known as a "liquidity put" or a "tender option bond."
ILLIQUID SECURITIES. The Portfolio may hold up to 10% if its net assets in
illiquid securities. Illiquid securities include repurchase agreements which
have a maturity of longer than seven days, securities with legal or
contractual restrictions on resale (restricted securities) and securities that
are not readily marketable in securities markets either within or outside of
the United States. 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 Portfolio intends to
comply with any applicable state blue sky laws restricting the Portfolio's
investments in illiquid securities. The Portfolio's investment in Rule 144A
securities could have the effect of increasing illiquidity to the extent that
qualified institutional buyers become, for a time, uninterested in purchasing
Rule 144A securities. The Portfolio Subadvisers will monitor the liquidity of
such restricted securities under the supervision of the Manager and the Board,
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 OTC options and
the assets used as "cover" for written OTC options are illiquid securities
unless the Portfolio and the counterparty have provided for the Portfolio, at
the Portfolio's election, to unwind the over-the-counter option. The exercise
of such an option ordinarily
would involve the payment by the Portfolio of an amount designed to reflect
the counterparty's economic loss from an early termination, but does allow the
Portfolio to treat the assets used as "cover" as "liquid." The Portfolio will
also treat non-U.S. Government IOs and POs as illiquid so long as the staff of
the SEC maintains its position that such securities are illiquid.
SECURITIES LENDING. The Portfolio 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 collateral in an
amount equal to at least 100% of the market value of the securities loaned.
During the time the Portfolio's securities are on loan, the borrower will pay
the Portfolio an amount equivalent to any dividend or interest paid on such
securities and the Portfolio may invest any cash collateral it receives and
earn additional income, or it may receive an agreed-upon amount of interest
income from the borrower. In these transactions, there are risks of delay in
recovery and in some cases even loss of rights in the collateral should the
borrower of the securities fail financially. The Portfolio may lend up to 30%
of the value of its total assets.
BORROWINGS. The Portfolio may borrow from banks or through forward rolls,
dollar rolls, or reverse repurchase agreements an amount equal to no more than
20% of the value of its total assets to take advantage of investment
opportunities, for temporary, extraordinary, or emergency purposes or for the
clearance of transactions and may pledge up to 20% of the value of its total
assets to secure such borrowings.
RISKS AND SPECIAL CONSIDERATIONS
Investing in securities of foreign companies and countries involves certain
risks and considerations 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
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net return on such investments as compared to dividends and interest paid to
the Portfolio 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 Portfolio 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 Portfolio can be expected to be higher
than that of an investment company investing exclusively in domestic
securities since the expenses of the Portfolio, such as custodial costs,
valuation costs and communication costs, as well as the rate of the management
fee (1% of the Portfolio's average daily net assets), though similar to such
expenses of other international funds, are higher than those costs incurred by
other investment companies.
DIRECTORS
World Fund has a Board of Directors which, in addition to overseeing the
actions of the Portfolio's Manager, Subadviser and Distributor, as set forth
below, decides upon matters of general policy. The Portfolio's Manager
conducts and supervises the daily business operations of the Portfolio. The
Portfolio's Subadviser furnishes daily investment advisory services.
MANAGER AND PORTFOLIO MANAGER
Manager
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF WORLD FUND AND IS
COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF 1% OF WORLD FUND'S AVERAGE
DAILY NET ASSETS. It was incorporated in May 1987 under the laws of the State
of Delaware.
As of May 31, 1996, PMF served as the manager of 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator of 22 closed-end investment companies, with aggregate assets of
approximately $52 billion.
PMF is a wholly-owned subsidiary of The Prudential Insurance Company of
America (Prudential), a major diversified insurance and financial services
company.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF WORLD FUND AND ALSO ADMINISTERS WORLD FUND'S CORPORATE AFFAIRS.
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Subadvisor
PURSUANT TO A SUBADVISORY AGREEMENT WITH PMF, MERCATOR FURNISHES INVESTMENT
ADVISORY SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE PORTFOLIO AND IS
COMPENSATED BY PMF FOR ITS SERVICES AT AN ANNUAL RATE OF .75 OF 1% OF THE
PORTFOLIO'S AVERAGE DAILY NET ASSETS UP TO AND INCLUDING $50 MILLION AND .60
OF 1% OF WORLD FUND'S AVERAGE DAILY NET ASSETS IN EXCESS OF $50 MILLION AND UP
TO AND INCLUDING $300 MILLION AND .45 OF 1% OF WORLD FUND'S AVERAGE DAILY NET
ASSETS IN EXCESS OF $300 MILLION.
Under the Subadvisory Agreement, Mercator, subject to the supervision of
PMF, is responsible for managing the assets of the Portfolio in accordance
with its investment objective, investment program and policies. Mercator
determines what securities and other instruments are purchased and sold for
the Portfolio and is responsible for obtaining and evaluating financial data
relevant to the Portfolio.
Peter F. Spano is responsible for the day-to-day management of the portfolio
of the Portfolio. Mr. Spano has managed the portfolio of the Portfolio since
its inception in November, 1992 and has been employed as a portfolio manager
with Mercator since its founding in 1984.
Mercator is a registered investment adviser and a Delaware limited
partnership with $1.8 billion in assets under management as of December 31,
1995. Mercator's general partners are four Florida corporations: JZT Corp.,
KXB Corp., TXB Corp., and MXW Corp. Mercator's limited partner is The
Prudential Asset Management Company, Inc., a wholly-owned indirect subsidiary
of Prudential. John G. Thompson, Peter F. Sparo, Kenneth B. Brown, and Michael
A. Williams are the sole shareholders of JZT Corp., PXS Corp., KXB Corp. and
MXW Corp., respectively. The address of each of the general partners is 2400
East Commercial Blvd., Suite 810, Fort Lauderdale, Florida 33308. Mercator
serves as adviser to various institutional investors and mutual funds.
Pursuant to a subadvisory agreement with PMF, PIC provides investment
advisory services to the Series with respect to (i) the management of short-
term assets, including cash, money market instruments and repurchase
agreements and (ii) the lending of portfolio securities in connection with the
management of the International Stock Series. For these services, PMF will
reimburse PIC for reasonable costs and expenses incurred by PIC determined in
a manner acceptable to PMF. PIC is an indirect, wholly-owned subsidiary of
Prudential.
FEE WAIVERS AND SUBSIDY
PMF may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Portfolio. Fee
waivers and expense subsidies will increase the Portfolio's total return.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Portfolio provided that the commissions, fees or other remuneration it
receives are fair and reasonable.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Portfolio's portfolio
securities and cash and, in that capacity, maintains certain financial and
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accounting books and records pursuant to an agreement with the Portfolio. Its
mailing address is P.O. Box 1713, Boston, Massachusetts 02105.
PMFS, 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.
PERFORMANCE
As of the date hereof, the Portfolio has not commenced operations.
WORLD FUND SHARES
WORLD FUND IS AUTHORIZED TO ISSUE 1 BILLION SHARES OF COMMON STOCK, $.01 PAR
VALUE PER SHARE, WHICH ARE CURRENTLY DIVIDED INTO TWO PORTFOLIOS OR SERIES,
EACH OF WHICH CONSISTS OF 500 MILLION AUTHORIZED SHARES. THE SHARES OF EACH
SERIES ARE DIVIDED INTO FOUR CLASSES, DESIGNATED CLASS A, CLASS B, CLASS C AND
CLASS Z COMMON STOCK, EACH CONSISTING OF 125 MILLION AUTHORIZED SHARES. ONLY
SHARES OF THE PORTFOLIO ARE OFFERED HEREBY. Each class of common stock
represents an interest in the same assets of World Fund and is identical in
all respects except that (i) each class (with the exception of Class Z shares)
is subject to different sales charges and distribution and/or service fees
which may affect performance, (ii) each class has exclusive voting rights on
any matter submitted to shareholders that relates solely to its arrangement
and has separate voting rights on any matter submitted to shareholders in
which the interests of one class differ from the interests of any other class,
(iii) each class has a different exchange privilege, (iv) only Class B shares
have a conversion feature. In accordance with World Fund's Articles of
Incorporation, the Board of Directors may authorize the creation of additional
series and classes within such series, with such preferences, privileges,
limitations and voting and dividend rights as the Board of Directors may
determine.
The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of the Portfolio, 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
Portfolio under certain circumstances. Each share of each class of common
stock is equal as to earnings, assets and voting privileges, except as noted
above, and each class (with the exception of Class Z shares which are not
subject to any distribution or service fees) bears the expenses related to the
distribution of its shares. Except for the conversion feature applicable to
the Class B shares, there are no conversion, preemptive or other subscription
rights. In the event of liquidation, each share of common stock of the
Portfolio is entitled to its portion of all of the Portfolio's assets after
all debt and expenses of the Portfolio have been paid. Since Class B and Class
C shares generally bear higher distribution expenses than Class A shares, the
liquidation proceeds to shareholders of those classes are likely to be lower
than to Class A shareholders and to Class Z shareholders whose shares are not
subject to any distribution and/or service fees. The Portfolio's shares do not
have cumulative voting rights for the election of Directors.
WORLD FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. WORLD 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 WORLD FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON
THE REMOVAL OF ONE OR MORE DIRECTORS OR TO TRANSACT ANY OTHER BUSINESS.
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SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Portfolio 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).
TAXATION OF THE PORTFOLIO
THE PORTFOLIO INTENDS TO QUALIFY FOR TREATMENT AS A REGULATED INVESTMENT
COMPANY UNDER THE INTERNAL REVENUE CODE. BY DOING SO, THE PORTFOLIO WILL NOT
BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME AND CAPITAL
GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS.
The Portfolio may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). In general, PFICs are foreign corporations that own mostly
passive assets or that derive 75% or more of their income from passive
sources. For tax purposes, the Portfolio's investments in PFICs may subject it
to federal income taxes and a charge in the nature of interest with respect to
certain gains and income realized by it. Under proposed Treasury regulations,
the Portfolio would be able to avoid such taxes and interest by electing to
"mark-to-market" its investments in PFICs, 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, futures and forward contracts (Section 1256 contracts). At
the end of each year, such investments held by the Portfolio will be required
to be "marked to market" for federal income tax 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.
TAXATION OF SHAREHOLDERS
Any dividends out of net taxable investment income, together with
distributions of net short-term capital gains (i.e., the excess of net short-
term capital gains over net long-term capital losses) distributed to
shareholders, will be taxable as ordinary income to the shareholder whether or
not reinvested. Any net 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 long-term capital gains 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 Portfolio will be eligible for the 70% dividends-
received deduction for corporate shareholders to the extent that the
Portfolio's income is derived from certain dividends received from domestic
corporations. Capital gains distributions are not eligible for the 70%
dividends-received deduction. Under tax proposals included in the budget plan
released by the Clinton Administration on December 7, 1995, the
dividends-received deduction allowed to corporate shareholders would be
reduced from 70% to 50% of eligible dividends and would be subject to
additional limitations. It is currently uncertain whether, when or in what
form these proposals or other changes to the dividends-received deduction will
be enacted into law.
Distributions by the Portfolio to a shareholder that is a qualified
retirement plan would generally not be taxable to participants in the plan.
Distributions from a qualified retirement plan (or non-qualified arrangement)
to a participant or beneficiary are subject to special rules. Because the
effect of these rules varies greatly with individual situations, potential
investors are urged to consult with their own tax advisers.
World 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 or Class Z shares or the
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exchange of Class A shares for Class Z 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.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Portfolio is required to withhold and
remit to the U.S. Treasury 31% of dividends, 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 Portfolio from sources within foreign
countries may be subject to foreign income taxes withheld at source. If the
Portfolio 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 Portfolio's present intention, the Portfolio 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, subject to generally
applicable limitations.
DIVIDENDS AND OTHER DISTRIBUTIONS
THE PORTFOLIO EXPECTS TO DISTRIBUTE ANNUALLY TO ITS SHAREHOLDERS ALL OF ITS
NET INVESTMENT INCOME AND ANY NET CAPITAL GAINS. Dividends paid by the
Portfolio 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 of net capital gains, if any, will be paid in the
same amount for each class of shares.
DIVIDENDS AND OTHER DISTRIBUTIONS WILL BE PAID IN ADDITIONAL PORTFOLIO
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 OTHER 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 08906-5015. The
Portfolio will notify each shareholder after the close of the Portfolio's
taxable year both of the dollar amount and the taxable status of that year's
dividends and other 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 other distributions in cash.
WHEN THE PORTFOLIO GOES "EX-DIVIDEND," THE NAV OF EACH CLASS IS REDUCED BY
THE AMOUNT OF THE DIVIDEND OR OTHER 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 OTHER 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 OTHER DISTRIBUTIONS WHEN MAKING YOUR PURCHASES.
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PURCHASES OF SECURITIES BEING OFFERED
SHARES OF THE PORTFOLIO MAY BE PURCHASED THROUGH PRUDENTIAL SECURITIES,
PRUSEC OR DIRECTLY FROM WORLD 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 offering
price per share 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). Class Z shares are
offered to a limited group of investors at net asset value without any sales
charge.
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.
Class Z shares are subject to a $10 million minimum initial investment
requirement which is waived for participants in the conversion, certain
benefit plans and other eligible investors and for shareholders who have
accumulated at least $10 million in shares of the Portfolio. There is no
minimum subsequent investment for Class Z shares.
The Portfolio reserves the right to reject any purchase order (including an
exchange into the Portfolio) or to suspend or modify the continuous offering
of its shares.
Your dealer is responsible for forwarding payment promptly to the Portfolio.
The Distributor reserves the right to cancel any purchase order for which
payment has not been received by the third business day following the
investment.
Transactions in Portfolio shares may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Portfolio by
wire, you must first telephone PMFS at (800) 225-1852 (toll-free) to receive
an account number. The following information will be requested: your name,
address, tax identification number, class election, dividend distribution
election, amount being wired and wiring bank. Instructions should then be
given by you to your bank to transfer funds by wire to State Street Bank and
Trust Company (State Street), Boston, Massachusetts, Custody and Shareholder
Services Division, Attention: Prudential World Fund, Inc. (International Stock
Series), specifying on the wire the account number assigned by PMFS and your
name and identifying the sales charge alternative.
If you arrange for receipt by State Street of federal funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Portfolio 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 World Fund,
Inc., Class Z shares and your name and individual account number. It is not
necessary to call PMFS to make subsequent purchase orders utilizing federal
funds. The minimum amount which may be invested by wire is $1,000.
CLASS Z SHARES
Class Z shares are available for purchase by (i) pension, profit sharing or
other employee benefit plans qualified under Section 401 of the Internal
Revenue Code, deferred compensation and annuity plans under
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Sections 457 and 403 (b)(7) of the Internal Revenue Code, and non-qualified
plans (Benefit Plans), provided such plans (in combination with other plans
sponsored by the same employer or group of related employers) have at least
$50 million in defined contribution assets or make a single investment in a
single PMF fund of $10 million or more; (ii) investors who make a single
investment in a single PMF fund of $10 million or more in a single account (or
who have $10 million or more invested in shares of the Portfolio held in a
single account); (iii) participants in the Fund Advisory Program (a mutual
fund allocation program sponsored by Prudential Securities); and (iv)
investors who are, or have executed a letter of intent to become, stockholders
of The Prudential Institutional Fund at the time World Fund is reorganized or
who at that time have exchangeability into The Prudential Institutional Fund.
After a Benefit Plan qualifies to purchase Class Z shares, all subsequent
purchases will be for Class Z shares. Other investors who qualify to purchase
Class Z shares by virtue of having made a single investment of $10 million or
more or having accumulated at least $10 million in shares of the Portfolio
will continue to so qualify unless the value of their investments should fall
below $10 million due to a redemption. In such cases, investors may continue
to have dividends and distributions earned on their remaining Class Z shares
automatically reinvested in Class Z shares. Such Investors will not, however,
otherwise qualify to make additional purchases of Class Z shares unless they
bring their total investment in shares of the Portfolio (held in a single
account) back to at least $10 million through a single transaction.
REDEMPTIONS
YOU CAN REDEEM SHARES OF THE PORTFOLIO 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.
IF YOU HOLD SHARES OF THE PORTFOLIO 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 Portfolio 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
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suspended at times (a) when the New York Stock Exchange is closed for other
than customary weekends and holidays, (b) when trading on such Exchange is
restricted, (c) when an emergency exists as a result of which disposal by the
Portfolio of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Portfolio 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 PORTFOLIO 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 World Fund determines that it would be
detrimental to the best interests of the remaining shareholders of the
Portfolio to make payment wholly or partly in cash, the Portfolio may pay the
redemption price in whole or in part by a distribution in kind of securities
from the investment portfolio of the Portfolio, 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. If your shares
are redeemed in kind, you would incur transaction costs in converting the
assets into cash. World Fund, however, has elected to be governed by Rule 18f-
1 under the Investment Company Act, under which World Fund is obligated to
redeem shares solely in cash up to the lesser of $250,000 or 1% of the net
asset value of World Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Portfolio, 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
Portfolio 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 such involuntary
redemption.
EXCHANGES
A SHAREHOLDER OF THE PORTFOLIO HAS 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 Z SHARES
MAY BE EXCHANGED FOR CLASS Z SHARES OF ANOTHER FUND ON THE BASIS OF THE
RELATIVE NAV. No sales charge will be imposed at the time of the exchange. An
exchange will be treated as a redemption and purchase for tax purposes.
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 World Fund at 1 (800) 225-1852 to execute a telephone exchange of
shares on
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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 WORLD FUND, THE PORTFOLIO OR THEIR 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.
(World Fund, the Portfolio, or their agents could be subject to liability if
they fail to employ reasonable 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 PORTFOLIO'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.
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.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice.
NET ASSET VALUE
THE PORTFOLIO'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 OF WORLD FUND HAS FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION
OF THE PORTFOLIO'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 Portfolio's Board of Directors.
The Portfolio 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 World Fund or days on
which changes in the value of the Portfolio'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.
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INFORMATION ABOUT INTERNATIONAL STOCK FUND
FINANCIAL INFORMATION
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
Unless indicated otherwise, the following financial highlights have been
audited by Deloitte & Touche LLP, independent accountants, whose report
thereon was unqualified. This information is derived from and 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 share of beneficial interest outstanding, total
return, ratios to average net assets and other supplemental data for the
periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS NOVEMBER 15,
ENDED YEAR ENDED DECEMBER 1992(A)
MARCH 31, 30, THROUGH
1996 -------------------- SEPTEMBER 30,
(UNAUDITED) 1995 1994 1993
----------- --------- --------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFOR-
MANCE:
Net asset value, beginning
of period.................. $ 15.25 $ 14.84 $ 12.35 $ 10.00
-------- --------- --------- -------
INCOME FROM INVESTMENT OPER-
ATIONS:
Net investment income(b).... .04 .18 .13 .16
Net realized and unrealized
gain (loss) on investment
and foreign currency
transactions............... .69 .66 2.54 2.21
-------- --------- --------- -------
Total from investment op-
erations................. .73 .84 2.67 2.37
-------- --------- --------- -------
Less distributions:
Dividends from net invest-
ment income................ (.19) (.10) (.03) (.02)
Distributions from net real-
ized gains................. -- (.33) (.15) --
-------- --------- --------- -------
Total distributions......... (.19) (.43) (.18) (.02)
-------- --------- --------- -------
Net asset value, end of pe-
riod....................... $ 15.79 $ 15.25 $ 14.84 $ 12.35
======== ========= ========= =======
TOTAL RETURN(D)............. 4.86% 5.95% 21.71% 23.74%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)...................... $162,206 $ 136,685 $ 102,824 $31,708
Average net assets (000).... $144,032 $ 118,927 $ 68,476 $14,491
Ratios to average net
assets:(b)
Expenses.................. 1.60%(c) 1.60% 1.60% 1.60%(c)
Net investment income..... .56%(c) 1.58% 1.08% 1.44%(c)
Portfolio turnover rate..... 9% 20% 21% 15%
Average commission rate paid
per share.................. $ 0.0194 N/A N/A N/A
</TABLE>
- --------
(a) Commencement of investment operations.
(b) Net of expenses subsidy/recovery.
(c) Annualized.
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<PAGE>
(d) 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 return for periods of
less than a full year are not annualized. Total return includes the effect
of expenses subsidies.
GENERAL
For a discussion of the organization, classification and sub-classification
of International Stock Fund, see "Introduction to the Funds" and "More Facts
About the Company" in the PIF Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of International Stock Fund's investment objective and
policies and risk factors associated with investment in International Stock
Fund, see "The Funds" and "Other Investment Practices, Risk Considerations,
and Policies of the Funds" in the PIF Prospectus.
BOARD OF TRUSTEES
For a discussion of the responsibilities of PIF's Board, see "Management of
the Company" and "More Facts About the Company" in the PIF Prospectus.
MANAGER AND PORTFOLIO MANAGER
For a discussion of PIF's Manager and subadviser and Fund's portfolio
manager, see "Management of the Company" in the PIF Prospectus.
PERFORMANCE
For a discussion of International Stock Fund's performance during the fiscal
year ended September 30, 1995, see Appendix B hereto.
INTERNATIONAL STOCK FUND'S SHARES
For a discussion of International Stock Fund's shares, including voting and
exchange rights and how the shares may be purchased and redeemed, see
"Investors Guide to Services" and "More Facts About the Company" in the PIF
Prospectus.
NET ASSET VALUE
For a discussion of how the net asset value of International Stock Fund's
shares is determined, see "Other Considerations" in the PIF Prospectus.
TAXES, DIVIDENDS AND OTHER DISTRIBUTIONS
For a discussion of International Stock Fund's policy with respect to
dividends and other distributions and the tax consequences of an investment in
International Stock Fund's shares, see "Other Considerations" in the PIF
Prospectus.
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<PAGE>
MISCELLANEOUS
ADDITIONAL INFORMATION
Both PIF and World Fund are subject to the informational requirements of the
Securities Exchange Act of 1934, and in accordance therewith files reports and
other information with the SEC. Reports and other information filed by PIF and
World Fund can be inspected and copied at the public reference facilities
maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the SEC's regional offices in New York (7 World Trade Center,
Suite 1300, New York, New York 10048) and Chicago (Citicorp Center, Suite
1400, 500 West Madison Street, Chicago, Illinois 60661-2511). Copies of such
material also can be obtained at prescribed rates from the Public Reference
Branch, Office of Consumer Affairs and Information Services, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
LEGAL MATTERS
Certain legal matters in connection with the issuance of Class Z shares of
the Portfolio as part of the Conversion will be passed upon by Sullivan &
Cromwell, New York, New York, counsel to the World Fund.
EXPERTS
The audited financial statements of International Stock Fund and the
Portfolio, incorporated by reference herein or in the Statement of Additional
Information, have been audited by Deloitte & Touche LLP, independent
accountants, to the extent indicated in its reports thereon which are included
in International Stock Fund's and the Portfolio's Annual Reports to
Shareholders for the fiscal years ended September 30, 1995 and October 31,
1995, respectively. The financial statements audited by Deloitte & Touche LLP
have been incorporated by reference herein or in the Statement of Additional
Information in reliance on its reports given on its authority as experts in
auditing and accounting.
VOTING INFORMATION
Forty percent of the shares of International Stock Fund outstanding on July
12, 1996, represented in person or by proxy, must be present for the
transaction of business at the Meeting. In the event that a quorum is not
present at the Meeting, or if a quorum is present but sufficient votes to
approve the proposal are not received, the persons named as proxies may
propose one or more adjournments of the Meeting to permit further solicitation
of Proxies. Any such adjournment will require the affirmative vote of a
majority of those shares present at the Meeting or represented by proxy. When
voting on a proposed adjournment, the persons named as proxies will vote all
shares for the proposed adjournment that they are entitled to vote, unless
directed to disapprove the proposal, in which case such shares will be voted
against the proposed adjournment. Any questions as to an adjournment of the
Meeting will be voted on by the persons named in the enclosed Proxy in the
same manner that the Proxies are instructed to be voted. In the event that the
Meeting is adjourned, the same procedures will apply at a later Meeting date.
If the accompanying form of Proxy is executed properly and returned, shares
represented by it will be voted at the Meeting in accordance with the
instructions on the Proxy. However, if no instructions are specified, on a
Proxy, the shares represented thereby will be voted for the proposal. A Proxy
may be revoked at any time prior to the time it is voted by written notice to
the Secretary of PIF or by attendance at the Meeting. If a Proxy that is
properly executed and returned is accompanied by instructions to withhold
authority to vote (an abstention) or
36
<PAGE>
represents a broker "non-vote" (that is, a Proxy from a broker or nominee
indicating that such person has not received instructions from the beneficial
owner or other person entitled to vote shares on a particular matter with
respect to which the broker or nominee does not have discretionary power), the
shares represented thereby, with respect to matters to be determined by a
majority of the votes cast on such matters, will be considered present at the
Meeting for purposes of determining the existence of a quorum for the
transaction of business but, not being cast, will have no effect on the
outcome of such matters.
The close of business on July 12, 1996 has been fixed as the record date for
the determination of shareholders entitled to notice of, and to vote at, the
Meeting. On that date, International Stock Fund had shares outstanding
and entitled to vote.
Each outstanding full share of International Stock Fund will be entitled to
one vote at the Meeting, and each outstanding fractional share of
International Stock Fund will be entitled to a proportionate fractional part
of one vote. [As of July 22, 1996, the Trustees and officers of PIF, as a
group, owned less than 1% of the outstanding shares of International Stock
Fund. As of July 22, 1996, the following shareholders owned beneficially or of
record 5% or more of the International Stock Fund's outstanding shares.
Information/standard language on controlling shareholder to come.] As of July
22, 1996, Prudential Securities was the record holder for other beneficial
owners of shares (or approximately % of the outstanding shares), of
the International Stock Fund. In the event of any meeting of shareholders,
Prudential Securities will forward, or cause the forwarding of, proxy
materials to the beneficial owners for which it is the record holder.]
The expenses of the Conversion and the solicitation of proxies will be borne
by International Stock Fund and will include reimbursement of brokerage firms
and others for expenses in forwarding proxy solicitation material to the
shareholders of the International Stock Fund. The solicitation of proxies will
be largely by mail but may include telephonic, telegraphic or oral
communication by regular employees of PIFM and its affiliates, including PMF.
This cost also will be borne by International Stock Fund.
OTHER MATTERS
No business other than as set forth herein is expected to come before the
Meeting, but should any other matter requiring a vote of shareholders of
International Stock Fund arise, including any question as to an adjournment of
the Meeting, the persons named in the enclosed Proxy will vote thereon
according to their best judgment in the interests of International Stock Fund,
taking into account all relevant circumstances.
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<PAGE>
SHAREHOLDERS' PROPOSALS
Any International Stock Fund shareholder proposal intended to be presented
at any subsequent meeting of the shareholders of International Stock Fund must
be received by PIF a reasonable time before the Board's solicitation relating
to such meeting is made in order to be included in International Stock Fund's
Proxy Statement and form of Proxy relating to that meeting. In the event that
the Plan is approved at this Meeting, it is not expected that there will be
any future shareholder meetings of International Stock Fund.
It is the present intent of the Boards of PIF and World Fund not to hold
annual meetings of shareholders unless the election of Directors/Trustees is
required under the Investment Company Act.
S. Jane Rose
Secretary
Dated: July , 1996
38
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF CONVERSION AND LIQUIDATION
This AGREEMENT AND PLAN OF CONVERSION AND LIQUIDATION (Agreement) is made as
of this 27th day of June, 1996, between Prudential World Fund, Inc., a
Maryland corporation (World Fund), on behalf of International Stock Series, a
segregated portfolio of assets (series) thereof (International Stock Series),
and The Prudential Institutional Fund, a Delaware business trust (PIF), on
behalf of its International Stock Fund series (International Stock Fund).
(International Stock Series and International Stock Fund are sometimes
referred to herein individually as a Fund and collectively as the Funds, and
World Fund and PIF are sometimes referred to herein individually as an
Investment Company and collectively as the Investment Companies. All
agreements, representations, actions, and obligations described herein made or
to be taken or undertaken by either Fund are made and shall be taken or
undertaken by World Fund on behalf of International Stock Series and by PIF on
behalf of International Stock Fund.)
International Stock Fund intends to change its identity, form, and place of
organization--by converting from a series of a Delaware business trust to a
series of a Maryland corporation--through a reorganization within the meaning
of section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended
(Code). International Stock Fund desires to accomplish such conversion by
transferring all of its assets to International Stock Series (which will be
established solely for the purpose of acquiring such assets and continuing
International Stock Fund's business) in exchange solely for voting shares of
common stock in International Stock Series (International Stock Series Shares)
and International Stock Series's assumption of International Stock Fund's
liabilities, followed by the constructive distribution of the International
Stock Series Shares pro rata to the holders of shares of beneficial interest
in International Stock Fund (International Stock Fund Shares) in exchange
therefor, all on the terms and conditions set forth in this Agreement (which
is intended to be, and is adopted as, a "plan of reorganization" for federal
income tax purposes) (all such transactions being herein referred to as the
Reorganization).
In consideration of the mutual promises herein contained, the parties agree
as follows:
1. PLAN OF CONVERSION AND LIQUIDATION.
1.1. International Stock Fund agrees to assign, sell, convey, transfer, and
deliver all of its assets described in paragraph 1.2 (Assets) to International
Stock Series. International Stock Series agrees in exchange therefor (a) to
issue and deliver to International Stock Fund full and fractional
International Stock Series Shares, equal in number to the number of full and
fractional International Stock Fund Shares then outstanding, and (b) to assume
all of International Stock Fund's liabilities described in paragraph 1.3
(Liabilities). Such transactions shall take place at the Closing (as defined
in paragraph 2.1).
1.2. The Assets shall include, without limitation, all cash, cash
equivalents, securities, receivables (including interest and dividends
receivable), claims and rights of action, rights to register shares under
applicable securities laws, books and records, deferred and prepaid expenses
shown as assets on International Stock Fund's books, and other property owned
by International Stock Fund at the Effective Time (as defined in paragraph
2.1).
1.3. The Liabilities shall include all of International Stock Fund's
liabilities, debts, obligations, and duties of whatever kind or nature,
whether absolute, accrued, contingent, or otherwise, whether or not
determinable at the Effective Time, and whether or not specifically referred
to herein.
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1.4. At the Effective Time (or as soon thereafter as is reasonably
practicable), (a) the International Stock Series Shares acquired by
International Stock Fund pursuant to paragraph 4.5 shall be redeemed by
International Stock Series for $1.00 and (b) International Stock Fund shall
constructively distribute the International Stock Series Shares received by it
pursuant to paragraph 1.1 to International Stock Fund's shareholders of
record, determined as of the Effective Time (collectively Shareholders and
each individually a Shareholder), in exchange for their International Stock
Fund Shares. Such distribution shall be accomplished by World Fund's transfer
agent (Transfer Agent) opening an account on International Stock Series's
share transfer books in each Shareholder's name and crediting thereto the
respective pro rata number of full and fractional (rounded to the third
decimal place) International Stock Series Shares due that Shareholder. All
outstanding International Stock Fund Shares shall simultaneously be canceled
on International Stock Fund's share transfer books. International Stock Series
shall not issue certificates representing the International Stock Series
Shares in connection with the Reorganization.
1.5. As soon as reasonably practicable after distribution of the
International Stock Series Shares pursuant to paragraph 1.4, International
Stock Fund shall be terminated as a series of PIF and any further actions
shall be taken in connection therewith as required by applicable law.
1.6. Any transfer taxes payable upon issuance of International Stock Series
Shares in a name other than that of the registered holder on International
Stock Fund's books of the International Stock Fund Shares constructively
exchanged therefor shall be paid by the person to whom such International
Stock Series Shares are to be issued, as a condition of such transfer.
2. CLOSING.
2.1. The Reorganization, together with related acts necessary to consummate
the same (Closing), shall occur at the Funds' principal office on September
20, 1996, or at such other place and/or on such other date as to which the
parties may agree. All acts taking place at the Closing shall be deemed to
take place simultaneously as of the close of business on the date thereof or
at such other time as the parties may agree (Effective Time).
2.2. PIF shall deliver to World Fund at the Closing a schedule of the
Assets as of the Effective Time, which shall set forth for all portfolio
securities included therein their adjusted tax basis and holding period by
lot. International Stock Fund's custodian shall deliver at the Closing a
certificate of an authorized officer stating that (a) the Assets held by the
custodian will be transferred to International Stock Series at the Effective
Time and (b) all necessary taxes in conjunction with the delivery of the
Assets, including all applicable federal and state stock transfer stamps, if
any, have been paid or provision for payment has been made.
2.3. PIF shall deliver to World Fund at the Closing a list of the
Shareholders' names and addresses and the number of outstanding International
Stock Fund Shares owned by each Shareholder, all as of the Effective Time,
certified by the Secretary or Assistant Secretary of PIF. The Transfer Agent
shall deliver at the Closing a certificate as to the opening on International
Stock Series's share transfer books of accounts in the Shareholders' names.
World Fund shall issue and deliver a confirmation to PIF evidencing the
International Stock Series Shares to be credited to International Stock Fund
at the Effective Time or provide evidence satisfactory to PIF that such shares
have been credited to International Stock Fund's account on International
Stock Series's books. At the Closing, each party shall deliver to the other
such bills of sale, checks, assignments, stock certificates, receipts, or
other documents as the other party or its counsel may reasonably request.
2.4. Each Investment Company shall deliver to the other at the Closing a
certificate executed in its name by its President or a Vice President in form
and substance satisfactory to the recipient and dated the Effective Time, to
the effect that the representations and warranties it made in this Agreement
are true and correct at the Effective Time except as they may be affected by
the transactions contemplated by this Agreement.
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3. REPRESENTATIONS AND WARRANTIES.
3.1. International Stock Fund represents and warrants as follows:
3.1.1. PIF is a business trust duly organized, validly existing, and in
good standing under the laws of the State of Delaware, and its Certificate
of Trust is on file with the Delaware Secretary of State;
3.1.2. PIF is duly registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (1940 Act),
and such registration is in full force and effect;
3.1.3. International Stock Fund is a duly established and designated
series of PIF;
3.1.4. At the Closing, International Stock Fund will have good and
marketable title to the Assets and full right, power, and authority to
sell, assign, transfer, and deliver the Assets free of any liens or other
encumbrances;
3.1.5. International Stock Series Shares are not being acquired for the
purpose of making any distribution thereof, other than in accordance with
the terms hereof;
3.1.6. International Stock Fund is a "fund" as defined in section
851(h)(2) of the Code; it qualified for treatment as a regulated investment
company under Subchapter M of the Code (RIC) for each past taxable year
since it commenced operations and will continue to meet all the
requirements for such qualification for its current taxable year; it has no
earnings and profits accumulated in any taxable year in which the
provisions of Subchapter M did not apply to it; and, for each past calendar
year since it commenced operations, it has made such distributions as are
necessary to avoid the imposition of federal excise tax or has paid or
provided for the payment of any excise tax imposed;
3.1.7. There is no plan or intention of Shareholders who own 5% or more
of the International Stock Fund Shares--and, to the best of PIF's
management's knowledge, there is no plan or intention of the remaining
Shareholders--to redeem or otherwise dispose of any portion of the
International Stock Series Shares to be received by them in the
Reorganization. PIF's management does not anticipate dispositions of those
International Stock Series Shares at the time of or soon after the
Reorganization to exceed the usual rate and frequency of redemptions of
shares of International Stock Fund as a series of an open-end investment
company. Consequently, its management expects that the percentage of
Shareholder interests, if any, that will be disposed of as a result of or
at the time of the Reorganization will be de minimus;
3.1.8. The Liabilities were incurred by International Stock Fund in the
ordinary course of its business;
3.1.9. International Stock Fund is not under the jurisdiction of a court
in a proceeding under Title 11 of the United States Code or similar case
within the meaning of section 368(a)(3)(A) of the Code;
3.1.10. Not more than 25% of the value of International Stock Fund's
total assets (excluding cash, cash items, and U.S. government securities)
is invested in the stock and securities of any one issuer, and not more
than 50% of the value of such assets is invested in the stock and
securities of five or fewer issuers;
3.1.11. International Stock Fund will be terminated as a series of PIF as
soon as reasonably practicable after the Reorganization, but in all events
within twelve months after the Effective Time;
3.1.12. As of the Effective Time, International Stock Fund will not have
outstanding any warrants, options, convertible securities, or any other
type of rights pursuant to which any person could acquire International
Stock Fund Shares;
3.1.13. Institutional Fund is not, and the execution, delivery, and
performance of this Agreement will not result, in violation of any
provision of its Declaration of Trust or By-Laws or of any material
agreement, indenture, instrument, contract, lease, or other undertaking to
which International Stock Fund is a party or by which International Stock
Fund is bound;
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3.1.14. All material contracts or other commitments of International
Stock Fund, or any of its properties or assets, except this Agreement and
investment contracts will be terminated, or provision for discharge of any
liabilities of International Stock Fund thereunder will be made at or prior
to the Effective Time without either Fund's incurring any liability or
penalty with respect thereto;
3.1.15. No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against International Stock Fund or
any of its properties or assets, except as previously disclosed in writing
to World Fund. Institutional Fund knows of no facts that might form the
basis for the institution of such litigation, proceedings, or
investigation, and International Stock Fund is not a party to or subject to
the provisions of any order, decree, or judgment of any court or
governmental body that materially and adversely affects its business or its
ability to consummate the transactions herein contemplated;
3.1.16. The Portfolio of Investments, Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net Assets,
and Financial Highlights of International Stock Fund at September 30, 1995,
and for the year then ended (copies of which have been furnished to World
Fund) have been audited by Deloitte & Touche LLP, independent accountants,
in accordance with generally accepted auditing standards. Such financial
statements are prepared in accordance with generally accepted accounting
principles and present fairly, in all material respects, the financial
condition, results of operations, changes in net assets, and financial
highlights of International Stock Fund as of and for the period ended on
such date, and there are no material known liabilities of International
Stock Fund (contingent or otherwise) not disclosed therein;
3.1.17. Since September 30, 1995, there has not been any material adverse
change in International Stock Fund's financial condition, assets,
liabilities, or business other than changes occurring in the ordinary
course of business, or any incurrence by International Stock Fund of
indebtedness maturing more than one year from the date such indebtedness
was incurred, except as otherwise disclosed to and accepted by World Fund.
For the purposes of this paragraph 3.1.17, a decline in net asset value or
a decrease in the number of shares outstanding shall not constitute a
material adverse change;
3.1.18. At the date hereof and at the Effective Time, all federal and
other tax returns and reports of International Stock Fund required by law
to have been filed on or before such dates shall have been timely filed,
and all federal and other taxes shown as due on said returns and reports
shall have been paid insofar as due, or provision shall have been made for
the payment thereof, and, to the best of Institutional Fund's knowledge,
all federal or other taxes required to be shown on any such return or
report have been shown on such return or report, no such return is
currently under audit, and no assessment has been asserted with respect to
such returns;
3.1.19. All issued and outstanding shares of International Stock Fund
are, and at the Effective Time will be, duly and validly authorized,
issued, and outstanding, fully paid and non-assessable. All issued and
outstanding shares of International Stock Fund will, at the time of the
Closing, be held in the names of the persons and in the amounts set forth
in the list of shareholders submitted to World Fund in accordance with the
provisions of paragraph 2.3. International Stock Fund does not have
outstanding any options, warrants, or other rights to subscribe for or
purchase any of its shares, nor is there outstanding any security
convertible into any of its shares;
3.1.20. At the Effective Time, International Stock Fund will have good
and marketable title to its assets to be transferred to International Stock
Series pursuant to paragraph 1.1, and full right, power, and authority to
sell, assign, transfer, and deliver such assets hereunder free of any
liens, claims, charges, or other encumbrances, and, upon delivery and
payment for such assets, International Stock Series will acquire good and
marketable title thereto;
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3.1.21. The execution, delivery, and performance of this Agreement have
been duly authorized by the Board of Trustees of Institutional Fund and by
all necessary corporate action, other than shareholder approval, on the
part of International Stock Fund, and this Agreement constitutes a valid
and binding obligation of Institutional Fund, enforceable in accordance
with its terms, except as the same may be limited by bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium, and similar
laws relating to or affecting creditors' rights and by general principles
of equity. At the Effective Time, the performance of this Agreement shall
have been duly authorized by all necessary action by International Stock
Fund's shareholders;
3.1.22. The information furnished and to be furnished by Institutional
Fund for use in applications for orders, registration statements, proxy
materials, and other documents that may be necessary in connection with the
transactions contemplated hereby is and shall be accurate and complete in
all material respects and is in compliance and shall comply in all material
respects with applicable federal securities and other laws and regulations;
and
3.1.23. On the effective date of the registration statement filed with
the SEC by World Fund on Form N-14 relating to the shares of International
Stock Series issuable hereunder, and any supplement or amendment thereto
(Registration Statement), at the time of the meeting of the shareholders of
International Stock Fund, and at the Effective Time, the Proxy Statement of
Institutional Fund and the Prospectus of International Stock Series to be
included in the Registration Statement (collectively, Proxy Statement)
(a) will comply in all material respects with the provisions of the
Securities Act of 1933 (1933 Act), the Securities Exchange Act of 1934
(1934 Act), and the Investment Company Act and the rules and
regulations thereunder and
(b) will not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein in light of the
circumstances under which they were made or necessary to make the
statements therein not misleading; provided, however, that the
representations and warranties in this paragraph 3.1.23 shall not apply
to statements in or omissions from the Proxy Statement made in reliance
upon and in conformity with information furnished by World Fund for use
therein.
3.2. International Stock Series represents and warrants as follows:
3.2.1. World Fund is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland, and its Articles
of Incorporation are on file with the Department of Assessments and
Taxation of the State of Maryland;
3.2.2. World Fund is duly registered as an open-end management investment
company under the 1940 Act, and such registration is in full force and
effect;
3.2.3. Before the Effective Time, International Stock Series will be a
duly established and designated series of World Fund;
3.2.4. International Stock Series has not commenced operations, nor will
it commence operations until after the Closing;
3.2.5. Prior to the Effective Time, there will be no issued and
outstanding International Stock Series Shares or any other securities
issued by International Stock Series, except as provided in paragraph 4.5;
3.2.6. No consideration other than International Stock Series Shares (and
International Stock Series's Assumption of the Liabilities) will be issued
in exchange for the assets in the Reorganization;
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3.2.7. The International Stock Series Shares to be issued and delivered
to International Stock Fund hereunder will, at the Effective Time, have
been duly authorized and, when issued and delivered as provided herein,
will be duly and validly issued and outstanding shares of International
Stock Series, fully paid and non-assessable;
3.2.8. International Stock Series will be a "fund" as defined in section
851(h)(2) of the Code and will meet all the requirements to qualify for
treatment as a RIC for its taxable year in which the Reorganization occurs;
3.2.9. International Stock Series has no plan or intention to issue
additional International Stock Series Shares following the Reorganization
except for shares issued in the ordinary course of its business as a series
of an open-end investment company; nor does International Stock Series have
any plan or intention to redeem or otherwise re-acquire any International
Stock Series Shares issued to the Shareholders pursuant to the
Reorganization, other than through redemptions arising in the ordinary
course of such business;
3.2.10. International Stock Series (a) will actively continue
International Stock Fund's business in substantially the same manner that
International Stock Fund conducted that business immediately before the
Reorganization, (b) has no plan or intention to sell or otherwise dispose
of any of the Assets, except for dispositions made in the ordinary course
of that business and dispositions necessary to maintain its status as a
RIC, and (c) expects to retain substantially all the Assets in the same
form as it receives them in the Reorganization, unless and until subsequent
investment circumstances suggest the desirability of change or it becomes
necessary to make dispositions thereof to maintain such status;
3.2.11. There is no plan or intention for International Stock Series to
be dissolved or merged into another corporation or business trust or "fund"
thereof (within the meaning of section 851(h)(2) of the Code) following the
Reorganization;
3.2.12. Immediately after the Reorganization, (a) not more than 25% of
the value of International Stock Series's assets (excluding cash, cash
items, and U.S. government securities) will be invested in the stock and
securities of any one issuer, and (b) not more than 50% of the value of
such assets will be invested in the stock and securities of five or fewer
issuers;
3.2.13. World Fund is not, and the execution, delivery, and performance
of this Agreement will not result, in violation of any provision of its
Articles of Incorporation or By-Laws or of any material agreement,
indenture, instrument, contract, lease, or other undertaking to which
International Stock Series is a party or by which International Stock
Series is bound;
3.2.14. The execution, delivery, and performance of this Agreement have
been duly authorized by the Board of Directors of World Fund and by all
necessary corporate action on the part of International Stock Series, and
this Agreement constitutes a valid and binding obligation of World Fund,
enforceable in accordance with its terms, except as the same may be limited
by bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium,
and similar laws relating to or affecting creditors' rights and by general
principles of equity;
3.2.15. The shares of International Stock Series to be issued and
delivered to International Stock Fund pursuant to this Agreement will, at
the Effective Time, have been duly authorized and, when issued and
delivered as provided in this Agreement, will be duly and validly issued
and outstanding shares of International Stock Series, fully paid and non-
assessable;
3.2.16. The information furnished and to be furnished by World Fund for
use in applications for orders, registration statements, proxy materials,
and other documents that may be necessary in connection
A-6
<PAGE>
with the transactions contemplated hereby is and shall be accurate and
complete in all material respects and is in compliance and shall comply in
all material respects with applicable federal securities and other laws and
regulations; and
3.2.17. On the effective date of the Registration Statement, at the time
of the meeting of the shareholders of International Stock Fund, and at the
Effective Time, the Proxy Statement (a) will comply in all material
respects with the provisions of the 1933 Act, the 1934 Act, and the
Investment Company Act and the rules and regulations thereunder and (b)
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein in light of the circumstances
under which they were made or necessary to make the statements therein not
misleading; provided, however, that the representations and warranties in
this paragraph 3.2.17 shall not apply to statements in or omissions from
the Proxy Statement made in reliance upon and in conformity with
information furnished by Institutional Fund for use therein.
3.3. Each Fund represents and warrants as follows:
3.3.1. The fair market value of the International Stock Series Shares,
when received by the Shareholders, will be approximately equal to the fair
market value of their International Stock Fund Shares constructively
surrendered in exchange therefor;
3.3.2. Immediately following consummation of the Reorganization, the
Shareholders will own all the International Stock Series Shares and will
own such shares solely by reason of their ownership of International Stock
Fund Shares immediately prior to the Reorganization;
3.3.3. The Shareholders will pay their own expenses, if any, incurred in
connection with the Reorganization;
3.3.4. Immediately following consummation of the Reorganization,
International Stock Series will hold the same assets--except for assets
used to pay expenses incurred in connection with the Reorganization (which
excepted assets, together with the amount of all redemptions and
distributions (other than regular, normal dividends) made by International
Stock Fund immediately preceding the Reorganization, will, in the
aggregate, constitute less than 1% of its net assets)--and be subject to
the same liabilities that International Stock Fund held or was subject to
immediately prior thereto, plus any liabilities and expenses of the parties
incurred in connection with the Reorganization; and
3.3.5. There is no intercompany indebtedness between the Funds that was
issued or acquired, or will be settled, at a discount.
4. CONDITIONS PRECEDENT.
Each Fund's obligations hereunder shall be subject to (a) performance by the
other party of all its obligations to be performed hereunder at or before the
Effective Time, (b) all representations and warranties of the other party
contained herein being true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions
contemplated hereby, as of the Effective Time, with the same force and effect
as if made on and as of the Effective Time, and (c) the further conditions
that, at or before the Effective Time:
4.1. All necessary filings shall have been made with the Securities and
Exchange Commission (SEC) and state securities authorities, and all consents,
orders, and permits of federal, state, and local regulatory authorities
(including those of the SEC and state securities authorities) deemed necessary
by either Investment Company to
A-7
<PAGE>
permit consummation, in all material respects, of the transactions
contemplated hereby shall have been obtained, except where failure to obtain
any such consent, order, or permit would not involve a risk of a material
adverse effect on the assets or properties of either Fund, provided that
either party hereto may for itself waive any part of this condition;
4.2. One or more post-effective amendments to PIF's registration statement
on Form N-1A under the Securities Act of 1933, as amended, and the 1940 Act
(Registration Statement) shall have been filed with the SEC containing (a)
such amendments to the Registration Statement as are determined by the
trustees/directors of each Investment Company to be necessary and appropriate
as a result of this Agreement and (b) the adoption by World Fund, as its own,
of the Registration Statement, as so amended, and such post-effective
amendment(s) to the Registration Statement shall have become effective;
4.3. Each party shall have received an opinion from Kirkpatrick & Lockhart
LLP as to the federal income tax consequences mentioned below. In rendering
such opinion, such counsel may rely as to factual matters, exclusively and
without independent verification, on the representations made in this
Agreement (or in separate letters addressed to such counsel) and the
certificates delivered pursuant to paragraph 2.4. Such opinion shall be
substantially to the effect that, based on the facts and assumptions stated
therein, for federal income tax purposes:
4.3.1. The Reorganization will constitute a reorganization within the
meaning of section 368(a)(1)(F) of the Code, and each Fund will be "a party
to a reorganization" within the meaning of section 368(b) of the Code;
4.3.2. No gain or loss will be recognized to International Stock Fund on
the transfer of the Assets to International Stock Series in exchange solely
for International Stock Series Shares and International Stock Series's
assumption of the Liabilities or on the subsequent distribution of those
shares to the Shareholders, in constructive exchange for their
International Stock Fund Shares, in liquidation of International Stock
Fund;
4.3.3. No gain or loss will be recognized to International Stock Series
on its receipt of the Assets in exchange for International Stock Series
Shares and its assumption of the Liabilities;
4.3.4. International Stock Series's basis for the Assets will be the same
as the basis thereof in International Stock Fund's hands immediately before
the Reorganization, and International Stock Series's holding period for the
Assets will include International Stock Fund's holding period therefor;
4.3.5. A Shareholder will recognize no gain or loss on the constructive
exchange of all its International Stock Fund Shares solely for
International Stock Series Shares pursuant to the Reorganization;
4.3.6. A Shareholder's basis for the International Stock Series Shares to
be received by it in the Reorganization will be the same as the basis for
its International Stock Fund Shares to be constructively surrendered in
exchange for those International Stock Series Shares, and its holding
period for those International Stock Series Shares will include its holding
period for those International Stock Fund Shares, provided they are held as
capital assets by the Shareholder at the Effective Time; and
4.3.7. For purposes of section 381 of the Code, International Stock
Series will be treated as if there had been no Reorganization. Accordingly,
the Reorganization will not result in the termination of International
Stock Fund's taxable year, and International Stock Fund's tax attributes
enumerated in section 381(c) of the Code will be taken into account by
International Stock Series as if there had been no Reorganization. The part
of International Stock Fund's taxable year before the Reorganization will
be included in International Stock Series's taxable year after the
Reorganization;
A-8
<PAGE>
4.4. World Fund shall have received on the Closing Date a favorable opinion
from Kirkpatrick & Lockhart, LLP, counsel to PIF, dated as of the Closing
Date, to the effect that:
4.4.1. PIF is duly organized and validly existing under the laws of the
State of Delaware with power under its Declaration of Trust to own all of
its properties and assets and, to the knowledge of such counsel, to carry
on its business as presently conducted and International Stock Fund has
been duly established in accordance with the terms of the PIF Declaration
of Trust as a separate series of PIF;
4.4.2. This Agreement has been duly authorized, executed and delivered by
PIF and constitutes a valid and legally binding obligation of PIF
enforceable against the assets of International Stock Fund in accordance
with its terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles;
4.4.3. The execution and delivery of the Agreement did not, and the
performance by PIF of its obligations hereunder will not, (a) violate PIF's
Declaration of Trust or By-Laws or (b) result in a default or a breach of
(i) the Management Agreement, dated October 30, 1992, between PIF and
Prudential Institutional Fund Management, Inc., (ii) the Custodian
Agreement, dated October 30, 1992, between PIF and State Street Bank and
Trust Company, (iii) the Distribution Agreement with respect to
International Stock Fund, dated May 1, 1993, between PIF and Prudential
Retirement Services, Inc., and (iv) the Administration, Transfer Agency and
Service Agreement, dated October 20, 1992, between PIF and PMF; provided,
however, that such counsel may state that insofar as performance by PIF of
its obligations under this Agreement is concerned they express no opinion
as to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or
affecting creditors' rights and to general equity principles;
4.4.4. All regulatory consents, authorizations and approvals required to
be obtained by PIF under the federal laws of the United States and the laws
of the State of Delaware for the consummation of the transactions
contemplated by this Agreement have been obtained;
4.4.5. Such counsel knows of no litigation or any governmental proceeding
instituted or threatened against PIF involving the International Stock
Fund, that would be required to be disclosed in the Registration Statement
and is not so disclosed; and
4.4.6. PIF has been registered with the SEC as an investment company,
and, to the knowledge of such counsel, no order has been issued or
proceeding instituted to suspend such registration.
4.4.7. To the knowledge of such counsel (without any independent inquiry
or investigation), (a) no material litigation or administration proceeding
or investigation of or before any court or governmental body is presently
pending or threatened against PIF (with respect to Acquiree Fund) or any of
its properties or assets distributable or allocable to Acquiree Fund, and
(b) PIF is not a party to or subject to the provision of any order, decree
or judgment of any court or governmental body that materially and adversely
affects its business, except as otherwise disclosed.
4.5. PIF shall have received on the Closing Date a favorable opinion from
Sullivan & Cromwell, counsel to World Fund, dated as of the Closing Date, to
the effect that:
4.5.1. World Fund is duly organized and validly existing under the laws
of the State of Maryland with power under its Articles of Incorporation to
own all of its properties and assets and, to the knowledge of such counsel,
to carry on its business as presently conducted and International Stock
Series has been
A-9
<PAGE>
duly established in accordance with the terms of the World Fund Articles of
Incorporation as a separate series of World Fund;
4.5.2. This Agreement has been duly authorized, executed and delivered by
World Fund and constitutes a valid and legally binding obligation of World
Fund enforceable against the assets of International Stock Series in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles;
4.5.3. The execution and delivery of the Agreement did not, and the
performance by World Fund of its obligations hereunder will not, (a)
violate World Fund's Articles of Incorporation or By-Laws or (a) result in
a default or a breach of any agreement entered into by World Fund;
provided, however, that such counsel may state that insofar as performance
by World Fund of its obligations under this Agreement is concerned they
express no opinion as to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles;
4.5.4. All regulatory consents, authorizations and approvals required to
be obtained by World Fund under the federal laws of the United States and
the laws of the State of Maryland for the consummation of the transactions
contemplated by this Agreement have been obtained;
4.5.5. Such counsel knows of no litigation or any governmental proceeding
instituted or threatened against World Fund involving the International
Stock Series, that would be required to be disclosed in the Registration
Statement and is not so disclosed; and
4.5.6. World Fund has been registered with the SEC as an investment
company, and, to the knowledge of such counsel, no order has been issued or
proceeding instituted to suspend such registration.
4.5.7. To the knowledge of such counsel (without any independent inquiry
or investigation), (a) no material litigation or administration proceeding
or investigation of or before any court or governmental body is presently
pending or threatened against World Fund (with respect to International
Stock Series Fund) or any of its properties or assets distributable or
allocable to Acquiree Fund, and (b) World Fund is not a party to or subject
to the provision of any order, decree or judgment of any court or
governmental body that materially and adversely affects its business,
except as otherwise disclosed.
4.6. PIF shall have prepared a proxy statement in compliance with the
Securities Exchange Act of 1934, as amended, and the 1940 Act in connection
with a meeting of International Stock Fund's shareholders for the purpose,
inter alia, of voting on the Reorganization and this Agreement; and the
Reorganization and this Agreement shall have been adopted and approved by the
affirmative vote of the holders of the requisite number of the outstanding
International Stock Fund Shares entitled to vote thereon as required by law at
the time such vote is taken;
4.7. Prior to the Closing, the directors of World Fund shall have authorized
the issuance of, and International Stock Series shall have issued, one
International Stock Series Share to International Stock Fund in consideration
of the payment of $1.00 for the purpose of enabling International Stock Fund
to vote on the matters referred to in paragraphs 4.6 and 4.7;
4.8. World Fund (on behalf of International Stock Series) shall have entered
into an Investment Management Agreement with Prudential Mutual Fund
Management, Inc., a Distribution Agreement with Prudential Securities
Incorporated, a Shareholder Administrative Services Agreement with Prudential
Mutual Fund Management, Inc., a Plan of Distribution, a Transfer Agency
Agreement and Service Agreement with
A-10
<PAGE>
Prudential Mutual Fund Services, Inc. and a Custodian Agreement with State
Street Bank and Trust Company. Each such agreement shall have been approved by
World Fund's directors and, to the extent required by law, by such of those
directors who are not "interested persons" thereof (as defined in the 1940
Act) (Independent Directors) and by International Stock Fund as the sole
shareholder of International Stock Series; and
4.9. The Independent Directors shall have selected Deloitte & Touche LLP as
independent public accountants for International Stock Series, and such
selection shall have been ratified by International Stock Fund as the sole
shareholder of International Stock Series.
At any time prior to the Closing, any of the foregoing conditions (except
that set forth in paragraph 4.4) may be waived by the trustees/directors of
either Investment Company if, in their judgment, such waiver will not have a
material adverse effect on the interests of International Stock Fund's
shareholders.
5. AMENDMENT.
This Agreement may be amended, modified, or supplemented at any time,
notwithstanding approval thereof by International Stock Fund's shareholders,
in such manner as may be mutually agreed upon in writing by the parties;
provided that following such approval no such amendment shall have a material
adverse effect on the Shareholders' interests.
6. TERMINATION.
The trustees/directors of either Investment Company may terminate this
Agreement and abandon the Reorganization, notwithstanding approval thereof by
International Stock Fund's Shareholders, at any time prior to the Closing, if
circumstances should develop that, in their judgment, make proceeding with
this Agreement inadvisable.
7. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the
internal laws of the State of Delaware; provided that, in the case of any
conflict between such laws and the federal securities laws, the latter shall
govern.
A-11
<PAGE>
IN WITNESS WHEREOF, each party has caused this Agreement to be executed and
delivered by its duly authorized officers as of the day and year first written
above.
Attest: THE PRUDENTIAL INSTITUTIONAL FUND,
on behalf of its series,
International Stock Fund
By:
- ------------------------------------- ---------------------------------
Title:
------------------------------
Attest: PRUDENTIAL WORLD FUND, INC.,
on behalf of its series,
International Stock Series
By:
- ------------------------------------- ---------------------------------
Title:
------------------------------
A-12
<PAGE>
APPENDIX B
PERFORMANCE INFORMATION
Below is total return information for International Stock Fund for the
fiscal years ended September 30, 1993, 1994, and 1995, and for the six-month
period ended March 31, 1996. The Class Z shares (and other classes) of the
Portfolio do not as yet have any performance history. The following table is
derived from the "Financial Highlights" of the International Stock Fund.
"Financial Highlights" for International Stock Fund are set forth in the PIF
Prospectus and Annual Report, which accompany this Prospectus and Proxy
Statement.
<TABLE>
<CAPTION>
INTERNATIONAL STOCK FUND
-------------------------------------
YEAR ENDED NOVEMBER 5,
SIX MONTHS SEPTEMBER 1992(a)
ENDED 30, THROUGH
MARCH 31, ----------- SEPTEMBER 30,
1996 1995 1994 1993
---------- ---- ----- -------------
<S> <C> <C> <C> <C>
TOTAL RETURN(A)........................... 4.86% 5.95% 21.71% 23.74%
</TABLE>
- --------
(a) 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 other distributions. Total returns for periods of less than
a full year are not annualized. Total return includes the effect of expense
subsidies.
B-1
<PAGE>
APPENDIX C
PRUDENTIAL WORLD FUND, INC.
NOMINATED SLATE OF DIRECTORS
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- --------------------- --------------------------------------------
<S> <C>
Thomas R. Anderson ( )....... Retired. Formerly, Chairman, President and Chief
c/o Prudential Mutual Fund Executive Officer of Kemper Financial Companies,
Management, Inc. Inc. (until 1991). Trustee/Director of Kemper
One Seaport Plaza Mutual Funds and Kemper Closed-End Funds (until
New York NY 10292 1994); Director of Hinsdale Financial Corpora-
tion, HInsdale Federal Bank for Savings, The
Real Exchange Corporation, and Speciality Equip-
ment Companies, Inc.
Edward D. Beach ( ).......... President and Director of BMC Fund, Inc.; former
c/o Prudential Mutual Fund Vice Chairman of Broyhill Furniture Industries,
Management, Inc. Inc.; Certified Public Accountant; President,
One Seaport Plaza Treasurer and Director of First Financial Fund,
New York NY 10292 Inc. and The High Yield Plus Fund, Inc.; Presi-
dent and Director of Global Utility Fund, Inc.
Stephen C. Eyre (73)......... Executive Director, The John A. Hartford Founda-
c/o Prudential Mutual Fund tion, Inc. (charitable foundation) (since May
Management, Inc. 1985); Director of Faircom, Inc.
One Seaport Plaza
New York NY 10292
Delayne Derick Gold (57)..... Marketing and Management Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York NY 10292
Don G. Hoff (60)............. Chairman and Chief Executive Officer of
c/o Prudential Mutual Fund Intertec, Inc. (investments) since 1980; Direc-
Management, Inc. tor of Innovative Capital Management Inc.; The
One Seaport Plaza Asia Pacific Fund, Inc. and The Greater China
New York NY 10292 Fund, Inc.
Robert E. LaBlanc (61)....... President of Robert E. LaBlanc Associates, Inc.
c/o Prudential Mutual Fund (telecommunications) since 1981; Director of
Management, Inc. Storage Technology Corporation;
One Seaport Plaza TIE/communications, Inc., Tribune Company;
New York NY 10292 Trustee of Manhattan College and Prudential U.S.
Government Fund.
Robin B. Smith ( )........... President (since September 1981) and Chief Exec-
c/o Prudential Mutual Fund utive Officer (since January 1988) of Publishers
Management, Inc. Clearing House; Director of BellSouth Corpora-
One Seaport Plaza tion, The Omnicom Group, Inc., Texaco Inc.,
New York, NY 10292 Springs Industries Inc., First Financial Fund,
Inc.; Trustee of The Target Portfolio Trust.
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- --------------------- --------------------------------------------
<S> <C>
Stephen Stoneburn ( )........ President, Argus Integrated Media, Inc. (since
c/o Prudential Mutual Fund June 1995); formerly Senior Vice President and
Management, Inc. Managing Director, Cowles Business Media (Janu-
One Seaport Plaza ary 1993-1995); prior thereto, Senior Vice Pres-
New York, NY 10292 ident (January 1991-1992) of Gralla Publications
(a division of United Newspapers, U.K.); Trustee
of The BlackRock Government Income Trust, Com-
mand Government Fund, Command Money Fund and
Command Tax-Free Fund.
Nancy H. Teeters ( )......... Economist; formerly Vice President and Chief
c/o Prudential Mutual Fund Economist (March 1986-June 1990) of Interna-
Management, Inc. tional Business Machines Corporation; Director
One Seaport Plaza of Inland Steel Corporation (since July 1991),
New York, NY 10292 First Financial Fund, Inc.
*Richard A. Redeker (52)..... President, Chief Executive Officer and Director
c/o Prudential Mutual Fund (since October 1993), Prudential Mutual Fund
Management, Inc. Management, Inc.; Director and Member of the Op-
One Seaport Plaza erating Committee (since October 1993), Pruden-
New York, NY 10292 tial Securities Incorporated; Director (since
October 1993) of Prudential Securities Group,
Inc.; Vice President, The Prudential Investment
Corporation (since July 1994); Director (since
January 1994) of Prudential Mutual Fund Distrib-
utors, Inc. and Prudential Mutual Fund Services,
Inc.; formerly Senior Executive Vice President
and Director of Kemper Financial Services, Inc.
(September 1978-September 1993); Director of The
Global Total Return Fund, Inc.; The Global Gov-
ernment Plus Fund, Inc., and The High Yield In-
come Fund, Inc.
</TABLE>
- --------
* "Interested" director, as defined in the Investment Company Act, by reason
of his affiliation with The Prudential Insurance Company of America or
Prudential Mutual Fund Management, Inc.
C-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SYNOPSIS................................................................... 2
General.................................................................. 2
The Proposed Conversion and Liquidation.................................. 2
Reasons for the Proposed Conversion...................................... 3
Structure of the Series.................................................. 4
Investment Objectives and Policies....................................... 5
Certain Differences Between the Series................................... 5
Fees and Expenses........................................................ 6
Management Fees........................................................ 6
Distribution Fees...................................................... 6
Administration Fees.................................................... 7
Other Expenses......................................................... 7
Fee Waivers and Subsidy................................................ 7
Expense Ratios......................................................... 7
Purchases and Redemptions................................................ 8
Exchange Privileges...................................................... 9
Dividends and Other Distributions........................................ 10
Federal Income Tax Consequences of the Proposed Conversion............... 10
PRINCIPAL RISK FACTORS..................................................... 10
SPECIAL MEETING OF WORLD FUND SHAREHOLDERS................................. 10
THE PROPOSED TRANSACTION................................................... 11
Agreement and Plan of Conversion and Liquidation......................... 11
Reasons for the Conversion............................................... 12
Description of Securities to be Issued................................... 12
Federal Income Tax Considerations........................................ 12
Certain Comparative Information About the Funds.......................... 13
Organization........................................................... 13
Capitalization......................................................... 13
Shareholder Meetings and Voting Rights................................. 13
Shareholder Liability.................................................. 14
Liability and Indemnification of Directors/Trustees.................... 14
Pro Forma Capitalization and Ratios...................................... 15
INFORMATION ABOUT WORLD FUND............................................... 15
INFORMATION ABOUT INTERNATIONAL STOCK FUND................................. 36
MISCELLANEOUS.............................................................. 38
Additional Matters....................................................... 38
Legal Matters............................................................ 38
Experts.................................................................. 38
VOTING INFORMATION......................................................... 38
OTHER MATTERS.............................................................. 39
SHAREHOLDERS' PROPOSALS.................................................... 40
APPENDIX A--Agreement and Plan of Conversion and Liquidation............... A-1
APPENDIX B--Performance Overview........................................... B-1
</TABLE>
<PAGE>
PRUDENTIAL WORLD FUND, INC.--INTERNATIONAL STOCK SERIES
STATEMENT OF ADDITIONAL INFORMATION
DATED JULY 22, 1996
ACQUISITION OF ASSETS OF
THE PRUDENTIAL INSTITUTIONAL FUND--INTERNATIONAL STOCK FUND
21 PRUDENTIAL PLAZA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
(800) 225-1852
----------------
BY AND IN EXCHANGE FOR CLASS Z SHARES OF
PRUDENTIAL WORLD FUND, INC.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292-1025
(800) 225-1852
This Statement of Additional Information relates specifically to the
proposed transfer of all the assets and the assumption of all the liabilities,
if any, of International Stock Fund (International Stock Fund), a series of
The Prudential Institutional Fund (PIF), by International Stock Series, a
Series of Prudential World Fund, Inc. (World Fund). This Statement of
Additional Information consists of this cover page, and the following
described documents, each of which is attached hereto and incorporated herein
by reference:
1. The Preliminary Statement of Additional Information of Prudential
World Fund, Inc.--Class Z shares dated 1996;
2. Pages 1, 17, 18, 19, 20, 21, 43, 44, 45, 48, 51, 52, 53, 54, 55, 56,
57, 58, 59 and 60 of the Annual Report to Shareholders of PIF for
the fiscal year ended September 30, 1995 relating to International
Stock Fund; and
3. Pages 1, 2, 16, 17, 18, 19, 37, 38, 39, 42, 45, 46, 47, 48, 49, 50
and 51 of the Semi-Annual Report to Shareholders of PIF relating to
the International Stock Fund for the six months ended March 31,
1996.
The Statement of Additional Information is not a prospectus and should be
read in conjunction with, the Prospectus and Proxy Statement dated July 22,
1996 relating to the above-referred matter. A copy of the Prospectus and Proxy
Statement dated July 22, 1996 may be obtained from World Fund without charge
by writing or calling World Fund, at the address or telephone number listed
above.
1
<PAGE>
PRUDENTIAL WORLD FUND, INC.
(International Stock Series)
Statement of Additional Information
September 18, 1996
The International Stock Series (the Series) is a series of Prudential World
Fund, Inc. (the Fund), an open-end, diversified management investment company
presently consisting of two series. Its investment objective is to achieve
long-term growth of capital through investment in equity securities of foreign
issuers. Income is a secondary objective. The Series will seek to achieve its
objective primarily through investment in a diversified portfolio of securities
which will consist of equity securities of foreign issuers. The Series will,
under normal circumstances, invest at least 65% of the value of its total assets
in common stocks and preferred stocks of issuers located in at least three
foreign countries. The Series may invest up to 35% of its total assets in (i)
other equity-related securities of foreign issuers; (ii) common stocks,
preferred stocks, and other equity-related securities of U.S. issuers; (iii)
investment grade debt securities of domestic and foreign corporations,
governments, governmental entities, and supranational entities; and (iv)
high-quality domestic money market instruments and short-term fixed income
securities. There can be no assurance that the Series' investment objective will
be achieved. See "Investment Objective and Policies."
The Series' address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.
Prior to June 21, 1996, the name of the Fund was Prudential Global Fund,
Inc.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Series' Prospectus, dated September 18, 1996, a
copy of which may be obtained from the Series at the address noted above.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Cross-reference
to page in
Page Prospectus
---- ---------------
<S> <C> <C>
Investment Objective and Policies.................................................................. B-2 5
Investment Restrictions............................................................................ B-10 13
Directors and Officers............................................................................. B-16 13
Manager............................................................................................ B-19 13
Distributor........................................................................................ B-21 14
Net Asset Value.................................................................................... B-22 16
Portfolio Transactions and Brokerage............................................................... B-23 16
Purchase and Redemption of Series Shares........................................................... B-24 20
Shareholder Investment Account..................................................................... B-27 28
Performance Information............................................................................ B-30 16
Taxes.............................................................................................. B-32 17
Custodian, Transfer and Dividend Disbursing Agent and Independent Accountants...................... B-34 16
Financial Statements............................................................................... B- -
Independent Auditors' Report....................................................................... B- -
Appendix--General Investment Information........................................................... App-1 -
Appendix--Historical Performance Data.............................................................. App-2 -
Appendix--Description of S&P, Moody's and Duff & Phelps Ratings.................................... App-6 -
</TABLE>
================================================================================
MF115B
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Series is to seek long-term growth of
capital through investment in equity securities of foreign issuers. Income is a
secondary objective. The Series will seek to achieve its objective primarily
through investment in a diversified portfolio of securities which will consist
of equity securities of foreign issuers. The Series will, under normal
circumstances, invest at least 65% of the value of its total assets in common
stocks and preferred stocks of issuers located in at least three foreign
countries. The Series may invest up to 35% of its total assets in (i) other
equity-related securities of foreign issuers; (ii) common stocks, preferred
stocks, and other equity-related securities of U.S. issuers; (iii) investment
grade debt securities of domestic and foreign corporations, governments,
governmental entities, and supranational entities; and (iv) high-quality
domestic money market instruments and short-term fixed income securities.
Although the Series does not purchase securities with a view to rapid turnover,
there are no limitations on the length of time that securities must be held by
the Series and the Series' annual portfolio turnover rate may vary significantly
from year to year. A portfolio turnover rate in excess of 100% may exceed that
of other investment companies with similar objectives. A higher portfolio
turnover rate may involve correspondingly greater transaction costs, which would
be borne directly by the Series, as well as additional realized gains and/or
losses to shareholders. There can be no assurance that the Series' investment
objective will be achieved. For a further description of the Series' investment
objective and policies, see "How the Series Invests--Investment Objective and
Policies" in the Prospectus.
U.S. Government Securities
Securities issued or guaranteed by the U.S. Government or one of its
agencies, authorities or instrumentalities in which the Series may invest
include debt obligations of varying maturities issued by the U.S. Treasury or
issued or guaranteed by an agency or instrumentality of the U.S. Government,
including the Federal Housing Administration, Farmers' Home Administration,
Export-Import Bank of the U.S. Small Business Administration, Government
National Mortgage Association ("GNMA"), General Services Administration, Central
Bank for Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks,
Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Intermediate Credit
Banks, Federal Land Banks, Federal National Mortgage Association ("FNMA"),
Maritime Administration, Tennessee Valley Authority, District of Columbia Armory
Board, Student Loan Marketing Association and Resolution Trust Corporation.
Direct obligations of the U.S. Treasury include a variety of securities that
differ in their interest rates, maturities and dates of issuance. Because the
U.S. Government is not obligated by law to provide support to an instrumentality
that it sponsors, the Series will invest in obligations issued by an
instrumentality of the U.S. Government only if the Series' Subadvisor determines
that the instrumentality's credit risk does not render its securities unsuitable
for investment by the Series. For further information, see "Mortgage-Related
Securities" below.
Repurchase Agreements and Reverse Repurchase Agreements
The Series may enter into repurchase and reverse repurchase agreements with
banks and securities dealers which meet the creditworthiness standards
established by the Board of Directors ("Qualified Institutions"). The Subadviser
will monitor the continued creditworthness of Qualified Institutions, subject to
the oversight of the Manager and the Board of Directors. The resale price of the
securities purchased reflects the purchase price plus an agreed upon market rate
of interest which is unrelated to the coupon rate or date of maturity of the
purchased security. The Series receives collateral equal to the repurchase price
plus accrued interest, which is marked-to-market daily. These agreements permit
the Series to keep all its assets earning interest while retaining "overnight"
flexibility to pursue investment of a longer-term nature.
The use of repurchase agreements and reverse repurchase agreements involves
certain risks. For example, if the seller of securities under a repurchase
agreement defaults on its obligation to repurchase the underlying securities, as
a result of its bankruptcy or otherwise, the Series will seek to dispose of such
securities, which action could involve costs or delays. If the seller becomes
insolvent and subject to liquidation or reorganization under applicable
bankruptcy or other laws, the Series' ability to dispose of the underlying
securities may be restricted. Finally, it is possible that the Series may not be
able to substantiate its interest in the underlying securities. To minimize this
risk, the securities underlying the agreement will be held by the Custodian at
all times in an amount at least equal to the repurchase price, including accrued
interest. If the counterparty fails to resell or repurchase the securities, the
Series may suffer a loss to the extent proceeds from the sale of the underlying
collateral are less than the repurchase price. Reverse repurchase agreements
involve the risk that the market value of the securities retained in lieu of
sale by the Series may decline below the price of the securities the Series has
sold but is obligated to repurchase.
Fixed Income Securities
In general, the ratings of Moody's Investors Service ("Moody's"), Standard
& Poor's Ratings Services ("S&P Ratings"), Duff and Phelps, Inc. ("Duff &
Phelps") and other nationally recognized statistical rating organizations
("NRSROs") represent the
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opinions of those organizations as to the quality of debt obligations that they
rate. These ratings are relative and subjective, are not absolute standards of
quality and do not evaluate the market risk of securities. These ratings will be
among the initial criteria used for the selection of portfolio securities. Among
the factors that the rating agencies consider are the long-term ability of the
issuer to pay principal and interest and general economic trends.
Subsequent to its purchase by the Series, an issue of debt obligations may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Series. Neither event will require the sale of the debt
obligation by the Series, but the Series' Subadvisor will consider the event in
its determination of whether the Series should continue to hold the obligation.
In addition, to the extent that the ratings change as a result of changes in
rating organizations or their rating systems or owing to a corporate
restructuring of Moody's, S&P Ratings, Duff & Phelps or other NRSRO, the Series
will attempt to use comparable ratings as standards for its investments in
accordance with its investment objectives and policies. The Appendix to this
Statement of Additional Information contains further information concerning the
ratings of Moody's, S&P Ratings and Duff & Phelps and their significance.
The Series may invest, to a limited extent, in medium, lower-rated and
unrated debt securities. Debt securities rated in the lowest category of
investment grade debt (i.e., Baa by Moody's or BBB by S&P Ratings) may have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds.
Non-investment grade fixed income securities are rated lower than Baa/BBB
(or the equivalent rating or, if not rated, determined by the Subadviser to be
of comparable quality to securities so rated) and are commonly referred to as
high risk or high yield securities or "junk" bonds. High yield securities are
generally riskier than higher quality securities and are subject to more credit
risk, including risk of default, and the prices of such securities are more
volatile than higher quality securities. Such securities may also have less
liquidity than higher quality securities. The Series is not authorized to invest
in excess of 5% of its net assets in non-investment grade fixed income
securities.
The markets in which medium and lower-rated securities (or unrated
securities that are equivalent to medium and lower-rated securities) are traded
are generally more limited than those in which higher-rated securities are
traded. The existence of limited markets may make it more difficult for the
Series to obtain accurate market quotations for purposes of valuing its
portfolio and calculating its net asset value. Moreover, the lack of a liquid
trading market may restrict the availability of debt securities for the Series
to purchase and may also have the effect of limiting the ability of the Series
to sell debt securities at their fair value either to meet redemption requests
or to respond to changes in the economy or the financial markets.
Lower-rated fixed income securities present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Series may
have to replace the security with a lower-yielding security, resulting in a
decreased return for investors. Also, as the principal value of fixed income
securities moves inversely with movements in interest rates, in the event of
rising interest rates, the value of the securities held by the Series may
decline proportionately more than if the Series consisted of higher-rated
securities. Investments in zero coupon bonds may be more speculative and subject
to greater fluctuations in value due to changes in interest rates than bonds
that pay interest currently. If the Series experiences unexpected net
redemptions, it may be forced to sell its higher-rated bonds, resulting in a
decline in the overall credit quality of the securities held by the Series and
increasing the exposure of the Series to the risks of lower-rated securities.
When-Issued and Delayed Delivery Securities
To secure prices deemed advantageous at a particular time, the Series may
purchase securities on a when-issued or delayed delivery basis, in which case
delivery of the securities occurs beyond the normal settlement period; payment
for or delivery of the securities would be made at the same time or prior to the
reciprocal delivery or payment by the other party to the transaction. The Series
will enter into when-issued or delayed delivery transactions for the purpose of
acquiring securities and not for the purpose of leverage. When-issued securities
purchased by the Series may include securities purchased on a "when, as and if
issued" basis under which the issuance of the securities depends on the
occurrence of a subsequent event, such as approval of a merger, corporate
reorganization or debt restructuring.
Securities purchased on a when-issued or delayed delivery basis may expose
the Series to risk because the securities may experience fluctuations in value
prior to their actual delivery. The Series does not accrue income with respect
to a when-issued or delayed-delivery security prior to its stated delivery date.
Purchasing securities on a when-issued or delayed delivery basis may involve the
additional risk that the yield available in the market when the delivery takes
place may be higher than that obtained in the transaction itself.
Forward Rolls and Dollar Rolls
Forward roll and dollar roll transactions involve the risk that the
market value of the securities sold by the Series may decline below the
repurchase price of those securities. At the time the Series enters into a
forward roll transaction, it will place in a
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segregated account with its Custodian cash, U.S. Government securities and other
liquid high grade debt securities having a value equal to the repurchase price
(including accrued interest) and will subsequently mark the account to market.
Mortgage-Related Securities
Mortgage-backed securities may be classified as private, governmental or
government related, depending on the issuer or guarantor. Private
mortgage-backed securities represent pass-through pools consisting principally
of conventional residential mortgage loans created by non-governmental issuers,
such as commercial banks, savings and loan associations and private mortgage
insurance companies. Governmental mortgage-backed securities are backed by the
full faith and credit of the United States. GNMA, the principal U.S. guarantor
of such securities, is a wholly-owned corporate instrumentality of the United
States within the Department of Housing and Urban Development. Pass-through
securities issued by FNMA are guaranteed as to timely payment of principal and
interest by FNMA, which guarantee is not backed by the full faith and credit of
the U.S. Government. FHLMC is a corporate instrumentality of the United States,
the stock of which is owned by the Federal Home Loan Banks. Participation
certificates representing interests in mortgages from FHLMC's national portfolio
are guaranteed as to the timely payment of interest and ultimate, but generally
not timely collection of principal by FHLMC. The obligations of the FHLMC under
its guarantee are obligations solely of FHLMC and are not backed by the full
faith and credit of the U.S. Government.
The Series expects that private and governmental entities may create
mortgage loan pools offering pass-through investments in addition to those
described above. The mortgages underlying these securities may be alternative
mortgage instruments, that is, mortgage instruments whose principal or interest
payments may vary or whose terms to maturity may be shorter than previously
customary. As new types of mortgage-backed securities are developed and offered
to investors, the Series, consistent with its investment objective and policies,
will consider making investments in those new types of securities.
The Series may also invest in pass-through securities backed by adjustable
rate mortgages that have been issued by GNMA, FNMA and FHLMC or private issuers.
These securities bear interest at a rate that is adjusted monthly, quarterly or
annually. The prepayment experience of the mortgages underlying these securities
may vary from that for fixed rate mortgages.
The average maturity of pass-through pools of mortgage-related securities
varies with the maturities of the underlying mortgage instruments. In addition,
a pool's stated maturity may be shortened by unscheduled payments on the
underlying mortgages. Factors affecting mortgage prepayments include the level
of interest rates, general economic and social conditions, the location of the
mortgaged property and age of the mortgage. Because prepayment rates of
individual pools vary widely, it is not possible to predict accurately the
average life of a particular pool. Common practice is to assume that prepayments
will result in an average life ranging from two to ten years for pools of fixed
rate 30-year mortgages. Pools of mortgages with other maturities or different
characteristics will have varying average life assumptions.
Because prepayments of principal generally occur when interest rates are
declining, it is likely that the Series will have to reinvest the proceeds of
prepayments at lower interest rates than those at which the assets were
previously invested. If this occurs, the Series' yield will correspondingly
decline. Thus, mortgage-related securities may have less potential for capital
appreciation in periods of falling interest rates than other fixed-income
securities of comparable maturity, although these securities may have a
comparable risk of decline in market value in periods of rising interest rates.
To the extent that the Series purchases mortgage-related securities at a
premium, unscheduled prepayments, which are made at par, will result in a loss
equal to any unamortized premium.
Government stripped mortgage-related interest-only ("IOs") and principal
only ("POs") securities are currently traded in an over-the-counter market
maintained by several large investment banking firms. There can be no assurance
that the Series will be able to effect a trade of IOs or POs at a time when it
wishes to do so. The Series will acquire IOs and POs only if, in the opinion of
the Series' Subadviser, a secondary market for the securities exists at the time
of acquisition, or is subsequently expected. The Series will treat IOs and POs
that are not U.S. Government securities as illiquid and will limit its
investments in these securities, together with other illiquid investments, in
order not to hold more than 15% of its net assets in illiquid securities. With
respect to IOs and POs that are issued by the U.S. Government, the Subadviser,
subject to the supervision of the Manager and the Board of Directors, may
determine that such securities are liquid, if they determine the securities can
be disposed of promptly in the ordinary course of business at a value reasonably
close to that used in the calculation of net asset value per share.
Investing in IOs and POs involves the risks normally associated with
investing in government and government agency mortgage-related securities. In
addition, the yields on IOs and POs are extremely sensitive to the prepayment
experience on the mortgage loans underlying the certificates collateralizing the
securities. If a decline in the level of prevailing interest rates results in a
rate of principal prepayments higher than anticipated, distributions of
principal will be accelerated, thereby reducing the yield to maturity on IOs and
increasing the yield to maturity on POs. Sufficiently high prepayment rates
could result in the Series not fully recovering its initial investment in an IO.
Mortgage-related securities may not be readily marketable. To the extent
any of these securities are not readily marketable in the judgment of the
Series' Subadviser, the investment restriction limiting a Series' investment in
illiquid instruments will apply.
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Collateralized Mortgage Obligations
The Series also may invest in, among other things, parallel pay CMOs and
Planned Amortization Class CMOs (PAC Bonds). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds always are
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
In reliance on SEC rules and orders, the Series' investments in certain
qualifying CMOs, including CMOs that have elected to be treated as Real Estate
Mortgage Investment Conduits (REMICs), are not subject to the Investment Company
Act of 1940, as amended (Investment Company Act) limitation on acquiring
interests in other investment companies. In order to be able to rely on the
SEC's interpretation, the CMOs and REMICs must be unmanaged, fixed-asset issuers
that (i) invest primarily in mortgage-backed securities, (ii) do not issue
redeemable securities, (iii) operate under general exemptive orders exempting
them from all provisions of the Investment Company Act, and (iv) are not
registered or regulated under the Investment Company Act as investment
companies. To the extent that the Series selects CMOs or REMICs that do not meet
the above requirements, the Series may not invest more than 10% of its assets in
all such entities and may not acquire more than 3% of the voting securities of
any single such entity.
Asset-Backed Securities
The value of these securities may change because of changes in the market's
perception of the creditworthiness of the servicing agent for the pool, the
originator of the pool, or the financial institution providing credit support
enhancement for the pool.
Securities Lending
The Series will enter into securities lending transactions only with
Qualified Institutions. The Series will comply with the following conditions
whenever it lends securities: (i) the Series must receive at least 100% cash
collateral or equivalent securities from the borrower; (ii) the value of the
loan is "marked-to-market" on a daily basis; (iii) the Series must be able to
terminate the loan at any time; (iv) the Series must receive reasonable interest
on the loan, as well as any dividends, interest or other distributions on the
loaned securities and any increase in market value; (v) the Series may pay only
reasonable custodian fees in connection with the loan; and (vi) voting rights on
the loaned securities may pass to the borrower except that, if a material event
adversely affecting the investment in the loaned securities occurs, the Series
must terminate the loan and regain the right to vote the securities. The Series
may pay reasonable finders', administrative and custodial fees in connection
with a loan of its securities. In these transactions, there are risks of delay
in recovery and in some cases even of loss of rights in the collateral should
the borrower of the securities fail financially.
Borrowing
The Series may borrow from time to time, at the Subadviser's discretion, to
take advantage of investment opportunities, when yields on available investments
exceed interest rates and other expenses of related borrowing, or when, in the
Subadviser's opinion, unusual market conditions otherwise make it advantageous
for the Series to increase its investment capacity. The Series will only borrow
when there is an expectation that it will benefit the Series after taking into
account considerations such as interest income and possible losses upon
liquidation. Borrowing by the Series creates an opportunity for increased net
income but, at the same time, creates risks, including the fact that leverage
may exaggerate rate changes in the net asset value of Series' shares and in the
yield on the Series. The Series may also borrow for temporary, extraordinary or
emergency purposes and for the clearance of transactions.
Securities of Foreign Issuers
The value of the Series' foreign investments may be significantly affected
by changes in currency exchange rates. The dollar value of a foreign security
generally decreases when the value of the dollar rises against the foreign
currency in which the security is denominated and tends to increase when the
value of the dollar falls against such currency. In addition, the value of the
Series' assets may be affected by losses and other expenses incurred in
converting between various currencies in order to purchase and sell foreign
securities and by currency restrictions and exchange control regulation.
The economies of many of the countries in which the Series may invest are
not as developed as the economy of the U.S. and may be subject to significantly
different forces. Political or social instability, expropriation or confiscatory
taxation, and limitations on the removal of funds or other assets, could also
adversely affect the value of investments.
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Foreign companies are generally not subject to the regulatory controls
imposed on U.S. issuers and, in general, there is less publicly available
information about foreign securities than is available about domestic
securities. Many foreign companies are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to domestic companies. Income from foreign
securities owned by the Series may be reduced by a withholding tax at the source
which would reduce dividend income payable to shareholders.
Brokerage commission rates in foreign countries, which are generally fixed
rather than subject to negotiation as in the U.S. are likely to be higher. The
securities markets in many of the countries in which the Series may invest will
have substantially less trading volume than the principal U.S. markets. As a
result, the securities of some companies in these countries may be less liquid
and more volatile than comparable U.S. securities. There is generally less
government regulation and supervision of foreign stock exchanges, brokers and
issuers which may make it difficult to enforce contractual obligations.
Liquidity Puts
The Series may purchase instruments together with the right to resell the
instruments at an agreed-upon price or yield, within a specified period prior to
the maturity date of the instruments. This instrument is commonly known as a
"put bond" or a "tender option bond."
Consistent with the Series' investment objective, the Series may purchase a
put so that it will be fully invested in securities while preserving the
necessary liquidity to purchase securities on a when-issued basis, to meet
unusually large redemptions and to purchase at a later date securities other
than those subject to the put. The Series will generally exercise the puts or
tender options on their expiration date when the exercise price is higher than
the current market price for the related fixed income security. Puts or tender
options may be exercised prior to the expiration date in order to fund
obligations to purchase other securities or to meet redemption requests. These
obligations may arise during periods in which proceeds from sales of Series'
shares and from recent sales of portfolio securities are insufficient to meet
such obligations or when the funds available are otherwise allocated for
investment. In addition, puts may be exercised prior to the expiration date in
the event the Subadvisor for the Series revises its evaluation of the
creditworthiness of the issuer of the underlying security. In determining
whether to exercise puts or tender options prior to their expiration date and in
selecting which puts or tender options to exercise in such circumstances, the
Series' Subadviser considers, among other things, the amount of cash available
to the Series, the expiration dates of the available puts or tender options, any
future commitments for securities purchases, the yield, quality and maturity
dates of the underlying securities, alternative investment opportunities and the
desirability of retaining the underlying securities in the Series.
These instruments are not deemed to be "put options" for purposes of the
Series' investment restrictions.
Options on Securities and Securities Indices
A number of risk factors are associated with options transactions. There is
no assurance that a liquid secondary market on an options exchange will exist
for any particular option, at any particular time. If the Series is unable to
effect a closing purchase transaction with respect to covered options it has
written, the Series will not be able to sell the underlying securities or
dispose of assets held in a segregated account until the options expire or are
exercised. Similarly, if the Series is unable to effect a closing sale
transaction with respect to options it has purchased, it would have to exercise
the options in order to realize any profit and may incur transaction costs upon
the purchase or sale of underlying securities. The ability to terminate
over-the-counter ("OTC") option positions is more limited than the ability to
terminate exchange-traded option positions because the Series would have to
negotiate directly with a contra party. In addition, with OTC options, there is
a risk that the contra party in such transactions will not fulfill its
obligations.
The Series pays brokerage commissions or spreads in connection with its
options transactions, as well as for purchases and sales of underlying
securities. The writing of options could result in significant increases in the
Series' turnover rate. The Series' transactions in options may be limited by the
requirements of the Internal Revenue Code for qualification as a regulated
investment company.
The risks of investment in index options may be greater than options on
securities. Because index options are settled in cash, when the Series writes a
call option on an index it cannot provide in advance for its potential
settlement obligations by acquiring and holding the underlying securities. The
Series can offset some of the risk of writing a call index option position by
holding a diversified portfolio of securities similar to those on which the
underlying index is based. However, the Series cannot, as a practical matter,
acquire and hold a portfolio containing exactly the same securities as underlie
the index and, as a result, bears a risk that the value of the securities held
will vary from the value of the index.
Even if the Series could assemble a securities portfolio that exactly
reproduced the composition of the underlying index, it still would not be fully
covered from a risk standpoint because of the "timing risk" inherent in writing
index options. When an index
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option is exercised, the amount of cash that the holder is entitled to receive
is determined by the difference between the exercise price and the closing index
level on the date when the option is exercised. As with other kinds of options,
the Series as the call writer will not know that it has been assigned until the
next business day at the earliest. The time lag between exercise and notice of
assignment poses no risk for the writer of a covered call on a specific
underlying security, such as a common stock, because there the writer's
obligation is to deliver the underlying security, not to pay its value as of a
fixed time in the past. So long as the writer already owns the underlying
security, it can satisfy its settlement obligations by simply delivering it, and
the risk that its value may have declined since the exercise date is borne by
the exercising holder. In contrast, even if the writer of an index call holds
securities that exactly match the composition of the underlying index, it will
not be able to satisfy its assignment obligations by delivering those securities
against payment of the exercise price. Instead, it will be required to pay cash
in an amount based on the closing index value on the exercise date; and by the
time it learns that it has been assigned, the index may have declined, with a
corresponding decline in the value of its securities portfolio. This "timing
risk" is an inherent limitation on the ability of index call writers to cover
their risk exposure by holding securities positions.
If the Series has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. If such a change causes the
exercised option to fall out-of-the-money, the Series will be required to pay
the difference between the closing index value and the exercise price of the
option (times the applicable multiplier) to the assigned writer.
The Series will not purchase put options or call options if, after any such
purchase, the aggregate premiums paid for such options would exceed 20% of the
Series net assets. The aggregate value of the obligations underlying put options
will not exceed 25% of the Series' net 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 Series 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 Series 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 Series' 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 Series 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 Series of options on indices would be
subject to the Subadviser'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 Series 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 Series. It is the Series' 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 Series will not
purchase or sell any index option contract unless and until, in the Subadviser'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 Series 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.
Price movements in the Series' portfolio probably will not correlate
precisely with movements in the level of the index and, therefore, the Series
bears the risk that the price of the securities held by the Series may not
increase as much as the index. In such
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event, the Series would bear a loss on the call which is not completely offset
by movements in the price of the Series portfolio. It is also possible that the
index may rise when the Series' portfolio of stocks does not rise. If this
occurred, the Series 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 Series in the opposite direction as the market would be likely to occur
for only a short period or to a small degree.
Unless the Series has other liquid assets which are sufficient to satisfy
the exercise of a call, the Series 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 Series fails to
anticipate an exercise, it may have to borrow (in amounts not exceeding 20% of
the Series total assets) pending settlement of the sale of securities in its
portfolio and would incur interest charges thereon.
When the Series has written a call, there is also a risk that the market
may decline between the time the Series 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 Series is able to sell stocks in its portfolio. As
with stock options, the Series 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 Series would be able to deliver the underlying securities in
settlement, the Series 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 Series has written is "covered" by an
index call held by the Series with the same strike price, the Series 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 Series exercises the call it holds or the time
the Series 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 Series 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 Series 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 Series 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 Series 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 Series originally wrote the OTC option. Any such cancellation, if
agreed to, may require the Series to pay a premium to the counterparty. While
the Series 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
Series, there can be no assurance that the Series will be able to liquidate an
OTC option at a favorable price at any time prior to expiration. Until the
Series is able to effect a closing purchase transaction in a covered OTC call
option the Series 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 Series 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 Series would remain exposed to
each counterparty's credit risk on the put or call until such option is
exercised or expires. There is no guarantee that the Series 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 Series 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 Series may lose the
benefit of the transaction. The value of an OTC option to the Series is
dependent upon the financial viability of the counterparty. If the Series
decides to enter into transactions in OTC options, the Subadviser will take into
account the credit quality of counterparties in order to limit the risk of
default by the counterparty.
OTC options may also be illiquid securities with respect to which no
secondary market exists. Similarly, the assets used to "cover" OTC options
written by the Series will be treated as illiquid. OTC options are sold to
qualified dealers who agree that the Series 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."
B-8
<PAGE>
Foreign Currency Forward Contracts, Options and Futures Transactions
There is no limitation on the value of forward contracts into which the
Series may enter. However, the Series' transactions 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 Series generally arising
in connection with the purchase or sale of its securities and accruals of
interest or dividends receivable and Series expenses. Position hedging is the
sale of a foreign currency with respect to security positions denominated or
quoted in that currency. The Series 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,
denominated or quoted in, or currently convertible into, such currency. A
forward contract generally has no deposit requirements, and no commissions are
charged for such trades.
The Series may enter into a forward contract to hedge against risk in the
following circumstances: (i) during the time period when the Series contracts
for the purchase or sale of a security denominated in a foreign currency, or
(ii) when the Series anticipates the receipt in a foreign currency of dividends
or interest payments on a security which it holds. 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 Series 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 Series' Subadviser
believes that the currency of a particular foreign country may suffer a
substantial decline against the U.S. dollar, the Series 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 securities of the Series
denominated in such foreign currency. Further, the Series may enter into a
forward contract in one foreign currency, or basket of currencies, to hedge
against the decline or increase in value in another foreign currency. Use of a
different currency or basket of currencies magnifies the risk that movements in
the price of the forward contract will not correlate or will correlate
unfavorably with the foreign currency being hedged.
Forward currency contracts (i) are traded in an interbank market conducted
directly between currency traders (typically commercial banks or other financial
institutions) and their customers, (ii) generally have no deposit requirements
and (iii) are typically consummated without payment of any commissions. Failure
by the Series' contra party to make or take delivery of the underlying currency
at the maturity of the forward contract would result in the loss to the Series
of any expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the contra party. Thus, there can be no assurance
that the Series will in fact be able to close out a forward currency contract at
a favorable price prior to maturity. In addition, in the event of insolvency of
the contra party, the Series might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the Series would
continue to be subject to market risk with respect to the position, and would
continue to be required to maintain a position in the securities or currencies
that are the subject of the hedge or to maintain cash or securities in a
segregated account.
The Series may purchase and write put and call options on foreign
currencies traded on securities exchanges or boards of trade (foreign and
domestic) and OTC options 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 securities, except that the Series has the right to take or make
delivery of a specified amount of foreign currency, rather than securities.
Generally, the OTC foreign currency options used by the Series are
European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
If the Series' Subadviser 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 Series may purchase call options or
write put options on the foreign currency. The Series could also enter into a
long forward contract or a long futures contract on such currency, or purchase a
call option, or write a put option, on a currency futures contract. The use of
such instruments could offset, at least partially, the effects of the adverse
movements of the exchange rates.
Foreign Currency Strategies--Special Considerations
The Series may use options on foreign currencies, futures on foreign
currencies, options on futures on foreign currencies and forward currency
contracts, to hedge against movements in the values of the foreign currencies in
which the Series'
B-9
<PAGE>
securities are denominated. Such currency hedges can protect against price
movements in a security that the Series owns or intends to acquire that are
attributable to changes in the value of the currency in which it is denominated.
Such hedges do not, however, protect against price movements in the securities
that are attributable to other causes.
The Series might seek to hedge against changes in the value of a particular
currency when no futures contract, forward contract or option involving that
currency is available or one of such contracts is more expensive than certain
other contracts. In such cases, the Series may hedge against price movements in
that currency by entering into a contract on another currency or basket of
currencies, the values of which the Series' Subadvisor believes will have a
positive correlation to the value of the currency being hedged. The risk that
movements in the price of the contract will not correlate perfectly with
movements in the price of the currency being hedged is magnified when this
strategy is used.
The value of futures contracts, options on futures contracts, forward
contracts and options on foreign currencies depends on the value of the
underlying currency relative to the U.S. dollar. Because foreign currency
transactions occurring in the interbank market might involve substantially
larger amounts than those involved in the use of futures contracts, forward
contracts or options, the Series could be disadvantaged by dealing in the odd-
lot market (generally consisting of transactions of less than $1 million) for
the underlying foreign currencies at prices that are less favorable than for
round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirements that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the futures contracts or options until they
reopen.
Settlement of futures contracts, forward contracts and options involving
foreign currencies might be required to take place within the country issuing
the underlying currency. Thus, the Series might be required to accept or make
delivery of the underlying foreign currency in accordance with any U.S. or
foreign regulations regarding the maintenance of foreign banking arrangements by
U.S. residents and might be required to pay any fees, taxes and charges
associated with such delivery assessed in the issuing country.
Covered Forward Currency Contracts, Futures Contracts and Options
Transactions using forward currency contracts, futures contracts and
options (other than options that the Series has purchased) expose the Series to
an obligation to another party. The Series will not enter into any such
transactions unless it owns either (1) an offsetting ("covered") position in
securities, currencies, or other options, forward currency contracts or futures
contracts, or (2) liquid assets with a value sufficient at all times to cover
its potential obligations not covered as provided in (1) above. The Series will
comply with SEC guidelines regarding cover for these instruments and, if the
guidelines so require, set aside cash, U.S. government securities or other
liquid, high-grade debt securities in a segregated account with its Custodian in
the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding forward currency contract, futures contract or
option is open, unless they are replaced with similar assets. As a result, the
commitment of a large portion of the Series' assets to cover segregated accounts
could impede portfolio management or the Series' ability to meet redemption
requests or other current obligations.
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 Series 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 Series 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 Series 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
B-10
<PAGE>
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 Series 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 Series Invests--Risks and Special Considerations," 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 Series 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 Series could not close a futures position and the
value of such position declined, the Series 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, Deutsche Mark 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 Series' futures or
options transactions constitute bona fide hedging transactions within the
meaning of the Commodity Futures Trading Commission's (CFTC's) regulations. The
Series will use currency futures and options on futures in a manner consistent
with this requirement. The Series 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 Series' total assets.
Successful use of futures contracts by the Series is also subject to the
ability of the Series' Manager or Subadviser to predict correctly movements in
the direction of markets and other factors affecting currencies generally. For
example, if the Series has hedged against the possibility of an increase in the
price of securities in its portfolio and the price of such securities increases
instead, the Series 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 Series 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 Series
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 Series 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
B-11
<PAGE>
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, Deutsche Mark and Eurodollar.
The holder or writer of an option may terminate its position by selling or
purchasing an option of the same series. There is no guarantee that such closing
transactions can be effected.
Illiquid Securities
The Series may hold up to 10% of its net assets in illiquid securities.
Illiquid securities include repurchase agreements which have a maturity of
longer than seven days and securities that are illiquid by virtue of the absence
of a readily available market 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 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 of 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 Subadviser anticipates that the market for certain
restricted securities such as institutional commercial paper will expand further
as a result of this new regulation and the development of automated systems for
the trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the NASD.
Restricted securities eligible for resale pursuant to Rule 144A and
commercial paper for which there is a readily available market will not be
deemed illiquid. The Subadviser will monitor the liquidity of such restricted
securities, subject to the supervision of the Manager and the Board of
Directors. In reaching liquidity decisions, Subadviser will consider, among
other things, 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 NRSROs, or if only one NRSRO rates the
securities, by that NRSRO, or, if unrated, be of comparable quality in the view
of the Subadviser, 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.
Other Investment Techniques
The Series may take advantage of opportunities in the area of options and
futures contracts and any other derivative instruments that are not presently
contemplated for use by the Series or that are not currently available but that
may be developed, to the extent such opportunities are both consistent with its
investment objective and legally permissible for the Series. Before entering
into such transactions or making any such investment, the Series will provide
appropriate disclosure in its Prospectus.
B-12
<PAGE>
INVESTMENT RESTRICTIONS
The investment restrictions listed below have been adopted by the Series as
fundamental policies, except as otherwise indicated. Under the Investment
Company Act, a fundamental policy of the Series may not be changed without the
vote of a majority of the outstanding voting securities of the Series. As
defined in the Investment Company Act, a "majority of a Fund's outstanding
voting securities" means the lesser of (i) 67% of the shares represented at a
meeting at which more than 50% of the outstanding shares are present in person
or represented by proxy or (ii) more than 50% of the outstanding shares. For
purposes of the following limitations: (i) all percentage limitations apply
immediately after a purchase or initial investment; and (ii) any subsequent
change in any applicable percentage resulting from market fluctuations does not
require elimination of any asset from the Series.
The Series may not:
1. Purchase any security if, as a result, with respect to 75% of the
Series' total assets, more than 5% of the value of its total assets (determined
at the time of investment) would then be invested in the securities of any one
issuer.
2. Purchase a security if more than 10% of the outstanding voting
securities of any one issuer would be held by the Series.
3. Purchase a security if, as a result, 25% or more of the value of its
total assets (determined at the time of investment) would be invested in
securities of one or more issuers having their principal business activities in
the same industry. This restriction does not apply to obligations issued or
guaranteed by the United States Government, its agencies or instrumentalities.
4. Purchase or sell real estate or interests therein (including limited
partnership interests), although the Series may purchase securities of issuers
which engage in real estate operations and securities which are secured by real
estate or interests therein.
5. Purchase or sell commodities or commodity futures contracts, except that
the Series may purchase and sell financial futures contracts and options thereon
and that forward contracts are not deemed to be commodities or commodity futures
contracts.
6. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Series may invest in the
securities of companies which operate, invest in or sponsor such programs.
7. Issue senior securities, borrow money or pledge its assets, except that
the Series may borrow from banks or through forward rolls, dollar rolls or
reverse repurchase agreements up to 20% of the value of its total assets to take
advantage of investment opportunities, for temporary, extraordinary or emergency
purposes, or for the clearance of transactions and may pledge up to 20% of the
value of its total assets to secure such borrowings. For purposes of this
restriction, the purchase or sale of securities on a "when-issued" or
delayed-delivery basis; the purchase and sale of options, financial futures
contracts and options thereon; the entry into repurchase agreements and
collateral and margin arrangements with respect to any of the foregoing, will
not be deemed to be a pledge of assets nor the issuance of senior securities.
8. Make loans except by the purchase of fixed income securities in which
the Series may invest consistently with its investment objective and policies or
by use of reverse repurchase and repurchase agreements, forward rolls, dollar
rolls and securities lending arrangements.
9. Make short sales of securities.
10. Purchase securities on margin, except for such short-term loans as are
necessary for the clearance of purchases of portfolio securities. (For the
purpose of this restriction, the deposit or payment by the Series of initial or
maintenance margin in connection with financial futures contracts is not
considered the purchase of a security on margin.)
11. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, the Series may be deemed to be an
underwriter under certain federal securities laws. The Series has no limit with
respect to investments in restricted securities.
The Series will not as a matter of operating policy:
1. Invest in oil, gas and mineral leases or development programs.
2. Purchase a security if, as a result, more than 15% of its total assets
would be invested in securities which are restricted as to disposition. This
restriction shall not apply to mortgage-backed securities or obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities.
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<PAGE>
3. Purchase or retain the securities of any issuer if any officer or
director or the Manager or the Subadviser owns more than 1/2 of 1% of the
outstanding securities of such issuer, and such officers and/or directors, who
own more than 1/2 of 1%, own in the aggregate more than 5% of the outstanding
securities of such issuer.
4. Purchase warrants if, as a result, the Series would then 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 or American Stock
Exchange or a major foreign exchange will be limited to 2% of the Series' total
assets (determined at the time of investment). For purposes of this limitation,
warrants acquired in units or attached to securities are deemed to be without
value.
5. Purchase securities of other investment companies except in compliance
with the Investment Company Act and applicable state law.
6. Invest in companies for the purpose of exercising control or management
of any other issuer, except in connection with a merger, consolidation,
acquisition or reorganization.
7. Invest more than 15% of its total assets in securities of unseasoned
issuers, including their predecessors, which have been in operation for less
than three years.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Series' 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 a Series'
asset coverage for borrowings falls below 300%, the Series will take prompt
action to reduce its borrowings, as required by applicable law.
In order to comply with the rules and regulations of certain State
securities commissions, the Series has agreed (i) that over-the-counter options
transactions shall be entered into only when such options are not available on a
national securities exchange, and (ii) broker-dealers with whom the Series shall
enter into such transaction shall have a minimum net worth, at the time of the
transaction is entered into, of $20 million. In addition, the Series will only
buy and sell puts and calls on securities, stock index futures, or financial
futures or options on financial futures, if such options are written by other
persons, and if;
(i) the aggregate premiums paid on all such options which are held at any
time do not exceed 20% of the Series' total net assets; and
(ii) the aggregate margin deposits required on all such futures or options
thereon held at any time do not exceed 5% of the Series' total assets.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
Position with Principal Occupation
Name, Address and Age Fund During Past Five Years
- --------------------- ------------- ----------------------
<S> <C> <C>
Stephen C. Eyre (73) 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 (57) Director Marketing and Management Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY
Don G. Hoff (60) Director Chairman and Chief Executive Officer of Intertec, Inc. (investments)
c/o Prudential Mutual Fund since 1980; Chairman and Chief Executive Officer of EHS, Inc. since
Management, Inc. 1993; Director of Innovative Capital Management, Inc., The Asia
One Seaport Plaza Pacific Fund and The Greater China Fund.
New York, NY
</TABLE>
B-14
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation
Name, Address and Age Fund During Past Five Years
- --------------------- ------------- ----------------------
<S> <C> <C>
*Harry A. Jacobs, Jr. (74) 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.
Sidney R. Knafel (65) 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., General American Investors Company, Inc., IGENE
Biotechnology, Inc., International CableTel Incorporated and
a number of private companies.
Robert E. LaBlanc (61) Director President of Robert E. LaBlanc Associates, Inc. (telecommunications)
c/o Prudential Mutual Fund since 1981; Director of Storage Technology Corporation, Titan Corp.,
Management, Inc. Tribune Company and Trustee of Manhattan College.
One Seaport Plaza
New York, NY
Thomas A. Owens, Jr. (73) Director Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY
*Richard A. Redeker (52) President and President, Chief Executive Officer and Director (since October 1993),
One Seaport Plaza Director PMF; Executive Vice President; Director and Member of the Operating
New York, NY Committee (since October 1993); Prudential Securities Incorporated
(Prudential Securities); Director (since October 1993) of Prudential
Securities Group, Inc. (PSG); Vice President, The Prudential
Investment Corporation (since July 1994); Director (since January
1994) of Prudential Mutual Fund Distributers, Inc. (PMFD) and
Prudential Mutual Fund Services, Inc. (PMFS); formerly Senior
Executive Vice President and Director of Kemper Financial Services,
Inc. (September 1978-September 1993); Director and President of The
Global Yield Fund, Inc.
Clay T. Whitehead (57) 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 (58) Vice President Vice President and Branch Manager of Prudential Securities.
39 Public Square,
Suite 500 Wilkes Barre, PA
</TABLE>
- --------------
* "Interested" director, as defined in the Investment Company Act, by reason of
his affiliation with Prudential or PMF.
B-15
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation
Name, Address and Age Fund During Past Five Years
- --------------------- ------------- ----------------------
<S> <C> <C>
Robert F. Gunia (49) 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; Executive Vice
President Treasurer, Comptroller, Director (since March
1991) of PMFD; Director (since June 1987) of PMFS; Vice
President and Director (since May 1989) of The Asia Pacific
Fund, Inc.
Grace C. Torres (36) Treasurer and First Vice President (since March 1994) of PMF; First Vice President
One Seaport Plaza Principal (since March 1994) of Prudential Securities; Vice President of
New York, NY Financial and Bankers Trust (July 1989-March 1994).
Accounting
Officer
Stephen M. Ungerman (43) Assistant First Vice President (since February 1993) of PMF; Tax Director of
One Seaport Plaza Treasurer the Money Management Group and the Private Asset Group of
New York, NY The Prudential Insurance Company of America (since March 1996); prior
thereto, Senior Tax Manager at Price Waterhouse LLP.
S. Jane Rose (50) Secretary Senior Vice President (since January 1991) and Senior Counsel (since
One Seaport Plaza June 1987) of PMF; Senior Vice President and Senior Counsel of
New York, NY Prudential Securities (since July 1992); formerly Vice President and
Associate General Counsel of Prudential Securities.
Ellyn C. Vogin (35) Assistant Vice President and Associate General Counsel of Prudential Securities
One Seaport Plaza Treasurer and PMF (since March 1995); prior thereto, associated with the law
New York, NY firm of Fulbright & Jaworski L.L.P.
</TABLE>
- -----------------
* "Interested" director, as defined in the Investment Company Act, by reason
of his affiliation with Prudential or PMF.
Directors and officers of the Fund are also trustees, directors and
officers of some or all of the other investment companies distributed by
Prudential Securities.
The officers conduct and supervise the daily business operations of the
Fund, while the Directors, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
The 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.
The Directors have adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 72, except that retirement is being phased in for Directors who were age 68
or older as of December 31, 1993. Under this phase-in provision, Messrs. Eyre,
Jacobs and Owens are scheduled to retire on December 31, 1998.
The Board of Directors has nominated a new slate of Directors for the Fund
which will be submitted to shareholders at a special meeting to be held on or
about December 1996.
Pursuant to the terms of the Management Agreement with the Fund, the
Manager pays all compensation of officers and employees of the Fund as well as
the fees and expenses of all Directors of the Fund who are affiliated persons of
the Manager.
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended October 31, 1995 to the Directors who are not
affiliated with the Manager and the aggregate compensation paid to such
Directors for service on the Fund's board and that of all other funds managed by
Prudential Mutual Fund Management, Inc. (Fund Complex) for the calendar year
ended December 31, 1995.
B-16
<PAGE>
Compensation Table
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement From Fund
Aggregate Benefits Accrued Estimated Annual and Fund
Compensation As Part of Fund Benefits Upon Complex Paid
Name and Position From Fund Expenses Retirement to Directors
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stephen C. Eyre--Director.............. $16,000 None N/A $ 41,000(4/4)*
Delayne Dedrick Gold--Director......... $12,000 None N/A $185,000(22/39)*
Don G. Hoff--Director.................. $12,000 None N/A $ 48,500(4/4)*
Sidney R. Knofel--Director............. $12,000 None N/A $ 35,500(4/4)*
Robert E. LaBlanc--Director............ $12,000 None N/A $ 35,500(4/4)*
Thomas A. Owens, Jr.--Director......... $12,000 None N/A $100,500(12/13)*
Clay T. Whitehead--Director............ $12,000 None N/A $ 35,500(4)*
</TABLE>
- -------------
* Indicates number of funds/portfolios in Fund Complex (including the Fund)
to which aggregate compensation relates.
As of June 20, 1996, the Directors and officers of the Fund, as a
group, owned less than 1% of the outstanding common stock of the Series.
As of June 20, 1996, there were no beneficial owners, directly or
indirectly, of more than 5% of the outstanding common stock of the Series.
MANAGER
The manager of the Series 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 Series, comprise the "Prudential Mutual Funds." See "How the Series is
Managed" in the Prospectus. As of May 31, PMF managed and/or administered
open-end and closed-end management investment companies with assets of
approximately $52 billion and, according to the Investment Company Institute, as
of December 31, 1995, the Prudential Mutual Funds were the 13th largest family
of mutual funds in the United States.
PMF is a subsidiary of Prudential Securities Incorporated and The
Prudential Insurance Company of America (Prudential). PMF has three wholly-owned
subsidiaries: Prudential Mutual Fund Distributors, Inc., Prudential Mutual Fund
Services, Inc. (PMFS or the Transfer Agent) and Prudential Mutual Fund
Investment Management, Inc. PMFS serves as the transfer agent for the Prudential
Mutual Funds and, in addition, provides customer service, recordkeeping and
management and administration services to qualified plans.
Pursuant to the Management Agreement with the Series (the Management
Agreement), PMF, subject to the supervision of the Series' Board of Directors
and in conformity with the stated policies of the Series, manages both the
investment operations of the Series and the composition of the Series'
portfolio, including the purchase, retention, disposition and loan of
securities. In connection therewith, PMF is obligated to keep certain books and
records of the Series. PMF also administers the Series' corporate affairs and,
in connection therewith, furnishes the Series with office facilities, together
with those ordinary clerical and bookkeeping services which are not being
furnished by State Street Bank and Trust Company, the Series' custodian, and
PMFS, the Series' transfer and dividend disbursing agent. The management
services of PMF for the Series 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 1% of the Series' 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 Series (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 Series' 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 Series'
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
Series believes that the most restrictive expense limitation of state securities
commissions is 2-1/2% of the Series' 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 Series are anticipated to be
higher than those of funds that invest only in U.S. securities, the Series 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 Series,
PMF bears the following expenses:
(a) the salaries and expenses of all of its and the Series' personnel
except the fees and expenses of Directors who are not affiliated persons of PMF
or the Series' investment adviser;
B-17
<PAGE>
(b) all expenses incurred, by PMF or by the Series in connection with
managing the ordinary course of the Series' business, other than those assumed
by the Series as described below; and
(c) the costs and expenses payable to Mercator Asset Management, L.P.
(Mercator) pursuant to the subadvisory agreement between PMF and Mercator (the
Subadvisory Agreement).
Under the terms of the Management Agreement, the Series 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 Series' 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 Series and of pricing the Series' shares,
(d) the charges and expenses of legal counsel and independent accountants for
the Series, (e) brokerage commissions and any issue or transfer taxes chargeable
to the Series in connection with its securities transactions, (f) all taxes and
corporate fees payable by the Series to governmental agencies, (g) the fees of
any trade associations of which the Series may be a member, (h) the cost of
stock certificates representing shares of the Series, (i) the cost of fidelity
and liability insurance, (j) the fees and expenses involved in registering and
maintaining registration of the Series and of its shares with the Securities and
Exchange Commission, registering the Series and qualifying its shares under
state securities laws, including the preparation and printing of the Series'
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 Series' 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 Series 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 __________
and by shareholders of the Fund on __________ .
PMF has entered into a Subadvisory Agreement (the Subadvisory Agreement)
with Mercator (the Subadviser). Dedicated to global and international common
stock investing, Mercator was initially founded in 1984 by senior professionals
formerly associated with Templeton Investment Counsel as Mercator Asset
Management, Inc. ("Mercator, Inc."). On November 30, 1995 Mercator, a limited
partnership organized under the laws of the State of Delaware, assumed the
investment advisory business of Mercator, Inc. As of December 31, 1995, Mercator
had $1.8 billion in assets under management. The Subadvisory Agreement provides
that Mercator will furnish investment advisory services in connection with the
management of the Series. In connection therewith, Mercator 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 Mercator's performance of such services.
Pursuant to a subadvisory agreement with PMF, The Prudential Investment
Corporation (PIC) provides investment advisory services to the Series with
respect to (i) the management of short-term assets, including cash, money market
instruments and repurchase agreements and (ii) the lending of portfolio
securities in connection with the management of the International Stock Series.
For these services, PMF will reimburse PIC for reasonable costs and expenses
incurred by PIC determined in a manner acceptable to PMF.
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
__________ , and by shareholders of the Series on __________ .
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 Mercator 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 PIC are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1994. Its primary business is to offer a full range of products and services in
three areas: insurance, investments and home ownership for individuals and
families; health-care management and other benefit programs for employees of
companies and members of groups; and asset management for institutional clients
and their associates. Prudential (together with its subsidiaries) employs nearly
100,000 persons worldwide, and maintains a sales force of approximately 19,000
agents, 3,400 insurance brokers and
B-18
<PAGE>
6,000 financial advisors. It insures or provides other financial services to
more than 50 million worldwide--to more than one of every five people in the
United States. Prudential is a major issuer of annuities, including variable
annuities. Prudential seeks to develop innovative products and services to meet
consumer needs in each of its business areas. Prudential has been engaged in the
insurance business since 1875. In July 1995, Institutional Investor ranked
Prudential the third largest institutional money manager of the 300 largest
money management organizations in the United States as of December 31, 1994. As
of December 31, 1994, Prudential through its subsidiaries provided automobile
insurance for more than 1.8 million cars and insured more than 1.5 million
homes. For the year ended December 31, 1994, The Prudential Bank, a subsidiary
of Prudential, served 940,000 customers in 50 states providing credit card
services and loans totaling more than $1.2 billion. Assets held by Prudential
Securities Incorporated (PSI) for its clients totaled approximately $150 billion
at December 31, 1994. During 1994, over 28,000 new customer accounts were opened
each month at PSI. The Prudential Real Estate Affiliates, the fourth largest
real estate brokerage network in the United States, has more than 34,000 brokers
and agents and more than 1,100 offices in the United States.
Based on data for the period from January 1, 1995 to September 30, 1995 for
the Prudential Mutual Funds, on an average day, there are approximately $80
million in common stock transactions, over $150 million in bond transactions and
over $3.1 billion in money market transactions. In 1994, the Prudential Mutual
Funds effected more than 40,000 trades in money market securities and held on
average $20 billion of money market securities. Based on complex-wide data for
the period from January 1, 1995 to September 30, 1995, on an average day, over
7,000 shareholders telephoned Prudential Mutual Fund Services, Inc., the
Transfer Agent of the Prudential Mutual Funds, on the Prudential Mutual Funds'
toll-free number. On an annual basis, that represents approximately 1.8 million
telephone calls answered.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
The Wall Street Journal, The New York Times, Barron's and USA Today.
DISTRIBUTOR
Prudential Securities Incorporated, One Seaport Plaza, New York, New York
10292 (Prudential Securities), acts as the distributor of the shares of the
Series.
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 Series
under Rule 12b-1 under the Investment Company Act and separate distribution
agreements (the Distribution Agreements), Prudential Securities (the
Distributor) incurs the expenses of distributing the Series' Class A, Class B
and Class C shares. Prudential Securities serves as the Distributor of the Class
Z shares and incurs the expenses of distributing the Series' Class Z shares
under a Distribution Agreement with the Fund, none of which are reimbursed by or
paid for by the Series. See "How the Series is Managed--Distributor" in the
Prospectus.
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%. 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 .75 of 1% (not including
the service fee) per annum of the Series' average daily net assets may be used
as reimbursement for distribution-related expenses with respect to the Class B
shares (asset-based sales charge). The Plans were last approved by the Board of
Directors, including a majority of the Rule 12b-1 Directors, on __________ . The
Class A Plan was approved by Class A and Class B shareholders, and the Class B
Plan was approved by Class B shareholders on __________ . The Class C Plan was
approved by the sole shareholder of Class C shares on __________ .
Prudential Securities will also receive 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.
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 of the Series.
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 Series will not be contractually obligated to pay expenses
incurred under any Plan if it is terminated or not continued.
B-19
<PAGE>
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 Series 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 Series has agreed to indemnify
Prudential Securities to the extent permitted by applicable law against certain
liabilities under the Securities Act of 1933, as amended.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the safety, potential returns
and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSI's
conduct violated the federal securities laws and that an order issued by the SEC
in 1986 requiring PSI to adopt, implement and maintain certain supervisory
procedures had not been complied with; (ii) directed PSI to cease and desist
from violating the federal securities laws and imposed a $10 million civil
penalty; and (iii) required PSI to adopt certain remedial measures including the
establishment of a Compliance Committee of its Board of Directors. Pursuant to
the terms of the SEC settlement, PSI established a settlement fund in the amount
of $330,000,000 and procedures, overseen by a court approved Claims
Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend the creation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Dallas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. and PSI entered into
agreements with the United States Attorney deferring prosecution (provided PSI
complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the Fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director will also serve as an independent "ombudsman" whom PSI
employees can call anonymously with complaints about ethics and compliance.
Prudential Securities shall report any allegations or instances of criminal
conduct and material improprieties to the new director. The new director will
submit compliance reports which shall identify all such allegations or instances
of criminal conduct and material improprieties every three months for a
three-year period.
NASD Maximum Sales Charge Rule. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred sales
charges and asset-based sales charges to 6.25% of total gross sales of each
class of shares. Interest charges on unreimbursed distribution expenses equal to
the prime rate plus one percent per annum may be added to the 6.25% limitation.
Sales from the reinvestment of dividends and distributions are not included in
the calculation of the 6.25% limitation. The annual asset-based sales charge on
shares of the Series may not exceed .75 of 1% per class. The 6.25% limitation
applies to the Series 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
B-20
<PAGE>
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. Other securities will be valued at the mean of the
most recently quoted bid and asked prices in the over-the-counter market.
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. Quotations of
foreign securities in a foreign currency are converted to U.S. dollar
equivalents at the current rate obtained from a recognized bank or dealer and
forward currency exchange contracts are valued at the current cost of covering
or offsetting such contracts. 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 more than 60 days, for which market quotations are readily
available, are valued at their current market quotations as supplied by an
independent pricing agent or principal market maker. The Series 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 Series shares have been received or days on which changes in the value
of the Series' portfolio securities do not affect net asset value. In the event
the New York Stock Exchange closes early on any business day, the net asset
value of the Series' shares shall be determined at a time between such closing
and 4:15 P.M., New York time.
Net asset value is calculated separately for each class. The net asset
value of Class B and Class C shares will generally be lower than the net asset
value of Class A and Class Z shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. The
net asset value of Class Z shares will generally be higher than the net asset
value of Class A, Class B or Class C shares as a result of the fact that the
Class Z shares are not subject to any distribution or service fee. It is
expected, however, that the 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 Series, 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 Series 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
Series' 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 Series, will not significantly affect the
Series' ability to pursue its present investment objective. However, in the
future, in other circumstances, the Series may be at a disadvantage because of
this limitation in comparison to other funds with similar objectives but not
subject to such limitations.
B-21
<PAGE>
In placing orders for portfolio securities of the Series, 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
Series 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 Series, 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 Series 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
Series, and the services furnished by such brokers, dealers or futures
commission merchants may be used by the Manager in providing investment
management for the Series. 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 Series 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 Series' 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 Series' 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
Series, 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 Series, 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
consistent with the foregoing standard. In accordance with Section 11(a) of the
Securities Exchange Act of 1934, Prudential Securities may not retain
compensation for effecting transactions on a national securities exchange for
the Series unless the Series has expressly authorized the retention of such
compensation. Prudential Securities must furnish to the Series at least annually
a statement setting forth the total amount of all compensation retained by
Prudential Securities from transactions effected for the Series 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.
PURCHASE AND REDEMPTION OF SERIES SHARES
Shares of the Series may be purchased at a price equal to the next
determined net asset value per share plus a sales charge which, at the election
of the investor, may be imposed either (i) at the time of purchase (Class A
shares) or (ii) on a deferred basis (Class B or Class C shares). Class Z shares
of the Series are offered to a limited group of investors at net asset value
without any sales charge. See "Shareholder Guide--How to Buy Shares of the
Series" in the Prospectus.
Each class represents an interest in the same assets of the Series and is
identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service expenses which may affect
performance, (ii) each class has exclusive voting rights on any matter submitted
to shareholders that relates solely to its arrangement and has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of any other class, (iii) each class has a
different exchange privilege and (iv) only Class B shares have a conversion
feature. See "Distributor." Each class also has separate exchange privileges.
See "Shareholder Investment Account--Exchange Privilege."
B-22
<PAGE>
Specimen Price Make-up
Under the current distribution arrangements between the Series and the
Distributor, Class A shares are sold at a maximum sales charge of 5% and Class
B*, Class C* and Class Z shares are sold at net asset value. Using the Series'
net asset value at ____________, 1996 the maximum offering price of the Series'
shares is as follows:
<TABLE>
<CAPTION>
Class A
<S> <C>
Net asset value and redemption price per Class A share ........................ $ ______
Maximum sales charge (5% of offering price) ................................... $ ======
Offering price to public ......................................................
Class B
Net asset value, offering price and redemption price per Class B share* ....... $ ======
Class C
Net asset value, offering price and redemption price per Class C share* ....... $ ======
Class Z
Net asset value, offering price and redemption price per Class Z share** ...... $ ======
</TABLE>
- ---------------
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
Reduction and Waiver of Initial Sales Charges--Class A Shares
Combined Purchase and Cumulative Purchase Privilege. If an investor or
eligible group of related investors purchases Class A shares of the Series
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 Series investors includes any combination of
the following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group
that holds 25% or more of the outstanding voting securities of a
company will be deemed to control the company, and a partnership will
be deemed to be controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Series investors may include the
following: an employer (or group of related employers) and one or more
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 Series 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
B-23
<PAGE>
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 Series 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 also available to investors
(or an eligible group of related investors), including retirement and groups
plans, who enter into a written Letter of Intent providing for the purchase,
within a thirteen-month period, of shares of the Fund and shares of other
Prudential Mutual Funds (Investment Letter of Intent). Retirement and group
plans may also qualify to purchase Class A shares at net asset value by entering
into an LOI whereby they agree to enroll, within a thirteen-month period, a
specified number of eligible employees or participants (Participant Letter of
Intent).
For purposes of the Investment Letter of Intent, all shares of the Fund
and shares of other Prudential Mutual Funds (excluding money market funds other
than those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the Transfer
Agent or through Prudential Securities.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant
enrollment goal over a thirteen-month period. Each investment made during the
period, in the case of an Investment Letter of Intent, will receive the reduced
sales charge applicable to the amount represented by the goal as if it were a
single investment. In the case of a Participant Letter of Intent, each
investment made during the period will be made at net asset value. Escrowed
Class A shares totaling 5% of the dollar amount of the Letter of Intent will be
held by the Transfer Agent in the name of the purchaser, except in the case of
retirement and group plans where the employer or plan sponsor will be
responsible for paying any applicable sales charge. The effective date of an
Investment Letter of Intent (except in the case of retirement and group plans)
may be back-dated up to 90 days, in order that any investment made during this
90-day period, valued at the purchaser's cost, can be applied to the fulfillment
of the Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter of
Intent does not obligate the retirement or group plan to enroll the indicated
number of eligible employees or participants. In the event the Letter of Intent
goals is not achieved within the thirteen-month period, the purchaser (or the
employer or plan sponsor in the case of any retirement or group plan) is
required to pay the difference between the sales charge otherwise applicable to
the purchases made during this period and sales charges actually paid. Such
payment may be made directly to the Distributor or, if not paid, the Distributor
will liquidate sufficient escrowed shares to obtain such difference. Investors
electing to purchase Class A shares of the Fund pursuant to a Letter of Intent
should carefully read such Letter of Intent.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charges will, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or, in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to any
individual participant in any retirement or group plans.
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.
<TABLE>
<S> <C>
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 considered A copy of the Social Security Administration award
disabled if he or she is unable to engage in any letter or a letter from a physician on the
substantial gainful activity by reason of any physician's letterhead stating that the
medically determinable physical or mental shareholder (or, in the case of a trust, the
impairment which can be expected to result in grantor) is permanently disabled. The letter must
death or to be of long-continued and indefinite also indicate the date of disability.
duration.
</TABLE>
B-24
<PAGE>
<TABLE>
<S> <C>
Distribution from an IRA or 403(b) Custodial Account A copy of the distribution form from the custodial
firm indicating (i) the date of birth of the
shareholder and(ii) that the shareholder is over
age 59 1/2 and is taking a normal
distribution--signed by the shareholder.
Distribution from Retirement Plan A letter signed by the plan administrator/trustee
indicating the reason for the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or the
plan administrator/trustee on company letterhead
indicating the amount of the excess and whether or
not taxes have been paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Series 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 Series 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 Series 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 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 Series makes available to its shareholders the privilege of exchanging
their shares of the Series 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 Series. 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 Series 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)
B-25
<PAGE>
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 Series 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 Series 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 Series, 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 Series from a money market fund during the month
(and are held in the Series at the end of the month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the
Class B 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 Series, respectively, without subjecting such shares to any CDSC.
Shares of any fund participating in the Class B or Class C exchange privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares of other funds, respectively, without
being subject to any CDSC.
Class Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
Additional details about the Exchange Privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Series' Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on sixty days' notice, and any fund, including the
Series, or the Distributor, has the right to reject any exchange application
relating to such fund's shares.
Dollar Cost Averaging
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university. (1)
B-26
<PAGE>
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
Period of
Monthly investments: $100,000 $150,000 $200,000 $250,000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years............................................ $ 110 $ 165 $ 220 $ 275
20 Years............................................ 176 264 352 440
15 Years............................................ 296 444 592 740
10 Years............................................ 555 833 1,110 1,388
5 Years............................................. 1,371 2,057 2,742 3,428
</TABLE>
See "Automatic Savings Accumulation Plan."
- ----------
(1) Source information concerning the costs of education at public and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees,
room and board for the 1993-1994 academic year.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Series. 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 Series 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 Series. 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.
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
B-27
<PAGE>
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
opposed to a taxable individual savings account.
Tax-Deferred Compounding(1)
<TABLE>
<CAPTION>
Contributions Personal
Made Over: Savings IRA
- ------------- -------- ---
<S> <C> <C>
10 years $ 26,165 $ 31,291
15 years 44,676 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
</TABLE>
- ----------
(1)The chart is for illustrative purposes only and does not represent the
performance of the Series or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
the IRA account will be subject to tax when withdrawn from the account.
Mutual Fund Programs
From time to time, the Series may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter promoted collectively. Typically, these programs are
created with an investment theme, e.g., to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Series may waive or
reduce the minimum initial investment requirements in connection with such a
program.
The mutual funds in the program may be purchased individually or as a part
of the program. Since the allocation of portfolios included in the program may
not be appropriate for all investors, investors should consult their Prudential
Securities Financial Adviser or Prudential/Pruco Securities Representative
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
PERFORMANCE INFORMATION
Average Annual Total Return. The Series may from time to time advertise
its average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares. See "How the Series
Calculates Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical
$1,000 payment made at the beginning of the 1, 5 or 10 year
periods.
Average annual total return takes into account any applicable initial or
contingent deferred sales charge but does not take into account any federal or
state income taxes that may be payable upon redemption.
Yield. The Series may from time to time advertise its yield as calculated
over a 30-day period. Yield is calculated separately for Class A, Class B, Class
C and Class Z shares. This yield will be computed by dividing the Series' net
investment income per
B-28
<PAGE>
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 6
YIELD = 2 [(-----+1) -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 Series as to what an investment in the Series will actually yield for any
given period. Yields for the Series 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 Series income and expenses.
Aggregate Total Return. The Series may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares. See "How the Series Calculates Performance" in the
Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Series 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.
From time to time, the performance of the Series may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long term and the rate of inflation.(1)
PERFORMANCE
COMPARISON OF DIFFERENT
TYPES OF INVESTMENTS
OVER THE LONG TERM
(1/1926 - 12/1994)
Common Stocks ............... 10.2%
Long-Term Govt. Bonds ....... 4.8%
Inflation ................... 3.1%
- ----------
(1) Source: Ibbotson Associates, Stocks, Bonds, Bills and Inflation--1995
Yearbook (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. Common stock returns
are based on the Standard and Poor's 500 Stock Index, a market-weighted,
unmanaged index of 500 common stocks in a variety of industry sectors. It is a
commonly used indicator of broad stock price movements. This chart is for
illustrative purposes only and is not intended to represent the performance of
any particular investment or fund. Investors cannot invest directly in an index.
Past performance is not a guarantee of future results.
B-29
<PAGE>
TAXES
The Series 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 Series 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 Series' 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 Series' 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 Series' ability to invest in other
types of assets.
As a regulated investment company, the Series 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 Series' net investment income including net short-term capital gains
earned in the taxable year is distributed. The Series 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 Series 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 Series to the extent the Series 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 Series accrues income,
expenses or other liabilities denominated in a foreign currency and the time the
Series 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 Series, 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 Series 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 Series 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 Series on
securities lapses or is terminated through a closing transaction, such as a
purchase by the Series of the option from its holder, the Series 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 Series in the closing
transaction. If securities are sold by the Series pursuant to the exercise of a
call option written by it, the Series 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 Series 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 Series' ability to write or acquire options. Certain
of the Series' transactions may be subject to wash sale and short sale
provisions of the Internal Revenue Code which may, among other things, require
the Series to defer losses. In addition, debt securities acquired by the Series
may be subject to original issue discount and market discount rules which may,
among other things, cause the Series 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
Series 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 Series'
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 Series may create "straddles" for federal income tax purposes and this may
affect the character and timing of gains or losses realized by the Series 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 Series' 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-30
<PAGE>
production of, passive income. If the Series acquires and holds stock in a PFIC
beyond the end of the year of its acquisition, the Series 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 Series distributes the PFIC income as a
taxable dividend to its shareholders. If the Series 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 Series 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 Series;
those amounts would be subject to the distribution requirements applicable to
the Series 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 Series does not or cannot elect to treat such a PFIC as a
"qualified electing fund", the Series can make a "mark-to-market" election,
i.e., treat the shares of the PFIC as sold on the last day of the Series'
taxable year, and thus avoid the special tax and interest charge. The gains the
Series recognizes from the mark-to-market election would be included as ordinary
income in the net investment income the Series must distribute to shareholders,
notwithstanding that the Series would receive no cash in respect of such gains.
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 Series will be
eligible for the dividends received deduction for corporate shareholders only to
the extent that the Series' 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 Series' 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 Series' shares, and will not be eligible for the
dividends received deduction for corporations. Any gain or loss realized upon a
sale or redemption of Series 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
Series 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 Series 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 Series' 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 Series, 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 Series
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 Series.
Distributions of net investment income made to a nonresident alien
individual, a nonresident alien 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 and
the shareholder complies with certain filing requirements. Gains realized upon
the sale or redemption of shares of the Series 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 Series 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 Series 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 Series 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 Series.
B-31
<PAGE>
Income received by the Series 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 Series' assets to be invested in
various countries is not known.
If the Series is liable for foreign taxes, the Series 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
Series will be able to do so. Under the Internal Revenue Code, if more than 50%
of the value of the Series' total assets at the close of its taxable year
consists of stock or securities of foreign corporations, the Series will be
eligible and may file an election with the Internal Revenue Service to
"pass-through" to the Series' shareholders the amount of foreign income taxes
paid by the Series. 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 Series; (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 Series 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
Series' taxable year whether the foreign income taxes paid by the Series 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 or Class Z 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, Class C and Class Z shares. See "Net Asset Value."
Distributions may be subject to additional state and local taxes.
Pennsylvania Personal Property Tax. The Series has received a written
letter of determination from the Pennsylvania Department of Revenue that the
Series will be subject to the Pennsylvania foreign franchise and corporate net
income tax by reason of the Series' business activities in Pennsylvania.
Accordingly, it is believed that Series shares are exempt from Pennsylvania
personal property taxes. The Series 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 Series' portfolio securities
and cash and in that capacity maintains certain financial and accounting books
and records pursuant to an agreement with the Series. Subcustodians provide
custodial services for the Series' 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
Series. 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 Series, 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.
Deloitte & Touche LLP, Two World Financial Center, New York, New York
10281, serves as the Series' independent accountants, and in that capacity
audits the Series' annual financial statements.
B-32
<PAGE>
APPENDIX--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
Asset Allocation
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns, while
enabling investors to work toward their financial goal(s). Asset allocation is
also a strategy to gain exposure to better performing asset classes while
maintaining investment in other asset classes.
Diversification
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks and (general returns) of any one type of security.
Duration
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
Market Timing
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
Power of Compounding
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
App-1
<PAGE>
APPENDIX--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the
rate of inflation.
[GRAPHICAL REPRESENTATION]
Source: Prudential Investment Corporation based on data from Ibbotson
Associates' EnCORR Software, Chicago, Il. As of 12/31/95. Used with permission.
All rights reserved. This chart is for illustrative purposes only and is not
indicative of the past, present, or future performance of any asset class or any
Prudential Mutual Fund.
Generally, stock returns are attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile than
bond prices over the long-term.
Small stock returns for 1926-1989 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.
Long-term government bond returns are represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. At the beginning of each year
a new bond with a then-current coupon replaces the old bond. Treasury bill
returns are for a one-month bill. Treasuries are guaranteed by the government as
to the timely payment of principal and interest; equities are not. Inflation is
measured by the consumer price index (CPI).
Impact of Inflation. The "real" rate of investment return is that which exceeds
the rate of inflation, the percentage change in the value of consumer goods and
the general cost of living. A common goal of long-term investors is to outpace
the erosive impact of inflation on investment returns.
App-2
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987 to
December 1995. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Series or of any sector in which the
Series invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Series Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
Historical Total Returns of Different Bond Market Sector
[GRAPHICAL REPRESENTATION]
(1) Lehman Brothers Treasury Bond Index is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.
(2) Lehman Brothers Mortgage-Backed Securities Index is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3) Lehman Brothers Corporate Bond Index includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
(4) Lehman Brothers High Yield Bond Index is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one year.
(5) Salomon Brothers World Government Index (Non U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the U.S.,
but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
App-3
<PAGE>
This chart illustrates the performance of major world stock markets for the
period from 1985 through 1995. It does not represent the performance of any
Prudential Mutual Fund.
[GRAPHICAL REPRESENTATION]
Source: Morgan Stanley Capital International as of 12/31/95. Morgan Stanley
country indices area unmanaged indices which include those stocks making up the
largest two-thirds of each country's total stock market capitalization. This
chart is for illustrative purposes only and is not indicative of the past,
present or future performance of any specific investment. Investors cannot
invest directly in stock indices.
Source: Lipper Analytical New Applications (LANA). This chart is for
illustrative purposes only and is not representative of the past, present or
future performance of any Prudential Mutual Fund. Common Stock total returns are
based on the S&P 500 Index, a market-value weighted index made up of 500 of the
largest stocks in the U.S. based upon their stock market value. Investors cannot
buy or invest in market indices.
This chart shows the growth of a hypothetical $10,000 investment made in the
stock representing the S&P 500 stock index with and without reinvested
dividends. As of 12/31/95.
[GRAPHICAL REPRESENTATION]
App-4
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
[GRAPHICAL REPRESENTATION]
Source: Prudential Investment Corporation based on data from Ibbotson
Associates' EnCORR Software, Chicago, Il. Used with permission. All rights
reserved. The chart illustrates the historical yield of the long-term U.S.
Treasury Bond from 1926-1995. Yields represent that of an annually renewed
one-bond portfolio with a remaining maturity of approximately 20 years. This
chart is for illustrative purposes and should not be construed to represent the
yields of any Prudential Mutual Fund.
App-5
<PAGE>
DESCRIPTION OF S&P, MOODY'S AND DUFF & PHELPS RATINGS
Description of S&P Corporate Bond Ratings:
AAA - Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC, C - Bonds rated BB, B, CCC, CC, or C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
represents the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
Description of Moody's Corporate Bond Ratings:
Aaa - Bonds rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of these issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well-safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds, and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 in the Aa and A rating
categories. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
Description of Duff & Phelps Bond Ratings:
AAA - Bonds rated AAA by Duff & Phelps are considered to be of the highest
credit quality. The risk factors are negligible, being only slightly more than
for risk-free U.S. Treasury debt.
App-6
<PAGE>
AA+, AA, AA- - Bonds rated AA+, AA or AA- are considered to be of high
credit quality. Protection factors are strong. Risk is modest but may vary
slightly from time to time because of economic conditions.
A+, A, A- - Bonds rated A+, A or A- have protection factors which are
average but adequate; however, risk factors are more variable and greater in
periods of economic stress.
BBB+, BBB, BBB- - Bonds rated BBB+, BBB or BBB- have below average
protection factors but are still considered sufficient for prudent investment.
These bonds demonstrate considerable variability in risk during economic cycles.
BB+, BB, BB- - Bonds rated BB+, BB, or BB- are below investment grade but
are still deemed likely to meet obligations when due. Present or prospective
financial protection factors fluctuate according to industry conditions or
company fortunes. Overall quality may move up or down frequently within this
category.
B+, B, B- - Bonds rated B+, B, or B- are below investment grade and possess
the risk that obligations will not be met when due. Financial protection factors
will fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC - Bonds rated CCC are well below investment grade securities.
Considerable uncertainty exists as to timely payment of principal, interest or
preferred dividends. Protection factors are narrow and risk can be substantial
with unfavorable economic/industry conditions, and/or with unfavorable company
developments.
DD - Bonds rated DD are defaulted debt obligations. The issuer failed to
meet scheduled principal and/or interest payments.
Description of S&P Commercial Paper Ratings:
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted A-1+.
Capacity for timely payment on commercial paper rated A-2 is strong, but the
relative degree of safety is not as high as for issues designated A-1.
Description of Moody's Commercial Paper Ratings:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rated Prime-2 (or related supporting institutions) are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics of
issuers rated Prime-1 but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
Description of Duff & Phelps Commercial Paper Rating:
Duff & Phelps commercial paper ratings are divided into three categories,
ranging from "1" for the highest quality obligations to "3" for the lowest. No
ratings are issued for companies whose paper is not deemed investment grade.
Issues assigned the Duff 1 rating are considered top grade. This category is
further divided into three gradations as follows: Duff 1 plus -- highest
certainty of timely payment, short-term liquidity, including internal operating
factors and/or ready access to alternative sources of funds, is clearly
outstanding and safety is just below risk-free U.S. Treasury short-term
obligations; Duff 1 -- very high certainty of timely payment, liquidity factors
are excellent and supported by strong fundamental protection factors, risk
factors are minor; Duff 1 minus-high certainty of timely payment, liquidity
factors are strong and supported by good fundamental protection factors, risk
factors are very small. Issues rated Duff 2 represent a good certainty of timely
payment; liquidity factors and company fundamentals are sound; although ongoing
internal funds needs may enlarge total financing requirements, access to capital
markets is good; risk factors are small. Duff 3 represents a satisfactory grade;
satisfactory liquidity and other protection factors qualify issue as to
investment grade; risk factors are larger and subject to more variation;
nevertheless timely payment is expected.
App-7
<PAGE>
THE PRUDENTIAL LETTER TO
(LOGO) INSTITUTIONAL SHAREHOLDERS
FUND
November 16, 1995
We are pleased to provide you with the Annual Report of The Prudential
Institutional Fund for the year ended September 30, 1995. The period was
generally characterized by bullish financial markets which, along with strong
cash flow from shareholders and retirement plan participants, resulted in
significant increases in the size of many of the Fund's portfolios. Total net
assets grew to $784.9 million at September 30, 1995 from $493.1 million at
September 30, 1994. The Fund has seven portfolios, each with a distinct
investment objective designed to allow shareholders the opportunity to select
various options to match different goals and risk tolerances.
Economy
Gross Domestic Product grew at a rate of 3.3% this fiscal year, compared to
4.4% the last fiscal year. The Fed ended its relentless pattern of rate
increases (six hikes during 1994) and cut short-term interest rates .25% in
July, 1995. The economy appears to be moving ahead at a reasonable pace, albeit
at one that's slower than 1994.
Leading indicators have been trending sideways --housing and auto sales
remain high but are off earlier peaks and employment remains relatively stable.
Restrained growth in both wages and consumer prices have kept inflation under
control. Although inflation isn't a problem, moderate economic growth led the
Fed to shelve any plans for further interest rate cuts.
Market Review
Returns for the U.S. stock and bond markets were lackluster toward the end of
1994. By the first quarter of 1995, the financial markets welcomed slower
economic growth and the S&P 500 Index returned nearly 10% --one of the best
quarters on record. Despite turmoil in the foreign exchange markets, bonds
rallied steadily throughout the first quarter. The surprisingly strong 1995
rally in stocks and bonds continued right through the third quarter. By the end
of September, 1995, the S&P 500 Index was up 29.7% for the fiscal year, while
the Lehman Government/Corporate Bond Index was up 14.3%.
Foreign stocks, as measured by the Morgan Stanley Europe, Australia and Far
East Index (EAFE), gained 5.8%. This relative performance is a reversal from
fiscal 1994 when the EAFE index outperformed both the S&P 500 Index and Lehman
index returns.
Fund Performance
As a result of the strength in the financial markets, each of the Fund's
portfolios achieved absolute positive returns for the year. For the most part,
comparable benchmarks proved difficult to surpass. Since each portfolio's
inception, returns have been very positive and compare satisfactorily versus the
benchmarks. This performance information along with comments from each
portfolio's adviser and portfolio holdings may be found on the following pages.
Summary
While we do not expect gains of this magnitude to be repeated in the near
future, we believe that investors who stick with a disciplined approach to
investing their retirement savings should be rewarded over the long term. We
look forward to continuing to meet the retirement and investment needs of our
shareholders.
Sincerely,
Mark R. Fetting
President
1
<PAGE>
THE PRUDENTIAL INTERNATIONAL STOCK FUND
(LOGO) INSTITUTIONAL
FUND
OBJECTIVE: Seeks to achieve long-term growth of capital through investment in
equity securities of foreign companies. Income is a secondary objective.
INVESTMENT APPROACH: While the Fund may invest anywhere outside the U.S., it is
expected that most investments will be made in developed countries in North
America, Western Europe and the Pacific Basin.
The Adviser maintains a consistently applied valuation process and remains
sensitive to stock prices keeping a long-term, global perspective. To this end,
each market is screened for undervalued securities using both historical and
forecasted data.
ADVISER: The Fund's adviser is Mercator Asset Management, Inc. Mercator is
dedicated to global and international common stock investing. Organized in 1984,
Mercator is a conservative, value-oriented manager, which places great emphasis
on capital preservation. Mercator manages $1.8 billion for institutional
clients.
ADVISER'S COMMENTS: Earlier in the fiscal year interest rates were rising and
both stock and bond prices were falling. Foreign stock markets were in the
doldrums, with the emerging markets of the world being particularly hard hit, as
investors sold stocks after the Mexican devaluation. Cash flows into foreign
stock markets by U.S. investors declined, thereby reducing demand for foreign
equities. During the second half of the fiscal year, the performance of foreign
markets improved as corporate earnings were very good and in many cases exceeded
expectations. Interest rates, with few exceptions, moved down; with rates
currently at levels not seen in eighteen months. The outlook for inflation
continues to be positive as labor costs remain subdued and raw material prices
trend down. Currencies, which had been stable, were more active late in the
period as the U.S. dollar staged a big rally against the Japanese yen, but had
little effect on most other foreign currencies.
During the year we eliminated our positions in Mexico due to the negative
outlook for stocks based on lack of earnings growth. Devaluation, high
inflation, high interest rates and the political risk were the major factors
causing us to significantly reduce our Mexican earnings estimates. Our sells in
other countries were not significant enough to alter their allocation in the
portfolio. While Japanese stocks continued to be overvalued relative to stocks
we monitor, Mercator identified several stocks that were attractively priced and
purchased them. We increased our positions in Switzerland, Sweden, Korea,
Australia and Canada. Analyzing stocks by sectors, we identified better values
in the consumer and financial groups and fewer opportunities in the basic
cyclicals.
<TABLE>
PERFORMANCE RESULTS:
<CAPTION>
Average Annual Returns Fund EAFE Index
<S> <C> <C>
------------------------- ------------- -------------
One Year ended 9/30/95 +5.95% +5.79%
From Inception (11/5/92) +17.48% +16.20%
</TABLE>
Results from inception are average annual returns. Fund performance figures are
historical and reflect reinvestment of dividends and distributions. Investment
return and principal value will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results. Investing in foreign markets involves
additional risks such as currency fluctuations and political and social
developments, which are described in the Fund's prospectus. The Manager is
currently limiting the expenses of the Fund. Without this reduction of expenses,
the total return would have been lower.
17
<PAGE>
THE PRUDENTIAL INTERNATIONAL STOCK FUND
(LOGO) INSTITUTIONAL Comparison of Change in Value
FUND of A $10,000 Investment
(CHART)
-------------- International Stock Fund - - - - MS EAFE Index
Past performance is no guarantee of future results and an investor's
shares may be worth more or less than their original cost.
This graph is furnished to you in accordance with SEC regulations. It
compares a $10,000 investment in The Prudential Institutional Fund:
International Stock Fund (the ``Fund'') with a similar investment in the
Morgan Stanley ``EAFE'' Index by portraying the initial account values
at the commencement of operations and subsequent account values at the
end of each fiscal year (September 30) beginning in 1992. For purposes
of the graph and, unless otherwise indicated in the accompanying table,
it has been assumed that all recurring fees (including management fees)
were deducted and all dividends and distributions were reinvested.
The EAFE Index is an arithmetical average weighted by market value of
the performance of 1023 companies representing the stock markets of
Europe, Australia, New Zealand and the Far East. The EAFE Index is an
unmanaged index and includes the reinvestment of all dividends, but does
not reflect the payment of transaction costs and advisory fees
associated with an investment in the Fund. The securities which comprise
the EAFE Index may differ substantially from the securities in the
Fund's portfolio. The EAFE Index is not the only index that may be used
to characterize performance of international equity funds and other
indices may portray different comparative performance.
18
<PAGE>
THE PRUDENTIAL INTERNATIONAL STOCK FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
LONG-TERM INVESTMENTS
Common Stocks--94.5%
Argentina--2.3%
35,000 Telecom Argentina (ADR) ......... $ 1,465,625
(Utilities)
95,000 YPF Sociedad Anonima (ADR) ...... 1,710,000
(Oil & Gas) -----------
3,175,625
-----------
Australia--7.3%
800,000 CSR, Ltd. ....................... 2,662,008
(Multi-Industry)
540,000 Mayne Nickless Ltd. ............. 2,560,519
(Multi-Industry)
270,000 National Australia Bank Ltd. .... 2,389,001
(Commercial Banking)
900,000 Pioneer International Ltd. ...... 2,382,195
(Building Materials & -----------
Components)
9,993,723
-----------
Canada--4.6%
100,000 Bank of Nova Scotia ............. 2,104,675
(Commercial Banking)
Canadian Tire Corp., Ltd.,
210,000 Class A ......................... 2,366,362
(Automotive Parts)
145,000 MacMillan Bloedel Ltd. .......... 1,782,455
(Forestry & Paper) -----------
6,253,492
-----------
<CAPTION>
Value
Shares Description (Note 1)
- -------------------------------------------------------------
<C> <S> <C>
Finland--2.5%
140,000 Enso-Gutzeit Oy, Class R ........ $ 1,186,316
(Forestry & Paper)
124,000 Outokumpu Oy .................... 2,205,966
(Metals - Non Ferrous) -----------
3,392,282
-----------
France--5.7%
12,000 Chargeurs S.A. .................. 2,484,523
(Multi-Industry)
30,075 Christian Dior S.A. ............. 2,734,923
(Textiles & Apparel)
19,000 Peugeot S.A. .................... 2,595,555
(Automobile Manufacturing) -----------
7,815,001
-----------
Germany--1.7%
7,000 Volkswagen A.G. ................. 2,272,059
(Automobile Manufacturing) -----------
Italy--0.7%
890,000 Bca Fideuram S.P.A. ............. 992,565
(Financial Services) -----------
Japan--5.9%
263,000 Hitachi Ltd. .................... 2,857,545
(Electrical Equipment)
165,000 Matsushita Electric Industrial 2,523,139
Co., Ltd. .
(Electrical Equipment)
51,000 Sony Corp. ...................... 2,637,223
(Electronics) -----------
8,017,907
-----------
</TABLE>
See Notes to Financial Statements.
19
<PAGE>
THE PRUDENTIAL INTERNATIONAL STOCK FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
Netherlands--11.3%
20,000 AKZO N.V. ....................... $ 2,400,650
(Chemicals)
30,000 Gamma Holding N.V. .............. 1,349,663
(Textiles & Apparel)
52,000 Internationale - Nederlanden Groep 3,018,495
N.V. .
(Insurance)
77,000 KLM Royal Dutch Airlines ........ 2,699,138
(Airline/Military Technology)
65,000 Knp Bt (kon) Nv ................. 1,929,205
(Forestry & Paper)
84,000 Pakhoed Holdings N.V. ........... 2,461,635
(Energy Equipment & Services)
63,000 Stork N.V. ...................... 1,574,606
(Machinery & Engineering) -----------
15,433,392
-----------
New Zealand--3.6%
700,000 Fisher & Paykel Industries Ltd. 2,165,471
...............................
(Consumer Durable Goods)
1,320,000 Lion Nathan Ltd. ................ 2,762,851
(Beverages & Tobacco) -----------
4,928,322
-----------
Norway--7.5%
195,000 Aker A.S. ....................... 2,827,438
(Multi-Industry)
101,000 Hafslund Nycomed A.S. ........... 2,623,168
(Health & Personal Care)
65,000 Orkla A.S. ...................... 2,899,936
(Food & Household Products)
127,900 Unitor Shipping Service, A.S. ... 1,956,405
(Business & Public Services) -----------
10,306,947
-----------
Value
Shares Description (Note 1)
- -------------------------------------------------------------
South Korea--7.4%
85,000 Korea Zinc ...................... $ 2,135,512
(Metals - Non Ferrous)
30,575 Lucky Development Co. ........... 704,475
(Construction & Housing)
4,500 Pohang Iron & Steel Co., Ltd. ... 388,375
(Metals - Steel)
13,134 Samsung Electronics Co., Ltd. ... 2,829,572
(Manufacturing)
2,599 Samsung Electronics Co., Ltd., new
shares.......................... 556,542
(Manufacturing)
35,000 Sam Yang Co. .................... 1,298,490
(Misc. Materials & Commodities)
60,020 Tong Yang Cement Corp. .......... 2,117,342
(Construction & Housing) -----------
10,030,308
-----------
Spain--5.9%
87,000 Banco Bilbao Vizcaya ............ 2,678,116
(Commercial Banking)
21,000 Banco de Andalucia .............. 2,726,963
(Commercial Banking)
355,000 Iberdrola ....................... 2,685,974
(Utilities) -----------
8,091,053
-----------
Sweden--7.5%
47,000 Electrolux AB ................... 2,245,708
(Appliances)
95,000 Pharmacia AB .................... 2,854,971
(Commercial Banking)
132,000 SKF International AB ............ 2,910,967
(Consumer Goods)
</TABLE>
See Notes to Financial Statements.
20
<PAGE>
THE PRUDENTIAL INTERNATIONAL STOCK FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
Sweden, cont'd.
90,000 Volvo AB ........................ $ 2,205,278
(Automobile Manufacturing) -----------
10,216,924
-----------
Switzerland--11.0%
4,100 Ciba-Geigy Ltd. ................. 3,284,256
(Chemicals)
3,500 Hero ............................ 1,680,363
(Food & Household Products)
11,000 Merkur Holding AG ............... 2,531,142
(Merchandising)
4,000 SMH-Swiss Corp. for
Microelectronics and Watchmaking
Industries Ltd.................. 2,595,156
(Electronics)
4,500 Sulzer Brothers Ltd. ............ 2,608,131
(Machinery & Engineering)
8,500 Zurich Insurance Co. ............ 2,382,353
(Insurance) -----------
15,081,401
-----------
United Kingdom--9.6%
270,076 Allied-Domecq PLC ............... 2,293,666
(Beverages & Tobacco)
Value
Shares Description (Note 1)
- -------------------------------------------------------------
445,000 Lloyds Abbey Life PLC ........... $ 3,173,557
(Insurance)
210,000 National Westminster Bank PLC ... 2,105,613
(Commercial Banking)
385,000 Takare .......................... 1,363,888
(Commercial Banking)
470,000 Tesco PLC ....................... 2,319,116
(Food & Household Products)
196,000 Whitbread PLC ................... 1,900,144
(Beverages & Tobacco) -----------
13,155,984
-----------
Total common stocks
(cost $111,841,426)............... 129,156,985
-----------
Principal
Amount
(000) SHORT-TERM INVESTMENT
- ----------
Repurchase Agreement--6.0%
$ 8,175 Joint Repurchase Agreement
Account,
6.39%, 10/2/95 (Note 5)
(cost $8,175,000)................. 8,175,000
-----------
Total Investments--100.5%
(cost $120,016,426; Note 4)....... 137,331,985
Liabilities in excess of other
assets--(0.5%).................. (646,763)
-----------
Net Assets--100%.................. $136,685,222
-----------
-----------
</TABLE>
- ---------------
ADR--American Depository Receipt.
See Notes to Financial Statements.
21
<PAGE>
THE PRUDENTIAL STATEMENT OF ASSETS
(LOGO) INSTITUTIONAL AND LIABILITIES
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
GROWTH STOCK INTERNATIONAL ACTIVE MONEY
STOCK INDEX STOCK BALANCED BALANCED INCOME MARKET
FUND FUND FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C>
------------ ------------ ------------- ------------ ----------- ----------- -----------
Assets
Investments, at value
(a)...................... $222,374,363 $ 96,471,101 $137,331,985 $133,506,023 $80,988,828 $57,633,152 $57,471,203
Cash....................... -- -- 184 417 872 897 440
Foreign currency, at value
(cost $153,643).......... -- -- 153,891 -- -- -- --
Receivable for investments
sold..................... 1,199,509 5,941,403 -- 176,030 1,133,257 -- --
Interest and dividends
receivable............... 162,987 206,021 404,440 641,767 685,304 563,134 386,072
Receivable for Fund shares
sold..................... 789,547 361,069 323,593 191,349 207,730 58,336 227,193
Due from Manager........... -- 1,754 -- -- -- 4,635 --
Deferred expenses and other
assets................... 29,670 32,252 29,485 30,735 28,919 31,988 30,486
------------ ------------ ------------- ------------ ----------- ----------- -----------
Total assets........... 224,556,076 103,013,600 138,243,578 134,546,321 83,044,910 58,292,142 58,115,394
------------ ------------ ------------- ------------ ----------- ----------- -----------
Liabilities
Payable for investments
purchased................ 2,555,583 872,222 987,689 1,013,369 667,995 5,934,375 --
Payable for Fund shares
reacquired............... 1,286,353 85,455 314,389 46,984 155,532 11,863 34,386
Accrued expenses........... 77,378 70,888 148,784 51,045 44,922 42,870 16,633
Due to broker-variation
margin................... -- 29,670 -- -- -- -- --
Management fee payable..... 107,403 -- 92,756 68,472 57,582 -- 3,953
Administration fee
payable.................. 23,965 10,799 14,738 14,564 8,933 5,667 6,345
------------ ------------ ------------- ------------ ----------- ----------- -----------
Total liabilities...... 4,050,682 1,069,034 1,558,356 1,194,434 934,964 5,994,775 61,317
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net Assets................. $220,505,394 $101,944,566 $136,685,222 $133,351,887 $82,109,946 $52,297,367 $58,054,077
============ ============ ============= ============ =========== =========== ===========
Net assets were comprised
of:
Shares of beneficial
interest, at par......... $ 13,604 $ 7,169 $ 8,964 $ 10,703 $ 6,576 $ 5,238 $ 58,054
Paid-in capital in excess
of par................... 169,441,843 80,650,936 121,007,773 116,928,121 71,932,999 52,130,203 57,996,023
------------ ------------ ------------- ------------ ----------- ----------- -----------
169,455,447 80,658,105 121,016,737 116,938,824 71,939,575 52,135,441 58,054,077
Undistributed net
investment income........ -- 1,562,991 1,582,613 2,883,961 1,706,435 -- --
Accumulated net realized
gain (loss) on
investments.............. (3,016,003) 4,001,988 (3,235,336) 1,414,649 2,082,012 (732,600) --
Net unrealized appreciation
(depreciation) on
investments and foreign
currencies............... 54,065,950 15,721,482 17,321,208 12,114,453 6,381,924 894,526 --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net assets, September 30,
1995..................... $220,505,394 $101,944,566 $136,685,222 $133,351,887 $82,109,946 $52,297,367 $58,054,077
============ ============ ============= ============ =========== =========== ===========
Shares of beneficial
interest issued and
outstanding.............. 13,604,202 7,168,801 8,964,457 10,703,173 6,575,791 5,237,904 58,054,077
============ ============ ============= ============ =========== =========== ===========
Net asset value per
share.................... $ 16.21 $ 14.22 $ 15.25 $ 12.46 $ 12.49 $ 9.98 $ 1.00
============ ============ ============= ============ =========== =========== ===========
(a) Identified cost........ $168,308,413 $ 80,942,844 $120,016,426 $121,391,570 $74,606,904 $56,738,626 $57,471,203
</TABLE>
See Notes to Financial Statements.
43
<PAGE>
THE PRUDENTIAL STATEMENT OF
(LOGO) INSTITUTIONAL OPERATIONS
FUND YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
GROWTH STOCK INTERNATIONAL ACTIVE MONEY
STOCK INDEX STOCK BALANCED BALANCED INCOME MARKET
FUND FUND FUND FUND FUND FUND FUND
------------ ------------ ------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Investment Income
Income
Interest................. $ 198,002 $ 637,099 $ 499,812 $ 3,847,389 $ 2,407,512 $ 3,187,231 $ 3,128,647
Dividends (a)............ 1,190,186 1,623,115 3,287,355 896,599 560,304 -- --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Total income........... 1,388,188 2,260,214 3,787,167 4,743,988 2,967,816 3,187,231 3,128,647
------------ ------------ ------------- ------------ ----------- ----------- -----------
Expenses
Management fee........... 1,049,893 286,843 1,367,665 733,748 496,395 231,931 236,009
Administration fee....... 201,075 96,138 159,439 140,527 95,069 62,187 70,311
Custodian's fees and
expenses................. 88,000 124,000 280,000 74,000 72,000 65,000 73,000
Registration fees........ 63,000 35,000 32,000 60,000 23,000 25,000 30,000
Transfer agent's fees and
expenses............... 36,092 17,256 28,618 25,224 17,064 11,162 12,621
Reports to
shareholders............. 25,000 25,000 25,000 13,000 25,000 13,000 13,000
Amortization of
organization
expenses............... 13,385 13,385 13,385 13,213 13,385 13,049 13,213
Legal fees............... 11,000 11,000 15,000 11,000 11,000 11,000 11,000
Audit fee................ 12,000 11,000 15,000 12,000 11,000 11,000 9,000
Trustees' fees........... 8,572 8,572 8,572 8,572 8,572 8,572 8,572
Miscellaneous............ 6,056 4,525 5,856 5,244 4,762 4,256 4,382
------------ ------------ ------------- ------------ ----------- ----------- -----------
Total expenses......... 1,514,073 632,719 1,950,535 1,096,528 777,247 456,157 481,108
Expense subsidy (Note
2)..................... (14,225) (202,456) (47,700) (48,317) (68,112) (131,453) (166,428)
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net expenses............... 1,499,848 430,263 1,902,835 1,048,211 709,135 324,704 314,680
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net investment income
(loss)................... (111,660) 1,829,951 1,884,332 3,695,777 2,258,681 2,862,527 2,813,967
------------ ------------ ------------- ------------ ----------- ----------- -----------
Realized and Unrealized
Gain (Loss) on Investment
and Foreign Currency
Transactions
Net realized gain (loss)
on:
Securities............... 820,651 1,869,439 (2,892,161) 1,585,229 2,197,085 92,951 --
Futures transactions..... -- 2,175,415 -- -- -- -- --
Foreign currency
transactions............. (5,798) -- (192,785) -- (1,009) -- --
------------ ------------ ------------- ------------ ----------- ----------- -----------
814,853 4,044,854 (3,084,946) 1,585,229 2,196,076 92,951 --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net change in unrealized
appreciation
(depreciation) on:
Securities and foreign
currencies............... 47,538,274 13,632,300 9,333,213 12,809,504 6,413,335 2,865,097 --
Financial futures
contracts................ -- 282,600 -- -- -- -- --
------------ ------------ ------------- ------------ ----------- ----------- -----------
47,538,274 13,914,900 9,333,213 12,809,504 6,413,335 2,865,097 --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net gain on investments and
foreign currencies....... 48,353,127 17,959,754 6,248,267 14,394,733 8,609,411 2,958,048 --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net Increase in Net Assets
Resulting from
Operations................. $ 48,241,467 $ 19,789,705 $8,132,599 $ 18,090,510 $10,868,092 $ 5,820,575 $ 2,813,967
------------ ------------ ------------- ------------ ----------- ----------- -----------
------------ ------------ ------------- ------------ ----------- ----------- -----------
(a)Net of foreign withholding taxes of $26,902, $11,248, $461,615, $3,187, $10,097, respectively.
</TABLE>
See Notes to Financial Statements.
44
<PAGE>
THE PRUDENTIAL STATEMENT OF CHANGES
(LOGO) INSTITUTIONAL IN NET ASSETS
FUND
<TABLE>
<CAPTION>
GROWTH STOCK INTERNATIONAL
STOCK INDEX STOCK
FUND FUND FUND
--------------------------- ---------------------------- -------------------------
Year Ended September 30, Year Ended September 30, Year Ended September 30,
--------------------------- ---------------------------- -------------------------
1995 1994 1995 1994 1995
------------ ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Assets
Operations
Net investment income
(loss)............... $(111,660) $25,287 $1,829,951 $892,321 $1,884,332
Net realized gain
(loss) on investments
and foreign currency
transactions......... 814,853 (3,778,648) 4,044,854 186,406 (3,084,946)
Net change in
unrealized
appreciation
(depreciation) on
investments and
foreign currencies... 47,538,274 3,531,929 13,914,900 380,870 9,333,213
------------ ------------- ------------- ------------- ------------
Net increase (decrease)
in net assets
resulting from
operations........... 48,241,467 (221,432) 19,789,705 1,459,597 8,132,599
------------ ------------- ------------- ------------- ------------
Net equalization
credits................. -- 44,776 -- 289,937 --
------------ ------------- ------------- ------------- ------------
Dividends and
distributions
Dividends to
shareholders from net
investment income.... (48,781) (43,709) (1,015,394) (481,228) (750,797)
------------ ------------- ------------ -------------- ------------
Distributions to
shareholders from net
realized gains....... -- (131,129) (165,297) (106,939) (2,440,090)
------------ ------------- ------------ -------------- ------------
Fund share transactions
Net proceeds from
shares sold.......... 138,943,130 80,605,272 52,960,096 29,356,230 93,624,206
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions........ 48,781 174,838 1,180,691 588,167 3,190,887
Cost of shares
redeemed............. (73,635,171) (21,470,653) (20,924,559) (8,128,767) (67,895,915)
------------ ------------- ------------- ------------- ------------
Net increase in net
assets from Fund
share transactions... 65,356,740 59,309,457 33,216,228 21,815,630 28,919,178
------------ ------------- ------------ ------------- ------------
Net increase............ 113,549,426 58,957,963 51,825,242 22,976,997 33,860,890
Net Assets
Beginning of year...... 106,955,968 47,998,005 50,119,324 27,142,327 102,824,332
------------ ------------- ------------ ------------- ------------
End of year...... ...... $220,505,394 $106,955,968 $101,944,566 $50,119,324 $136,685,222
============ ============= ============ ============= ============
<CAPTION>
INTERNATIONAL ACTIVE
STOCK BALANCED
FUND FUND
--------------------------- ----------------------------
Year Ended September 30, Year Ended September 30,
--------------------------- ----------------------------
1994 1995 1994
------------ ------------- ------------
<S> <C> <C> <C>
Increase (Decrease) in
Net Assets
Operations
Net investment income
(loss)............... $ 736,785 $ 3,695,777 $ 1,805,400
Net realized gain
(loss) on investments
and foreign currency
transactions........ . 2,235,681 1,585,229 119,065
Net change in
unrealized
appreciation
(depreciation) on
investments and
foreign currencies... 5,701,535 12,809,504 (1,395,057)
------------- ------------- -------------
Net increase (decrease)
in net assets
resulting from
operations......... .. 8,674,001 18,090,510 529,408
------------- ------------- -------------
Net equalization
credits................. 695,692 -- 296,744
------------- ------------- -------------
Dividends and
distributions
Dividends to
shareholders from net
investment incom e.... (98,619) (2,260,245) (503,768)
------------- ------------- -------------
Distributions to
shareholders from net
realized gains....... (493,097) (272,788) (395,817)
------------- ------------- -------------
Fund share transactions
Net proceeds from
shares sold.......... 86,220,384 54,908,716 56,588,609
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions........ 591,716 2,533,033 899,585
Cost of shares
redeemed............. (24,473,332) (20,823,769) (15,023,860)
------------- ------------- --------------
Net increase in net
assets from Fund
share transactions... 62,338,768 36,617,980 42,464,334
------------- ------------- --------------
Net increase............ 71,116,745 52,175,457 42,390,901
Net Assets
Beginning of year...... 31,707,587 81,176,430 38,785,529
------------- ------------- --------------
End of year............ $ 102,824,332 $ 133,351,887 $81,176,430
============= ============= ==============
</TABLE>
See Notes to Financial Statements.
45
<PAGE>
THE PRUDENTIAL FINANCIAL HIGHLIGHTS
(LOGO) INSTITUTIONAL
FUND
<TABLE>
<CAPTION>
ACTIVE
BALANCED
INTERNATIONAL FUND
STOCK ---------
FUND
---------------------------------------------- Year
November 5, Ended
1992(a) September
Year Ended September 30, Through 30,
---------------------------- September 30, ---------
1995 1994 1993 1995
--------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 14.84 $ 12.35 $ 10.00 $ 10.92
--------- ------------- ------------- ---------
Income from investment operations:
Net investment income(b)...................... .18 .13 .16 .33
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions................................. .66 2.54 2.21 1.54
--------- ------------- ------------- ---------
Total from investment operations............. .84 2.67 2.37 1.87
--------- ------------- ------------- ---------
Less distributions:
Dividends from net investment income.......... (.10) (.03) (.02) (.29)
Distributions from net realized gains......... (.33) (.15) -- (.04)
--------- ------------- ------------- ---------
Total distributions........................... (.43) (.18) (.02) (.33)
--------- ------------- ------------- ---------
Net asset value, end of period................ $ 15.25 $ 14.84 $ 12.35 $ 12.46
========= ============= ============= =========
TOTAL RETURN(d)............................... 5.95% 21.71% 23.74% 17.66%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 136,685 $ 102,824 $31,708 $ 133,352
Average net assets (000)...................... $ 118,927 $ 68,476 $14,491 $ 104,821
Ratios to average net assets:(b)
Expenses..................................... 1.60% 1.60% 1.60%(c) 1.00%
Net investment income........................ 1.58% 1.08% 1.44%(c) 3.53%
Portfolio turnover rate....................... 20% 21% 15% 30%
<CAPTION>
ACTIVE
BALANCE
FUND
--------------------------------
January 4,
1993(a)
Year Ended Through
September 30, September 30,
1994 1993
------------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 11.05 $ 10.00
------------- -------------
Income from investment operations:
Net investment income(b)...................... .24 .21
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions................................. (.12) .84
------------- -------------
Total from investment operations............. .12 1.05
------------- -------------
Less distributions:
Dividends from net investment income.......... (.14) --
Distributions from net realized gains......... (.11) --
------------- -------------
Total distributions........................... (.25) --
------------- -------------
Net asset value, end of period................ $ 10.92 $ 11.05
============= =============
TOTAL RETURN(d)............................... 1.07% 10.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $81,176 $38,786
Average net assets (000)...................... $58,992 $12,815
Ratios to average net assets:(b)
Expenses..................................... 1.00% 1.00%(c)
Net investment income........................ 3.06% 2.68%(c)
Portfolio turnover rate....................... 40% 47%
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) 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 return for periods of
less than a full year are not annualized. Total return includes the effect
of expense subsidies.
See Notes to Financial Statements.
48
<PAGE>
THE PRUDENTIAL NOTES TO
[LOGO] INSTITUTIONAL FINANCIAL STATEMENTS
FUND
The Prudential Institutional Fund (the "Company") is registered under the
Investment Company Act of 1940 as an open-end, diversified management investment
company. The Company was established as a Delaware business trust on May 11,
1992 and consists of seven separate funds (Fund or Funds): Growth Stock Fund,
Stock Index Fund, International Stock Fund, Active Balanced Fund, Balanced Fund,
Income Fund and Money Market Fund. The Company had no operations until July 7,
1992 when 10,000 shares of beneficial interest (2,500 shares each of Growth
Stock Fund, Stock Index Fund, International Stock Fund and Balanced Fund) were
sold for $100,000 to Prudential Institutional Fund Management, Inc. ("PIFM").
Investment operations commenced on: November 5, 1992 for the Growth Stock Fund,
Stock Index Fund, International Stock Fund and Balanced Fund; January 4, 1993
for the Active Balanced Fund and Money Market Fund; and March 1, 1993 for the
Income Fund.
The Funds' investment objectives are as follows: Growth Stock Fund--long-term
growth of capital through investment primarily in equity securities of
established companies with above-average growth prospects; Stock Index
Fund--investment results that correspond to the price and yield performance of
Standard & Poor's 500 Composite Stock Price Index; International Stock
Fund--long-term growth of capital through investment in equity securities of
foreign issues with income as a secondary objective; Active Balanced Fund--total
returns approaching equity returns, while accepting less risk than an all-equity
portfolio, through an actively-managed portfolio of equity securities, fixed
income securities and money market instruments; Balanced Fund--long-term total
return consistent with moderate portfolio risk; Income Fund--a high level of
income over the longer term while providing reasonable safety of principal; and
Money Market Fund--high current income, preservation of principal and
maintenance of liquidity, while maintaining a $1.00 net asset value per share.
The ability of issuers of debt securities, other than those issued or
guaranteed by the U.S. Government, held by the Funds to meet their obligations
may be affected by economic developments in a specific industry, region, or
country.
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund.
Securities Valuations: Securities, including options, warrants, futures
contracts and options thereon, for which the primary market is on a national
securities exchange, commodities exchange or board of trade and NASDAQ national
market equity securities are valued at the last sale price on such exchange or
board of trade on the date of valuation or, if there was no sale on such day, at
the average of readily available closing bid and asked prices on such day.
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, shall be valued at the average of the most recently quoted bid
and asked prices provided by a principal market maker or dealer.
U.S. Government securities for which market quotations are available shall be
valued at a price provided by an independent broker/dealer or pricing service.
Securities for which reliable market quotations are not available or for
which the pricing agent or principal market maker does not provide a valuation
or provides a valuation that, in the judgment of one of the subadvisers, does
not represent fair value, shall be valued at fair value as determined under
procedures established by the Trustees.
Quotations of foreign securities in a foreign currency shall be converted to
U.S. dollar equivalents at the current rate obtained from a recognized bank or
dealer. Forward currency
51
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
exchange contracts shall be valued at the current cost of covering or offsetting
such contracts.
Securities held by the Money Market Fund are valued at amortized cost, which
approximates market value. The amortized cost method involves valuing a security
at its cost on the date of purchase and thereafter assuming a constant
amortization to maturity of the difference between the principal amount due at
maturity and cost. Short-term securities held by the other Funds which mature in
more than 60 days are valued at current market quotations and those which mature
in 60 days or less are valued at amortized cost. In the event that a Subadviser
determines that amortized cost does not represent fair value for certain
short-term securities with remaining maturities of 60 days or less, such
securities will be valued at market value.
In connection with transactions in repurchase agreements, it is the Company's
policy that its custodian or designated subcustodians, as the case may be under
triparty repurchase agreements, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults, and the value of the collateral declines or, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Company may be delayed or limited.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Fund is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the ``initial margin.'' Subsequent payments, known as ``variation
margin,'' are made or received by the Fund each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.
The Funds invest in financial futures contracts in order to hedge their
existing portfolio securities, or securities the Funds intend to purchase,
against fluctuations in value. Under a variety of circumstances, a Fund may not
achieve the anticipated benefits of the financial futures contracts and may
realized a loss. The use of futures transactions involves the risk of imperfect
correlation in movements in the price of futures contracts and the underlying
assets.
Dollar Rolls: The Fund may enter into dollar rolls in which the Fund sells
securities for delivery in the current month and simultaneously contracts to
repurchase somewhat similar securities on a specified future date. During the
roll period, the Fund forgoes principal and interest paid on the securities. The
Fund is compensated by the interest earned on the cash proceeds of the initial
sale and by the lower repurchase price at the future date.
Foreign Currency Translation: The books and records of the Funds are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(i) market value of investment securities, other assets and liabilities--at
the closing rates of exchange.
(ii) purchases and sales of investment securities, income and expenses--at
the rate of exchange
52
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
prevailing on the respective dates of such transactions.
Although the net assets of the Funds are presented at the foreign exchange
rates and market values at the close of the fiscal year, the Funds do not
isolate that portion of the results of operations arising as a result of changes
in the foreign exchange rates from the fluctuations arising from changes in the
market prices of securities held at the end of the fiscal year. Similarly, the
Funds do not isolate the effect of changes in foreign exchange rates from the
fluctuations arising from changes in the market prices of long-term portfolio
securities sold during the fiscal year. Accordingly, these realized foreign
currency gains (losses) are included in the reported net realized gains (losses)
on investment transactions.
Net realized losses on foreign currency transactions represent net foreign
exchange losses from holding of foreign currencies, currency gains or losses
realized between the trade and settlement dates of securities transactions, and
the difference between the amounts of dividends and foreign taxes recorded on
the Funds' books and the U.S. dollar equivalent amounts actually received or
paid. Net currency gains and losses from valuing foreign currency denominated
assets and liabilities at year end exchange rates are reflected as a component
of net unrealized appreciation/
depreciation on securities and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the level of governmental supervision and regulation of
foreign securities markets and the possibility of political or economic
instability.
Equalization: During the fiscal year ended September 30, 1995, the Funds
(except for the Income and Money Market Funds) discontinued the accounting
practice of equalization. Equalization is a practice whereby a portion of the
proceeds from sales and costs of repurchases of capital shares, equivalent on a
per-share basis to the amount of distributable net investment income on the date
of the transaction, is credited or charged to undistributed net investment
income. The following balances of undistributed net investment income at
September 30, 1994, resulting from equalization were transferred to paid-in
capital in excess of par for each of the respective Funds:
Growth Stock Fund $ 90,444
Stock Index Fund 398,227
International Stock Fund 881,462
Active Balanced Fund 788,116
Balanced Fund 899,912
Such reclassifications have no effect on net assets, results of operations,
or net asset value per share of the Funds.
Dividends and Distributions: Dividends and distributions of each Fund are
declared in cash and automatically reinvested in additional shares of the Fund.
The Income Fund and Money Market Fund will declare dividends of their net
investment income and, for the Money Market Fund, net capital gain (loss), daily
and distribute such dividends monthly. Each other Fund will declare and
distribute a dividend of its net investment income, if any, at least annually.
Except for the Money Market Fund, each Fund will declare and distribute its net
capital gains, if any, at least annually. Distributions of income dividends and
capital gains distributions of each Fund are made on the payment date and
reinvested at the per share net asset value as of the record date or such other
date as the Board may determine. On the ``ex-dividend'' date, the net asset
value per share excludes the dividend (i.e., is reduced by the amount of the
distribution).
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
53
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
Taxes: It is the Funds' policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance
with the Funds' understanding of the applicable country's tax rules and rates.
Reclassification of Capital Accounts: The Company accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies.
For the year ended September 30, 1995, the application of this statement
affected undistributed net investment income (``UNI''), accumulated net realized
gain (loss) on investments (``G/L'') and paid-in capital in excess of par
(``PIC'') by the following amounts:
<TABLE>
<CAPTION>
UNI G/L PIC
--------- -------- ---------
<S> <C> <C> <C>
Growth Stock Fund $ 141,451 $ 5,798 $(147,249)
International Stock Fund (81,325) 81,325 --
Active Balanced Fund (107,185) 107,185 --
Balanced Fund (112,634) 112,634 --
</TABLE>
Net investment income, net realized gains and net assets were not affected by
this change.
Deferred Organizational Expenses: Approxi-
mately $450,000 of costs were incurred in connection with the organization and
initial registration of the Company and have been deferred and are being
amortized ratably over the period of benefit not to exceed 60 months from the
date each of the Funds' commenced investment operations.
Note 2. Agreements
The Company has entered into a management agreement with PIFM. Pursuant to
this agreement, PIFM has responsibility for all investment advisory services and
supervises the subadviser's performance of such services. PIFM is an indirect,
wholly-owned subsidiary of The Prudential Insurance Company of America
(Prudential).
PIFM has entered into subadvisory agreements with The Prudential Investment
Corporation (``PIC''), Jennison Associates Capital Corp. (``Jennison'') and
Mercator Asset Management, Inc. (``Mercator''), each a wholly-owned subsidiary
of Prudential. Each subadviser will furnish investment advisory services in
connection with the management of the various Funds. Jennison serves as
subadviser to the Growth Stock Fund and the Active Balanced Fund. PIC serves as
subadviser to the Balanced Fund, the Stock Index Fund, the Income Fund and the
Money Market Fund. Mercator serves as subadviser to the International Stock
Fund. PIFM will pay for the costs and expenses attributable to the subadvisory
agreements and the salaries and expenses of all personnel of the Company except
for fees and expenses of unaffiliated Trustees. The Funds will bear all other
costs and expenses.
Each Fund will pay PIFM a fee for its services provided to the Fund. The fees
are computed daily and payable monthly at the annual rates specified below of
the value of each Funds' average daily net assets:
Fund Management Fee
- -------------------------- ---------------
Growth Stock Fund .70%
Stock Index Fund .40
International Stock Fund 1.15
Active Balanced Fund .70
Balanced Fund .70
Income Fund .50
Money Market Fund .45
PIFM has voluntarily agreed to subsidize a portion of the operating expenses
of the Funds until September 30, 1996. Such expenses may be recovered by PIFM
through December 31, 1996 so
54
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
long as the total expense ratios do not exceed certain predetermined levels set
forth in the Company's prospectus. For the year ended September 30, 1995, PIFM
subsidized the following amounts:
<TABLE>
<CAPTION>
Percentage
of Average Amount per
Fund Net Assets Share
- ------------------------- ------------- ------------------
<S> <C> <C>
Growth Stock Fund .01% $ .001
Stock Index Fund .28 .025
International Stock Fund .04 .002
Active Balanced Fund .05 .004
Balanced Fund .10 .005
Income Fund .28 .027
Money Market Fund .32 .001
</TABLE>
The Company has entered into an administration agreement with Prudential
Mutual Fund Management, Inc. (``PMF''), an indirect wholly-owned subsidiary of
Prudential. The administration fee paid PMF will be computed daily and payable
monthly, at an annual rate of .17% of the Company's daily net assets up to $250
million and .15% of the Company's average daily net assets in excess of $250
million. PMF will furnish to the Company such services as the Company may
require in connection with the administration of the Company's business affairs.
PMF will also provide certain transfer agent services through its wholly-owned
subsidiary, Prudential Mutual Fund Services, Inc. (``PMFS''). For such services,
PMFS will be paid .03% of the Company's daily net assets up to $250 million and
.02% of the Company's average daily net assets in excess of $250 million from
the administration fee paid to PMF.
Note 3. Other Transactions with Affiliates
For the year ended September 30, 1995, Prudential Securities Incorporated, an
affiliate of PIFM, earned approximately $1,000 in brokerage commissions from
portfolio transactions executed on behalf of the Balanced Fund.
Note 4. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term
investments, for the year ended September 30, 1995 were as follows:
<TABLE>
<CAPTION>
Fund Purchases Sales
- ---------------------------- ------------ -----------
<S> <C> <C>
Growth Stock Fund $166,285,606 $94,901,288
Stock Index Fund 31,191,257 6,793,307
International Stock Fund 51,878,167 22,058,837
Active Balanced Fund 55,254,010 24,449,598
Balanced Fund 51,413,549 41,017,407
Income Fund 72,942,188 62,818,679
</TABLE>
On September 30, 1995, the Stock Index Fund purchased 62 financial futures
contracts on the S&P 500 Index expiring December, 1995. The cost of such
contracts was $18,040,975. The value of such contracts on September 30, 1995 was
$18,234,200, thereby resulting in an unrealized gain of $193,225.
The federal income tax basis and unrealized appreciation/depreciation of the
Fund's investments as of September 30, 1995 were as follows:
<TABLE>
<CAPTION>
Net Unrealized
Appreciation/ Gross Unrealized
Fund Basis Depreciation Appreciation Depreciation
- ------------------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
Growth Stock Fund $168,492,267 $ 53,882,096 $55,631,552 $1,749,456
Stock Index Fund 80,984,245 15,486,856 16,243,442 756,586
International Stock
Fund 120,016,426 17,315,559 19,620,167 2,304,608
Active Balanced
Fund 121,485,163 12,020,860 12,744,154 723,294
Balanced Fund 74,648,132 6,340,696 6,845,882 505,186
Income Fund 56,738,626 894,526 1,086,048 191,522
</TABLE>
The following Funds elected to treat net losses incurred in the eleven month
period ended September 30, 1994 as having occurred in the current fiscal year:
<TABLE>
<CAPTION>
Capital Currency
---------- --------
<S> <C> <C>
Growth Stock Fund $3,796,000 --
International Stock Fund -- $186,000
Income Fund 828,000 --
</TABLE>
55
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
The following Funds will elect to treat net losses incurred in the eleven
month period ended September 30, 1995 as having been incurred in the following
fiscal year:
<TABLE>
<CAPTION>
Capital Currency
---------- --------
<S> <C> <C>
Growth Stock Fund -- $ 4,000
International Stock Fund $3,066,000 169,000
Balanced Fund -- 1,000
</TABLE>
For federal income tax purposes, the following Funds have a capital loss
carryforward as of September 30, 1995 which expires in 2003:
Growth Stock Fund $2,825,300
Income Fund 723,300
The average monthly balance of dollar rolls outstanding during the year ended
September 30, 1995 for the Income Fund was approximately $4,142,000. The amount
of dollar rolls outstanding at September 30, 1995 was $5,940,665, which was
10.2% of total assets.
Note 5. Joint Repurchase Agreement Account
The Company, 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. At September 30,
1995, the Company had a 9.01% undivided interest, in the aggregate, in the
repurchase agreements in the joint account which represented $65,929,000 in
principal amount, in the aggregate, as follows:
<TABLE>
<CAPTION>
Percentage Principal
Company Interest Amount
- ---------------------------- ---------- -----------
<S> <C> <C>
Growth Stock Fund .66% $ 4,819,000
Stock Index Fund 1.71 12,494,000
International Stock Fund 1.12 8,175,000
Active Balanced Fund 3.50 25,625,000
Balanced Fund 1.00 7,338,000
Income Fund 1.02 7,478,000
</TABLE>
As of such date, each repurchase agreement in the joint account and the
collateral therefor was as follows:
Bear, Stearns & Co., Inc., 6.375%, in the principal amount of $225,000,000,
repurchase price $225,119,531, due 10/2/95. The value of the collateral
including accrued interest was $229,660,959.
BT Securities Corp., 6.10%, in the principal amount of $56,863,000,
repurchase price $56,891,905, due 10/2/95. The value of the collateral including
accrued interest was $58,082,904.
Goldman, Sachs & Co., 6.45%, in the principal amount of $225,000,000,
repurchase price $225,120,938, due 10/2/95. The value of the collateral
including accrued interest was $229,500,013.
Smith Barney, Inc., 6.43%, in the principal amount of $225,000,000,
repurchase price $225,120,563, due 10/2/95. The value of the collateral
including accrued interest was $229,500,366.
Note 6. Capital
Each Fund has authorized an unlimited number of shares of beneficial interest
at $.001 par value per share.
Transactions in shares of beneficial interest during the years ended
September 30, 1995 and 1994 were as follows:
Year ended September 30, 1995:
<TABLE>
<CAPTION>
Shares
Issued in
Reinvestment Increase
Shares of Dividends/ Shares in Shares
Fund Sold Distributions Redeemed Outstanding
- ----------------------- ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Growth Stock Fund 9,932,496 4,078 (5,248,506) 4,688,068
Stock Index Fund 4,340,797 107,238 (1,725,892) 2,722,143
International Stock
Fund 6,497,880 228,737 (4,691,305) 2,035,312
Active Balanced Fund 4,883,689 242,395 (1,856,069) 3,270,015
Balanced Fund 2,303,919 168,832 (1,702,980) 769,771
Income Fund 1,204,925 296,456 (675,384) 825,997
Money Market Fund 55,919,976 2,813,967 (47,010,598) 11,723,345
</TABLE>
56
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND
Year ended September 30, 1994:
<TABLE>
<CAPTION>
Shares
Issued in
Reinvestment Increase
Shares of Dividends/ Shares in Shares
Fund Sold Distributions Redeemed Outstanding
- ---------------------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Growth Stock Fund 6,739,890 14,450 (1,804,735) 4,949,605
Stock Index Fund 2,697,792 52,328 (744,579) 2,005,541
International Stock
Fund 6,022,403 42,326 (1,702,734) 4,361,995
Active Balanced Fund 5,244,905 81,781 (1,404,380) 3,922,306
Balanced Fund 3,900,150 118,117 (556,779) 3,461,488
Income Fund 1,613,971 216,368 (809,032) 1,021,307
Money Market Fund 32,311,167 1,277,602 (17,493,001) 16,095,768
</TABLE>
Of the shares outstanding at September 30, 1995, PIFM and affiliates owned
the following shares:
<TABLE>
<CAPTION>
Fund Shares
- -------------------------- ----------
<S> <C>
Growth Stock Fund 4,724,608
Stock Index Fund 3,429,256
International Stock Fund 4,962,191
Active Balanced Fund 2,396,951
Balanced Fund 3,356,418
Income Fund 2,889,945
Money Market Fund 27,811,405
</TABLE>
57
<PAGE>
THE PRUDENTIAL INDEPENDENT
(LOGO) INSTITUTIONAL AUDITORS' REPORT
FUND
The Shareholders and Trustees of
The Prudential Institutional Fund:
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of The Prudential Institutional Fund
(consisting of the Growth Stock Fund, Stock Index Fund, International Stock
Fund, Active Balanced Fund, Balanced Fund, Income Fund and Money Market Fund),
as of September 30, 1995, the related statements of operations for the year then
ended and of changes in net assets for each of the two years in the period then
ended, and the financial highlights for the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
September 30, 1995, by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of each of the
respective portfolios constituting The Prudential Institutional Fund as of
September 30, 1995, the results of their operations, the changes in their net
assets, and the financial highlights for the periods presented in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
November 16, 1995
58
<PAGE>
THE PRUDENTIAL FEDERAL INCOME
(LOGO) INSTITUTIONAL TAX INFORMATION
FUND
As required by the Internal Revenue Code, we wish to advise you as to the
federal tax status of dividends and distributions paid by the Funds during their
fiscal year ended September 30, 1995.
Detailed below, please find the aggregate dividends and distributions, per
share, paid by each Fund during the fiscal year ended September 30, 1995 as well
as the corporate dividend received deduction percentage:
<TABLE>
<CAPTION>
Ordinary Dividends* Long-Term Total Corporate
------------------------- Capital Dividends Dividend
Short-Term Gains and Received
Fund Income Capital Gains Distributions Distributions Deduction
- ------------------------------------------ ------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Growth Stock Fund $.005 -- -- $.005 100%
Stock Index Fund .215 $.025 $.010 .250 87
International Stock Fund .107 .060 .258 .425 --
Active Balanced Fund .290 .010 .025 .325 23
Balanced Fund .255 .005 .040 .300 24
Income Fund .594 -- -- .594 --
Money Market Fund .053 -- -- .053 --
</TABLE>
* For federal income tax purposes, ordinary income dividends and short-term
capital gains distributions are taxable as ordinary income. Long-term capital
gains distributions are taxable as capital gains income.
59
<PAGE>
THE PRUDENTIAL SUPPLEMENTAL
(LOGO) INSTITUTIONAL PROXY INFORMATION
FUND
A Special Meeting of Shareholders of The Prudential Institutional Fund,
International Stock Fund (the ``Fund'') was held on Thursday, November 16, 1995
at the offices of The Prudential Insurance Company of America, Prudential Plaza,
751 Broad Street, Newark, New Jersey. The meeting was held for the following
purposes:
(1) To approve a new Subadvisory Agreement between Prudential Institutional Fund
Management, Inc. and Mercator Asset Management, L.P. on behalf of the Fund.
(2) To transact such other business as may properly come before the meeting or
any adjournments thereof.
The results of the proxy solicitation on the above matters were as follows:
Votes for Votes against Abstentions
---------- -------------- ------------
Mercator Asset
(1) Management, L.P. 5,678,306 124,086 31,474
(2) There was no other business voted upon at the Special Meeting of
Shareholders.
60
<PAGE>
THE PRUDENTIAL LETTER TO
(LOGO) INSTITUTIONAL SHAREHOLDERS
FUND
May 20, 1996
We are pleased to provide you with the Semi-Annual Report of The Prudential
Institutional Fund for the six months ended March 31, 1996. A combination of
continued gains in the equity markets, albeit with more volatility, along with
strong cash flow from shareholders and retirement plan participants, resulted in
significant increases in the size of many of the Fund's portfolios. Total net
assets grew to $957.9 million at March 31, 1996 from $784.9 million at September
30, 1995. The Fund has seven portfolios, each with a distinct investment
objective designed to allow investors the opportunity to select various options
to match different goals and risk tolerances.
Economy
The U.S. economy is growing sluggishly, on the order of 2% per year and
inflation is restrained at just under 3% per year. At the outset of 1996, the
focus of most commentators was on the deceleration of growth at the end of 1995
and the potentially debilitating effects of adverse weather conditions in early
1996. The prevailing fear was that the U.S. was slipping into or possibly
already in the midst of a recession. Sentiment has shifted dramatically and
market commentators are now talking about the ``growth scare'' that is pushing
interest rates higher. The focal point for this shift in sentiment about the
economy was Fed Chairman Greenspan's February statement to Congress on the state
of the economy. Subsequent employment reports that were much better than
expected added to the new sentiment that ``strong'' underlying economic growth
of 2% or more would force interest rates higher.
Market Review
The February shift in sentiment about the economy led to a dramatic shift in
the U.S. stock and bond markets. At that point, the S&P 500 was at its all-time
high of 661 and the yield on 30-year U.S. Treasuries was about 6.0%. Greenspan's
statement can essentially serve as the demarcation point to end the 1995 stock
and bond rallies. From that point until the end of March, long-term treasury
yields rose about 70 basis points to 6.7% and the S&P 500 fluctuated in the 640
to 660 range, ending the period at 645. For the six month period as a whole,
stocks gained nearly 12%, while bonds returned about 2.4% as measured by the
Lehman Aggregate Index.
Foreign stocks, as represented by the Morgan Stanley Europe, Australia and
Far East Index (EAFE) moved in roughly the same pattern as the U.S. stock market
during this six month period but the gain in foreign stocks was a more modest
7%.
Fund Performance
As a result of the continued strength in the financial markets, each of the
Fund's portfolios achieved absolute positive returns for the six month period.
Since each portfolio's inception, returns have been very positive and compare
satisfactorily versus the benchmarks. This performance information and portfolio
holdings along with comments from each portfolio's adviser may be found on the
following pages.
1
<PAGE>
(LOGO) INSTITUTIONAL LETTER TO
FUND SHAREHOLDERS
Summary
The economy and markets are in an uncertain period characterized by
heightened volatility. This underscores our belief that investors need to focus
on the longer-term and continue to exercise a disciplined approach to investing
their retirement savings. We look forward to continuing to provide you with the
investment options and services you need to help you accomplish your goals.
Sincerely,
Mark R. Fetting
President
2
<PAGE>
THE PRUDENTIAL INTERNATIONAL STOCK FUND
(LOGO) INSTITUTIONAL
FUND
OBJECTIVE: Seeks to achieve long-term growth of capital through investment in
equity securities of foreign companies. Income is a secondary objective.
INVESTMENT APPROACH: While the Fund may invest anywhere outside the U.S., it is
expected that most investments will be made in developed countries in North
America, Western Europe and the Pacific Basin.
The Adviser maintains a consistently applied valuation process and remains
sensitive to stock prices keeping a long-term, global perspective. To this end,
each market is screened for undervalued securities using both historical and
forecasted data.
ADVISER: The Fund's adviser is Mercator Asset Management, L.P. Mercator is
dedicated to global and international common stock investing. Organized in 1984,
Mercator is a conservative, value-oriented manager, which places great emphasis
on capital preservation. Mercator manages $1.9 billion for institutional
clients.
ADVISER'S COMMENTS: The Fund was +4.86% vs. +7.06% for the EAFE Index. The
Index performed well in the period due mainly to the rally in the Japanese stock
market and the flow of funds into international portfolios.
The Fund with its significant underweighting in Japan and exposure to European
cyclicals, which were poor performers early in the period, lagged the index.
Currency markets were relatively quiet; however, the Japanese yen hit a cyclical
low against the U.S. dollar offsetting some of the gains in Japanese stocks. The
U.S. broad rally ended and interest rates rose putting pressure on U.S. stocks.
Interest rates still have room to move lower in many overseas countries. This
may prove to be an additional positive factor for foreign stocks.
Many European stocks, particularly cyclicals, recovered nicely from the
depressed price levels seen late last year. Investors have apparently become
more sanguine regarding the global economic outlook and bought economically
sensitive stocks. Several corporate restructurings and a merger had a positive
impact on the portfolio. Markets that performed well were France, Spain,
Switzerland and the Netherlands. The laggards were the United Kingdom, Norway,
Korea and Italy. Our underweighting in Japan continues based on very high stock
valuations. Our only holding in Germany was sold and positions were reduced in
Norway and Switzerland, all based on high price levels. Undervalued stocks were
bought in the United Kingdom, Italy, New Zealand and the Netherlands.
The Fund is well positioned; offering very attractive valuation levels, i.e.,
low price/cash flow multiple, low price/book value ratio and a relatively high
dividend yield. Importantly, the forecasted earnings growth rate for the
portfolio is very favorable for the long term.
<TABLE>
PERFORMANCE RESULTS:
<CAPTION>
Periods ended 3/31/96 Fund EAFE Index
<S> <C> <C>
------------------------- ------------- -------------
Six Months............... 4.86% 7.06%
One Year................. 17.67% 12.33%
From Inception
(11/5/92)................ 16.33% 15.96%
</TABLE>
Results from inception are average annual returns. Fund performance figures are
historical and reflect reinvestment of dividends and distributions. Investment
return and principal value will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results. Investing in foreign markets involves
additional risks such as currency fluctuations and political and social
developments, which are described in the Fund's prospectus.
16
<PAGE>
THE PRUDENTIAL INTERNATIONAL STOCK FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
LONG-TERM INVESTMENTS--94.0%
Common Stocks
Argentina--2.6%
44,000 Telecom Argentina (ADR) ......... $ 1,826,000
(Utilities)
115,000 YPF Sociedad Anonima (ADR) ...... 2,314,375
(Oil & Gas) -----------
4,140,375
-----------
Australia--7.1%
880,000 CSR, Ltd. ....................... 2,933,241
(Multi-Industry)
600,000 Mayne Nickless Ltd. ............. 3,192,388
(Multi-Industry)
300,000 National Australia Bank Ltd. .... 2,675,973
(Commercial Banking)
900,000 Pioneer International Ltd. ...... 2,690,057
(Building Materials & -----------
Components)
11,491,659
-----------
Canada--5.0%
130,000 Bank of Nova Scotia ............. 2,933,407
(Commercial Banking)
270,000 Canadian Tire Corp., Ltd., Class A 3,269,125
.
(Automotive Parts)
145,000 MacMillan Bloedel Ltd. .......... 1,848,743
(Forestry & Paper) -----------
8,051,275
-----------
Finland--1.4%
136,000 Outokumpu O.V. .................. 2,296,955
(Metals - Non Ferrous) -----------
Value
Shares Description (Note 1)
- -------------------------------------------------------------
<C> <S> <C>
France--7.7%
12,000 Chargeurs Reunis S.A. ........... $ 3,070,571
(Multi-Industry)
30,075 Christian Dior S.A. ............. 4,006,020
(Textiles & Apparel)
20,000 Peugeot S.A. .................... 3,049,131
(Automobile Manufacturing)
35,000 Societe Nationale Elf Aquitaine 2,372,705
............................... -----------
(Energy)
12,498,427
-----------
Italy--3.8%
1,200,000 Banca Fideuram S.P.A. ........... 1,766,730
(Financial Services)
215,000 Benetton Group S.P.A. (ADR) ..... 2,459,688
(Textiles & Apparel)
2,100,000 Parmalat Finanziaria S.P.A. ..... 1,930,019
(Agriculture) -----------
6,156,437
-----------
Japan--5.6%
305,000 Hitachi, Ltd. ................... 2,958,955
(Electrical Equipment)
180,000 Matsushita Electric Industrial 2,921,642
Co., Ltd. .
(Electrical Equipment)
54,000 Sony Corp. ...................... 3,218,843
(Electronics) -----------
9,099,440
-----------
Netherlands--11.7%
29,000 AKZO N.V. ....................... 3,222,027
(Chemicals)
30,000 Gamma Holding N.V. .............. 1,271,925
(Textiles & Apparel)
</TABLE>
See Notes to Financial Statements.
17
<PAGE>
THE PRUDENTIAL INTERNATIONAL STOCK FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
Netherlands, cont'd
52,000 Internationale - Nederlanden
Group N.V. .................... $ 3,774,042
(Insurance)
90,000 KLM Royal Dutch Airlines ........ 3,129,914
(Airlines / Military Technology)
65,000 Knp Bt (kon) Nv ................. 1,627,555
(Forestry & Paper)
110,000 Pakhoed Holdings N.V. ........... 2,947,260
(Energy Equipment & Services)
110,000 Stork N.V. ...................... 3,080,319
(Machinery & Engineering) -----------
19,053,042
-----------
New Zealand--5.3%
1,320,000 Carter Holt Harvey Ltd. ......... 2,912,716
(Forestry & Paper)
700,000 Fisher & Paykel Industries Ltd. 2,240,656
...............................
(Consumer Durable Goods)
1,400,000 Lion Nathan Ltd. ................ 3,451,564
(Beverages & Tobacco) -----------
8,604,936
-----------
Norway--4.8%
100,000 Hafslund Nycomed A.S. ........... 2,725,623
(Health & Personal Care)
70,000 Orkla A.S. ...................... 3,058,149
(Food & Household Products)
127,900 Unitor A.S. ..................... 1,952,201
(Business & Public Services) -----------
7,735,973
-----------
South Korea--6.0%
85,000 Korea Zinc ...................... 1,868,968
(Metals - Non Ferrous)
30,575 L.G. Construction Ltd. .......... 676,187
(Construction & Housing)
Value
Shares Description (Note 1)
- -------------------------------------------------------------
17,600 Pohang Iron & Steel Co., Ltd. ... $ 1,273,455
(Metal - Steel)
35,000 Sam Yang Co. .................... 1,261,745
(Misc. Materials & Commodities)
6,580 Sam Yang Co., new shares ........ 222,908
(Misc. Materials & Commodities)
18,189 Samsung Electronics Co., Ltd. ... 2,139,198
(Manufacturing)
4,879 Samsung Electronics Co., Ltd., new
shares ........................ 545,126
(Manufacturing)
60,020 Tong Yang Cement Co. ............ 1,718,694
(Construction & Housing) -----------
9,706,281
-----------
Spain--5.8%
87,000 Banco Bilbao Vizcaya, S.A. ...... 3,245,981
(Commercial Banking)
21,000 Banco de Andalucia S.A. ......... 2,919,134
(Commercial Banking)
355,000 Iberdrola S.A. .................. 3,275,515
(Utilities) -----------
9,440,630
-----------
Sweden--6.4%
65,000 Electrolux AB ................... 3,169,643
(Appliances)
145,000 SKF International AB ............ 3,194,286
(Consumer Goods)
60,000 Svedala Industri AB ............. 1,953,536
(Engineering & Contruction)
90,000 Volvo AB ........................ 2,090,194
(Automobile Manufacturing) -----------
10,407,659
-----------
</TABLE>
See Notes to Financial Statements.
18
<PAGE>
THE PRUDENTIAL INTERNATIONAL STOCK FUND
(LOGO) INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
Switzerland--10.2%
4,100 Ciba-Geigy Ltd. ................. $ 5,123,710
(Chemicals)
13,000 Merkur Holding AG ............... 2,563,995
(Merchandising)
3,225,178
5,200 SMH-Swiss Corp. for
Microelectronics and Watchmaking
Industries Ltd..................
(Electronics)
4,800 Sulzer Brothers Ltd. ............ 3,182,543
(Machinery & Engineering)
8,500 Zurich Versicherun .............. 2,439,782
(Insurance) -----------
16,535,208
-----------
United Kingdom--10.6%
360,076 Allied-Lyons PLC ................ 2,698,825
(Beverages & Tobacco)
1,070,000 Coats Viyella PLC ............... 3,381,062
(Textiles & Apparel)
445,000 Lloyds Abbey Life PLC ........... 3,668,198
(Insurance)
210,000 National Westminster Bank PLC ... 2,037,201
(Commercial Banking)
Value
Shares Description (Note 1)
- -------------------------------------------------------------
473,000 Takare PLC ...................... $ 1,086,667
(Health Services)
570,000 Tesco PLC ....................... 2,318,842
(Food & Household Products)
196,000 Whitbread PLC ................... 2,033,034
(Beverages & Tobacco) -----------
17,223,829
-----------
Total common stocks
(cost $131,032,274)............... 152,442,126
-----------
Principal
Amount
(000) SHORT-TERM INVESTMENT--6.9%
- ----------
Repurchase Agreement
$ 11,189 Joint Repurchase Agreement
Account,
5.35%, 4/01/96 (Note 4)
(cost $11,189,000)................ 11,189,000
-----------
Total Investments--100.9%
(cost $142,221,274; Note 3)....... 163,631,126
Liabilities in excess of other
assets--(0.9%).................. (1,424,946)
-----------
Net Assets--100%.................. $162,206,180
===========
</TABLE>
- ---------------
ADR--American Depository Receipt.
See Notes to Financial Statements.
19
<PAGE>
THE PRUDENTIAL STATEMENT OF ASSETS
(LOGO) INSTITUTIONAL AND LIABILITIES
FUND MARCH 31, 1996
<TABLE>
<CAPTION>
GROWTH STOCK INTERNATIONAL ACTIVE MONEY
STOCK INDEX STOCK BALANCED BALANCED INCOME MARKET
FUND FUND FUND FUND FUND FUND FUND
------------ ------------ ------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Investments, at value
(a)...................... $288,473,390 $147,528,594 $163,631,126 $141,973,548 $99,302,946 $64,948,809 $60,050,002
Cash....................... 571 -- 365 3,578 2,454 344 664
Foreign currency, at value
(cost $120,455).......... -- -- 120,201 -- -- -- --
Receivable for investments
sold..................... 1,843,811 110,805 -- 159,396 222,356 -- --
Interest and dividends
receivable............... 244,056 237,503 486,827 694,471 662,192 679,143 423,064
Receivable for Fund shares
sold..................... 836,874 419,537 507,136 469,950 397,983 60,429 47,347
Deferred expenses and other
assets................... 22,618 21,921 22,047 23,402 21,788 25,157 23,503
------------ ------------ ------------- ------------ ----------- ----------- -----------
Total assets........... 291,421,320 148,318,360 164,767,702 143,324,345 100,609,719 65,713,882 60,544,580
------------ ------------ ------------- ------------ ----------- ----------- -----------
Liabilities
Payable for investments
purchased................ 1,894,523 780,201 1,838,999 505,568 555,826 8,346,485 387,225
Payable for Fund shares
reacquired............... 379,951 350,236 440,038 2,721 151,391 6,891 195,043
Accrued expenses........... 59,193 56,018 104,667 27,875 33,386 17,866 17,517
Due to broker - variation
margin................... -- 29,750 -- -- -- -- --
Management fee payable..... 184,161 1,164 159,906 84,218 54,094 10,568 7,913
Administration fee
payable.................. 32,006 16,314 17,912 15,912 10,987 6,426 6,699
------------ ------------ ------------- ------------ ----------- ----------- -----------
Total liabilities...... 2,549,834 1,233,683 2,561,522 636,294 805,684 8,388,236 614,397
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net Assets................. $288,871,486 $147,084,677 $162,206,180 $142,688,051 $99,804,035 $57,325,646 $59,930,183
============ ============ ============= ============ =========== =========== ===========
Net assets were comprised
of:
Shares of beneficial
interest, at par......... $ 16,906 $ 9,836 $ 10,275 $ 11,342 $ 7,936 $ 5,781 $ 59,930
Paid-in capital in excess
of par................... 223,817,874 119,565,666 140,973,229 124,739,121 88,818,388 57,616,118 59,870,253
------------ ------------ ------------- ------------ ----------- ----------- -----------
223,834,780 119,575,502 140,983,504 124,750,463 88,826,324 57,621,899 59,930,183
Undistributed net
investment income
(loss)................... (362,804) 536,299 183,078 1,026,586 671,956 -- --
Accumulated net realized
gain (loss) on
investments.............. 2,165,314 596,539 (364,666 ) 3,304,353 1,284,654 (179,120) --
Net unrealized appreciation
(depreciation) on
investments and foreign
currencies............... 63,234,196 26,376,337 21,404,264 13,606,649 9,021,101 (117,133) --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net assets, March 31,
1996..................... $288,871,486 $147,084,677 $162,206,180 $142,688,051 $99,804,035 $57,325,646 $59,930,183
============ ============ ============= ============ =========== =========== ===========
Shares of beneficial
interest issued and
outstanding.............. 16,906,186 9,835,809 10,275,205 11,341,527 7,936,350 5,780,560 59,930,183
============ ============ ============= ============ =========== =========== ===========
Net asset value per
share.................... $ 17.09 $ 14.95 $ 15.79 $ 12.58 $ 12.58 $ 9.92 $ 1.00
============ ============ ============= ============ =========== =========== ===========
(a) Identified cost........ $225,239,430 $121,196,832 $142,221,274 $128,366,899 $90,281,845 $65,065,943 $60,050,002
</TABLE>
See Notes to Financial Statements.
37
<PAGE>
THE PRUDENTIAL STATEMENT OF
(LOGO) INSTITUTIONAL OPERATIONS
FUND SIX MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
GROWTH STOCK INTERNATIONAL ACTIVE MONEY
STOCK INDEX STOCK BALANCED BALANCED INCOME MARKET
FUND FUND FUND FUND FUND FUND FUND
------------ ------------ ------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Investment Income
Income
Interest................. $ 142,475 $ 222,810 $ 299,227 $ 2,194,088 $ 1,500,344 $ 1,839,465 $ 1,716,542
Dividends (a)............ 835,346 1,295,809 1,257,014 610,799 246,391 -- --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Total income........... 977,821 1,518,619 1,556,241 2,804,887 1,746,735 1,839,465 1,716,542
------------ ------------ ------------- ------------ ----------- ----------- -----------
Expenses
Management fee........... 885,234 242,455 828,186 482,513 312,574 139,295 132,163
Administration fee....... 168,078 80,560 95,715 91,614 59,348 37,027 38,798
Custodian's fees and
expenses................. 46,000 68,000 138,000 38,000 34,000 30,000 29,000
Registration fees........ 34,000 20,000 17,000 28,000 12,000 14,000 11,000
Transfer agent's fees and
expenses............... 28,969 13,885 16,497 15,790 10,229 6,382 6,964
Reports to
shareholders............. 15,000 15,000 15,000 7,500 15,000 7,500 7,500
Legal fees............... 7,500 7,500 7,500 7,500 7,500 7,500 7,500
Amortization of
organization
expenses............... 6,693 6,693 6,693 6,606 6,693 6,525 6,606
Audit fee................ 6,000 5,000 7,500 6,000 5,000 5,000 4,500
Trustees' fees........... 6,000 6,000 6,000 6,000 6,000 6,000 6,000
Miscellaneous............ 1,762 769 1,337 919 753 790 1,188
------------ ------------ ------------- ------------ ----------- ----------- -----------
Total expenses......... 1,205,236 465,862 1,139,428 690,442 469,097 260,019 251,219
Expense recovery
(subsidy) (Note 2)..... 59,383 (102,179) 12,836 (1,136) (22,563) (65,010) (75,031)
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net expenses............... 1,264,619 363,683 1,152,264 689,306 446,534 195,009 176,188
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net investment income
(loss)................... (286,798) 1,154,936 403,977 2,115,581 1,300,201 1,644,456 1,540,354
------------ ------------ ------------- ------------ ----------- ----------- -----------
Realized and Unrealized
Gain (Loss) on Investment
and Foreign Currency
Transactions
Net realized gain (loss) on:
Securities
transactions............. 5,181,317 329,077 2,870,670 3,822,493 1,674,656 553,480 774
Financial futures
contracts................ -- 706,645 -- -- -- -- --
Foreign currency
transactions............. (76,006) -- (63,741 ) -- -- -- --
------------ ------------ ------------- ------------ ----------- ----------- -----------
5,105,311 1,035,722 2,806,929 3,822,493 1,674,656 553,480 774
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net change in unrealized
appreciation
(depreciation) on:
Securities and foreign
currencies............... 9,168,246 10,803,505 4,083,056 1,492,196 2,639,177 (1,011,659) --
Financial futures
contracts................ -- (148,650) -- -- -- -- --
------------ ------------ ------------- ------------ ----------- ----------- -----------
9,168,246 10,654,855 4,083,056 1,492,196 2,639,177 (1,011,659) --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net gain (loss) on
investments and foreign
currencies............... 14,273,557 11,690,577 6,889,985 5,314,689 4,313,833 (458,179) 774
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net Increase in Net Assets
Resulting from
Operations................. $ 13,986,759 $ 12,845,513 $7,293,962 $ 7,430,270 $ 5,614,034 $ 1,186,277 $ 1,541,128
============ ============ ============= ============ =========== =========== ===========
(a) Net of foreign withholding taxes of $17,997, $1,988, $160,696, $1,168 and $4,070, respectively.
</TABLE>
See Notes to Financial Statements.
38
<PAGE>
THE PRUDENTIAL STATEMENT OF CHANGES
(LOGO) INSTITUTIONAL IN NET ASSETS
FUND (UNAUDITED)
<TABLE>
<CAPTION>
GROWTH STOCK INTERNATIONAL
STOCK INDEX STOCK
FUND FUND FUND
--------------------------- ---------------------------- ---------------------
Six Months Year Six Months Year Six Months
Ended Ended Ended Ended Ended
March 31, September 30, March 31, September 30, March 31,
1996 1995 1996 1995 1996
------------ ------------ ------------- -------------- ---------------------
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Assets
Operations
Net investment income
(loss)............... $ (286,798) $ (111,660) $ 1,154,936 $ 1,829,951 $ 403,977
Net realized gain
(loss) on investments
and foreign currency
transactions......... 5,105,311 814,853 1,035,722 4,044,854 2,806,929
Net change in
unrealized
appreciation
on investments and
foreign currencies... 9,168,246 47,538,274 10,654,855 13,914,900 4,083,056
------------ ------------- ------------ ------------------- ------------
Net increase in net
assets resulting from
operations........... 13,986,759 48,241,467 12,845,513 19,789,705 7,293,962
------------ ------------- ------------ ------------------- ------------
Dividends and
distributions
Dividends to
shareholders from net
investment income.... -- (48,781) (2,181,628) (1,015,394) (1,739,771)
Distributions to
shareholders from net
realized gains....... -- -- (4,441,171) (165,297) --
------------ ------------- ------------ ------------------- ------------
Total dividends and
distributions........ -- (48,781) (6,622,799) (1,180,691) (1,739,771)
------------ ------------- ------------ ------------------- ------------
Fund share transactions
Net proceeds from
shares sold.......... 133,171,200 138,943,129 57,112,238 52,960,096 57,849,159
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions........ -- 48,781 6,622,799 1,180,691 1,739,771
Cost of shares
redeemed............. (78,791,867) (73,635,170) (24,817,640) (20,924,559) (39,622,163)
------------ ------------- ------------ ------------------- ------------
Net increase in net
assets from Fund
share transactions... 54,379,333 65,356,740 38,917,397 33,216,228 19,966,767
------------ ------------- ------------ ------------------- ------------
Net increase............ 68,366,092 113,549,426 45,140,111 51,825,242 25,520,958
Net Assets
Beginning of period.... 220,505,394 106,955,968 101,944,566 50,119,324 136,685,222
------------ ------------- ------------ ------------------- ------------
End of period.......... $288,871,486 $ 220,505,394 $147,084,677 $ 101,944,566 $162,206,180
============ ============= ============ =================== ============
<CAPTION>
INTERNATIONAL ACTIVE
STOCK BALANCED
FUND FUND
---------------- ---------------------------
Year Six Months Year
Eneded Ended Ended
September 30, March 31, September 30,
1995 1996 1995
--------------- ----------- --------------
<S> <C> <C> <C>
Increase (Decrease) in
Net Assets
Operations
Net investment income
(loss)............... $ 1,884,332 $ 2,115,581 $ 3,695,777
Net realized gain
(loss) on investments
and foreign currency
transactions......... (3,084,946) 3,822,493 1,585,229
Net change in
unrealized
appreciation
on investments and
foreign currencies... 9,333,213 1,492,196 12,809,504
------------- ------------ -------------
Net increase in net
assets resulting from
operations........... 8,132,599 7,430,270 18,090,510
------------- ------------ -------------
Dividends and
distributions
Dividends to
shareholders from net
investment income.... (750,797) (3,972,956) (2,260,245)
Distributions to
shareholders from net
realized gains....... (2,440,090) (1,932,789) (272,788)
------------- ------------ -------------
Total dividends and
distributions........ (3,190,887) (5,905,745) (2,533,033)
------------- ------------ -------------
Fund share transactions
Net proceeds from
shares sold.......... 93,624,206 17,976,072 54,908,716
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions........ 3,190,887 5,905,745 2,533,033
Cost of shares
redeemed............. (67,895,915) (16,070,178) (20,823,769)
------------- ------------ -------------
Net increase in net
assets from Fund
share transactions... 28,919,178 7,811,639 36,617,980
------------- ------------ -------------
Net increase............ 33,860,890 9,336,164 52,175,457
Net Assets
Beginning of period.... 102,824,332 133,351,887 81,176,430
------------- ------------ -------------
End of period.......... $ 136,685,222 $142,688,051 $ 133,351,887
============= ============ =============
</TABLE>
See Notes to Financial Statements.
39
<PAGE>
THE PRUDENTIAL FINANCIAL HIGHLIGHTS
(LOGO) INSTITUTIONAL (UNAUDITED)
FUND
<TABLE>
<CAPTION>
INTERNATIONAL ACTIVE
STOCK BALANCED
FUND FUND
--------------------------------------------------------- ---------------------------
Year
November 5, Ended
Six Months Year Ended September 1992(a) Six Months September
Ended 30, Through Ended 30,
March 31, ----------------------- September 30, March 31, ---------
1996 1995 1994 1993 1996 1995
---------- --------- --------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning
of period.................. $ 15.25 $ 14.84 $ 12.35 $ 10.00 $ 12.46 $ 10.92
---------- --------- --------- ---------- ---------- ---------
Income from investment
operations:
Net investment income(b).... .04 .18 .13 .16 .19 .33
Net realized and unrealized
gain (loss) on investment
and foreign currency
transactions............... .69 .66 2.54 2.21 .48 1.54
---------- --------- --------- ---------- ---------- ---------
Total from investment
operations............... .73 .84 2.67 2.37 .67 1.87
---------- --------- --------- ---------- ---------- ---------
Less distributions:
Dividends from net
investment income.......... (.19) (.10) (.03) (.02) (.37) (.29)
Distributions from net
realized gains............. -- (.33) (.15) -- (.18) (.04)
---------- --------- --------- ---------- ---------- ---------
Total distributions........ (.19) (.43) (.18) (.02) (.55) (.33)
---------- --------- --------- ---------- ---------- ---------
Net asset value, end of
period..................... $ 15.79 $ 15.25 $ 14.84 $ 12.35 $ 12.58 $ 12.46
========== ========= ========= ========== ========== =========
TOTAL RETURN(d)............. 4.86% 5.95% 21.71% 23.74% 5.51% 17.66%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of period
(000)...................... $162,206 $ 136,685 $ 102,824 $31,708 $142,688 $ 133,352
Average net assets (000).... $144,032 $ 118,927 $ 68,476 $14,491 $137,861 $ 104,821
Ratios to average
net assets:(b)
Expenses................... 1.60%(c) 1.60% 1.60% 1.60%(c) 1.00%(c) 1.00%
Net investment income...... .56%(c) 1.58% 1.08% 1.44%(c) 3.07%(c) 3.53%
Portfolio turnover rate..... 9% 20% 21% 15% 21% 30%
Average commission rate paid
per share.................. $ 0.0194 N/A N/A N/A $ 0.0650 N/A
<CAPTION>
Year January 4,
Ended 1993(a)
September Through
30, September 30,
1994 1993
--------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMA
Net asset value, beginning
of period.................. $ 11.05 $ 10.00
--------- ----------
Income from investment
operations:
Net investment income(b).... .24 .21
Net realized and unrealized
gain (loss) on investment
and foreign currency
transactions............... (.12) .84
--------- ----------
Total from investment
operations............... .12 1.05
--------- ----------
Less distributions:
Dividends from net
investment income.......... (.14) --
Distributions from net
realized gains............. (.11) --
--------- ----------
Total distributions........ (.25) --
--------- ----------
Net asset value, end of
period..................... $ 10.92 $ 11.05
========= ==========
TOTAL RETURN(d)............. 1.07% 10.50%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of period
(000)...................... $81,176 $38,786
Average net assets (000).... $58,992 $12,815
Ratios to average
net assets:(b)
Expenses................... 1.00% 1.00%(c)
Net investment income...... 3.06% 2.68%(c)
Portfolio turnover rate..... 40% 47%
Average commission rate paid
per share.................. N/A N/A
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy/recovery.
(c) Annualized.
(d) 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 return for periods of
less than a full year are not annualized. Total return includes the effect
of expense subsidies.
See Notes to Financial Statements.
42
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND (UNAUDITED)
The Prudential Institutional Fund (the ``Company'') is registered under the
Investment Company Act of 1940 as an open-end, diversified management investment
company. The Company was established as a Delaware business trust on May 11,
1992 and consists of seven separate funds (Fund or Funds): Growth Stock Fund,
Stock Index Fund, International Stock Fund, Active Balanced Fund, Balanced Fund,
Income Fund and Money Market Fund. The Company had no operations until July 7,
1992 when 10,000 shares of beneficial interest (2,500 shares each of Growth
Stock Fund, Stock Index Fund, International Stock Fund and Balanced Fund) were
sold for $100,000 to Prudential Institutional Fund Management, Inc. (``PIFM'').
Investment operations commenced on: November 5, 1992 for the Growth Stock Fund,
Stock Index Fund, International Stock Fund and Balanced Fund; January 4, 1993
for the Active Balanced Fund and Money Market Fund; and March 1, 1993 for the
Income Fund.
The Funds' investment objectives are as follows: Growth Stock Fund--long-term
growth of capital through investment primarily in equity securities of
established companies with above-average growth prospects; Stock Index
Fund--investment results that correspond to the price and yield performance of
Standard & Poor's 500 Composite Stock Price Index; International Stock
Fund--long-term growth of capital through investment in equity securities of
foreign issues with income as a secondary objective; Active Balanced Fund--total
returns approaching equity returns, while accepting less risk than an all-equity
portfolio, through an actively-managed portfolio of equity securities, fixed
income securities and money market instruments; Balanced Fund--long-term total
return consistent with moderate portfolio risk; Income Fund--a high level of
income over the longer term while providing reasonable safety of principal; and
Money Market Fund--high current income, preservation of principal and
maintenance of liquidity, while maintaining a $1.00 net asset value per share.
The ability of issuers of debt securities, other than those issued or
guaranteed by the U.S. Government, held by the Funds to meet their obligations
may be affected by economic developments in a specific industry, region, or
country.
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund.
Securities Valuations: Securities, including options, warrants, futures
contracts and options thereon, for which the primary market is on a national
securities exchange, commodities exchange or board of trade and NASDAQ national
market equity securities are valued at the last sale price on such exchange or
board of trade on the date of valuation or, if there was no sale on such day, at
the average of readily available closing bid and asked prices on such day.
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, shall be valued at the average of the most recently quoted bid
and asked prices provided by a principal market maker or dealer.
U.S. Government securities for which market quotations are available shall be
valued at a price provided by an independent broker/dealer or pricing service.
Securities for which reliable market quotations are not available or for
which the pricing agent or principal market maker does not provide a valuation
or provides a valuation that, in the judgment of one of the subadvisers, does
not represent fair value, shall be valued at fair value as determined under
procedures established by the Trustees.
Quotations of foreign securities in a foreign currency shall be converted to
U.S. dollar equivalents at the current rate obtained from a
45
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND (UNAUDITED)
recognized bank or dealer. Forward currency exchange contracts shall be valued
at the current cost of covering or offsetting such contracts.
Securities held by the Money Market Fund are valued at amortized cost, which
approximates market value. The amortized cost method involves valuing a security
at its cost on the date of purchase and thereafter assuming a constant
amortization to maturity of the difference between the principal amount due at
maturity and cost. Short-term securities held by the other Funds which mature in
more than 60 days are valued at current market quotations and those which mature
in 60 days or less are valued at amortized cost. In the event that a Subadviser
determines that amortized cost does not represent fair value for certain
short-term securities with remaining maturities of 60 days or less, such
securities will be valued at market value.
In connection with transactions in repurchase agreements, it is the Company's
policy that its custodian or designated subcustodians, as the case may be under
triparty repurchase agreements, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults, and the value of the collateral declines or, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Company may be delayed or limited.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Fund is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the ``initial margin.'' Subsequent payments, known as ``variation
margin,'' are made or received by the Fund each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.
The Funds invest in financial futures contracts in order to hedge their
existing portfolio securities, or securities the Funds intend to purchase,
against fluctuations in value. Under a variety of circumstances, a Fund may not
achieve the anticipated benefits of the financial futures contracts and may
realized a loss. The use of futures transactions involves the risk of imperfect
correlation in movements in the price of futures contracts and the underlying
assets.
Dollar Rolls: The Fund may enter into dollar rolls in which the Fund sells
securities for delivery in the current month and simultaneously contracts to
repurchase somewhat similar securities on a specified future date. During the
roll period, the Fund forgoes principal and interest paid on the securities. The
Fund is compensated by the interest earned on the cash proceeds of the initial
sale and by the lower repurchase price at the future date.
Foreign Currency Translation: The books and records of the Funds are
maintained in U.S. dollars.
46
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND (UNAUDITED)
Foreign currency amounts are translated into U.S. dollars on the following
basis:
(i) market value of investment securities, other assets and liabilities--at
the closing rates of exchange.
(ii) purchases and sales of investment securities, income and expenses--at
the rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Funds are presented at the foreign exchange
rates and market values at the close of the fiscal period, the Funds do not
isolate that portion of the results of operations arising as a result of changes
in the foreign exchange rates from the fluctuations arising from changes in the
market prices of securities held at the end of the fiscal period. Similarly, the
Funds do not isolate the effect of changes in foreign exchange rates from the
fluctuations arising from changes in the market prices of long-term portfolio
securities sold during the fiscal period. Accordingly, these realized foreign
currency gains (losses) are included in the reported net realized gains (losses)
on investment transactions.
Net realized losses on foreign currency transactions represent net foreign
exchange losses from holding of foreign currencies, currency gains or losses
realized between the trade and settlement dates of securities transactions, and
the difference between the amounts of dividends and foreign taxes recorded on
the Funds' books and the U.S. dollar equivalent amounts actually received or
paid. Net currency gains and losses from valuing foreign currency denominated
assets and liabilities at period end exchange rates are reflected as a component
of net unrealized appreciation/
depreciation on securities and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the level of governmental supervision and regulation of
foreign securities markets and the possibility of political or economic
instability.
Dividends and Distributions: Dividends and distributions of each Fund are
declared in cash and automatically reinvested in additional shares of the Fund.
The Income Fund and Money Market Fund will declare dividends of their net
investment income and, for the Money Market Fund, net capital gain (loss), daily
and distribute such dividends monthly. Each other Fund will declare and
distribute a dividend of its net investment income, if any, at least annually.
Except for the Money Market Fund, each Fund will declare and distribute its net
capital gains, if any, at least annually. Distributions of income dividends and
capital gains distributions of each Fund are made on the payment date and
reinvested at the per share net asset value as of the record date or such other
date as the Board may determine. On the ``ex-dividend'' date, the net asset
value per share excludes the dividend (i.e., is reduced by the amount of the
distribution).
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Taxes: It is the Funds' policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance
with the Funds' understanding of the applicable country's tax rules and rates.
Reclassification of Capital Accounts: The Company accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement
47
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND (UNAUDITED)
of Position 93-2: Determination, Disclosure, and Financial Statement
Presentation of Income, Capital Gain, and Return of Capital Distributions by
Investment Companies.
For the six months ended March 31, 1996, the application of this statement
affected undistributed net investment income (``UNI'') and accumulated net
realized gain (loss) on investments (``G/L'') by the following amounts:
<TABLE>
<CAPTION>
UNI G/L
-------- -------
<S> <C> <C>
Growth Stock Fund $(76,006) $76,006
International Stock Fund (63,741) 63,741
</TABLE>
Net investment income, net realized gains and net assets were not affected by
this change.
Deferred Organizational Expenses: Approxi-
mately $450,000 of costs were incurred in connection with the organization and
initial registration of the Company and have been deferred and are being
amortized ratably over the period of benefit not to exceed 60 months from the
date each of the Funds' commenced investment operations.
Note 2. Agreements
The Company has entered into a management agreement with PIFM. Pursuant to
this agreement, PIFM has responsibility for all investment advisory services and
supervises the subadviser's performance of such services. PIFM is an indirect,
wholly-owned subsidiary of The Prudential Insurance Company of America
(Prudential).
PIFM has entered into subadvisory agreements with The Prudential Investment
Corporation (``PIC''), Jennison Associates Capital Corp. (``Jennison'') and
Mercator Asset Management, L.P. (``Mercator''). PIC and Jennison are
wholly-owned subsidiaries of Prudential. Each subadviser will furnish investment
advisory services in connection with the management of the various Funds.
Jennison serves as subadviser to the Growth Stock Fund and the Active Balanced
Fund. PIC serves as subadviser to the Balanced Fund, the Stock Index Fund, the
Income Fund and the Money Market Fund. Mercator serves as subadviser to the
International Stock Fund. PIFM will pay for the costs and expenses attributable
to the subadvisory agreements and the salaries and expenses of all personnel of
the Company except for fees and expenses of unaffiliated Trustees. The Funds
will bear all other costs and expenses.
Each Fund will pay PIFM a fee for its services provided to the Fund. The fees
are computed daily and payable monthly at the annual rates specified below of
the value of each Funds' average daily net assets:
<TABLE>
<CAPTION>
Fund Management Fee
- -------------------------- ---------------
<S> <C>
Growth Stock Fund .70%
Stock Index Fund .40
International Stock Fund 1.15
Active Balanced Fund .70
Balanced Fund .70
Income Fund .50
Money Market Fund .45
</TABLE>
PIFM has voluntarily agreed to subsidize a portion of the operating expenses
of the Funds until September 30, 1996. Such expenses may be recovered by PIFM
through December 31, 1996 so long as the total expense ratios do not exceed
certain predetermined levels set forth in the Company's prospectus. For the six
months ended March 31, 1996, PIFM subsidized the following amounts:
<TABLE>
<CAPTION>
Percentage
of Average Amount per
Fund Net Assets Share
- --------------------------- ------------- ------------------
<S> <C> <C>
Stock Index Fund .17% $ .011
Active Balanced Fund .002 .0001
Balanced Fund .05 .003
Income Fund .23 .011
Money Market Fund .25 .001
</TABLE>
48
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND (UNAUDITED)
PIFM also recovered the following amounts of operating expenses it previously
subsidized for the six months ended March 31, 1996:
<TABLE>
<CAPTION>
Percentage
of Average Amount per
Net Assets Share
------------- ------------------
<S> <C> <C>
Growth Stock Fund .05% $ .004
International Stock Fund .02 .001
</TABLE>
The Company has entered into an administration agreement with Prudential
Mutual Fund Management, Inc. (``PMF''), an indirect wholly-owned subsidiary of
Prudential. The administration fee paid PMF will be computed daily and payable
monthly, at an annual rate of .17% of the Company's daily net assets up to $250
million and .15% of the Company's average daily net assets in excess of $250
million. PMF will furnish to the Company such services as the Company may
require in connection with the administration of the Company's business affairs.
PMF will also provide certain transfer agent services through its wholly-owned
subsidiary, Prudential Mutual Fund Services, Inc. (``PMFS''). For such services,
PMFS will be paid .03% of the Company's daily net assets up to $250 million and
.02% of the Company's average daily net assets in excess of $250 million from
the administration fee paid to PMF.
Note 3. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term
investments, for the six months ended March 31, 1996 were as follows:
<TABLE>
<CAPTION>
Fund Purchases Sales
- ---------------------------- ------------ -----------
<S> <C> <C>
Growth Stock Fund $125,001,676 $72,554,977
Stock Index Fund 47,804,297 948,671
International Stock Fund 28,187,107 11,866,927
Active Balanced Fund 28,778,511 23,901,019
Balanced Fund 40,800,913 29,694,202
Income Fund 30,157,486 28,424,962
</TABLE>
On March 31, 1996, the Stock Index Fund purchased 17 financial futures
contracts on the S&P 500 Index expiring June, 1996. The cost of such contracts
was $5,491,050. The value of such contracts on March 31, 1996 was $5,535,625,
thereby resulting in an unrealized gain of $44,575.
The federal income tax basis and unrealized appreciation/depreciation of the
Fund's investments as of March 31, 1996 were as follows:
<TABLE>
<CAPTION>
Net Unrealized
Appreciation/
(Depreciation)
--------------- Gross Unrealized
Fund Basis Appreciation Depreciation
- ------------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Growth Stock Fund $225,390,343 $63,083,047 $66,420,094 $3,337,047
Stock Index Fund 121,241,374 26,287,220 27,491,663 1,204,443
International
Stock Fund 142,221,274 21,409,852 25,461,090 4,051,238
Active Balanced
Fund 128,545,569 13,427,979 13,990,099 562,120
Balanced Fund 90,294,873 9,008,073 9,842,011 833,938
Income Fund 65,076,580 (127,771) 544,801 672,572
</TABLE>
The following Funds elected to treat net losses incurred in the eleven month
period ended September 30, 1995 as having occurred in the current fiscal year:
<TABLE>
<CAPTION>
Capital Currency
---------- --------
<S> <C> <C>
Growth Stock Fund -- $ 4,000
International Stock Fund $3,066,000 169,000
Balanced Fund -- 1,000
</TABLE>
For federal income tax purposes, the following Funds have a capital loss
carryforward as of September 30, 1995 which expires in 2003:
<TABLE>
<S> <C>
Growth Stock Fund $2,825,300
Income Fund 723,300
</TABLE>
The average monthly balance of dollar rolls outstanding during the six months
ended March 31, 1996 for the Income Fund was approximately $6,397,000. The
maximum amount of dollar rolls outstanding at any month-end during the six
months ended March 31, 1996 was $6,991,530 as of January 31, 1996 which was
10.8% of total assets. The amount of dollar rolls outstanding at March 31, 1996,
was $6,723,720, which was 10.2% of total assets.
49
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND (UNAUDITED)
Note 4. Joint Repurchase Agreement Account
The Company, 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. At March 31,
1996, the Company had a 4.60% undivided interest, in the aggregate, in the
repurchase agreements in the joint account which represented $67,021,000 in
principal amount, in the aggregate, as follows:
<TABLE>
<CAPTION>
Percentage Principal
Company Interest Amount
- ---------------------------- ---------- -----------
<S> <C> <C>
Growth Stock Fund .28% $ 4,122,000
Stock Index Fund .41 5,929,000
International Stock Fund .77 11,189,000
Active Balanced Fund 1.64 23,888,000
Balanced Fund .71 10,344,000
Income Fund .79 11,549,000
</TABLE>
As of such date, each repurchase agreement in the joint account and the
collateral therefor was as follows:
Bear, Stearns & Co., Inc., 5.30%, in the principal amount of $387,000,000,
repurchase price $387,170,925, due 4/1/96. The value of the collateral including
accrued interest was $395,137,122.
CS First Boston Corp., 5.50%, in the principal amount of $150,000,000,
repurchase price $150,068,750, due 4/1/96. The value of the collateral including
accrued interest was $153,001,819.
Goldman Sachs & Co., 5.40%, in the principal amount of $463,000,000,
repurchase price $463,208,350, due 4/1/96. The value of the collateral including
accrued interest was $472,260,747.
Nomura Securities, Inc., 5.375%, in the principal amount of $100,000,000,
repurchase price $100,044,792, due 4/1/96. The value of the collateral including
accrued interest was $102,398,695.
Smith Barney, Inc., 5.284%, in the principal amount of $355,886,000,
repurchase price $356,042,708, due 4/1/96. The value of the collateral including
accrued interest was $363,004,234.
Note 5. Capital
Each Fund has authorized an unlimited number of shares of beneficial interest
at $.001 par value per share.
Transactions in shares of beneficial interest during the six months ended
March 31, 1996 and the year ended September 30, 1995 were as follows:
Six months ended March 31, 1996:
<TABLE>
<CAPTION>
Shares
Issued in
Reinvestment Increase
Shares of Dividends/ Shares in Shares
Fund Sold Distributions Redeemed Outstanding
- ---------------------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Growth Stock Fund 8,107,640 -- (4,805,656) 3,301,984
Stock Index Fund 3,893,782 467,712 (1,694,486) 2,667,008
International Stock
Fund 3,795,911 116,606 (2,601,769) 1,310,748
Active Balanced Fund 1,438,229 483,285 (1,283,160) 638,354
Balanced Fund 1,748,784 395,938 (784,163) 1,360,559
Income Fund 780,386 162,743 (400,473) 542,656
Money Market Fund 22,399,365 1,541,128 (22,064,387) 1,876,106
</TABLE>
Year ended September 30, 1995:
<TABLE>
<CAPTION>
Shares
Issued in
Reinvestment Increase
Shares of Dividends/ Shares in Shares
Fund Sold Distributions Redeemed Outstanding
- ----------------------- ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Growth Stock Fund 9,932,496 4,078 (5,248,506) 4,688,068
Stock Index Fund 4,340,797 107,238 (1,725,892) 2,722,143
International Stock
Fund 6,497,880 228,737 (4,691,305) 2,035,312
Active Balanced Fund 4,883,689 242,395 (1,856,069) 3,270,015
Balanced Fund 2,303,919 168,832 (1,702,980) 769,771
Income Fund 1,204,925 296,456 (675,384) 825,997
Money Market Fund 55,919,976 2,813,967 (47,010,598) 11,723,345
</TABLE>
50
<PAGE>
THE PRUDENTIAL NOTES TO
(LOGO) INSTITUTIONAL FINANCIAL STATEMENTS
FUND (UNAUDITED)
Of the shares outstanding at March 31, 1996, PIFM and affiliates owned the
following shares:
<TABLE>
<CAPTION>
Fund Shares
- -------------------------- ----------
<S> <C>
Growth Stock Fund 5,800,387
Stock Index Fund 4,642,203
International Stock Fund 5,647,337
Active Balanced Fund 2,485,468
Balanced Fund 3,883,087
Income Fund 2,975,746
Money Market Fund 28,544,777
</TABLE>
Note 6. Proposed Reorganization
On May 17, 1996, the Trustees of the Fund approved an Agreement and a Plan of
Reorganization (the ``Plan of Reorganization'') for the Fund. Under the Plan of
Reorganization, substantially all of the assets and liabilities of the Growth
Stock Fund, Balanced Fund, Income Fund and Money Market Fund will be transferred
at net asset value for equivalent value Class Z shares of Prudential Jennison
Fund, Inc., Prudential Allocation Fund (Balanced Portfolio), Prudential
Government Income Fund, Inc. and Prudential MoneyMart Assets, Inc.,
respectively. These Funds will then cease operations. Stock Index Fund and
Active Balanced Fund will remain with The Prudential Institutional Fund (to be
renamed the Prudential Dryden Fund) as Class Z shares. Active Balanced Fund will
begin offering Classes A, B and C shares and Stock Index Fund will offer Class A
shares. International Stock Fund will join the Prudential Global Fund as a
separate series of a newly named Prudential World Fund. The existing
shareholders will become Class Z shareholders and the Fund will also begin
offering Classes A, B and C shares. The successor funds will be managed by PMF,
PMFS will provide transfer agency services and Prudential Securities
Incorporated, a wholly-owned subsidiary of Prudential, will act as distributor.
The Plan of Reorganization requires the approval of shareholders of the Fund
to become effective. A proxy will be mailed to shareholders of the Fund for
shareholder meetings in the fall of 1996. If the Plan of Reorganization is
approved, it is expected that the reorganizations will take place shortly after
the meetings. All funds involved will share pro rata in the costs of the
reorganizations.
51
<PAGE>
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION.
As permitted by Section 17(h) and (i) of the Investment Company Act of 1940
(the 1940 Act) and pursuant to Article VI of the Fund's By-Laws (Exhibit 2 to
the Registration Statement), officers, directors, employees and agents of the
Registrant will not be liable to the Registrant, any shareholder, officer,
director, employee, agent or other person for any action or failure to act,
except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Section 2-418 of the Maryland General Corporation Law permits indemnification
of directors who acted in good faith and reasonably believed that the conduct
was in the best interests of the Registrant. As permitted by Section 17(i) of
the 1940 Act, pursuant to Section 10 of each Distribution Agreement (Exhibit 7
to the Registration Statement), each Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities arising
from bad faith, gross negligence, willful misfeasance or reckless disregard of
duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (Securities Act) may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1940 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in connection with the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such director, officer or controlling person in connection with
the shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the 1940 Act and will be governed
by the final adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of
indemnification payments to officers and directors under certain
circumstances.
Section 9 of the Management Agreement (Exhibit 6(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibits 6(c) and (d)
to the Registration Statement) limit the liability of Prudential Mutual Fund
Management, Inc. (PMF), Mercator Asset Management, L.P. (Mercator) and The
Prudential Investment Corporation (PIC), respectively, to liabilities arising
from willful misfeasance, bad faith or gross negligence in the performance of
their respective duties or from reckless disregard by them of their respective
obligations and duties under the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner
consistent with Release No. 11330 of the Securities and Exchange Commission
under the 1940 Act so long as that interpretation of Section 17(h) and 17(i)
of such Act remains in effect and is consistently applied.
Under Section 17(h) of the 1940 Act, it is the position of the staff of the
Securities and Exchange Commission that if there is neither a court
determination on the merits that the defendant is not liable nor a court
determination that the defendant was not guilty of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of one's office, no indemnification will be permitted unless an
C-1
<PAGE>
independent legal counsel (not including a counsel who does work for either
the Registrant, its investment adviser, its principal underwriter or persons
affiliated with these persons) determines, based upon a review of the facts,
that the person in question was not guilty of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct
of his office.
Under its Articles of Incorporation, the Registrant may advance funds to
provide for indemnification. Pursuant to the Securities and Exchange
Commission staff's position on Section 17(h), advances will be limited in the
following respect:
(1) Any advances must be limited to amounts used, or to be used, for the
preparation and/or presentation of a defense to the action (including cost
connected with preparation of a settlement);
(2) Any advances must be accompanied by a written promise by, or on
behalf of, the recipient to repay that amount of the advance which exceeds
the amount to which it is ultimately determined that he is entitled to
receive from the Registrant by reason of indemnification;
(3) Such promise must be secured by a surety bond or other suitable
insurance and;
(4) Such surety bond or other insurance must be paid for by the recipient
of such advance.
ITEM 16. EXHIBITS.
<TABLE>
<C> <C> <S>
1. (a) Restated Articles of Incorporation. Incorporated by reference to
Exhibit 1 to Post-Effective Amendment No. 17 to the Registration
Statement filed on Form N-1A via EDGAR on January 3, 1995 (File No.
2-89725).
(b) Articles Supplementary.*
(c) Amendment to Articles of Incorporation.*
2. Amended and Restated By-Laws of the Registrant, incorporated by
reference to Exhibit 2 to Post-Effective Amendment No. 15 to the
Registration Statement on Form N-1A (File No. 2-89725 filed via
EDGAR).
3. Not Applicable.
4. Agreement and Plan of Conversion and Liquidation, filed herewith as
Appendix A to the Prospectus and Proxy Statement.*
5. (a) Specimen Certificate for shares of Common Stock of the Registrant,
incorporated by reference to Exhibit No. 4 to the Registration
Statement on Form N-1A, Pre-Effective Amendment No. 1 (File No. 2-
89725).
(b) Specimen Certificate for shares of Common Stock of the Registrant
for Class A shares, incorporated by reference to Exhibit 4(b) to
Post-Effective Amendment No. 11 to the Registration Statement on
Form N-1A (File No. 2-89725).
(c) Instruments defining rights of shareholders, incorporated by
reference to Exhibit No. 4(c) to the Registration Statement on Form
N-1A, Post-Effective Amendment No. 14 (File No. 2-89725 filed via
EDGAR).
</TABLE>
C-2
<PAGE>
<TABLE>
<C> <C> <S>
6. (a) Management Agreement between Registrant and Prudential Mutual Fund
Management, Inc., incorporated by reference to Exhibit No. 5(b) to
Post-Effective Amendment No. 7 to the Registration Statement on Form
N-1A (File No. 2-89725).
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and the Prudential Investment Corporation, incorporated by
reference to Exhibit No. 5 to Post-Effective Amendment No. 7 to
Registration Statement on Form N-1A (File No. 2-89725).
(c) Form of Management Agreement between Registrant and Prudential
Mutual Fund Management, Inc. with respect to the International Stock
Series of the Registrant.*
(d) Form of Subadvisory Agreement between Mercator Asset Management,
L.P. and Prudential Mutual Fund Management, Inc. with respect to the
International Stock Series of the Registrant.*
(e) Form of Subadvisory Agreement between the Prudential Investment
Corporation and Prudential Mutual Fund Management, Inc. with respect
to the International Stock Series of the Registrant.*
7. (a) Distribution and Service Agreement for Class A shares as amended and
restated June 5, 1995, incorporated by reference to Exhibit No. 6(a)
to Post-Effective Amendment No. 18 to the Registration Statement on
Form N-1A (File No. 2-89725) filed on November 1, 1995.
(b) Distribution and Service Agreement for Class B shares as amended and
restated June 5, 1995, incorporated by reference to Exhibit No. 6(b)
to Post-Effective Amendment No. 18 to the Registration Statement on
Form N-1A (File No. 2-89725) filed on November l, 1995.
(c) Distribution and Service Agreement for Class C shares as amended and
restated June 5, 1995, incorporated by reference to Exhibit No. 6(c)
to Post-Effective Amendment No. 18 to the Registration Statement on
Form N-1A (File No. 2-89725) filed on November 1, 1995.
(d) Form of Distribution and Service Agreement for Class Z shares
incorporated by reference to Exhibit No. 6(d) to Post-Effective
Amendment No. 18 to the Registration Statement on Form N-1A (File
No. 2-89725) filed on November 1, 1995.
(e) Form of Distribution and Service Agreement for Class A Shares of
International Stock Series of the Registrant.*
8. Not Applicable.
9. (a) Custodian Agreement between the Registrant and State Street Bank and
Trust Company, incorporated by reference to Exhibit No. 8 to
Registration Statement on Form N-1A (File No. 2-89725).
(b) Form of Amendment to Custodian Agreement, incorporated by reference
to Exhibit No. 8(b) to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A (File No. 2-89725) filed on
November 1, 1995.
(c) Form of Custodian Agreement between the Registrant and State Street
Bank and Trust Company with respect to the Registrant's
International Stock Series.*
10. (a) Amended and Restated Distribution and Service Plan for Class A
shares of Prudential Global Fund, Inc. dated July 1, 1993,
incorporated by reference to Exhibit No. 15(d) to the Registration
Statement on Form N-1A, Post-Effective Amendment No. 14 (File No. 2-
89725) filed via EDGAR.
(b) Amended and Restated Distribution and Service Plan for Class B
shares of Prudential Global Fund, Inc. dated July 1, 1993,
incorporated by reference to Exhibit No. 15(e) to the Registration
Statement on Form N-1A, Post-Effective Amendment No. 14 (File No. 2-
89725) filed via EDGAR.
(c) Distribution and Service Plan for Class A shares; incorporated by
reference to Exhibit 6(c) to Post-Effective Amendment No. 17 to the
Registration Statement filed on Form N-1A via EDGAR on January 3,
1995 (File No. 2-89725).
</TABLE>
C-3
<PAGE>
<TABLE>
<C> <C> <S>
(d) Distribution and Service Plan for Class B shares; incorporated by
reference to Exhibit 6(d) to Post-Effective Amendment No. 17 to the
Registration Statement filed on Form N-1A via EDGAR on January 3, 1995
(File No. 2-89725).
(e) Distribution and Service Plan for Class C shares; incorporated by
reference to Exhibit 6(e) to Post-Effective Amendment No. 17 to the
Registration Statement filed on Form N-1A via EDGAR on January 3, 1995
(File No. 2-89725).
(f) Form of Distribution and Service Plan (Class A) for Prudential World
Fund, Inc. (International Stock Series).*
(g) Form of Distribution and Service Plan (Class B) for Prudential World
Fund, Inc. (International Stock Series).*
(h) Form of Distribution and Service Plan (Class C) for Prudential World
Fund, Inc. (International Stock Series).*
(i) Rule 18f-3 Plan, incorporated by reference to Exhibit No. 18 to Post-
Effective Amendment No. 18 to the Registration Statement on Form N-1A
(File No. 2-89725) filed on November 1, 1995.
11. Opinion and Consent of Sullivan & Cromwell.*
12. Tax Opinion Counsel.*
13. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc., incorporated by reference to
Exhibit No. 9 to the Registration Statement on Form N-1A, Post-
Effective Amendment No. 7 (File No. 2-89725).
14. Consent of Independent Accountants.*
15. Not Applicable.
16. Not Applicable.
17. (a) Proxy.*
(b) Copy of Registrant's declaration pursuant to Rule 24f-2 under the
Investment Company Act of 1940.*
(c) Preliminary Prospectus of Registrant dated , 1996.*
(d) Prospectus of Prudential Institutional Fund dated February 1, 1996 (as
supplemented on May 30, 1996.)*
(e) Statement of Additional Information of Prudential Institutional Fund
dated February 1, 1996, as supplemented.*
</TABLE>
- --------
*Filed herewith.
ITEM 17. UNDERTAKINGS.
(1) The undersigned registrant agrees that prior to any public reoffering of
the securities through the use of a prospectus which is a part of this
registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the
securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
C-4
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the Registrant, in the City of New York, and the
State of New York, on the 28th day of June, 1996.
PRUDENTIAL WORLD FUND, INC.
/s/ Richard A. Redeker
By: _________________________________
(RICHARD A. REDEKER, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Stephen C. Eyre Director June 28, 1996
- -------------------------------------
STEPHEN C. EYRE
/s/ Delayne D. Gold Director June 28, 1996
- -------------------------------------
DELAYNE D. GOLD
/s/ Dan G. Hoff Director June 28, 1996
- -------------------------------------
DAN G. HOFF
/s/ Harry A. Jacobs, Jr. Director June 28, 1996
- -------------------------------------
HARRY A. JACOBS, JR.
/s/ Sidney R. Knafel Director June 28, 1996
- -------------------------------------
SIDNEY R. KNAFEL
/s/ Robert E. LaBlanc Director June 28, 1996
- -------------------------------------
ROBERT E. LABLANC
/s/ Thomas A. Owens, Jr. Director June 28, 1996
- -------------------------------------
THOMAS A. OWENS, JR.
1
<PAGE>
SIGNATURE TITLE DATE
/s/ Richard A. Redeker President and June 28, 1996
- ------------------------------------- Director
RICHARD A. REDEKER
/s/ Clay T. Whitehead Director June 28, 1996
- -------------------------------------
CLAY T. WHITEHEAD
/s/ Grace C. Torres Treasurer, Principal June 28, 1996
- ------------------------------------- Financial and
GRACE C. TORRES Accounting Officer
2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS PAGE
-------- ----
<C> <C> <S> <C>
1. (a) Restated Articles of Incorporation. Incorporated by
reference to Exhibit 1 to Post-Effective Amendment No. 17
to the Registration Statement filed on Form N-1A via EDGAR
on January 3, 1995 (File No. 2-89725).
(b) Articles Supplementary.*
(c) Amendment to Articles of Incorporation.*
2. Amended and Restated By-Laws of the Registrant,
incorporated by reference to Exhibit 2 to Post-Effective
Amendment No. 15 to the Registration Statement on Form N-1A
(File No. 2-89725 filed via EDGAR).
3. Not Applicable.
4. Agreement and Plan of Conversion and Liquidation, filed
herewith as Appendix A to the Prospectus and Proxy
Statement.*
5. (a) Specimen Certificate for shares of Common Stock of the
Registrant, incorporated by reference to Exhibit No. 4 to
the Registration Statement on Form N-1A, Pre-Effective
Amendment No. 1 (File No. 2-89725).
(b) Specimen Certificate for shares of Common Stock the
Registrant for Class A shares, incorporated by reference to
Exhibit 4(b) to Post-Effective Amendment No. 11 to the
Registration Statement on Form N-1A (File No. 2-89725).
(c) Instruments defining rights of shareholders, incorporated
by reference to Exhibit No. 4(c) to the Registration
Statement on Form N-1A, Post-Effective Amendment No. 14
(File No. 2-89725 filed via EDGAR).
6. (a) Management Agreement between Registrant and Prudential
Mutual Fund Management, Inc., incorporated by reference to
Exhibit No. 5(b) to Post-Effective Amendment No. 7 to the
Registration Statement on Form N1-A (File No. 2-89725).
(b) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and the Prudential Investment Corporation,
incorporated by reference to Exhibit No. 5 to Post-
Effective Amendment No. 7 to Registration Statement on Form
N-1A (File No. 2-89725).
(c) Form of Management Agreement between Registrant and
Prudential Mutual Fund Management, Inc. with respect to the
International Stock Series of the Registrant.*
(d) Form of Subadvisory Agreement between Mercator Asset
Management, L.P. and Prudential Mutual Fund Management,
Inc. with respect to the International Stock Series of the
Registrant.*
(e) Form of Subadvisory Agreement between the Prudential
Investment Corporation and Prudential Mutual Fund
Management, Inc. with respect to the International Stock
Series of the Registrant.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS PAGE
-------- ----
<C> <C> <S> <C>
7. (a) Distribution and Service Agreement for Class A shares of
Prudential Global Fund, Inc. as amended and restated June
5, 1995, incorporated by reference to Exhibit No. 6(a) to
Post-Effective Amendment No. 18 to the Registration
Statement on Form N-1A (File No. 2-89725) filed on November
1, 1995.
(b) Distribution and Service Agreement for Class B shares of
Prudential Global Fund, Inc. as amended and restated June
5, 1995, incorporated by reference to Exhibit No. 6(b) to
Post-Effective Amendment No. 18 to the Registration
Statement on Form N-1A (File No. 2-89725) filed on November
1, 1995.
(c) Distribution and Service Agreement for Class C shares of
Prudential Global Fund, Inc. as amended and restated June
5, 1995, incorporated by reference to Exhibit No. 6(c) to
Post-Effective Amendment No. 18 to the Registration
Statement on Form N-1A (File No. 2-89725) filed on November
1, 1995.
(d) Form of Distribution and Service Agreement for Class Z
shares of Prudential Global Fund, Inc., incorporated by
reference to Exhibit No. 6(d) to Post-Effective Amendment
No. 18 to the Registration Statement on Form N-1A (File No.
2-89725) filed on November 1, 1995.
(e) Form of Distribution and Service Agreement for
International Stock Series of Registrant.*
8. Not Applicable.
9. (a) Custodian Agreement between the Registrant and State Street
Bank and Trust Company, incorporated by reference to
Exhibit No. 8 to Registration Statement on Form N-1A (File
No. 2-89725).
(b) Form of Amendment to Custodian Agreement, incorporated by
reference to Exhibit No. 8(b) to Post-Effective Amendment
No. 18 to the Registration Statement on Form N-1A (File No.
2-89725) filed on November 1, 1995.
(c) Form of Custodian Agreement between the Registrant and
State Street Bank and Trust Company with respect to the
Registrant's International Stock Series.*
10. (a) Amended and Restated Distribution and Service Plan for
Class A shares of Prudential Global Fund, Inc. dated July
1, 1993, incorporated by reference to Exhibit No. 15(d) to
the Registration Statement on Form N-1A, Post-Effective
Amendment No. 14 (File No. 2-89725) filed via EDGAR.
(b) Amended and Restated Distribution and Service Plan for
Class B shares of Prudential Global Fund, Inc. dated July
1, 1993, incorporated by reference to Exhibit No. 15(e) to
the Registration Statement on Form N-1A, Post-Effective
Amendment No. 14 (File No. 2-89725) filed via EDGAR.
(c) Distribution and Service Plan for Class A shares;
incorporated by reference to Exhibit 6(c) to Post-Effective
Amendment No. 17 to the Registration Statement filed on
Form N-1A via EDGAR on January 3, 1995 (File No. 2-89725).
(d) Distribution and Service Plan for Class B shares;
incorporated by reference to Exhibit 6(d) to Post-Effective
Amendment No. 17 to the Registration Statement filed on
Form N-1A via EDGAR on January 3, 1995 (File No. 2-89725).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS PAGE
-------- ----
<C> <C> <S> <C>
(e) Distribution and Service Plan for Class C shares;
incorporated by reference to Exhibit 6(e) to Post-Effective
Amendment No. 17 to the Registration Statement filed on
Form N-1A via EDGAR on January 3, 1995 (File No. 2-89725).
(f) Form of Distribution and Service Plan (Class A) for
Prudential World Fund, Inc. (International Stock Series).*
(g) Form of Distribution and Service Plan (Class B) for
Prudential World Fund, Inc. (International Stock Series).*
(h) Form of Distribution and Service Plan (Class C) for
Prudential World Fund, Inc. (International Stock Series).*
(i) Rule 18f-3 Plan, incorporated by reference to Exhibit No.
18 to Post-Effective Amendment No. 18 to the Registration
Statement on Form N-1A (File No. 2-89725) filed on
November 1, 1995.
11. Opinion and Consent of Sullivan & Cromwell.*
12. Tax Opinion of Counsel.*
13. Transfer Agency and Service Agreement between the
Registrant and Prudential Mutual Fund Services, Inc.,
incorporated by reference to Exhibit No. 9 to the
Registration Statement on Form N-1A, Post-Effective
Amendment No. 7 (File No. 2-89725).
14. Consent of Independent Accountants.*
15. Not Applicable.
16. Not Applicable.
17. (a) Proxy.*
(b) Copy of Registrant's declaration pursuant to Rule 24f-2
under the Investment Company Act of 1940.*
(c) Preliminary Prospectus of Registrant shares dated ,
1996, as further supplemented.*
(d) Prospectus of Prudential Institutional Fund dated February
1, 1996 (as supplemented on May 30, 1996.)*
(e) Statement of Additional Information of Prudential
Institutional Fund dated February 1, 1996, as
supplemented.*
</TABLE>
- --------
* Filed herewith.
<PAGE>
EXHIBIT 1(b)
ARTICLES SUPPLEMENTARY
OF
PRUDENTIAL GLOBAL FUND, INC.
* * * * * * *
Pursuant to Section 2-208.1
of the Maryland General Corporation Law
* * * * * * *
Prudential Global Fund, Inc., a Maryland corporation having its principal
offices in Baltimore, Maryland (the "Corporation"), hereby certifies to the
State Department of Assessments and Taxation of Maryland, that:
FIRST: The Corporation is registered as an open-end company under the
Investment Company Act of 1940.
SECOND: The total number of shares of all classes of stock which the
Corporation has authority to issue prior to the filing of these Articles
Supplementary is 500,000,000 shares of common stock, par value of $.01 each,
having an aggregate par value of $5,000,000, divided into four classes of shares
consisting of 125 million shares of Class A common stock, 125 million shares of
Class B common stock, 125 million shares of Class C common stock and 125 million
shares of Class Z common stock, each class having an aggregate par value of
$1,250,000.
THIRD: The total number of shares of all classes of stock which the
Corporation has authority to issue is hereby increased to 1,000,000,000 shares
of capital stock, par value of $.01 and having an aggregate par value of
$10,000,000, of which 500,000,000 shares shall be of the series designated
"common stock" and 500,000,000 shares shall be of the series designated "common
stock--International Stock Series." The aggregate par value of each series is
$5,000,000 and the aggregate par value of each class within each series is
$1,250,000. For convenience of reference, the "common stock" series may be
referred to as the "common stock--Global Series." Each such series shall be
divided into four classes, as follows: 125 million shares of Class A common
stock, 125 million shares of Class B common stock, 125 million shares of Class C
common stock and 125 million shares of Class Z common stock.
FOURTH: The aggregate par value of all classes and series of capital stock
is hereby increased from $5,000,000 to $10,000,000.
FIFTH: The foregoing amendments do not change the preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption of the capital stock of the
Corporation, except that, as contemplated by Article IV, Section 2 of the
charter, the "common stock--Global Series" and "common stock--International
Stock Series" shall be related to separate
<PAGE>
portfolios of investments, and thus shall have all of the powers, preferences,
and voting or other special rights, and the qualifications, restrictions and
limitations set forth in Article IV, Section 7 of the charter of the
Corporation.
SIXTH: In accordance with Section 2-105(c) of the Maryland General
Corporation Law and pursuant to a resolution duly adopted by the Board of
Directors of the Corporation at a meeting held on May 8, 1996, to increase the
number of authorized shares which the Corporation has authority to issue to 1
billion to be divided into two series of 500 million shares each, each series to
consist of 125 million shares of Class A common stock, 125 million shares of
Class B common stock, 125 million shares of Class C common stock and 125 million
shares of Class Z common stock.
IN WITNESS WHEREOF, PRUDENTIAL GLOBAL FUND, INC., has caused these presents
to be signed in its name and on its behalf by its Vice President and attested by
its Assistant Secretary on June 20, 1996.
PRUDENTIAL GLOBAL FUND, INC.
By /s/ ROBERT F. GUNIA
-------------------------
Robert F. Gunia
Vice President
Attest: /s/ ELLYN C. ACKER
- --------------------------
Ellyn C. Acker
Assistant Secretary
THE UNDERSIGNED, Vice President of Prudential Global Fund, Inc., who
executed on behalf of the Corporation the foregoing Articles Supplementary of
which this certificate is made a part, hereby acknowledges in the name and on
behalf of said Corporation the foregoing Articles Supplementary to be the
corporate act of said Corporation and hereby certifies that to the best of his
knowledge, information and belief the matters and facts set forth therein with
respect to the authorization and approval thereof are true in all material
respects under the penalties of perjury.
/s/ ROBERT F. GUNIA
-------------------
Robert F. Gunia
Vice President
<PAGE>
EXHIBIT 1(c)
ARTICLES OF AMENDMENT
OF
PRUDENTIAL GLOBAL FUND, INC.
PRUDENTIAL GLOBAL FUND, INC., a Maryland corporation having its principal
offices in Baltimore, Maryland (the "Corporation"), hereby certifies to the
State Department of Assessments and Taxation of Maryland that:
FIRST: Article I of the Corporation's charter is hereby amended in its
entirety to read as follows:
The name of the corporation (hereinafter called the "Corporation") is
Prudential World Fund, Inc.
SECOND: The designation of the "common stock" series of capital stock is
hereby amended to be "common stock--Global Series."
THIRD: The foregoing amendment does not change the preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption of the capital stock of the
Corporation.
FOURTH: The foregoing amendments have been approved by a majority of the
entire Board of Directors of the Corporation without action by the stockholders
in accordance with Section 2-605(a)(4) of the Maryland General Corporation Law
(the Corporation being registered as an open-end company under the Investment
Company Act of 1940).
IN WITNESS WHEREOF, PRUDENTIAL GLOBAL FUND, INC. has caused these presents
to be signed in its name and on its behalf by its Vice President and attested by
its Assistant Secretary on June 21, 1996.
PRUDENTIAL GLOBAL FUND, INC.
By: /s/ ROBERT F. GUNIA
-------------------------------
Robert F. Gunia, Vice President
Attest: /s/ ELLYN C. ACKER
-----------------------------------
Ellyn C. Acker, Assistant Secretary
<PAGE>
The undersigned, Vice President of PRUDENTIAL GLOBAL FUND, INC., who
executed on behalf of said corporation the foregoing amendments to the Charter
of which this certificate is made a part, hereby acknowledges in the name and on
behalf of said corporation, the foregoing amendments to the Charter to be the
corporate act of said corporation and further certifies that, to the best of his
knowledge, information and belief, the matters and facts set forth therein with
respect to the approval thereof are true in all material respects, under the
penalties of perjury.
/s/ ROBERT F. GUNIA
-------------------
Robert F. Gunia
<PAGE>
EXHIBIT 6(c)
PRUDENTIAL WORLD FUND, INC.
(The Fund)
International Stock Series
FORM OF
MANAGEMENT AGREEMENT
Agreement made this ___ day of __________, 1996 between the Fund, a
Maryland corporation, on behalf of its International Stock Series, and
Prudential Mutual Fund Management, Inc., a Delaware corporation (the "Manager").
W I T N E S S E T H
WHEREAS, the Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"); and
WHEREAS, the Fund desires to retain the Manager to render or contract to
obtain as hereinafter provided investment advisory services to the International
Stock Series and the Fund also desires to avail itself of the facilities
available to the Manager with respect to the administration of its day to day
corporate affairs, and the Manager is willing to render such investment advisory
and administrative services;
NOW, THEREFORE, the parties agree as follows:
1. The Fund hereby appoints the Manager to act as manager of the Fund and
administrator of its corporate affairs for the period and on the terms set forth
in this Agreement. The Manager accepts such appointment and agrees to render the
services herein described, for the compensation herein provided. The Manager
will enter into agreements, dated the date hereof, with each of Mercator Asset
Management, L.P. (Mercator) and The Prudential Investment
<PAGE>
Corporation ("PIC") pursuant to which each shall furnish to the Fund and its
International Stock Series the investment advisory services specified therein in
connection with the management of the Fund. Such agreements in the forms
attached as Exhibit A are hereinafter referred to as the "Subadvisory
Agreements." The Manager will continue to have responsibility for all investment
advisory services furnished pursuant to the Subadvisory Agreements.
2. Subject to the supervision of the Board of Directors of the Fund, the
Manager shall administer the Fund's corporate affairs and, in connection
therewith, shall furnish the Fund with office facilities and with clerical,
bookkeeping and recordkeeping services at such office facilities and, subject to
Section 1 hereof and the Subadvisory Agreements, the Manager shall manage the
investment operations of the International Stock Series and the composition of
the International Stock Series' portfolio, including the purchase, retention and
disposition thereof, in accordance with the International Stock Series'
investment objective, policies and restrictions as stated in the Prospectus
(hereinafter defined) and subject to the following understandings:
(a) The Manager shall provide supervision of the International Stock
Series' investments and determine from time to time what investments or
securities will be purchased, retained, sold or loaned by the International
Stock Series, and what portion of the assets will be invested or held
uninvested as cash.
(b) The Manager, in the performance of its duties and obligations
under this Agreement, shall act in conformity with
2
<PAGE>
the Fund's Articles of Incorporation and By-Laws, and Prospectus
(hereinafter defined) of the International Stock Series and with the
instructions and directions of the Board of Directors of the Fund and will
conform to and comply with the requirements of the 1940 Act and all other
applicable federal and state laws and regulations.
(c) The Manager shall determine the securities and futures contracts
to be purchased or sold by the International Stock Series and will place
orders pursuant to its determinations with or through such persons,
brokers, dealers or futures commission merchants (including but not limited
to Prudential Securities Incorporated) in conformity with the policy with
respect to brokerage as set forth in the Fund's Registration Statement and
the International Stock Series' Prospectus (hereinafter defined) or as the
Board of Directors may direct from time to time. In providing the
International Stock Series with investment supervision, it is recognized
that the Manager will give primary consideration to securing the most
favorable price and efficient execution. Consistent with this policy, the
Manager may consider the financial responsibility, research and investment
information and other services provided by brokers, dealers or futures
commission merchants who may effect or be a party to any such transaction
or other transactions to which other clients of the Manager may be a party.
It is understood that Prudential Securities Incorporated may be used as
principal broker for securities
3
<PAGE>
transactions but that no formula has been adopted for allocation of the
International Stock Series' investment transaction business. It is also
understood that it is desirable for the International Stock Series that the
Manager have access to supplemental investment and market research and
security and economic analysis provided by brokers or futures commission
merchants and that such brokers may execute brokerage transactions at a
higher cost to the International Stock Series than may result when
allocating brokerage to other brokers or futures commission merchants on
the basis of seeking the most favorable price and efficient execution.
Therefore, the Manager is authorized to pay higher brokerage commissions
for the purchase and sale of securities and futures contracts for the
International Stock Series to brokers or futures commission merchants who
provide such research and analysis, subject to review by the Fund's Board
of Directors from time to time with respect to the extent and continuation
of this practice. It is understood that the services provided by such
broker or futures commission merchant may be useful to the Manager in
connection with its services to other clients.
On occasions when the Manager deems the purchase or sale of a security
or a futures contract to be in the best interest of the International Stock
Series as well as other clients of the Manager, Mercator or PIC, the
Manager, to the extent permitted by applicable laws and regulations, may,
but shall be under no obligation to, aggregate the securities or futures
4
<PAGE>
contracts to be so sold or purchased in order to obtain the most
favorable price or lower brokerage commissions and efficient execution. In
such event, allocation of the securities or futures contracts so purchased
or sold, as well as the expenses incurred in the transaction, will be made
by the Manager in the manner it considers to be the most equitable and
consistent with its fiduciary obligations to the International Stock
Series, the Fund and to such other clients.
(d) The Manager shall maintain all books and records with respect to
the International Stock Series' portfolio transactions and shall render to
the Fund's Board of Directors such periodic and special reports as the
Board may reasonably request.
(e) The Manager shall be responsible for the financial and accounting
records to be maintained by the International Stock Series (including those
being maintained by the Fund's Custodian).
(f) The Manager shall provide the Fund's Custodian on each business
day with information relating to all transactions concerning the
International Stock Series' assets.
(g) The investment management services of the Manager to the Fund
under this Agreement are not to be deemed exclusive, and the Manager shall
be free to render similar services to others.
3. The Fund has delivered to the Manager copies of each of the following
documents and will deliver to it all future
5
<PAGE>
amendments and supplements, if any:
(a) Articles of Incorporation of the Fund, as filed with the Secretary
of State of Maryland (such Articles of Incorporation, as in effect on the
date hereof and as amended from time to time, are herein called the
"Articles of Incorporation");
(b) By-Laws of the Fund (such By-Laws, as in effect on the date hereof
and as amended from time to time, are herein called the "By-Laws");
(c) Certified resolutions of the Board of Directors of the Fund
authorizing the appointment of the Manager and approving the form of this
agreement;
(d) Registration Statement under the 1940 Act and the Securities Act
of 1933, as amended, on Form N-1A (the "Registration Statement"), as filed
with the Securities and Exchange Commission (the "Commission") relating to
the Fund and its International Stock Series, and shares of the Fund's
Common Stock and all amendments thereto;
(e) Notification of Registration of the Fund under the 1940 Act on
Form N-8A as filed with the Commission and all amendments thereto; and
(f) Prospectus of the Fund and its International Stock Series (such
Prospectus and Statement of Additional Information, as currently in effect
and as amended or supplemented from time to time, being herein called the
"Prospectus").
6
<PAGE>
4. The Manager shall authorize and permit any of its directors, officers
and employees who may be elected as Directors or officers of the Fund to serve
in the capacities in which they are elected. All services to be furnished by the
Manager under this Agreement may be furnished through the medium of any such
directors, officers or employees of the Manager.
5. The Manager shall keep the Fund's books and records required to be
maintained by it pursuant to paragraph 2 hereof. The Manager agrees that all
records which it maintains for the International Stock Series are the property
of the Fund and it will surrender promptly to the Fund any such records upon the
Fund's request provided, however, that the Manager may retain a copy of such
records. The Manager further agrees to preserve for the periods prescribed by
Rule 31a-2 under the 1940 Act any such records as are required to be maintained
by the Manager pursuant to Paragraph 2 hereof.
6. During the term of this Agreement, the Manager shall pay the following
expenses:
(i) the salaries and expenses of all personnel of the Fund and the
Manager except the fees and expenses of Directors who are not affiliated
persons of the Manager or the International Stock Series investment
adviser,
(ii) all expenses incurred by the Manager or by the International
Stock Series in connection with managing the ordinary course of the
International Stock Series' business other than those assumed by the
International Stock Series
7
<PAGE>
herein, and
(iii) the costs and expenses payable to Mercator and PIC pursuant to
the Subadvisory Agreements.
The Fund on behalf of its International Stock Series assumes and will pay
the expenses described below:
(a) the fees and expenses incurred by the International Stock Series
in connection with the management of the investment and reinvestment of the
International Stock Series' assets,
(b) the fees and expenses of Directors who are not affiliated persons
of the Manager or the International Stock Series' investment advisers,
(c) the fees and expenses of the Custodian that relate to (i) the
custodial function and the recordkeeping connected therewith, (ii)
preparing and maintaining the general accounting records of the
International Stock Series and the providing of any such records to the
Manager useful to the Manager in connection with the Manager's
responsibility for the accounting records of the International Stock Series
pursuant to Section 31 of the 1940 Act and the rules promulgated
thereunder, (iii) the pricing of the shares of the International Stock
Series, including the cost of any pricing service or services which may be
retained pursuant to the authorization of the Board of Directors of the
Fund, and (iv) for both mail and wire orders, the cashiering function in
connection with the issuance and redemption of the
8
<PAGE>
International Stock Series' securities,
(d) the fees and expenses of the Fund's Transfer and Dividend
Disbursing Agent, which may be the Custodian, that relate to the
maintenance of each shareholder account,
(e) the charges and expenses of legal counsel and independent
accountants for the Fund,
(f) brokers' commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities and futures transactions,
(g) all taxes and corporate fees payable by the Fund to federal, state
or other governmental agencies,
(h) the fees of any trade associations of which the Fund may be a
member,
(i) the cost of stock certificates representing, and/or non-negotiable
share deposit receipts evidencing, shares of the International Stock
Series,
(j) the cost of fidelity, directors and officers and errors and
omissions insurance,
(k) 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 as a broker or dealer and qualifying its
shares under state securities laws, including the preparation and printing
of the Fund's registration statements, prospectuses and statements of
additional information for filing under federal and state securities laws
for such purposes,
9
<PAGE>
(l) allocable communications expenses with respect to investor
services and all expenses of shareholders' and directors' meetings and of
preparing, printing and mailing reports to shareholders in the amount
necessary for distribution to the shareholders,
(m) litigation and indemnification expenses and other extraordinary
expenses not incurred in the ordinary course of the Fund's business, and
(n) any expenses assumed by the Fund's International Stock Series
pursuant to a Plan of Distribution adopted in conformity with Rule 12b-1
under the 1940 Act.
7. In the event the expenses of the Fund's International Stock Series for
any fiscal year (including the fees payable to the Manager but excluding
interest, taxes, brokerage commissions, distribution fees and litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business) exceed the lowest applicable annual
expense limitation established and enforced pursuant to the statute or
regulations of any jurisdictions in which shares of the Fund are then qualified
for offer and sale, the compensation due the Manager will be reduced by the
amount of such excess, or, if such reduction exceeds the compensation payable to
the Manager, the Manager will pay to the Fund the amount of such reduction which
exceeds the amount of such compensation.
8. For the services provided and the expenses assumed pursuant to this
Agreement, the Fund will pay to the Manager as
10
<PAGE>
full compensation therefor a fee at an annual rate of 1% of the Fund's average
daily net assets. This fee will be computed daily and will be paid to the
Manager monthly. Any reduction in the fee payable and any payment by the Manager
to the Fund pursuant to paragraph 7 shall be made monthly. Any such reductions
or payments are subject to readjustment during the year.
9. The Manager shall not be liable for any error of judgment or for any
loss suffered by the Fund in connection with the matters to which this Agreement
relates, except a loss resulting from a breach of fiduciary duty with respect to
the receipt of compensation for services (in which case any award of damages
shall be limited to the period and the amount set forth in Section 36(b)(3) of
the 1940 Act) or loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement.
10. This Agreement shall continue in effect for a period of more than two
years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Fund at any
time, without the payment of any penalty, by the Board of Directors of the Fund
or by vote of a majority of the outstanding voting securities (as defined in the
1940 Act) of the International Stock Series, or by the Manager at any time,
without the payment of any penalty, on not more than 60 days' nor less than 30
days' written
11
<PAGE>
notice to the other party. This Agreement shall terminate automatically in the
event of its assignment (as defined in the 1940 Act).
11. Nothing in this Agreement shall limit or restrict the right of any
director, officer or employee of the Manager who may also be a Director, officer
or employee of the Fund to engage in any other business or to devote his or her
time and attention in part to the management or other aspects of any business,
whether of a similar or dissimilar nature, nor limit or restrict the right of
the Manager to engage in any other business or to render services of any kind to
any other corporation, firm, individual or association.
12. Except as otherwise provided herein or authorized by the Board of
Directors of the Fund from time to time, the Manager shall for all purposes
herein be deemed to be an independent contractor and shall have no authority to
act for or represent the Fund in any way or otherwise be deemed an agent of the
Fund.
13. During the term of this Agreement, the Fund agrees to furnish the
Manager at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature, or other material prepared for distribution to
shareholders of the Fund or the public, which refer in any way to the Manager,
prior to use thereof and not to use such material if the Manager reasonably
objects in writing within five business days (or such other time as may be
mutually agreed) after receipt thereof. In the event of termination of this
Agreement, the Fund will continue to furnish to
12
<PAGE>
the Manager copies of any of the above mentioned materials which refer in any
way to the Manager. Sales literature may be furnished to the Manager hereunder
by first-class or overnight mail, facsimile transmission equipment or hand
delivery. The Fund shall furnish or otherwise make available to the Manager such
other information relating to the business affairs of the Fund as the Manager at
any time, or from time to time, reasonably requests in order to discharge its
obligations hereunder.
14. This Agreement may be amended by mutual consent, but the consent of the
Fund must be obtained in conformity with the requirements of the 1940 Act.
15. Any notice or other communication required to be given pursuant to this
Agreement shall be deemed duly given if delivered or mailed by registered mail,
postage prepaid, (1) to the Manager at One Seaport Plaza, New York, N.Y. 10292,
Attention: Secretary; or (2) to the Fund at One Seaport Plaza, New York, N.Y.
10292, Attention: President.
16. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
17. The Fund may use the name "Prudential World Fund, Inc." or any name
including the word "Prudential" only for so long as this Agreement or any
extension, renewal or amendment hereof remains in effect, including any similar
agreement with any organization which shall have succeeded to the Manager's
business as Manager or any extension, renewal or amendment thereof remain in
effect. At such time as such an agreement shall no longer be in
13
<PAGE>
effect, the Fund will (to the extent that it lawfully can) cease to use such a
name or any other name indicating that it is advised by, managed by or otherwise
connected with the Manager, or any organization which shall have so succeeded to
such businesses. In no event shall the Fund use the name "Prudential World Fund,
Inc." or any name including the word "Prudential" if the Manager's function is
transferred or assigned to a company of which The Prudential Insurance Company
of America does not have control.
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below as of the day and
year first above written.
PRUDENTIAL WORLD FUND, INC.
By ----------------------------------
Richard A. Redeker
President
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
By ----------------------------------
Robert F. Gunia
Executive Vice President
14
<PAGE>
EXHIBIT 6(d)
PRUDENTIAL WORLD FUND, INC.
(The Fund)
International Stock Series
FORM OF
SUBADVISORY AGREEMENT
Agreement made as of this ___ day of _________, 1996, between Prudential
Mutual Fund Management, Inc. (PMF or the Manager), a Delaware corporation, and
Mercator Asset Management, L.P. (the Subadviser), a limited partnership
organized under the laws of the State of Delaware.
W I T N E S S E T H
WHEREAS, the Manager has entered into a Management Agreement, dated
_______________, 1996 (the Management Agreement), with the Fund, on behalf of
its International Stock Series, a diversified, open-end management investment
company registered under the Investment Company Act of 1940 (the 1940 Act),
pursuant to which PMF will act as Manager of the International Stock Series;
WHEREAS, the shares of the Fund are divided into separate series or funds,
each of which is established pursuant to a resolution of the Board of Directors
of the Fund, and the Board of Directors may from time to time terminate such
series or funds or establish and terminate additional series or funds;
WHEREAS, the Manager has entered into a separate subadvisory agreement,
dated __________, 1996, with The Prudential Investment Corporation (PIC) a New
Jersey corporation, pursuant to which PIC will provide investment advisory
services to the International
<PAGE>
Stock Series with respect to (i) the management of short-term assets, including
cash, money market instruments and repurchase agreements and (ii) the lending of
portfolio securities;
WHEREAS, the Manager desires to retain the Subadviser to provide investment
advisory services to the International Stock Series in connection with the
management of its assets and the Subadviser is willing to render such investment
advisory services;
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Board of
Directors of the Fund, the Subadviser shall manage the investment
operations of the International Stock Series and the composition of the
International Stock Series' portfolio, including the purchase, retention
and disposition thereof, in accordance with the International Stock Series'
investment objective, policies and restrictions as stated in the Prospectus
(such Prospectus and Statement of Additional Information as currently in
effect and as amended or supplemented from time to time, being herein
collectively called the "Prospectus") and subject to the following
understandings:
(i) The Subadviser shall provide supervision of the International
Stock Series' investments and determine from time to time what
investments and securities will be purchased, retained, sold or loaned
by the International Stock Series, and what portion of the assets will
be invested or held uninvested as cash.
2
<PAGE>
(ii) In the performance of its duties and obligations under this
Agreement, the Subadviser shall act in conformity with the Fund's
Articles of Incorporation and By-Laws, and Prospectus of the
International Stock Series and with the instructions and directions of
the Manager and of the Board of Directors of the Fund and will conform
to and comply with the requirements of the 1940 Act, the Internal
Revenue Code of 1986 and all other applicable federal and state laws
and regulations.
(iii) The Subadviser shall advise PIC of the dollar amount of the
Fund's assets that shall be invested in repurchase agreements, money
market instruments or held in cash and advise PIC as to the securities
available for lending and the securities to be recalled from loan. In
the event the agreement with PIC is terminated, the Subadviser shall
provide investment advisory services to the Fund with respect to the
management of short-term assets and the lending of portfolio
securities under this Agreement.
(iv) The Subadviser shall determine the securities, futures
contracts and currencies to be purchased or sold by the International
Stock Series and will place orders with or through such persons,
brokers, dealers or futures commission merchants (including but not
limited to Prudential Securities
3
<PAGE>
Incorporated) to carry out the policy with respect to brokerage as set
forth in the International Stock Series Registration Statement and
Prospectus or as the Board of Directors may direct from time to time.
In providing the International Stock Series with investment
supervision, it is recognized that the Subadviser will give primary
consideration to securing the most favorable price and efficient
execution. Within the framework of this policy, the Subadviser may
consider the financial responsibility, research and investment
information and other services provided by brokers, dealers or futures
commission merchants who may effect or be a party to any such
transaction or other transactions to which the Subadviser's other
clients may be a party. It is understood that Prudential Securities
Incorporated may be used as principal broker for securities
transactions but that no formula has been adopted for allocation of
the International Stock Series' investment transaction business. It is
also understood that it is desirable for the International Stock
Series that the Subadviser have access to supplemental investment and
market research and security and economic analysis provided by brokers
or futures commission merchants who may execute brokerage transactions
at a higher cost to the Fund than may result when allocating brokerage
to
4
<PAGE>
other brokers on the basis of seeking the most favorable price and
efficient execution. Therefore, the Subadviser is authorized to place
orders for the purchase and sale of securities and futures contracts
for the International Stock Series with such brokers or futures
commission merchants, subject to review by the Board of Directors of
the Fund from time to time with respect to the extent and continuation
of this practice. It is understood that the services provided by such
brokers or futures commission merchants may be useful to the
Subadviser in connection with the Subadviser's services to other
clients.
On occasions when the Subadviser deems the purchase or sale of a
security or futures contract to be in the best interest of the
International Stock Series as well as other clients of the Subadviser,
the Subadviser, to the extent permitted by applicable laws and
regulations, may, but shall be under no obligation to, aggregate the
securities or futures contracts to be sold or purchased in order to
obtain the most favorable price or lower brokerage commissions and
efficient execution. In such event, allocation of the securities or
futures contracts so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the Subadviser in the
manner the Subadviser considers to be the most equitable and
5
<PAGE>
consistent with its fiduciary obligations to the International Stock
Series, the Fund and to such other clients.
(v) The Subadviser shall maintain all books and records with
respect to the International Stock Series' portfolio transactions
required by subparagraphs (b)(5), (6), (7), (9), (10) and (11) and
paragraph (f) of Rule 31a-1 under the 1940 Act and shall render to the
Board of Directors of the Fund such periodic and special reports as
the Board may reasonably request.
(vi) The Subadviser shall provide the Fund's Custodian on each
business day with information relating to all transactions concerning
the International Stock Series' assets and shall provide the Manager
with such information upon request of the Manager.
(vii) The investment management services provided by the
Subadviser hereunder are not to be deemed exclusive, and the
Subadviser shall be free to render similar services to others.
(b) The Subadviser shall authorize and permit any of its directors,
officers and employees who may be elected as Directors or officers of the
Fund to serve in the capacities in which they are elected. Services to be
furnished by the Subadviser under this Agreement may be furnished through
the medium of any of such directors,
6
<PAGE>
officers or employees.
(c) The Subadviser shall keep the International Stock Series books and
records required to be maintained by the Subadviser pursuant to paragraph
1(a)(v) hereof and shall timely furnish to the Manager all information
relating to the Subadviser's services hereunder needed by the Manager to
keep the other books and records of the International Stock Series required
by Rule 31a-1 under the 1940 Act. The Subadviser agrees that all records
which it maintains for the International Stock Series are the property of
the Fund and the Subadviser will surrender promptly to the Fund any of such
records upon the Fund's request; provided, however, that the Subadviser may
retain a copy of such records. The Subadviser further agrees to preserve
for the periods prescribed by Rule 31a-2 of the Commission under the 1940
Act any such records as are required to be maintained by it pursuant to
paragraph 1(a)(v) hereof.
2. The Manager shall continue to have responsibility for all services to be
provided to the International Stock Series pursuant to the Management Agreement
and shall oversee and review the Subadviser's performance of its duties under
this Agreement.
3. The Manager shall compensate the Subadviser for the services provided
and the expenses assumed pursuant to this Subadvisory Agreement, a fee at an
annual rate of .75 of 1% of the average daily net assets of the Fund up to and
including $50 million and .60 of 1% of the average daily net assets of the Fund
7
<PAGE>
in excess of $50 million and up to and including $300 million and .45 of 1% of
the average daily net assets in excess of $300 million. This fee will be
computed daily and paid monthly.
8
<PAGE>
4. The Subadviser shall not be liable for any error of judgment or for any
loss suffered by the Fund or the Manager in connection with the matters to which
this Agreement relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the Subadviser's part in the performance of its
duties or from its reckless disregard of its obligations and duties under this
Agreement.
5. This Agreement shall continue in effect for a period of more than two
years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Fund at any
time, without the payment of any penalty, by the Board of Directors of the Fund
or by vote of a majority of the outstanding voting securities (as defined in the
1940 Act) of the Fund, or by the Manager or the Subadviser at any time, without
the payment of any penalty, on not more than 60 days' nor less than 30 days'
written notice to the other party. This Agreement shall terminate automatically
in the event of its assignment (as defined in the 1940 Act) or upon the
termination of the Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any of
the Subadviser's directors, officers, or employees who may also be a Director,
officer or employee of the Fund to engage in any other business or to devote his
or her time and attention in part to the management or other aspects of any
business, whether of a similar or a dissimilar nature, nor limit or
9
<PAGE>
restrict the Subadviser's right to engage in any other business or to render
services of any kind to any other corporation, firm, individual or association.
7. During the term of this Agreement, the Manager agrees to furnish the
Subadviser at its principal office all prospectuses, proxy statements, reports
to stockholders, sales literature or other material prepared for distribution to
shareholders of the Fund or the public, which refer to the Subadviser in any
way, prior to use thereof and not to use material if the Subadviser reasonably
objects in writing five business days (or such other time as may be mutually
agreed) after receipt thereof. Sales literature may be furnished to the
Subadviser hereunder by first-class or overnight mail, facsimile transmission
equipment or hand delivery.
8. Any notice or other communication required to be given pursuant to this
Agreement shall be deemed duly given if delivered or mailed by registered mail,
postage prepaid, (1) to the Manager at One Seaport Plaza, New York, New York
10292, Attention: Secretary; or (2) to the Subadviser at 2400 East Commercial
Blvd., Fort Lauderdale, FL 33308, Attention: President.
9. This Agreement may be amended by mutual consent, but the consent of the
Fund must be obtained in conformity with the requirements of the 1940 Act.
10. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without reference to choice of law principles
thereof and in accordance with the 1940 Act. In the case of any conflict the
1940 Act shall control.
10
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
By _____________________________________
MERCATOR ASSET MANAGEMENT, L.P.
By _____________________________________
11
<PAGE>
EX-99.6(e)
PRUDENTIAL WORLD FUND, INC.
(The Fund)
International Stock Series
FORM OF
SUBADVISORY AGREEMENT
Agreement made as of this ___ day of _________, 1996, between Prudential
Mutual Fund Management, Inc. (PMF or the Manager), a Delaware corporation, and
The Prudential Investment Corporation (PIC), a New Jersey Corporation.
W I T N E S S E T H
WHEREAS, the Manager has entered into a Management Agreement, dated
_______________, 1996 (the Management Agreement), with the Fund, on behalf of
its International Stock Series, a diversified, open-end management investment
company registered under the Investment Company Act of 1940 (the 1940 Act),
pursuant to which PMF will act as Manager of the International Stock Series;
WHEREAS, the shares of common stock of the Fund are divided into
separate series or portfolios, each of which is established pursuant to a
resolution of the Directors of the Fund and documents appropriately filed with
the State of Maryland, and the Directors may from time to time terminate such
series or portfolios or establish and terminate additional series and
portfolios;
<PAGE>
WHEREAS, the Manager has entered into separate subadvisory agreements with
a "Subadviser" for the International Stock Series pursuant to which investment
advisory services will be provided to the International Stock Series except with
respect to (i) the management of short-term assets, including cash, money market
instruments and repurchase agreements and (ii) the lending of portfolio
securities; WHEREAS, the Manager desires to retain PIC to provide investment
advisory services to the International Stock Series with respect to (i) the
management of short-term assets, including cash, money market instruments and
repurchase agreements and (ii) the lending of portfolio securities in connection
with the management of the International Stock Series and PIC is willing to
render such investment advisory services;
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Directors of
the Fund, PIC shall manage the short-term assets and cash of the
International Stock Series, including the purchase, retention and
disposition thereof, in accordance with the International Stock Series'
investment objective, policies and restrictions as stated in the Prospectus
(such Prospectus and Statement of Additional Information as currently in
effect and as amended or supplemented from time to time, being herein
collectively called the "Prospectus") and subject to the following
understandings:
(i) PIC shall provide supervision of International Stock Series'
investments and determine from time to time what investments and
securities will
2
<PAGE>
be purchased, retained, sold or loaned by International Stock Series,
and what portion of the assets will be invested or held uninvested as
cash.
(ii) In the performance of its duties and obligations under this
Agreement, PIC shall act in conformity with the Fund's Articles of
Incorporation, By-Laws and Prospectus of the Fund and with the
instructions and directions of the Manager and of the Directors of the
Fund and will conform to and comply with the requirements of the 1940
Act, the Internal Revenue Code of 1986 and all other applicable
federal and state laws and regulations.
(iii) The Subadviser shall advise PIC of the dollar amount of
International Stock Series' assets that shall be invested in
repurchase agreements, money market instruments or held in cash and
advise PIC as to the securities available for lending and the
securities to be recalled from loan.
(iv) Upon receipt of information from the Subadviser as to the
amount of funds available for short-term investment, as described in
paragraph 1(a)(iii) above, PIC shall determine the securities to be
purchased or sold by International Stock Series and will place orders
with or through such persons, brokers or dealers (including but not
limited to Prudential Securities Incorporated) to carry out the
3
<PAGE>
policy with respect to brokerage as set forth in the International
Stock Series' Registration Statement and Prospectus or as the Board of
Directors may direct from time to time. In providing International
Stock Series with investment supervision, it is recognized that PIC
will give primary consideration to securing the most favorable price
and efficient execution. Within the framework of this policy, PIC may
consider the financial responsibility, research and investment
information and other services provided by brokers or dealers who may
effect or be a party to any such transaction or other transactions to
which PIC's other clients may be a party.
On occasions when PIC deems the purchase or sale of a security to
be in the best interest of the International Stock Series as well as
other clients of PIC, PIC, to the extent permitted by applicable laws
and regulations, may, but shall be under no obligation to, aggregate
the securities to be sold or purchased in order to obtain the most
favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities so purchased or
sold, as well as the expenses incurred in the transaction, will be
made by PIC in the manner PIC considers to be the most equitable and
consistent with its fiduciary obligations to the International Stock
4
<PAGE>
Series, the Fund and to such other clients.
(v) PIC shall maintain all books and records with respect to
International Stock Series' portfolio transactions required by
subparagraphs (b)(5), (6), (7), (9), (10) and (11) and paragraph (f)
of Rule 31a-1 under the 1940 Act and shall render to the Board of
Directors of the Fund such periodic and special reports as the Board
may reasonably request.
(vi) PIC shall provide the Fund's Custodian on each business day
with information relating to all transactions concerning International
Stock Series' assets and shall provide the Manager with such
information upon request of the Manager.
(vii) The investment management services provided by PIC
hereunder are not to be deemed exclusive, and PIC shall be free to
render similar services to others.
(b) PIC shall authorize and permit any of its directors, officers and
employees who may be elected as Directors or officers of the Fund to serve
in the capacities in which they are elected. Services to be furnished by
PIC under this Agreement may be furnished through the medium of any of such
directors, officers or employees.
(c) PIC shall keep the International Stock Series' books and records
required to be maintained by PIC pursuant to paragraph 1(a)(v) hereof and
shall timely furnish to the Manager all information relating to PIC's
services
5
<PAGE>
hereunder needed by the Manager to keep the other books and records of the
Fund required by Rule 31a-1 under the 1940 Act. PIC agrees that all records
which it maintains for the International Stock Series are the property of
the Fund and PIC will surrender promptly to the Fund any of such records
upon the Fund's request, provided however that PIC may retain a copy of
such records. PIC further agrees to preserve for the periods prescribed by
Rule 31a-2 of the Commission under the 1940 Act any such records as are
required to be maintained by it pursuant to paragraph 1(a)(v) hereof.
2. The Manager shall continue to have responsibility for all services to be
provided to the International Stock Series pursuant to the Management Agreement
and shall oversee and review PIC's performance of its duties under this
Agreement.
3. The Manager shall reimburse PIC for reasonable costs and expenses
incurred by PIC determined in a manner acceptable to the Manager in furnishing
the services provided in paragraph 1 hereof.
4. PIC shall not be liable for any error of judgment or for any loss
suffered by a Fund or the Manager in connection with the matters to which this
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on PIC's part in the performance of its duties or from its
reckless disregard of its obligations and duties under this Agreement.
6
<PAGE>
5. This Agreement shall continue in effect for a period of more than two
years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Fund at any
time, without the payment of any penalty, by the Board of Directors of the Fund
or by vote of a majority of the outstanding voting securities (as defined in the
1940 Act) of the International Stock Series, or by the Manager or PIC at any
time, without the payment of any penalty, on not more than 60 days' nor less
than 30 days' written notice to the other party. This Agreement shall terminate
automatically in the event of its assignment (as defined in the 1940 Act) or
upon the termination of the Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any of
PIC's directors, officers, or employees who may also be a Director, officer or
employee of the Fund to engage in any other business or to devote his or her
time and attention in part to the management or other aspects of any business,
whether of a similar or a dissimilar nature, nor limit or restrict PIC's right
to engage in any other business or to render services of any kind to any other
corporation, firm, individual or association.
7. During the term of this Agreement, the Manager agrees to furnish PIC at
its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature or other material prepared for distribution to
shareholders of International Stock Series or the public, which refer to PIC in
any way, prior to
7
<PAGE>
use thereof and not to use material if PIC reasonably objects in writing five
business days (or such other time as may be mutually agreed) after receipt
thereof. Sales literature may be furnished to PIC hereunder by first-class or
overnight mail, facsimile transmission equipment or hand delivery.
8. Any notice or other communication required to be given pursuant to this
Agreement shall be deemed duly given if delivered or mailed by registered mail,
postage prepaid, (1) to the Manager at One Seaport Plaza, New York, New York
10292, Attention: Secretary; or (2) to PIC at Prudential Plaza, 751 Broad
Street, Newark, NJ 07102-3777, Attention: President.
9. This Agreement may be amended by mutual consent, but the consent of a
Fund must be obtained in conformity with the requirements of the 1940 Act.
10. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without reference to choice of law principles
thereof and in accordance with the 1940 Act. In the case of any conflict the
1940 Act shall control.
8
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
By_____________________________________
THE PRUDENTIAL INVESTMENT CORPORATION
By_____________________________________
9
<PAGE>
EXHIBIT 7(e)
PRUDENTIAL WORLD FUND, INC.
(International Stock Series)
Form of
Distribution Agreement
Agreement made as of ______________, 1996 between Prudential World Fund,
Inc., a Maryland corporation (the Fund), and Prudential Securities Incorporated,
a Delaware corporation (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of 1940,
as amended (the Investment Company Act), as a diversified, open-end, management
investment company and it is in the interest of the Fund to offer its shares for
sale continuously;
WHEREAS, the shares of the Fund may be divided into classes and/or series
(all such shares being referred to herein as Shares) and the Fund currently is
authorized to offer Class A, Class B, Class C and Class Z Shares;
WHEREAS, the Distributor is a broker-dealer registered under the Securities
Exchange Act of 1934, as amended, and is engaged in the business of selling
shares of registered investment companies either directly or through other
broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement with
each other, with respect to the continuous offering of the Fund's Shares from
and after the date hereof in order to promote the growth of the Fund and
facilitate the distribution of its Shares; and
WHEREAS, upon approval by the holders of the respective classes and/or
series of Shares of the Fund it is contemplated that the Fund will adopt a plan
(or plans) of distribution pursuant to Rule 12b-1 under the Investment Company
Act with respect to certain of its classes and/or series of Shares (the Plans)
authorizing payments by the Fund to the Distributor with respect to the
distribution of such classes and/or series of Shares and the maintenance of
related shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
The Fund hereby appoints the Distributor as the principal underwriter and
distributor of the Shares of the Fund to sell Shares to the public on behalf of
the Fund and the Distributor
<PAGE>
hereby accepts such appointment and agrees to act hereunder. The Fund hereby
agrees during the term of this Agreement to sell Shares of the Fund through the
Distributor on the terms and conditions set forth below.
Section 2. Exclusive Nature of Duties
The Distributor shall be the exclusive representative of the Fund to act as
principal underwriter and distributor of the Fund's Shares, except that:
2.1 The exclusive rights granted to the Distributor to sell Shares of the
Fund shall not apply to Shares of the Fund issued in connection with the merger
or consolidation of any other investment company or personal holding company
with the Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding shares of any such company by
the Fund.
2.2 Such exclusive rights shall not apply to Shares issued by the Fund
pursuant to reinvestment of dividends or capital gains distributions or through
the exercise of any conversion feature or exchange privilege.
2.3 Such exclusive rights shall not apply to Shares issued by the Fund
pursuant to the reinstatement privilege afforded redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases made through the
Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean the
Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. Purchase of Shares from the Fund
3.1 The Distributor shall have the right to buy from the Fund on behalf of
investors the Shares needed, but not more than the Shares needed (except for
clerical errors in transmission) to fill unconditional orders for Shares placed
with the Distributor by investors or registered and qualified securities dealers
and other financial institutions (selected dealers).
3.2 The Shares shall be sold by the Distributor on behalf of the Fund and
delivered by the Distributor or selected
2
<PAGE>
dealers, as described in Section 6.4 hereof, to investors at the offering price
as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of any or all classes
and/or series of its Shares at times when redemption is suspended pursuant to
the conditions in Section 4.3 hereof or at such other times as may be determined
by the Board of Directors. The Fund shall also have the right to suspend the
sale of any or all classes and/or series of its Shares if a banking moratorium
shall have been declared by federal or New York authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the Fund,
shall be promptly advised of all purchase orders for Shares received by the
Distributor. Any order may be rejected by the Fund; provided, however, that the
Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Shares. The Fund (or its agent) will confirm
orders upon their receipt, will make appropriate book entries and upon receipt
by the Fund (or its agent) of payment therefor, will deliver deposit receipts
for such Shares pursuant to the instructions of the Distributor. Payment shall
be made to the Fund in New York Clearing House funds or federal funds. The
Distributor agrees to cause such payment and such instructions to be delivered
promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Shares by the Fund
4.1 Any of the outstanding Shares may be tendered for redemption at any
time, and the Fund agrees to repurchase or redeem the Shares so tendered in
accordance with its Articles of Incorporation as amended from time to time, and
in accordance with the applicable provisions of the Prospectus. The price to be
paid to redeem or repurchase the Shares shall be equal to the net asset value
determined as set forth in the Prospectus. All payments by the Fund hereunder
shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as defined
in the above paragraph pursuant to the instructions of the Distributor on or
before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Shares shall be
paid by the Fund as follows: (i) in the case of Shares subject to a contingent
deferred sales charge, any applicable contingent deferred sales charge shall be
paid to the Distributor, and the balance shall be paid to or for the account of
the redeeming shareholder, in each case in accordance with applicable provisions
of the Prospectus; and (ii) in the case of all other Shares, proceeds shall be
paid to or for the account of the redeeming shareholder, in each case in
accordance with applicable provisions of the Prospectus.
3
<PAGE>
4.3 Redemption of any class and/or series of Shares or payment may be
suspended at times when the New York Stock Exchange is closed for other than
customary weekends and holidays, when trading on said Exchange is restricted,
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 during any
other period when the Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Fund
5.1 Subject to the possible suspension of the sale of Shares as provided
herein, the Fund agrees to sell its Shares so long as it has Shares of the
respective class and/or series available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Shares, and this shall
include one certified copy, upon request by the Distributor, of all financial
statements prepared for the Fund by independent public accountants. The Fund
shall make available to the Distributor such number of copies of its Prospectus
and annual and interim reports as the Distributor shall reasonably request.
5.3 The Fund shall take, from time to time, but subject to the necessary
approval of the Board of Directors and the shareholders, all necessary action to
fix the number of authorized Shares and such steps as may be necessary to
register the same under the Securities Act, to the end that there will be
available for sale such number of Shares as the Distributor reasonably may
expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Shares for sales under the
securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Articles of
Incorporation or By-Laws to comply with the laws of any state, to maintain an
office in any state, to change the terms of the offering of its Shares in any
state from the terms set forth in its Registration Statement, to qualify as a
foreign corporation in any state or to consent to service of process in any
state other than with respect to claims arising out of the offering of its
Shares. Any such qualification
4
<PAGE>
may be withheld, terminated or withdrawn by the Fund at any time in its
discretion. As provided in Section 9 hereof, the expense of qualification and
maintenance of qualification shall be borne by the Fund. The Distributor shall
furnish such information and other material relating to its affairs and
activities as may be required by the Fund in connection with such
qualifications.
Section 6. Duties of the Distributor
6.1 The Distributor shall devote reasonable time and effort to effect sales
of Shares, but shall not be obligated to sell any specific number of Shares.
Sales of the Shares shall be on the terms described in the Prospectus. The
Distributor may enter into like arrangements with other investment companies.
The Distributor shall compensate the selected dealers as set forth in the
Prospectus.
6.2 In selling the Shares, the Distributor shall use its best efforts in
all respects duly to conform with the requirements of all federal and state laws
relating to the sale of such securities. Neither the Distributor nor any
selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the confirmation
of sales to investors and selected dealers, the collection of amounts payable by
investors and selected dealers on such sales and the cancellation of unsettled
transactions, as may be necessary to comply with the requirements of the
National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected dealer
agreements with registered and qualified securities dealers and other financial
institutions of its choice for the sale of Shares, provided that the Fund shall
approve the forms of such agreements. Within the United States, the Distributor
shall offer and sell Shares only to such selected dealers as are members in good
standing of the NASD. Shares sold to selected dealers shall be for resale by
such dealers only at the offering price determined as set forth in the
Prospectus.
Section 7. Payments to the Distributor
7.1 With respect to classes and/or series of Shares which impose a
front-end sales charge, the Distributor shall receive and may retain any portion
of any front-end sales charge which is imposed on such sales and not reallocated
to selected dealers as set forth in the Prospectus, subject to the limitations
of Article III, Section 26 of the NASD Rules of Fair Practice.
5
<PAGE>
Payment of these amounts to the Distributor is not contingent upon the adoption
or continuation of any applicable Plans.
7.2 With respect to classes and/or series of Shares which impose a
contingent deferred sales charge, the Distributor shall receive and may retain
any contingent deferred sales charge which is imposed on such sales as set forth
in the Prospectus, subject to the limitations of Article III, Section 26 of the
NASD Rules of Fair Practice. Payment of these amounts to the Distributor is not
contingent upon the adoption or continuation of any Plan.
Section 8. Payment of the Distributor under the Plan
8.1 The Fund shall pay to the Distributor as compensation for services
under any Plans adopted by the Fund and this Agreement a distribution and
service fee with respect to the Fund's classes and/or series of Shares as
described in each of the Fund's respective Plans and this Agreement.
8.2 So long as a Plan or any amendment thereto is in effect, the
Distributor shall inform the Board of Directors of the commissions and account
servicing fees with respect to the relevant class and/or series of Shares to be
paid by the Distributor to account executives of the Distributor and to
broker-dealers and financial institutions which have dealer agreements with the
Distributor. So long as a Plan (or any amendment thereto) is in effect, at the
request of the Board of Directors or any agent or representative of the Fund,
the Distributor shall provide such additional information as may reasonably be
requested concerning the activities of the Distributor hereunder and the costs
incurred in performing such activities with respect to the relevant class and/or
series of Shares.
Section 9. Allocation of Expenses
The Fund shall bear all costs and expenses of the continuous offering of
its Shares (except for those costs and expenses borne by the Distributor
pursuant to a Plan and subject to the requirements of Rule 12b-1 under the
Investment Company Act), including fees and disbursements of its counsel and
auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and all amendments and supplements thereto, and preparing
and mailing annual and periodic reports and proxy materials to shareholders
(including but not limited to the expense of setting in type any such
Registration Statements, Prospectuses, annual or periodic reports or proxy
materials). The Fund shall also bear the cost of expenses of qualification of
the Shares for sale, and, if necessary or advisable in connection therewith, of
qualifying the Fund as a broker or dealer, in such states of the United States
or other
6
<PAGE>
jurisdictions as shall be selected by the Fund and the Distributor pursuant to
Section 5.4 hereof and the cost and expense payable to each such state for
continuing qualification therein until the Fund decides to discontinue such
qualification pursuant to Section 5.4 hereof. As set forth in Section 8 above,
the Fund shall also bear the expenses it assumes pursuant to any Plan, so long
as such Plan is in effect.
Section 10. Indemnification
10.1 The Fund agrees to indemnify, defend and hold the Distributor, its
officers and directors and any person who controls the Distributor within the
meaning of Section 15 of the Securities Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any
reasonable counsel fees incurred in connection therewith) which the Distributor,
its officers, directors or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, except insofar as such claims,
demands, liabilities or expenses arise out of or are based upon any such untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with information furnished in writing by the Distributor
to the Fund for use in the Registration Statement or Prospectus; provided,
however, that this indemnity agreement shall not inure to the benefit of any
such officer, director, trustee or controlling person unless a court of
competent jurisdiction shall determine in a final decision on the merits, that
the person to be indemnified was not liable by reason of willful misfeasance,
bad faith or gross negligence in the performance of its duties, or by reason of
its reckless disregard of its obligations under this Agreement (disabling
conduct), or, in the absence of such a decision, a reasonable determination,
based upon a review of the facts, that the indemnified person was not liable by
reason of disabling conduct, by (a) a vote of a majority of a quorum of
directors or trustees who are neither "interested persons" of the Fund as
defined in Section 2(a)(19) of the Investment Company Act nor parties to the
proceeding, or (b) an independent legal counsel in a written opinion. The Fund's
agreement to indemnify the Distributor, its officers and directors or trustees
and any such controlling person as aforesaid is expressly conditioned upon the
Fund's being promptly notified of any action brought against the Distributor,
its officers or directors or trustees, or any such controlling person, such
notification to be given by letter or telegram addressed to the Fund at its
principal business office. The Fund agrees promptly to notify the Distributor of
the commencement of any litigation or proceedings against it or any of
7
<PAGE>
its officers or directors in connection with the issue and sale of any Shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund, its
officers and Directors and any person who controls the Fund, if any, within the
meaning of Section 15 of the Securities Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending against such claims, demands or liabilities and any
reasonable counsel fees incurred in connection therewith) which the Fund, its
officers and Directors or any such controlling person may incur under the
Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its Directors or officers or
such controlling person resulting from such claims or demands shall arise out of
or be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon any
alleged omission to state a material fact in connection with such information
required to be stated in the Registration Statement or Prospectus or necessary
to make such information not misleading. The Distributor's agreement to
indemnify the Fund, its officers and Directors and any such controlling person
as aforesaid, is expressly conditioned upon the Distributor's being promptly
notified of any action brought against the Fund, its officers and Directors or
any such controlling person, such notification being given to the Distributor at
its principal business office.
Section 11. Duration and Termination of this Agreement
11.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Board of Directors of the Fund, or by the vote of a
majority of the outstanding voting securities of the applicable class and/or
series of the Fund, and (b) by the vote of a majority of those Directors who are
not parties to this Agreement or interested persons of any such parties and who
have no direct or indirect financial interest in this Agreement or in the
operation of any of the Fund's Plans or in any agreement related thereto
(Independent Directors), cast in person at a meeting called for the purpose of
voting upon such approval.
11.2 This Agreement may be terminated at any time, without the payment of
any penalty, by a majority of the Independent Directors or by vote of a majority
of the outstanding voting securities of the applicable class and/or series of
the Fund, or by the Distributor, on sixty (60) days' written notice to the other
party. This Agreement shall automatically terminate in the event of its
assignment.
8
<PAGE>
11.3 The terms "affiliated person," "assignment," "interested person" and
"vote of a majority of the outstanding voting securities", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. Amendments to this Agreement
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Board of Directors of the Fund, or by the vote
of a majority of the outstanding voting securities of the applicable class
and/or series of the Fund, and (b) by the vote of a majority of the Independent
Directors cast in person at a meeting called for the purpose of voting on such
amendment.
Section 13. Separate Agreement as to Classes and/or Series
The amendment or termination of this Agreement with respect to any class
and/or series shall not result in the amendment or termination of this Agreement
with respect to any other class and/or series unless explicitly so provided.
Section 14. Governing Law
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year above written.
Prudential Securities Incorporated
By:
--------------------------------
Robert F. Gunia
Senior Vice President
Prudential World Fund, Inc.
By:
--------------------------------
Richard A. Redeker
President
10
<PAGE>
EXHIBIT 9(c)
FORM OF
CUSTODIAN CONTRACT
Between
EACH OF THE PARTIES INDICATED ON APPENDIX A
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Employment of Custodian and Property to be Held by It................................... -1-
2. Duties to the Custodian with Respect to Property of The
Fund Held By the Custodian in the United States.........................................
2.1 Holding Securities................................................................ -2-
2.2 Delivery of Securities......................................................... -2-
2.3 Registration of Securities..................................................... -6-
2.4 Bank Accounts.................................................................. -7-
2.5 Availability of Federal Funds.................................................. -7-
2.6 Collection of Income........................................................... -8-
2.7 Payment of Fund Monies......................................................... -8-
2.8 Liability for Payment in Advance of Receipt of Securities Purchased............ -11-
2.9 Appointment of Agents.......................................................... -11-
2.10 Deposit of Securities in Securities Systems.................................... -11-
2.10A Fund Assets Held in the Custodian's Direct Paper System........................ -13-
2.11 Segregated Account............................................................. -14-
2.12 Ownership Certificates for Tax Purposes........................................ -15-
2.13 Proxies........................................................................ -16-
2.14 Communications Relating to Fund Portfolio Securities........................... -16-
2.15 Reports to Fund by Independent Public Accountants.............................. -16-
3. Duties of the Custodian with Respect to Property of the
Fund Held Outside of the United States.................................................. -17-
3.1 Appointment of Foreign Sub-Custodians.......................................... -17-
3.2 Assets to be Held.............................................................. -17-
3.3 Foreign Securities Depositories................................................ -18-
3.4 Segregation of Securities...................................................... -18-
3.5 Agreements with Foreign Banking Institutions................................... -18-
3.6 Access of Independent Accountants of the Fund.................................. -19-
3.7 Reports by Custodian........................................................... -19-
3.9 Liability of Foreign Sub-Custodians............................................ -20-
3.10 Liability of Custodian......................................................... -21-
3.11 Reimbursements for Advances.................................................... -21-
3.12 Monitoring Responsibilities.................................................... -22-
3.13 Branches of U.S. Banks......................................................... -22-
4. Payments for Repurchases or Redemptions and Sales of
Shares of the Fund...................................................................... -23-
5. Proper Instructions..................................................................... -24-
6. Actions Permitted without Express Authority............................................. -24-
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
7. Evidence of Authority................................................................... -25-
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income........................................... -26-
9. Records................................................................................. -26-
10. Opinion of Fund's Independent Accountant................................................ -27-
11. Compensation of Custodian............................................................... -27-
12. Responsibility of Custodian............................................................. -27-
13. Effective Period, Termination and Amendment............................................. -29-
14. Successor Custodian..................................................................... -30-
15. Interpretative and Additional Provisions................................................ -32-
16. Massachusetts Law to Apply.............................................................. -32-
17. Prior Contracts......................................................................... -32-
18. The Parties............................................................................. -32-
19. Limitation of Liability................................................................. -33-
</TABLE>
-ii-
<PAGE>
CUSTODIAN CONTRACT
This Contract between State Street Bank and Trust Company, a
Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston, Massachusetts 02110, hereinafter called the
"Custodian", and each Fund listed on Appendix A which evidences its agreement to
be bound hereby by executing a copy of this Contract (each such Fund
individually hereinafter referred to as the "Fund").
WITNESSETH: That in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its assets,
including securities it desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Articles of
Incorporation/Declaration of Trust. The Fund agrees to deliver to the Custodian
all securities and cash owned by it, and all payments of income, payments of
principal or capital distributions received by it with respect to all securities
owned by the Fund from time to time, and the cash consideration received by it
for such new or treasury shares of capital stock, ("Shares") of the Fund as may
be issued or sold from time to time. The Custodian shall not be responsible for
any property of the Fund held or received by the Fund and not delivered to the
Custodian.
<PAGE>
Upon receipt of "Proper Instructions" (within the meaning of Article
5), the Custodian shall from time to time employ one or more sub-custodians
located in the United States, but only in accordance with an applicable vote by
the Board of Directors/Trustees of the Fund, and provided that the Custodian
shall have the same responsibility or liability to the Fund on account of any
actions or omissions of any sub-custodian so employed as any such sub-custodian
has to the Custodian, provided that the Custodian agreement with any such
domestic sub-custodian shall impose on such sub-custodian responsibilities and
liabilities similar in nature and scope to those imposed by this Agreement with
respect to the functions to be performed by such sub-custodian. The Custodian
may employ as sub-custodians for the Fund's securities and other assets the
foreign banking institutions and foreign securities depositories designated in
Schedule "A" hereto but only in accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of The Fund Held By the
Custodian in the United States.
2.1 Holding Securities. The Custodian shall hold and physically
segregate for the account of the Fund all non-cash property, to be held by it in
the United States, including all domestic securities owned by the Fund, other
than (a) securities which are maintained pursuant to Section 2.10 in a clearing
agency which acts as a securities depository or in a book-entry system
authorized by the U.S. Department of Treasury, collectively referred to herein
as "Securities System" and (b) commercial paper
-2-
<PAGE>
of an issuer for which State Street Bank and Trust Company acts as issuing and
paying agent ("Direct Paper") which is deposited and/or maintained in the Direct
Paper System of the Custodian pursuant to Section 2.10A.
2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by the Fund held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper book-entry
system account ("Direct Paper System") only upon receipt of Proper Instructions,
which may be continuing instructions when deemed appropriate by the parties, and
only in the following cases:
(1) Upon sale of such securities for the account of the
Fund and receipt of payment therefor;
(2) Upon the receipt of payment in connection with any
repurchase agreement related to such securities
entered into by the Fund;
(3) In the case of a sale effected through a Securities
System, in accordance with the provisions of
Section 2.10 hereof;
(4) To the depository agent in connection with tender
or other similar offers for portfolio securities of
the Fund;
(5) To the issuer thereof or its agent when such
securities are called, redeemed, retired or
otherwise become payable; provided that, in any
-3-
<PAGE>
such case, the cash or other consideration is to be
delivered to the Custodian;
(6) To the issuer thereof, or its agent, for transfer
into the name of the Fund or into the name of any
nominee or nominees of the Custodian or into the name
or nominee name of any agent appointed pursuant to
Section 2.9 or into the name or nominee name of any
sub-custodian appointed pursuant to Article 1; or for
exchange for a different number of bonds,
certificates or other evidence representing the same
aggregate face amount or number of units; provided
that, in any such case, the new securities are to be
delivered to the Custodian;
(7) Upon the sale of such securities for the account of
the Fund, to the broker or its clearing agent,
against a receipt, for examination in accordance with
"street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or
liability for any loss arising from the delivery of
such securities prior to receiving payment for such
securities except as may arise from the Custodian's
own negligence or willful misconduct;
(8) For exchange or conversation pursuant to any plan
of merger, consolidation, recapitalization,
-4-
<PAGE>
reorganization or readjustment of the securities of
the issuer of such securities, or pursuant to
provisions for conversion contained in such
securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities
and cash, if any, are to be delivered to the
Custodian;
(9) In the case of warrants, rights or similar
securities, the surrender thereof in the exercise of
such warrants, rights or similar securities or the
surrender of interim receipts or temporary securities
for definitive securities; provided that, in any such
case, the new securities and cash, if any, are to be
delivered to the Custodian;
(10) For delivery in connection with any loans of
securities made by the Fund, but only against receipt
of adequate collateral as agreed upon from time to
time by the Custodian and the Fund, which may be in
the form of cash or obligations issued by the United
States government, its agencies or instrumentalities,
except that in connection with any loans for which
collateral is to be credited to the Custodian's
account in the book-entry system authorized by the
U.S. Department of the Treasury, the Custodian will
not be held liable or
-5-
<PAGE>
responsible for the delivery of securities owned by
the Fund prior to the receipt of such collateral;
(11) For delivery as security in connection with any
borrowings by the Fund requiring a pledge of assets
by the Fund, but only against receipt of amounts
borrowed;
(12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a
broker-dealer registered under the Securities
Exchange Act of 1934 (the "Exchange Act") and a
member of The National Association of Securities
Dealers, Inc. ("NASD"), relating to compliance with
the rules of The Options Clearing Corporation and of
any registered national securities exchange, or of
any similar organization or organizations, regarding
escrow or other arrangements in connection with
transactions by the Fund;
(13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, and a
Futures Commission Merchant registered under the
Commodity Exchange Act, relating to compliance with
the rules of the Commodity Futures Trading Commission
and/or any Contract Market, or any similar
organization or organizations, regarding account
deposits in connection with transactions by the Fund;
-6-
<PAGE>
(14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such
Transfer Agent or to the holders of shares in
connection with distributions in kind, as may be
described from time to time in the Fund's currently
effective prospectus and statement of additional
information ("prospectus"), in satisfaction of
requests by holders of Shares for repurchase or
redemption; and
(15) For any other proper business purpose, but only upon
receipt of, in addition to Proper Instructions, a
certified copy of a resolution of the Board of
Directors/Trustees or of the Executive Committee
signed by an officer of the Fund and certified by the
Secretary or an Assistant Secretary, specifying the
securities to be delivered, setting forth the purpose
for which such delivery is to be made, declaring such
purpose to be a proper business purpose, and naming
the person or persons to whom delivery of such
securities shall be made.
2.3 Registration of Securities. Domestic securities held by the
Custodian (other than bearer securities) shall be registered in the name of the
Fund or in the name of any nominees of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Fund, unless the
Fund has authorized in writing
-7-
<PAGE>
the appointment of a nominee to be used in common with other registered
investment companies having the same investment adviser as the Fund, or in the
name or nominee name of any agent appointed pursuant to Section 2.9 or in the
name or nominee name of any sub-custodian appointed pursuant to Article 1. All
securities accepted by the Custodian on behalf of the Fund under the terms of
this Contract shall be in "street name" or other good delivery form. If,
however, the Fund directs the Custodian to maintain securities in "street name",
the Custodian shall utilize its best efforts to timely collect income due the
Fund on such securities and to notify the Fund on a best efforts basis of
relevant corporate actions including, without limitation, pendency of calls,
maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate
bank account or accounts in the United States in the name of the Fund, subject
only to draft or order by the Custodian acting pursuant to the terms of this
Contract, and shall hold in such account or accounts, subject to the provisions
hereof, all cash received by it from or for the account of the Fund, other than
cash maintained by the Fund, in a bank account established and used in
accordance with Rule 17f-3 under the Investment Company Act of 1940. Funds held
by the Custodian for the Fund may be deposited by it to its credit as Custodian
in the Banking Department of the Custodian or in such other banks or trust
companies as it may in its discretion deem necessary or desirable; provided,
however, that every such bank or
-8-
<PAGE>
trust company shall be qualified to act as a custodian under the Investment
Company Act of 1940 and that each such bank or trust company and the funds to be
approved by vote of a majority of the Board of Directors/Trustees of the Fund.
Such funds shall be deposited by the Custodian in its capacity as Custodian and
shall be withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the
Fund and the Custodian, the Custodian shall, upon the receipt of Proper
Instructions, make federal funds available to the Fund as of specified times
agreed upon from time to time by the Fund and the Custodian in the amount of
checks received in payment for Shares of the Fund which are deposited into the
Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments with
respect to registered securities held hereunder to which the Fund shall be
entitled either by law or pursuant to custom in the securities business, and
shall collect on a timely basis all income and other payments with respect to
bearer securities if, on the date of payment by the issuer, such securities are
held by the Custodian or its agent thereof and shall credit such income, as
collected, to the Fund's custodian account. Without limiting the generality of
the foregoing, the Custodian shall detach and present for payment all coupons
and other income items requiring presentation as and when they become due and
shall collect interest when due on securities held hereunder. Income due the
Fund on securities loaned pursuant to the provisions of Section
-9-
<PAGE>
2.2 (10) shall be the responsibility of the Fund. The Custodian will have no
duty or responsibility in connection therewith, other than to provide the Fund
with such information or data as may be necessary to assist the Fund in
arranging for the timely delivery to the Custodian of the income to which the
Fund is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions, which
may be continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out monies of the Fund in the following cases only:
(1) Upon the purchase of securities held domestically,
options, futures contracts or options on futures
contracts for the account of the Fund but only (a)
against the delivery of such securities, or evidence
of title to such options, futures contracts or
options on futures contracts, to the Custodian (or
any bank, banking firm or trust company doing
business in the United States or abroad which is
qualified under the Investment Company Act of 1940,
as amended, to act as a custodian and has been
designated by the Custodian as its agent for this
purpose) registered in the name of the Fund or in the
name of a nominee of the Custodian referred to in
Section 2.3 hereof or in proper form for transfer;
(b) in the case of a purchase effected through a
Securities System, in
-10-
<PAGE>
accordance with the conditions set forth in Section
2.10 hereof; (c) in the case of a purchase involving
the Direct Paper System, in accordance with the
conditions set forth in Section 2.10A; (d) in the
case of repurchase agreements entered into between
the Fund and the Custodian, or another bank, or a
broker-dealer which is a member of NASD, (i) against
delivery of the securities either in certificate form
or through an entry crediting the Custodian's account
at the Federal Reserve Bank with such securities or
(ii) against delivery of the receipt evidencing
purchase by the Fund of securities owned by the
Custodian along with written evidence of the
agreement by the Custodian to repurchase such
securities from the Fund or (e) for transfer to a
time deposit account of the Fund in any bank, whether
domestic or foreign; such transfer may be effected
prior to receipt of a confirmation from a broker
and/or the applicable bank pursuant to Proper
Instructions from the Fund as defined in Article 5;
(2) In connection with conversion, exchange or
surrender of securities owned by the Fund as set
forth in Section 2.2 hereof;
(3) For the redemption or repurchase of Shares issued
by the Fund as set forth in Article 4 hereof;
-11-
<PAGE>
(4) For the payment of any expense or liability incurred
by the Fund, including but not limited to the
following payments for the account of the Fund:
interest, taxes, management, accounting, transfer
agent and legal fees, and operating expenses of the
Fund whether or not such expenses are to be in whole
or part capitalized or treated as deferred expenses;
(5) For the payment of any dividends declared pursuant
to the governing documents of the Fund;
(6) For payment of the amount of dividends received in
respect of securities sold short;
(7) For any other proper purpose, but only upon receipt
of, in addition to Proper Instructions, a certified
copy of a resolution of Board of Directors/Trustees
or of the Executive Committee of the Fund signed by
an officer of the Fund and certified by its Secretary
or an Assistant Secretary, specifying the amount of
such payment, setting forth the purpose for which
such payment is to be made, declaring such purpose to
be a proper purpose, and naming the person or persons
to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities
Purchased. Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of
-12-
<PAGE>
securities for the account of the Fund is made by the Custodian in advance of
receipt of the securities purchased in the absence of specific written
instructions from the Fund to so pay in advance, the Custodian shall be
absolutely liable to the Fund for such securities to the same extent as if the
securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in
its discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of 1940, as
amended, to act as a custodian, as its agent to carry out such of the provisions
of this Article 2 as the Custodian may from time to time direct; provided,
however, that the appointment of any agent shall not relieve the Custodian of
its responsibilities or liabilities hereunder.
2.10 Deposit of Securities in Securities Systems. The Custodian may
deposit and/or maintain domestic securities owned by the Fund in a clearing
agency registered with the Securities and Exchange Commission under Section 17A
of the Securities Exchange Act of 1934, which acts as a securities depository,
or in the book-entry system authorized by the U.S. Department of the Treasury
and certain federal agencies, collectively referred to herein as "Securities
System" in accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to the following
provisions:
(1) The Custodian may keep domestic securities of the
Fund in a Securities System provided that such
-13-
<PAGE>
securities are represented in an account ("Account")
of the Custodian in the Securities System which shall
not include any assets of the Custodian other than
assets held as a fiduciary, custodian or otherwise
for customers;
(2) The records of the Custodian with respect to domestic
securities of the Fund which are maintained in a
Securities System shall identify by book-entry those
securities belonging to the Fund;
(3) The Custodian shall pay for domestic securities
purchased for the account of the Fund upon (i)
receipt of advice from the Securities System that
such securities have been transferred to the Account,
and (i.) the making of an entry on the records of the
Custodian to reflect such payment and transfer for
the account of the Fund. The Custodian shall transfer
domestic securities sold for the account of the Fund
upon (i) receipt of advice from the Securities System
that payment for such securities has been transferred
to the Account, and (ii) the making of an entry on
the records of the Custodian to reflect such transfer
and payment for the account of the Fund. Copies of
all advices from the Securities System of transfers
of domestic securities for the account of the Fund
shall identify the Fund, be maintained for the Fund
-14-
<PAGE>
by the Custodian and be provided to the Fund at its
request. Upon request, the Custodian shall furnish
the Fund confirmation of each transfer to or from the
account of the Fund in the form of a written advice
or notice and shall furnish promptly to the Fund
copies of daily transaction sheets reflecting each
day's transactions in the Securities System for the
account of the Fund.
(4) The Custodian shall provide the Fund with any report
obtained by the Custodian on the Securities System's
accounting system, internal accounting control and
procedures for safeguarding securities deposited in
the Securities System;
(5) The Custodian shall have received the initial or
annual certificate, as the case may be, required by
Article 13 hereof;
(6) Anything to the contrary in this Contract
notwithstanding, the Custodian shall be liable to the
Fund for any loss or damage to the Fund resulting
from use of the Securities System by reason of any
negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or
their employees or from failure of the Custodian or
any such agent to enforce effectively such rights as
it may have against the Securities System; at the
election of the Fund, it shall be
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entitled to be subrogated to the rights of the
Custodian with respect to any claim against the
Securities System or any other person which the
Custodian may have as a consequence of any such loss
or damage if and to the extent that the Fund has not
been made whole for any such loss or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System. The
Custodian may deposit and/or maintain securities owned by the Fund in the Direct
Paper System of the Custodian subject to the following provisions:
(1) No transaction relating to securities in the Direct
Paper System will be effected in the absence of
Proper Instructions;
(2) The Custodian may keep securities of the Fund in the
Direct Paper System only if such securities are
represented in an account ("Account") of the
Custodian in the Direct Paper System which shall not
include any assets of the Custodian other than assets
held as a fiduciary, custodian or otherwise for
customers;
(3) The records of the Custodian with respect to
securities of the Fund which are maintained in the
Direct Paper System shall identify by book-entry
those securities belonging to the Fund;
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(4) The Custodian shall pay for securities purchased for
the account of the Fund upon the making of an entry
on the records of the Custodian to reflect such
payment and transfer of securities to the account of
the Fund. The Custodian shall transfer securities
sold for the account of the Fund upon the making of
an entry on the records of the Custodian to reflect
such transfer and receipt of payment for the account
of the Fund;
(5) The Custodian shall furnish the Fund confirmation of
each transfer to or from the account of the Fund, in
the form of a written advice or notice, of Direct
Paper on the next business day following such
transfer and shall furnish to the Fund copies of
daily transaction sheets reflecting each day's
transaction in the Direct Paper System for the
account of the Fund;
(6) The Custodian shall provide the Fund with any report
on its system of internal accounting control as the
Fund may reasonably request from time to time;
2.11 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for and on
behalf of the Fund, into which account or accounts may be transferred cash
and/or securities, including securities maintained in an account by the
Custodian pursuant to
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Section 2.10 hereof, (i) in accordance with the provisions of any agreement
among the Fund, the Custodian and a broker-dealer registered under the Exchange
Act and a member of the NASD (or any futures commission merchant registered
under the Commodity Exchange Act), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national securities exchange
(or the Commodity Futures Trading Commission or any registered contract market),
or of any similar organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund, (ii) for purposes of
segregating cash, government securities or liquid, high-grade debt obligations
in connection with options purchased, sold or written by the Fund or commodity
futures contracts or options thereon purchased or sold by the Fund, (iii) for
the purposes of compliance by the Fund with the procedures required by
Investment Company Act Release No. 10666, or any subsequent release or releases
of the Securities and Exchange Commission relating to the maintenance of
segregated accounts by registered investment companies and (iv) for other proper
corporate purposes, but only, in the case of clause (iv), upon receipt of, in
addition to Proper Instructions, a certified copy of a resolution of the Board
of Directors/Trustees or of the Executive Committee signed by an officer of the
Fund and certified by the Secretary or an Assistant Secretary, setting forth the
purpose or purposes of such segregated account and declaring such purposes to be
proper corporate purposes.
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2.12 Ownership Certificates for Tax Purposes. The Custodian shall
execute ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other payments with
respect to domestic securities of the Fund held by it and in connection with
transfers of such securities.
2.13 Proxies. The Custodian shall, with respect to the domestic
securities held hereunder, cause to be promptly executed by the registered
holder of such securities, if the securities are registered otherwise than in
the name of the Fund or a nominee of the Fund, all proxies, without indication
of the manner in which such proxies are to be voted, and shall promptly deliver
to the Fund such proxies, all proxy soliciting materials and all notices
relating to such securities.
2.14 Communications Relating to Fund Portfolio Securities. Subject to
the provisions of Section 2.3, the Custodian shall transmit promptly to the Fund
all written information (including, without limitation, pendency of calls and
maturities of securities held domestically and expirations of rights in
connection therewith and notices of exercise of call and put options written by
the Fund and the maturity of futures contracts purchased or sold by the Fund)
received by the Custodian from issuers of the securities being held for the
Fund. With respect to tender or exchange offers, the Custodian shall transmit
promptly to the Fund all written information received by the Custodian from
issuers of the securities whose tender or exchange is sought and from the party
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(or his agents) making the tender or exchange offer. If the Fund desires to take
action with respect to any tender offer, exchange offer or any other similar
transaction, the Fund shall notify the Custodian at least three business days
prior to the date of which the Custodian is to take such action.
2.15 Reports to Fund by Independent Public Accountants. The Custodian
shall provide the Fund, at such times as the Fund may reasonably require, with
reports by independent public accountants on the accounting system, internal
accounting control and procedures for safeguarding securities, futures contracts
and options on futures contracts, including securities deposited and/or
maintained in a Securities System, relating to the services provided by the
Custodian under this Contract; such reports shall be of sufficient scope and in
sufficient detail, as may reasonably be required by the Fund to provide
reasonable assurance that any material inadequacies would be disclosed by such
examination, and, if there are no such inadequacies, the reports shall so state.
3. Duties of the Custodian with Respect to Property of the Fund Held Outside of
the United States
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes
and instructs the Custodian to employ as sub-custodians for the Fund's
securities and other assets maintained outside the United States the foreign
banking institutions and foreign securities depositories designated on Schedule
A hereto ("foreign sub-custodians"). Upon receipt of "Proper Instructions", as
defined in Section 5 of this Contract, together with a certified
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resolution of the Fund's Board of Directors/Trustees, the Custodian and the Fund
may agree to amend Schedule A hereto from time to time to designate additional
foreign banking institutions and foreign securities depositories to act as
sub-custodian. Upon receipt of Proper Instructions, the Fund may instruct the
Custodian to cease the employment of any one or more such sub-custodians for
maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and
other assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under the
Investment Company Act of 1940, and (b) cash and cash equivalents in such
amounts as the Custodian or the Fund may determine to be reasonably necessary to
effect the Fund's foreign securities transactions.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed
upon in writing by the Custodian and the Fund, assets of the Fund shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as sub-custodians
pursuant to the terms hereof. Where possible, such arrangements shall include
entry into agreements containing the provisions set forth in Section 3.5 hereof.
3.4 Segregation of Securities. The Custodian shall identify on its
books as belonging to the Fund, the foreign securities of the Fund held by each
foreign sub-custodian. Each agreement pursuant to which the Custodian employs a
foreign banking
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institution shall require that such institution establish a custody account for
the Custodian on behalf of the Fund and physically segregate in that account,
securities and other assets of the Fund, and, in the event that such institution
deposits the Fund's securities in a foreign securities depository, that it shall
identify on its books as belonging to the Custodian, as agent for the Fund, the
securities so deposited.
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall be substantially in the form set forth in
Exhibit I hereto and shall provide that (a) the Fund's assets will not be
subject to any right, charge, security interest, lien or claim of any kind in
favor of the foreign banking institution or its creditors or agent, except a
claim of payment for their safe custody or administration; (b) beneficial
ownership of the Fund's assets will be freely transferable without the payment
of money or value other than for custody or administration; (c) adequate records
will be maintained identifying the assets as belonging to the Fund; (d) officers
of or auditors employed by, or other representatives of the Custodian, including
to the extent permitted under applicable law the independent public accountants
for the Fund, will be given access to the books and records of the foreign
banking institution relating to its actions under its agreement with the
Custodian; and (e) assets of the Fund held by the foreign sub-custodian will be
subject only to the instructions of the Custodian or its agents.
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3.6 Access of Independent Accountants of the Fund. Upon request of the
Fund, the Custodian will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of any
foreign banking institution employed as a foreign sub-custodian insofar as such
books and records relate to the performance of such foreign banking institution
under its agreement with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from
time to time, as mutually agreed upon, statements in respect of the securities
and other assets of the Fund held by foreign sub-custodians, including but not
limited to an identification of entities having possession of the Fund's
securities and other assets and advices or notifications of any transfers of
securities to or from each custodial account maintained by a foreign banking
institution for the Custodian on behalf of the Fund indicating, as to securities
acquired for the Fund, the identity of the entity having physical possession of
such securities.
3.8 Transactions in Foreign Custody Account
(a) Except as otherwise provided in paragraph (b) of this Section 3.8,
the provision of Sections 2.2 and 2.7 of this Contract shall apply, in their
entirety to the foreign securities of the Fund held outside the United States by
foreign sub-custodians.
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<PAGE>
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of the Fund and
delivery of securities maintained for the account of the Fund may be effected in
accordance with the customary established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivering securities to the
purchaser thereof or to a dealer therefore (or an agent for such purchaser or
dealer) against a receipt with the expectation of receiving later payment for
such securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may
be maintained in the name of such entity's nominee to the same extent as set
forth in Section 2.3 of this Contract, and the Fund agrees to hold any such
nominee harmless from any liability as a holder of record of such securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to
which the Custodian employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the Custodian and
each Fund from and against any loss, damage, cost, expense, liability or claim
arising out of or in connection with the institution's performance of such
obligations. At the election of the Fund, it shall be entitled to be subrogated
to the rights of the Custodian with respect to any claims against a foreign
banking institution as
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a consequence of any such loss, damage, cost, expense, liability or claim if and
to the extent that the Fund has not been made whole for any such loss, damage,
cost, expense, liability or claim.
3.10 Liability of Custodian. The Custodian shall be liable for the acts
or omissions of a foreign banking institution to the same extent as set forth
with respect to sub-custodians generally in this Contract and, regardless of
whether assets are maintained in the custody of a foreign banking institution, a
foreign securities depository or a branch of a U.S. bank as contemplated by
paragraph 3.13 hereof, the Custodian shall not be liable for any loss, damage,
cost, expense, liability or claim resulting from nationalization, expropriation,
currency restrictions, or acts of war or terrorism or any loss where the
sub-custodian has otherwise exercised reasonable care. Notwithstanding the
foregoing provisions of this paragraph 3.10, in delegating custody duties to
State Street London Ltd., the Custodian shall not be relieved of any
responsibility to the Fund for any loss due to such delegation, except such loss
as may result from (a) political risk (including, but not limited to, exchange
control restrictions, confiscation, expropriation, nationalization,
insurrection, civil strife or armed hostilities) or (b) other losses (excluding
a bankruptcy or insolvency of State Street London Ltd. not caused by political
risk) due to Acts of God, nuclear incident or other losses under circumstances
where the Custodian and State Street London Ltd. have exercised reasonable care.
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3.11 Reimbursement for Advances. If the Fund requires the Custodian to
advance cash or securities for any purpose including the purchase or sale of
foreign exchange or of contracts for foreign exchange, or in the event that the
Custodian or its nominees shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the performance
of this Contract, except such as may arise from its or its nominee's own
negligent action, negligent failure to act or wilful misconduct, any property at
any time held for the account of the Fund shall be security therefor and should
the Fund fail to repay the Custodian promptly, the Custodian shall be entitled
to utilize available cash and to dispose of the Fund assets to the extent
necessary to obtain reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually
to the Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be similar in
kind and scope to that furnished to the Fund in connection with the initial
approval of this Contract. In addition, the Custodian will promptly inform the
Fund in the event that the Custodian learns of a material adverse change in the
financial condition of a foreign sub-custodian or any material loss of the
assets of the Fund or in the case of any foreign sub-custodian not the subject
of an exemptive order from the Securities and Exchange Commission is notified by
such foreign sub-custodian that there appears to be a substantial likelihood
that its shareholders equity will decline below $200 million (U.S.
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dollars or the equivalent thereof) or that its shareholders equity has declined
below $200 million (in each case computed in accordance with generally accepted
U.S. accounting principles).
3.13 Branches of U.S. Banks
(a) Except as otherwise set forth in this Contract, the provisions of
Article 3 shall not apply where the custody of the Fund assets are maintained in
a foreign branch of a banking institution which is a "bank" as defined by
Section 2(a)(5) of the Investment Company Act of 1940 meeting the qualification
set forth in Section 26(a) of said Act. The appointment of any such branch as a
sub-custodian shall be governed by paragraph 1 of this Contract.
(b) Cash held for the Fund in the United Kingdom shall be maintained in
an interest bearing account established for the Fund with the Custodian's London
branch, which account shall be subject to the direction of the Custodian, State
Street London Ltd. or both.
4. Payments for Repurchases or Redemptions and Sales of Shares of the Fund.
From such funds as may be available for the purpose but subject to the
limitations of the Articles of Incorporation/Declaration of Trust and any
applicable votes of the Board of Directors/Trustees of the Fund pursuant
thereto, the Custodian shall, upon receipt of instructions from the Transfer
Agent, make funds available for payment to holders of Shares who have delivered
to the Transfer Agent a request for redemption or
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repurchase of their Shares. In connection with the redemption or repurchase of
Shares of the Fund, the Custodian is authorized upon receipt of instructions
from the Transfer Agent to wire funds to or through a commercial bank designated
by the redeeming shareholders. In connection with the redemption or repurchase
of Shares of the Fund, the Custodian shall honor checks drawn on the Custodian
by a holder of Shares, which checks have been furnished by the Fund to the
holder of Shares, when presented to the Custodian in accordance with such
procedures and controls as are mutually agreed upon from time to time between
the Fund and the Custodian.
The Custodian shall receive from the distributor for the Fund's Shares
or from the Transfer Agent of the Fund and deposit into the Fund's account such
payments as are received for Shares of the Fund issued or sold from time to time
by the Fund. The Custodian will provide timely notification to the Fund and the
Transfer Agent of any receipt by it of payments for Shares of the Fund.
5. Proper Instructions.
Proper Instructions as used herein means a writing signed or initialled
by one or more person or persons as the officers of the Fund shall have from
time to time authorized. Each such writing shall set forth the specific
transaction or type of transaction involved, including a specific statement of
the purpose for which such action is requested. Oral instructions will be
considered Proper Instructions if the Custodian reasonably believes them to
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have been given by a person authorized to give such instructions with respect to
the transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. It is understood and agreed that the Board of
Directors/Directors/Trustees has authorized (i) Prudential Mutual Fund
Management, Inc., as Manager of the Fund, and (ii) The Prudential Investment
Corporation (or Prudential-Bache Securities Inc.), as Subadviser to the Fund, to
deliver proper instructions with respect to all matters for which proper
instructions are required by this Article 5. The Custodian may rely upon the
certificate of an officer of the Manager or Subadviser, as the case may be, with
respect to the person or persons authorized on behalf of the Manager and
Subadviser, respectively, to sign, initial or give proper instructions for the
purpose of this Article 5. Proper Instructions may include communications
effected directly between electro-mechanical or electronic devices provided that
the Fund and the Custodian are satisfied that such procedures afford adequate
safeguards for the Fund's assets. For purposes of this Section, Proper
Instructions shall include instructions received by the Custodian pursuant to
any three-party agreement which requires a segregated asset account in
accordance with Section 2.11.
6. Actions Permitted without Express Authority.
The Custodian may in its discretion, without express authority from the
Fund:
(1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its
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duties under this Contract, provided that all such payments shall be accounted
for to the Fund;
(2) surrender securities in temporary form for securities in definitive
form;
(3) endorse for collection, in the name of the Fund, checks, drafts and
other negotiable instruments; and
(4) in general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase, transfer and other dealings
with the securities and property of the Fund except as otherwise directed by the
Board of Directors/Trustees of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the Fund.
The Custodian may receive and accept a certified copy of a vote of the Board of
Directors/Trustees of the Fund as conclusive evidence (a) of the authority of
any person to act in accordance with such vote or (b) of any determination or of
any action by the Board of Directors/ Trustees pursuant to the Articles of
Incorporation/Declaration of Trust as described in such vote, and such vote may
be considered as in full force and effect until receipt by the Custodian of
written notice to the contrary.
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8. Duties of Custodian with Respect to the Books of Account and Calculation of
Net Asset Value and Net Income.
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Directors/Trustees of the Fund
to keep the books of account of the Fund and/or compute the net asset value per
share of the outstanding shares of the Fund or, if directed in writing to do so
by the Fund, shall itself keep such books of account and/or compute such net
asset value per share. If so directed, the Custodian shall also calculate daily
the net income of the Fund as described in the Fund's currently effective
prospectus and shall advise the Fund and the Transfer Agent daily of the total
amounts of such net income and, if instructed in writing by an officer of the
Fund to do so, shall advise the Transfer Agent periodically of the division of
such net income among its various components. The calculations of the net asset
value per share and the daily income of the Fund shall be made at the time or
times described from time to time in the Fund's currently effective prospectus.
9. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder.
All such records shall be the property of the Fund and shall at all times during
the regular business hours of the Custodian be open for
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inspection by duly authorized officers, employees or agents of the Fund and
employees and agents of the Securities and Exchange Commission. The Custodian
shall, at the Fund's request, supply the Fund with a tabulation of securities
owned by the Fund and held by the Custodian and shall, when requested to do so
by the Fund and for such compensation as shall be agreed upon between the Fund
and the Custodian, include certificate numbers in such tabulations.
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund may from
time to time request, to obtain from year to year favorable opinions from the
Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's Form N-1A, Form N-2 (in the case
of a closed end Fund) and Form N-SAR or other periodic reports to the Securities
and Exchange Commission and with respect to any other requirements of such
Commission.
11. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund and the Custodian.
12. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request,
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consent, certificate or other instrument reasonably believed by it to be genuine
and to be signed by the proper party or parties, including any futures
commission merchant acting pursuant to the terms of a three-party futures or
options agreement. The Custodian shall be held to the exercise of reasonable
care in carrying out the provisions of this Contract but shall be kept
indemnified by and shall be without liability to the Fund for any action taken
or omitted by it in good faith without negligence. It shall be entitled to rely
on and may act upon advice of counsel (who may be counsel for the Fund) on all
matters, and shall be without liability for any action reasonably taken or
omitted pursuant to such advice. Notwithstanding the foregoing, the
responsibility of the Custodian with respect to redemptions effected by check
shall be in accordance with a separate Agreement entered into between the
Custodian and the Fund.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States and, regardless of whether assets are maintained in
the custody of a foreign banking institution, a foreign securities depository or
a branch of a U.S. bank as contemplated by paragraph 3.11 hereof, the Custodian
shall not be liable for any loss, damage, cost, expense, liability or claim
resulting from, or caused by, the direction of or authorization by the Fund to
maintain custody or any securities or cash of the Fund in a foreign country
including, but not limited
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to, losses resulting from nationalization, expropriation, currency
restrictions, or acts of war or terrorism.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian to advance cash or securities for
any purpose or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or wilful
misconduct, any property at any time held for the account of the Fund shall be
security therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of the Fund
assets to the extent necessary to obtain reimbursement provided, however that,
prior to disposing of Fund assets hereunder, the Custodian shall give the Fund
notice of its intention to dispose of assets identifying such assets and the
Fund shall have one business day from receipt of such notice to notify the
Custodian if the Fund
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wishes the Custodian to dispose of Fund assets of equal value other than those
identified in such notice.
13. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than sixty (60) days after the date of such delivery or mailing; provided,
however that the Custodian shall not act under Section 2.10 hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
cSecretary that the Board of Directors/Trustees of the Fund has approved the
initial use of a particular Securities System and the receipt of an annual
certificate of the Secretary or an Assistant Secretary that the Board of
Directors/Trustees has reviewed the use by the Fund of such Securities System,
as required in each case by Rule 17f-4 under the Investment Company Act of 1940,
as amended and that the Custodian shall not act under Section 2.10A hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Directors/Trustees has approved the
initial use of the Direct Paper System and the receipt of an annual certificate
of the Secretary or an Assistant Secretary that the Board of Directors/Trustees
has reviewed the use by the Fund of the Direct Paper System; provided further,
however, that
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the Fund shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Articles of
Incorporation/Declaration of Trust, and further, provided, that the Fund may at
any time by action of its Board of Directors/Trustees (i) substitute another
bank or trust company for the Custodian by giving notice as described above to
the Custodian, or (ii) immediately terminate this Contract in the event of the
appointment of a conservator or receiver for the Custodian by the Comptroller of
the Currency or upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian
such compensation as may be due as of the date of such termination and shall
likewise reimburse the Custodian for its costs, expenses and disbursements.
14. Successor Custodian
If a successor custodian shall be appointed by the Board of
Directors/Trustees of the Fund, the Custodian shall, upon termination, deliver
to such successor custodian at the office of the Custodian, duly endorsed and in
the form for transfer, all securities then held by it hereunder and shall
transfer to an account of the successor custodian all of the Fund's securities
held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a certified copy of a vote of the Board of
Directors/Trustees of the Fund, deliver
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at the office of the Custodian and transfer such securities, funds and other
properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors/Trustees shall have been
delivered to the Custodian on or before the date when such termination shall
become effective, then the Custodian shall have the right to deliver to a bank
or trust company, which is a "bank" as defined in the Investment Company Act of
1940, doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian and all instruments held by the Custodian
relative thereto and all other property held by it under this Contract and to
transfer to an account of such successor custodian all of the Fund's securities
held in any Securities System. Thereafter, such bank or trust company shall be
the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors/Trustees to appoint a successor custodian, the Custodian
shall be entitled to fair compensation for its services during such period as
the Custodian retains possession of such securities, funds and other properties
and the provisions of this Contract
-37-
<PAGE>
relating to the duties and obligations of the Custodian shall remain in full
force and effect.
15. Interpretative and Additional Provisions
In connection with the operation of this Contract, the Custodian and
the Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretative or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation/ Declaration of Trust of the Fund. No
interpretative or additional provisions made as provided in the preceding
sentence shall be deemed to be an amendment of this Contract.
16. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of the Commonwealth of Massachusetts.
17. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund and the Custodian relating to the custody of
the Fund's assets.
18. The Parties
All references herein to the "Fund" are to each of the Funds listed on
Appendix A individually, as if this Contract were between
-38-
<PAGE>
such individual Fund and the Custodian. With respect to any Fund listed on
Appendix A which is organized as a Massachusetts Business Trust, references to
Board of Directors and Articles of Incorporation shall be deemed a reference to
Board of Directors/Trustees and Articles of Incorporation/Declaration of Trust
respectively and reference to shares of capital stock shall be deemed a
reference to shares of beneficial interest.
19. Limitation of Liability
Each Fund listed on Appendix A that is referenced as a Massachusetts
Business Trust is the designation of the Directors/Trustees under a Articles of
Incorporation/Declaration of Trust, dated (see Appendix A) and all persons
dealing with the Fund must look solely to the property of the Fund for the
enforcement of any claims against the Fund as neither the Directors/Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the dates set forth on Appendix A.
-39-
<PAGE>
ATTEST STATE STREET BANK AND TRUST COMPANY
- ------------------------- By
Assistant Secretary --------------------------------------------
ATTEST EACH OF THE FUNDS LISTED ON APPENDIX A
- ------------------------- By
Secretary --------------------------------------------
-40-
<PAGE>
APPENDIX A
<TABLE>
<CAPTION>
Execution Date of
Fund Name Date Declaration of Trust
- --------- --------- --------------------
(if applicable)
<S> <C> <C>
Command Government Fund July 1, 1990 August 19, 1981
Command Money Fund July 1, 1990 June 5, 1981
Command Tax-Free Fund July 1, 1990 June 5, 1981
The BlackRock Government Income Trust August 30, 1991 June 13, 1991
The Global Total Return Fund, Inc. September 5, 1990
(formerly The Global Yield Fund, Inc.)
Prudential Adjustable Rate Securities Fund, Inc. June 1, 1992
Prudential California Municipal Fund August 1, 1990 May 18, 1984
Prudential Diversified Bond Fund, Inc. January 3, 1995
Prudential Equity Fund, Inc. August 1, 1990
Prudential Global Fund, Inc. June 7, 1990
Prudential GNMA Fund, Inc. August 1, 1990
Prudential Government Income Fund, Inc. July 31, 1990
(formerly Prudential Government Plus Fund)
Prudential Government Securities Trust July 26, 1990 September 22, 1990
Prudential Growth Opportunity Fund, Inc. July 26, 1990
Prudential High Yield Fund, Inc. July 26, 1990
Prudential Jennison Fund, Inc. August 24, 1995
Prudential IncomeVertible(r) Fund, Inc. June 6, 1990
Prudential MoneyMart Assets July 25, 1990
Prudential Multi-Sector Fund, Inc. June 1, 1990
Prudential Municipal Series Fund August 1, 1990 May 18, 1984
Prudential National Municipals Fund, Inc. July 26, 1990
Prudential Pacific Growth Fund, Inc. July 16, 1992
Prudential Short-Term Global Income Fund, Inc. October 25, 1990
Prudential Special Money Market Fund January 12, 1990
Prudential Structured Maturity Fund, Inc. July 25, 1989
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Execution Date of
Fund Name Date Declaration of Trust
- --------- --------- --------------------
(if applicable)
<S> <C> <C>
Prudential Tax-Free Money Fund July 26, 1990
Prudential U.S. Government Fund June 7, 1990 September 22, 1986
Prudential Utility Fund, Inc. June 6, 1990
The Target Portfolio Trust November 9, 1992 July 29, 1992
</TABLE>
<PAGE>
EXHIBIT 10(f)
PRUDENTIAL WORLD FUND, INC.
(International Stock Series)
FORM OF
Distribution and Service Plan
(Class A Shares)
Introduction
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by Prudential World Fund, Inc. (the Fund) for the
International Stock Series (the Series) and by Prudential Securities
Incorporated (Prudential Securities), the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class A shares issued by the Fund
(Class A shares). Under the Plan, the Fund intends to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class A shares.
A majority of the Board of Directors of the Fund, including a majority of
those 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 this Plan or any agreements related to it (the Rule 12b-1
Directors), have determined by votes cast in person at a meeting called for
<PAGE>
the purpose of voting on this Plan that there is a reasonable likelihood that
adoption of this Plan will benefit the Fund and its shareholders. Expenditures
under this Plan by the Fund for Distribution Activities (defined below) are
primarily intended to result in the sale of Class A shares of the Fund within
the meaning of paragraph (a)(2) of Rule 12b-1 promulgated under the Investment
Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
The material aspects of the Plan are as follows:
1. Distribution Activities
The Fund shall engage the Distributor to distribute Class A shares of the
Fund and to service shareholder accounts using all of the facilities of the
Prudential Securities distribution network including sales personnel and branch
office and central support systems, and also using such other qualified
broker-dealers and financial institutions as the Distributor may select,
including Pruco Securities Corporation (Prusec). Services provided and
activities undertaken to distribute Class A shares of the Fund are referred to
herein as "Distribution Activities."
2
<PAGE>
2. Payment of Service Fee
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class A shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class A
shares of the Fund hereunder and shall pay such amounts monthly or at such other
intervals as the Board of Directors may determine.
3. Payment for Distribution Activities
The Fund shall pay to the Distributor as compensation for its services a
distribution fee, together with the service fee (described in Section 2 hereof),
of .30 of 1% per annum of the average daily net assets of the Class A shares of
the Fund for the performance of Distribution Activities. The Fund shall
calculate and accrue daily amounts payable by the Class A shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors may determine. Amounts payable under the Plan shall be
subject to the limitations of Article III, Section 26 of the NASD Rules of Fair
Practice.
Amounts paid to the Distributor by the Class A shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class A shares according to the
ratio of the sales of Class A shares to the total sales of the Fund's shares
3
<PAGE>
over the Fund's fiscal year or such other allocation method approved by the
Board of Directors. The allocation of distribution expenses among classes will
be subject to the review of the Board of Directors.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or
on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated
with performance of Distribution Activities including central office
and branch expenses;
(c) amounts paid to Prusec for performing services under a
selected dealer agreement between Prusec and the Distributor for sale
of Class A shares of the Fund, including sales commissions and trailer
commissions paid to, or on account of, agents and indirect and
overhead costs associated with Distribution Activities;
(d) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing Fund
prospectuses, statements of additional information and periodic
financial reports and sales literature to persons other than current
shareholders of the Fund; and
(e) sales commissions (including trailer commissions) paid to, or
on account of, broker-dealers and other financial institutions (other
than Prusec) which have entered into selected dealer agreements with
the Distributor with respect to Class A shares of the Fund.
4. Quarterly Reports; Additional Information
An appropriate officer of the Fund will provide to the Board of Directors
of the Fund for review, at least quarterly, a written report specifying in
reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
4
<PAGE>
made in compliance with the requirements of Rule 12b-1. The Distributor will
provide to the Board of Directors of the Fund such additional information as the
Board shall from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.
The Distributor will inform the Board of Directors of the Fund of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and financial institutions
which have selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class A shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors of the Fund and a majority of the Rule 12b-1
Directors by votes cast in person at a meeting called for the purpose of voting
on the continuation of the Plan.
6. Termination
This Plan may be terminated at any time by vote of a majority of the Rule
12b-1 Directors, or by vote of a majority of
5
<PAGE>
the outstanding voting securities (as defined in the Investment Company Act) of
the Class A shares of the Fund.
7. Amendments
The Plan may not be amended to change the combined service and distribution
fees to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class A shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors of the Fund and a majority of the Rule 12b-1 Directors by votes cast
in person at a meeting called for the purpose of voting on the Plan.
8. Rule 12b-1 Directors
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Directors shall be committed to the discretion of the Rule 12b-1 Directors.
9. Records
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated:
6
<PAGE>
EXHIBIT 10(g)
PRUDENTIAL WORLD FUND, INC.
(International Stock Series)
FORM OF
Distribution and Service Plan
(Class B Shares)
Introduction
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by Prudential World Fund, Inc. (the Fund) for the
International Stock Series (the Series) and by Prudential Securities
Incorporated (Prudential Securities), the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which
the Fund will continue to employ the Distributor to distribute Class B shares
issued by the Fund (Class B shares). Under the Plan, the Fund wishes to pay to
the Distributor, as compensation for its services, a distribution and service
fee with respect to Class B shares.
A majority of the Board of Directors of the Fund including a majority
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 this Plan or any agreements related to it (the Rule 12b-1
Directors), have determined by votes cast in person at a meeting called for the
purpose of voting on this Plan that there is a reasonable likelihood that
adoption of
<PAGE>
this Plan will benefit the Fund and its shareholders. Expenditures under this
Plan by the Fund for Distribution Activities (defined below) are primarily
intended to result in the sale of Class B shares of the Fund within the meaning
of paragraph (a)(2) of Rule 12b-1 promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor
and/or other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
The material aspects of the Plan are as follows:
1. Distribution Activities
The Fund shall engage the Distributor to distribute Class B shares of
the Fund and to service shareholder accounts using all of the facilities of the
Prudential Securities distribution network including sales personnel and branch
office and central support systems, and also using such other qualified
broker-dealers and financial institutions as the Distributor may select,
including Pruco Securities Corporation (Prusec). Services provided and
activities undertaken to distribute Class B shares of the Fund are referred to
herein as "Distribution Activities."
2
<PAGE>
2. Payment of Service Fee
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class B shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class B
shares of the Fund hereunder and shall pay such amounts monthly or at such other
intervals as the Board of Directors may determine.
3. Payment for Distribution Activities
The Fund shall pay to the Distributor as compensation for its services
a distribution fee of .75 of 1% per annum of the average daily net assets of the
Class B shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class B shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors may determine. Amounts payable under the Plan shall be
subject to the limitations of Article III, Section 26 of the NASD Rules of Fair
Practice.
Amounts paid to the Distributor by the Class B shares of the Fund will
not be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class B shares according to the
ratio of the sale of Class B shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Directors. The allocation of distribution expenses among classes will be subject
to the review of the Board of Directors.
3
<PAGE>
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to,
or on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated
with performance of Distribution Activities including central office
and branch expenses;
(c) amounts paid to Prusec for performing services under a
selected dealer agreement between Prusec and the Distributor for sale
of Class B shares of the Fund, including sales commissions and trailer
commissions paid to, or on account of, agents and indirect and overhead
costs associated with Distribution Activities;
(d) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing Fund
prospectuses, statements of additional information and periodic
financial reports and sales literature to persons other than current
shareholders of the Fund; and
(e) sales commissions (including trailer commissions) paid to,
or on account of, broker-dealers and other financial institutions
(other than Prusec) which have entered into selected dealer agreements
with the Distributor with respect to Class B shares of the Fund.
4. Quarterly Reports; Additional Information
An appropriate officer of the Fund will provide to the Board of
Directors of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Directors of the Fund such additional
information as they shall from time to time reasonably request, including
information about Distribution Activities undertaken or to be
4
<PAGE>
undertaken by the Distributor.
The Distributor will inform the Board of Directors of the Fund of the
commissions and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
The Plan shall not take effect until it has been approved by a vote of
a majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Fund.
If approved by a vote of a majority of the outstanding voting
securities of the Class B shares of the Fund, the Plan shall, unless earlier
terminated in accordance with its terms, continue in full force and effect
thereafter for so long as such continuance is specifically approved at least
annually by a majority of the Board of Directors of the Fund and a majority of
the Rule 12b-1 Directors by votes cast in person at a meeting called for the
purpose of voting on the continuation of the Plan.
6. Termination
This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Directors, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class B shares of
the Fund.
7. Amendments
The Plan may not be amended to change the combined service and
5
<PAGE>
distribution fees to be paid as provided for in Sections 2 and 3 hereof so as to
increase materially the amounts payable under this Plan unless such amendment
shall be approved by the vote of a majority of the outstanding voting securities
(as defined in the Investment Company Act) of the Class B shares of the Fund.
All material amendments of the Plan shall be approved by a majority of the Board
of Directors of the Fund and a majority of the Rule 12b-1 Directors by votes
cast in person at a meeting called for the purpose of voting on the Plan.
8. Rule 12b-1 Directors
While the Plan is in effect, the selection and nomination of the Rule
12b-1 Directors shall be committed to the discretion of the Rule 12b-1
Directors.
9. Records
The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Section 4 hereof, for a period of not less than
six years from the date of effectiveness of the Plan, such agreements or
reports, and for at least the first two years in an easily accessible place.
Dated:
6
<PAGE>
EXHIBIT 10(h)
PRUDENTIAL WORLD FUND, INC.
(International Stock Series)
FORM OF
Distribution and Service Plan
(Class C Shares)
Introduction
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b- 1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by Prudential World Fund, Inc. (the Fund) for the
International Stock Series (the Series) and by Prudential Securities
Incorporated (Prudential Securities), the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which
the Fund will continue to employ the Distributor to distribute Class C shares
issued by the Fund (Class C shares). Under the Plan, the Fund wishes to pay to
the Distributor, as compensation for its services, a distribution and service
fee with respect to Class C shares.
A majority of the Board of Directors of the Fund including a majority
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 this Plan or any agreements related to it (the Rule 12b-1
Directors), have determined by votes cast in person at a meeting called for the
purpose of voting on this Plan that there is a reasonable likelihood that
adoption of
<PAGE>
this Plan will benefit the Fund and its shareholders. Expenditures under this
Plan by the Fund for Distribution Activities (defined below) are primarily
intended to result in the sale of Class C shares of the Fund within the meaning
of paragraph (a)(2) of Rule 12b-1 promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor
and/or other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
The material aspects of the Plan are as follows:
1. Distribution Activities
The Fund shall engage the Distributor to distribute Class C shares of
the Fund and to service shareholder accounts using all of the facilities of the
Prudential Securities distribution network including sales personnel and branch
office and central support systems, and also using such other qualified
broker-dealers and financial institutions as the Distributor may select,
including Pruco Securities Corporation (Prusec). Services provided and
activities undertaken to distribute Class C shares of the Fund are referred to
herein as "Distribution Activities."
2
<PAGE>
2. Payment of Service Fee
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class C shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class C
shares of the Fund hereunder and shall pay such amounts monthly or at such other
intervals as the Board of Directors may determine.
3. Payment for Distribution Activities
The Fund shall pay to the Distributor as compensation for its services
a distribution fee of .75 of 1% per annum of the average daily net assets of the
Class C shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class C shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors may determine. Amounts payable under the Plan shall be
subject to the limitations of Article III, Section 26 of the NASD Rules of Fair
Practice.
Amounts paid to the Distributor by the Class C shares of the Fund will
not be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class C shares according to the
ratio of the sale of Class C shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Directors. The allocation of distribution expenses among
3
<PAGE>
classes will be subject to the review of the Board of Directors.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to,
or on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated
with performance of Distribution Activities including central office
and branch expenses;
(c) amounts paid to Prusec for performing services under a
selected dealer agreement between Prusec and the Distributor for sale
of Class C shares of the Fund, including sales commissions and trailer
commissions paid to, or on account of, agents and indirect and overhead
costs associated with Distribution Activities;
(d) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing Fund
prospectuses, statements of additional information and periodic
financial reports and sales literature to persons other than current
shareholders of the Fund; and
(e) sales commissions (including trailer commissions) paid to,
or on account of, broker-dealers and other financial institutions
(other than Prusec) which have entered into selected dealer agreements
with the Distributor with respect to Class C shares of the Fund.
4. Quarterly Reports; Additional Information
An appropriate officer of the Fund will provide to the Board of
Directors of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Directors of the Fund such additional
information as they shall from time to time reasonably request, including
4
<PAGE>
information about Distribution Activities undertaken or to be undertaken by the
Distributor.
The Distributor will inform the Board of Directors of the Fund
of the commissions and account servicing fees to be paid by the
Distributor to account executives of the Distributor and to
broker-dealers and other financial institutions which have selected
dealer agreements with the Distributor.
5. Effectiveness; Continuation
The Plan shall not take effect until it has been approved by a vote of
a majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class C shares of the Fund.
If approved by a vote of a majority of the outstanding voting
securities of the Class C shares of the Fund, the Plan shall, unless earlier
terminated in accordance with its terms, continue in full force and effect
thereafter for so long as such continuance is specifically approved at least
annually by a majority of the Board of Directors of the Fund and a majority of
the Rule 12b-1 Directors by votes cast in person at a meeting called for the
purpose of voting on the continuation of the Plan.
6. Termination
This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Directors, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class C shares of
the Fund.
5
<PAGE>
7. Amendments
The Plan may not be amended to change the combined service and
distribution fees to be paid as provided for in Sections 2 and 3 hereof so as to
increase materially the amounts payable under this Plan unless such amendment
shall be approved by the vote of a majority of the outstanding voting securities
(as defined in the Investment Company Act) of the Class C shares of the Fund.
All material amendments of the Plan shall be approved by a majority of the Board
of Directors of the Fund and a majority of the Rule 12b-1 Directors by votes
cast in person at a meeting called for the purpose of voting on the Plan.
8. Rule 12b-1 Directors
While the Plan is in effect, the selection and nomination of the Rule
12b-1 Directors shall be committed to the discretion of the Rule 12b-1
Directors.
9. Records
The Fund shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Section 4 hereof, for a period of not less than
six years from the date of effectiveness of the Plan, such agreements or
reports, and for at least the first two years in an easily accessible place.
Dated:
6
<PAGE>
EXHIBIT 11
SULLIVAN & CROMWELL
NEW YORK TELEPHONE: (212) 558-4000
TELEX: 62694 (INTERNATIONAL) 127816 (DOMESTIC)
CABLE ADDRESS: LADYCOURT, NEW YORK
FACSIMILE: (212) 558-3588 (125 Broad Street)
(212) 558-3792 (250 Park Avenue)
125 Broad Street, New York 10004-2498
__________
250 PARK AVENUE, NEW YORK 10177-0021
1701 PENNSYLVANIA AVE, N.W. WASHINGTON, D.C. 20006-5805
444 SOUTH FLOWER STREET, LOS ANGELES 90071-2901
8, PLACE VENDOME, 75001 PARIS
ST. OLAVE'S HOUSE, 9a IRONMONGER LANE, LONDON EC2V 8EY
101 COLLINS STREET, MELBOURNE 3000
2-1, MARUNOUCHI I-CHOME, CHIYODA-KU, TOKYO 100
GLOUCESTER TOWER, 11 PEDDER STREET, HONG KONG
June 26, 1996
Prudential World Fund, Inc.,
One Seaport Plaza,
New York, New York 10292.
Dear Sirs:
We have acted as counsel to Prudential World Fund, Inc. (the "Fund"),
of which the International Stock Series is a separate series (the "International
Stock Series"), in connection with the proposed reorganization (the
"Reorganization") described in the form of Agreement and Plan of Conversion and
Liquidation between the Fund, on behalf of International Stock Series, and
Prudential Institutional Fund, on behalf of its International Stock Fund series
(the "Agreement"), set forth as Appendix A to the Prospectus and Proxy Statement
included in the Registration Statement of the Fund on Form N-14 (the
"Registration Statement").
For the purposes of the opinion set forth below, we have examined such
corporate records, certificates and
<PAGE>
Prudential World Fund, Inc. -2-
other documents, and such questions of law, as we have considered necessary or
appropriate for the purposes of this opinion.
Upon the basis of such examination, we advise you that, in our
opinion, when the Agreement is executed and delivered by the Fund and Prudential
Institutional Fund and when the shares (the "Securities") of Common Stock, par
value $.01 per share, of the International Stock Series are issued and sold as
contemplated by the Agreement, following effectiveness of the Registration
Statement, for the consideration stated in the Agreement, which consideration
shall be at least equal to the net asset value and par value per Security, they
will be validly issued, fully paid and nonassessable by you.
The foregoing opinion is limited to the Federal laws of the United
States and the General Corporation Laws of the State of Maryland, and we are
expressing no opinion as to the effect of the laws of any other jurisdiction.
Also, we have relied as to certain matters on information obtained from public
officials, officers of the Fund and other sources believed by us to be
responsible.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement referred to above.
<PAGE>
Prudential World Fund, Inc. -3-
In giving such consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Act.
Very truly yours,
/s/ Sullivan & Cromwell
Sullivan & Cromwell
<PAGE>
EXHIBIT 12
June 27, 1996
The Prudential Institutional Fund
21 Prudential Plaza
751 Broad Street
Newark, NJ 07102-3777
Prudential World Fund, Inc.
One Seaport Plaza
New York, NY 10292
Re: Reorganization to Convert from a Series of a Delaware
Business Trust to a Series of a Maryland Corporation
----------------------------------------------------
Ladies and Gentlemen:
You have requested our opinion as to certain federal income tax
consequences of the proposed transaction described below ("Reorganization") to
convert International Stock Fund ("Old Fund"), a segregated portfolio of assets
("series") of The Prudential Institutional Fund, a Delaware business trust
("Institutional Fund"), to International Stock Series ("New Fund"), which is to
be established as a series of Prudential World Fund, Inc., a Maryland
corporation ("World Fund"),/1/ pursuant to an Agreement and Plan of Conversion
and Liquidation between the Investment Companies dated as of June 27, 1996
("Plan"). A copy of the Plan is attached as an appendix to the Prospectus and
Proxy Statement to be furnished in connection with the solicitation of proxies
by Institutional Fund's board of trustees for use at a special meeting of Old
Fund shareholders to be held on September 6, 1996 ("Proxy"), included in the
registration statement on Form N-14 to be filed with the Securities and Exchange
Commission ("SEC") on or about the date hereof ("Registration Statement").
Specifically, each Investment Company has requested our opinion:
- --------------
/1/ Old Fund and New Fund are sometimes referred to herein individually as a
"Fund" and collectively as the "Funds," and Institutional Fund and World Fund
are sometimes referred to herein individually as an "Investment Company" and
collectively as the "Investment Companies."
<PAGE>
The Prudential Institutional Fund
Prudential World Fund, Inc.
June 27, 1996
Page 2
(1) that the acquisition by New Fund of Old Fund's assets in exchange
solely for voting shares of common stock in New Fund and the assumption by
New Fund of Old Fund's liabilities, followed by the distribution of those
shares by Old Fund pro rata to its shareholders of record, determined as of
the Effective Time (as hereinafter defined) ("Shareholders"),
constructively in exchange for their shares of beneficial interest in Old
Fund ("Old Fund Shares"), will constitute a "reorganization" within the
meaning of section 368(a)(1)(F)/2/ and that each Fund will be a "party to a
reorganization" within the meaning of section 368(b),
(2) that Old Fund, the Shareholders, and New Fund will recognize no
gain or loss on the Reorganization, and
(3) regarding the basis and holding period after the Reorganization of
the transferred assets and the shares of New Fund issued pursuant thereto.
In rendering this opinion, we have examined (1) Old Fund's currently
effective prospectus and statement of additional information (collectively
"P/SAI"), (2) New Fund's preliminary P/SAI filed with the SEC, (3) the Proxy,
(4) the Plan, and (5) such other documents as we have deemed necessary or
appropriate for the purposes hereof. As to various matters of fact material to
this opinion, we have relied, exclusively and without independent verification,
on statements of responsible officers of each Investment Company and the
representations described below and made in the Plan (as contemplated in
paragraph 4.3 thereof) (collectively "Representations").
FACTS
-----
Institutional Fund is a business trust organized under the laws of the
State of Delaware; Old fund is a series thereof. World Fund is a corporation
organized under the laws of the State of Maryland; New Fund will be a series
thereof that will not commence operations until consummation of the
Reorganization. Each Investment Company is registered with the SEC as an open-
end management investment company under the Investment Company Act of 1940, as
amended ("1940 Act").
- -----------------
/2/ All section references are to the Internal Revenue Code of 1986, as amended
("Code"), and all "Treas. Reg. Section" references are to the regulations
under the Code ("Regulations").
<PAGE>
The Prudential Institutional Fund
Prudential World Fund, Inc.
June 27, 1996
Page 3
New Fund's shares of common stock will be divided into four classes,
designated Class A, Class B, Class C, and Class Z shares; only the Class Z
shares ("New Fund Shares") are involved in the Reorganization. Old Fund offers
for sale only one class of shares.
The Funds' investment objectives and policies are described in the Proxy
and their respective P/SAIs. New Fund's investment objective will be identical
to Old Fund's, and it will have substantially identical investment policies to
those of Old Fund.
In considering the Reorganization, each Investment Company's board of
trustees/directors (each a "board") made an extensive inquiry into a number of
factors (which are described in the Proxy, together with a discussion of the
purposes of the Reorganization). Pursuant thereto, each board approved the
Plan, subject to approval of Old Fund's shareholders. In doing so, each board,
including a majority of its members who are not "interested persons" (as that
term is defined in the 1940 Act) of either Investment Company, determined that
the Reorganization is in its Fund's best interests and that its Fund's
shareholders' interests will not be diluted as a result of the Reorganization.
The Plan provides in relevant part for the following:
(1) The acquisition by New Fund of all cash, cash equivalents,
securities, receivables (including interest and dividends receivable),
claims and rights of action, rights to register shares under applicable
securities laws, books and records, deferred and prepaid expenses shown as
assets on Old Fund's books, and other property owned by Old Fund at the
Effective Time (i.e., the close of business on the date on which the
Reorganization, together with related acts necessary to consummate the same
("Closing"), shall occur, scheduled for September 20, 1996, or such other
date or such other time as to which the parties may agree) (collectively
"Assets"), in exchange solely for
(a) full and fractional New Fund Shares equal in number to the
number of full and fractional Old Fund Shares then outstanding, and
(b) New Fund's assumption of all of Old Fund's liabilities,
debts, obligations, and duties of whatever kind or nature, whether
absolute, accrued, contingent, or otherwise, whether or not arising in
the ordinary course of business, whether or not determinable at the
Effective Time, and whether or not specifically referred to in the
Plan (collectively "Liabilities"),
<PAGE>
The Prudential Institutional Fund
Prudential World Fund, Inc.
June 27, 1996
Page 4
(2) The constructive distribution of such New Fund Shares to the
Shareholders, and
(3) The subsequent liquidation of Old Fund./3/
The distribution described in (2) will be accomplished by transferring the
New Fund Shares then credited to Old Fund's account on New Fund's share transfer
records to accounts on those records established in the Shareholders' names,
with each Shareholder's account being credited with the respective pro rata
number of full and fractional (rounded to three decimal places) New Fund Shares
due such Shareholder./4/ If the Reorganization is implemented, New Fund will
continue Old Fund's business and Old Fund will be terminated as a series of
Institutional Fund.
REPRESENTATIONS
---------------
The representations enumerated below have been made to us by appropriate
officers of each Investment Company.
Each of Institutional Fund, on behalf of Old Fund, and World Fund, on
behalf of New Fund, has represented and warranted to us as follows:
- --------------
/3/ The Old Fund Shares are not, and the New Fund Shares will not be, in
certificate form. The Plan provides that, at the time of the
Reorganization, each Old Fund Share will, in effect, be converted
automatically into a New Fund Share. Accordingly, Old Fund Shareholders
will not, nor will it be necessary for them to, make physical delivery of
their Old Fund Shares or receive certificates for New Fund Shares pursuant
to the Reorganization. Old Fund Shares nevertheless will be treated as
having been exchanged for New Fund Shares, and the tax consequences to the
Old Fund Shareholders thus will be unaffected by the absence of share
certificates. See discussion at V. below.
---
/4/ Prior to the Closing, the directors of World Fund will have authorized the
issuance of, and New Fund will have issued, one New Fund Share to Old Fund
in consideration of the payment of $1.00 for the purpose of enabling Old
Fund to vote on certain matters unrelated to the Reorganization.
Concurrently with the exchange described in (1) and as an integral part of
the Reorganization, that New Fund Share will be redeemed.
<PAGE>
The Prudential Institutional Fund
Prudential World Fund, Inc.
June 27, 1996
Page 5
1. The fair market value of the New Fund Shares, when received by the
Shareholders, will be approximately equal to the fair market value of their
Old Fund Shares constructively surrendered in exchange therefor;
2. Immediately following consummation of the Reorganization, the
Shareholders will own all the New Fund Shares and will own such shares
solely by reason of their ownership of Old Fund Shares immediately prior to
the Reorganization;
3. The Shareholders will pay their own expenses, if any, incurred in
connection with the Reorganization;
4. Immediately following consummation of the Reorganization, New Fund
will hold the same assets -- except for assets used to pay expenses
incurred in connection with the Reorganization (which excepted assets,
together with the amount of all redemptions and distributions (other than
regular, normal dividends) made by Old Fund immediately preceding the
Reorganization, will, in the aggregate, constitute less than 1% of its net
assets) -- and be subject to the same liabilities that Old Fund held or was
subject to immediately prior thereto, plus any liabilities and expenses of
the Funds incurred in connection with the Reorganization; and
5. There is no intercompany indebtedness between the Funds that was
issued or acquired, or will be settled, at a discount.
Institutional Fund also has represented and warranted to us on behalf of
Old Fund as follows:
1. Institutional Fund is a business trust duly organized, validly
existing, and in good standing under the laws of the State of Delaware; it
is duly registered as an open-end management investment company under the
1940 Act, and such registration is in full force and effect; and Old Fund
is a duly established and designated series thereof;
2. Old Fund is a "fund" as defined in section 851(h)(2); it qualified
for treatment as a regulated investment company under Subchapter M of the
Code ("RIC") for each past taxable year since it commenced operations and
will continue to meet all the requirements for such qualification for its
current taxable year; it has no earnings and profits accumulated in any
taxable year in which the provisions of Subchapter M did not apply to it;
and, for each past calendar year since it commenced operations, it has made
such distributions as are necessary to avoid the imposition of federal
excise tax or has paid or provided for the payment of any excise tax
imposed;
<PAGE>
The Prudential Institutional Fund
Prudential World Fund, Inc.
June 27, 1996
Page 6
3. There is no plan or intention of Shareholders who own 5% or more of the
Old Fund Shares -- and, to the best of Institutional Fund's management's
knowledge, there is no plan or intention of the remaining Shareholders --
to redeem or otherwise dispose of any portion of the New Fund Shares to be
received by them in the Reorganization. Institutional Fund's management
does not anticipate dispositions of those New Fund Shares at the time of or
soon after the Reorganization to exceed the usual rate and frequency of
redemptions of shares of Old Fund as a series of an open-end investment
company. Consequently, its management expects that the percentage of
Shareholder interests, if any, that will be disposed of as a result of or
at the time of the Reorganization will be de minimis;
4. The Liabilities were incurred by Old Fund in the ordinary course
of business;
5. Old Fund is not under the jurisdiction of a court in a proceeding
under Title 11 of the United States Code or similar case within the meaning
of section 368(a)(3)(A);
6. Not more than 25% of the value of Old Fund's total assets
(excluding cash, cash items, and U.S. government securities) is invested in
the stock and securities of any one issuer, and not more than 50% of the
value of such assets is invested in the stock and securities of five or
fewer issuers;
7. Old Fund will be terminated as a series of Institutional Fund as
soon as reasonably practicable after the Reorganization, but in all events
within twelve months after the Effective Time; and
8. As of the Effective Time, Old Fund will not have outstanding any
warrants, options, convertible securities, or any other type of rights
pursuant to which any person could acquire Old Fund Shares.
World Fund also has represented and warranted to us on behalf of New Fund
as follows:
1. World Fund is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland; it is duly
registered as an open-end management investment company under the 1940 Act,
and such registration is in full force and effect; and before the Effective
Time, New Fund will be a duly established and designated series thereof;
2. New Fund has not commenced operations, nor will it commence
operations until after the Closing;
<PAGE>
The Prudential Institutional Fund
Prudential World Fund, Inc.
June 27, 1996
Page 7
3. Prior to the Effective Time, there will be no issued and outstanding New
Fund Shares or any other securities issued by New Fund, except for one New
Fund Share issued to Old Fund in consideration of the payment of $1.00 for
the purpose of enabling Old Fund to vote on certain matters unrelated to
the Reorganization;
4. No consideration other than New Fund Shares (and New Fund's
assumption of the Liabilities) will be issued in exchange for the Assets in
the Reorganization;
5. New Fund will be a "fund" as defined in section 851(h)(2) and will
meet all the requirements to qualify for treatment as a RIC for its taxable
year in which the Reorganization occurs;
6. New Fund has no plan or intention to issue additional New Fund
Shares following the Reorganization except for shares issued in the
ordinary course of its business as a series of an open-end investment
company; nor does New Fund have any plan or intention to redeem or
otherwise reacquire any New Fund Shares issued to the Shareholders pursuant
to the Reorganization, other than through redemptions arising in the
ordinary course of such business;
7. New Fund (a) will actively continue Old Fund's business in
substantially the same manner that Old Fund conducted that business
immediately before the Reorganization, (b) has no plan or intention to sell
or otherwise dispose of any of the Assets, except for dispositions made in
the ordinary course of that business and dispositions necessary to maintain
its status as a RIC, and (c) expects to retain substantially all the Assets
in the same form as it receives them in the Reorganization, unless and
until subsequent investment circumstances suggest the desirability of
change or it becomes necessary to make dispositions thereof to maintain
such status;
8. There is no plan or intention for New Fund to be dissolved or
merged into another corporation or business trust or "fund" thereof (within
the meaning of section 851(h)(2)) following the Reorganization; and
9. Immediately after the Reorganization, (a) not more than 25% of the
value of New Fund's total assets (excluding cash, cash items, and U.S.
government securities) will be invested in the stock and securities of any
one issuer, and (b) not more than 50% of the value thereof will be invested
in the stock and securities of five or fewer issuers.
<PAGE>
The Prudential Institutional Fund
Prudential World Fund, Inc.
June 27, 1996
Page 8
OPINION
-------
Based solely on the facts set forth above, and conditioned on (1) the
Representations being true at the time of the Closing and (2) the Reorganization
being consummated in accordance with the Plan, our opinion (as explained more
fully in the next section of this letter) is as follows:
1. New Fund's acquisition of the Assets in exchange solely for the
New Fund Shares and New Fund's assumption of the Liabilities, followed by
Old Fund's distribution of those shares pro rata to the Shareholders
constructively in exchange for their Old Fund Shares, will constitute a
reorganization within the meaning of section 368(a)(1)(F), and each Fund
will be a "party to a reorganization" within the meaning of section 368(b);
2. No gain or loss will be recognized to Old Fund on the transfer of
the Assets to New Fund in exchange solely for the New Fund Shares and New
Fund's assumption of the Liabilities or on the subsequent distribution of
those shares to the Shareholders in constructive exchange for their Old
Fund Shares (sections 361 and 357(a));
3. No gain or loss will be recognized to New Fund on its receipt of
the Assets in exchange solely for the New Fund Shares and its assumption of
the Liabilities (section 1032(a));
4. New Fund's basis for the Assets will be the same as the basis
thereof in Old Fund's hands immediately before the Reorganization (section
362(b)), and New Fund's holding period for the Assets will include Old
Fund's holding period therefor (section 1223(2));
5. A Shareholder will recognize no gain or loss on the constructive
exchange of all its Old Fund Shares solely for New Fund Shares pursuant to
the Reorganization (section 354(a));
6. A Shareholder's basis for the New Fund Shares to be received by it
in the Reorganization will be the same as the basis for its Old Fund Shares
to be constructively surrendered in exchange therefor (section 358(a)), and
its holding period for those New Fund Shares will include its holding
period for those Old Fund Shares, provided they are held as capital assets
by the Shareholder at the Effective Time (section 1223(1)); and
7. For purposes of section 381, New Fund will be treated as if there
had been no Reorganization. Accordingly, the Reorganization will not
result in the termination
<PAGE>
The Prudential Institutional Fund
Prudential World Fund, Inc.
June 27, 1996
Page 9
of Old Fund's taxable year, and Old Fund's tax attributes enumerated in
section 381(c) will be taken into account by New Fund as if there had been
no Reorganization. The part of Old Fund's taxable year before the
Reorganization will be included in New Fund's taxable year after the
Reorganization (section 381).
The foregoing opinion (1) is based on, and is conditioned on the continued
applicability of, the provisions of the Code and the Regulations, judicial
decisions, and rulings and other pronouncements of the Internal Revenue Service
("Service") in existence on the date hereof and (2) is applicable only to the
extent each Fund is solvent. We express no opinion about the tax treatment of
the transactions described herein if either Fund is insolvent.
ANALYSIS
--------
I. The Reorganization Will Qualify as a Reorganization under Section
-----------------------------------------------------------------
368(a)(1)(F), and Each Fund Will Be a Party to a Reorganization.
---------------------------------------------------------------
A. Each Fund Is a Separate Corporation.
-----------------------------------
Section 368(a)(1)(F) provides that "a mere change in identity, form, or
place of organization of one corporation, however effected," is a reorganization
("F Reorganization"). That section's limitation of the definition of an F
Reorganization to a change involving one corporation was adopted by the Tax
---------------
Equity and Fiscal Responsibility Act of 1982 ("TEFRA"). TEFRA's legislative
history explains, however, that the statutory limitation does not preclude the
use of more than one entity to consummate a transaction under section
368(a)(1)(F), provided that only one operating company is involved in the
reorganization. H.R. Conf. Rep. No. 760, 97th Cong., 2d Sess., reprinted in
------------
1982 U.S. Code Cong. & Ad. News 1315. That report cites the reincorporation of
- -------------------------------
an operating company in a different state (in essence the transaction involved
herein) as an example of an F Reorganization that requires the involvement of
more than one corporation, but that, nonetheless, complies with amended section
368(a)(1)(F).
For such a transaction to qualify under that section, therefore, the
entities involved therein must be corporations (or associations taxable as
corporations). Institutional Fund, however, is a Delaware business trust, not a
corporation, and Old Fund is a separate series thereof; and New Fund will be a
separate series of World Fund.
Treasury Regulation section 301.7701-4(b) provides that certain
arrangements known as trusts (because legal title is conveyed to trustees for
the benefit of beneficiaries) will not be classified as trusts for purposes of
the Code because they are not simply arrangements to protect or conserve the
property for the beneficiaries. These "business or commercial trusts" are
<PAGE>
The Prudential Institutional Fund
Prudential World Fund, Inc.
June 27, 1996
Page 10
created simply as devices to carry on profit-making businesses that normally
would have been carried on through corporations or partnerships. Treasury
Regulation section 301.7701-4(c) further provides that an "`investment' trust
will not be classified as a trust if there is a power under the trust agreement
to vary the investment of the certificate holders." See Commissioner v. North
--- ---------------------
American Bond Trust, 122 F.2d 545 (2d Cir. 1941), cert. denied, 314 U.S. 701
- ------------------- ------------
(1942).
Based on these criteria, Institutional Fund does not qualify as a trust for
federal income tax purposes. While Institutional Fund is an "investment trust,"
it does not have a fixed pool of assets -- Old Fund (as well as each other
series thereof) has been a managed portfolio of securities, and its investment
adviser has had the authority to buy and sell securities for it. Institutional
Fund is not simply an arrangement to protect or conserve property for the
beneficiaries, but it is designed to carry on a profit-making business. In
addition, the word "association" has long been held to include a Massachusetts
business trust (see Hecht v. Malley, 265 U.S. 144 (1924)), which for these
--- ---------------
purposes has similar characteristics to a Delaware business trust, such as
Institutional Fund. Accordingly, we believe that Institutional Fund will be
treated as a corporation for federal income tax purposes.
Institutional Fund as such, however, is not participating in the
Reorganization, but rather a series thereof (Old Fund) is the participant.
Ordinarily, a transaction involving a segregated pool of assets such as Old Fund
could not qualify as a reorganization, because the pool would not be a
corporation. Under section 851(h), however, Old Fund is treated as a separate
corporation for all purposes of the Code save the definitional requirement of
section 851(a) (which is satisfied by Institutional Fund). Thus, we believe
that Old Fund will be a separate corporation, and its shares will be treated as
shares of corporate stock, for purposes of section 368(a)(1)(F); for similar
reasons, we believe that New Fund will be a separate corporation, and its shares
will be treated as shares of corporate stock, for those purposes.
B. Business Purpose.
----------------
All reorganizations must meet the judicially imposed requirements of the
"business purpose doctrine," which was established in Gregory v. Helvering, 293
--------------------
U.S. 465 (1935), and is now set forth in Treas. Reg. (S)(S) 1.368-1(b), -1(c),
and -2(g) (the last of which provides that, to qualify as a reorganization, a
transaction must be "undertaken for reasons germane to the continuance of the
business of a corporation a party to the reorganization"). Under that
doctrine, a transaction must have a bona fide business purpose other than the
avoidance of federal income tax to be a valid reorganization. The substantial
business purposes of the Reorganization are described in the Proxy.
Accordingly, we believe that the Reorganization is being undertaken for a bona
fide business purpose (and not a purpose to avoid federal income tax) and
therefore meets the requirements of the business purpose doctrine.
<PAGE>
The Prudential Institutional Fund
Prudential World Fund, Inc.
June 27, 1996
Page 11
C. Requirements of Continuity.
--------------------------
1. Continuity of Business.
----------------------
In addition, the Reorganization must meet the "continuity of business
enterprise" requirement of Treas. Reg. (S) 1.368-1(d). That Regulation requires
an acquiring corporation either to continue the acquired corporation's historic
business or to use a significant portion of the acquired corporation's assets in
a business. The Reorganization will involve only a change in the domicile and
identity of one operating entity, Old Fund, through its "conversion" to New
Fund. New Fund will actively continue Old Fund's business in the same manner
that Old Fund conducted it immediately before the Reorganization, and New Fund's
investment objective will be identical, and its investment policies will be
substantially identical, to those of Old Fund immediately before the
Reorganization. Because the Reorganization meets the requirement that an F
Reorganization be "a mere change in identity, form, or place of organization of
one corporation," the Reorganization also will meet the less stringent
continuity of business enterprise requirement of Treas. Reg. (S) 1.368-1(d).
2. Continuity of Interest.
----------------------
Nor will any shift in proprietary interest occurring as a result of the
Reorganization violate the "continuity of interest" requirement of Treas. Reg.
(S) 1.368-1(b). That section requires "a continuity of interest [in the
business enterprise] on the part of those persons who, directly or indirectly,
were the owners of the enterprise prior to the reorganization." The Fifth
Circuit has ruled that a redemption of 48% of the stock of a transferor
corporation was not a sufficient shift in proprietary interest to disqualify a
transaction as an F Reorganization, even though only 52% of the transferor's
shareholders would hold all the stock in the transferee. Reef Corp. v.
-------------
Commissioner, 368 F.2d 125 (5th Cir. 1966), cert. denied, 386 U.S. 1018 (1967);
- ------------ ------------
see also Aetna Casualty and Surety Co. v. U.S., 568 F.2d 811, 822-23 (2d Cir.
- -------- -------------------------------------
1976) (redemption of a 38.39% minority interest did not prevent a transaction
from qualifying as an F Reorganization); Rev. Rul. 61-156, 1961-2 C.B. 62 (a
transaction qualified as an F Reorganization even though the transferor's
shareholders acquired only 45% of the transferee's stock, while the remaining
55% of that stock was issued to new shareholders in a public underwriting
immediately after the transfer).
There is no plan or intention of Shareholders who own 5% or more of the Old
Fund Shares -- and, to the best of Institutional Fund's management's knowledge,
there is no plan or intention of the remaining Shareholders -- to redeem or
otherwise dispose of any portion of the New Fund Shares to be received by them
in the Reorganization. Institutional Fund's management does not anticipate
dispositions of those New Fund Shares at the time of or soon
<PAGE>
The Prudential Institutional Fund
Prudential World Fund, Inc.
June 27, 1996
Page 12
after the Reorganization to exceed the usual rate and frequency of redemptions
of shares of Old Fund as a series of an open-end investment company and,
consequently, expects that the percentage of Shareholder interests, if any, that
will be disposed of as a result of or at the time of the Reorganization will be
de minimis. Under the foregoing authorities a de minimis shift in interest will
not disqualify a transaction as an F Reorganization. See, e.g., Rev. Rul. 66-
--- ----
284, 1966-2 C.B. 115.
Old Fund is a series of an open-end investment company whose shares are
offered for sale on a continuous basis. New Fund will continue Old Fund's
operation as a series of an open-end investment company, and consequently New
Fund's shares similarly will be offered for sale to the public on an ongoing
basis. However, such sales of New Fund shares will arise out of a public
offering separate and unrelated to the Reorganization and not as a result
thereof. See Reef Corp. v. Commissioner, 368 F.2d at 134; Rev. Rul. 61-156,
--- --------------------------
supra. Those sales will occur in the ordinary course of New Fund's operation as
- -----
a series of an open-end investment company, just as they would have occurred if
Old Fund had continued to operate, and will not affect the characterization of
an F Reorganization as such. It is not within the purpose of the continuity of
interest requirement to disqualify the Reorganization as an F Reorganization
because of shifts in proprietary interest that would ultimately occur regardless
of Old Fund's change in its form, domicile, and identity.
No change in Old Fund's business nor substantial change in its proprietary
interests will occur as a result of the Reorganization, which is being
undertaken for bona fide business purposes. Accordingly, we believe that the
Reorganization will qualify as a reorganization under section 368(a)(1)(F).
D. Satisfaction of Section 368(a)(2)(F).
------------------------------------
Section 368(a)(2)(F), however, denies reorganization status to any
transaction (with an exception not relevant here) if, immediately before the
transaction, two or more of the parties thereto were investment companies. But
that section does not apply to a participating investment company if it is a RIC
or if --
(1)not more than 25% of the value of its total assets is invested
in the stock and securities of any one issuer and
(2)not more than 50% of the value of its total assets is invested
in the stock and securities of five or fewer issuers.
<PAGE>
The Prudential Institutional Fund
Prudential World Fund, Inc.
June 27, 1996
Page 13
In determining total assets for these purposes, cash and cash items (including
receivables) and U.S. government securities are excluded. Section
368(a)(2)(F)(iv). Each Fund is a RIC, and the foregoing percentage tests will
be satisfied by each Fund. Furthermore, section 368(a)(2)(F) does not apply if
the stock of each investment company is owned by substantially the same persons
in the same proportions. Section 368(a)(2)(F)(v). Because the change in
shareholders as a result of the Reorganization will be de minimis, the
Reorganization should fall within this exception. In addition, it is arguable
that only one investment company is involved in the Reorganization and that
section 368(a)(2)(F) therefore does not apply, because for purposes of section
368(a)(1)(F) the involvement of New Fund (which will not be an operating entity
until consummation of the Reorganization) is ignored for purposes of counting
the number of corporations participating in the Reorganization. H.R. Conf. Rep.
No. 760, supra; see discussion at page 10 above. For the foregoing reasons, we
----- ---
believe that section 368(a)(2)(F) will not affect the Reorganization's status as
an F Reorganization.
E. Each Fund Will Be a Party to a Reorganization.
---------------------------------------------
Section 368(b) provides, in pertinent part, that the term "party to a
reorganization" includes a corporation resulting from a reorganization and both
corporations in the case of a reorganization resulting from the acquisition by
one corporation of properties of another. Accordingly, we believe that each
Fund will be a "party to a reorganization" within the meaning of section 368(b).
Cf. Rev. Rul. 72-206, 1972-1 C.B. 105.
- --
II. No Gain or Loss Will Be Recognized to Old Fund.
----------------------------------------------
Section 361(a) provides that no gain or loss shall be recognized to a
corporation a party to a reorganization if such corporation exchanges property
solely for stock or securities in another corporation a party to the
reorganization. Section 357(a) further provides, in general, that if, as part
of the consideration for such an exchange of property, a party to the exchange
assumes the liabilities of the transferor, or acquires property from the
transferor subject to a liability, that assumption or acquisition will not be
treated as money or other property and will not, therefore, prevent the exchange
from falling within the provisions of section 361. Accordingly, we believe that
no gain or loss will be recognized to Old Fund on the transfer of the Assets to
New Fund in exchange solely for New Fund Shares and New Fund's assumption of the
Liabilities.
Section 361(c) provides that no gain or loss shall be recognized to a
corporation a party to a reorganization on the distribution to its shareholders,
in pursuance of the plan of reorganization, of stock in another corporate party
to the reorganization that was received by the
<PAGE>
The Prudential Institutional Fund
Prudential World Fund, Inc.
June 27, 1996
Page 14
distributing corporation in the exchange. Section 361(c)(4) provides that
section 336 (which requires recognition of gain to a liquidating corporation on
the distribution of appreciated property) shall not apply to a distribution
described in the preceding sentence. Accordingly, we believe that no gain or
loss will be recognized to Old Fund on the distribution of New Fund Shares to
the Shareholders, in constructive exchange for their Old Fund Shares, in
liquidation of Old Fund.
III. No Gain or Loss Will Be Recognized to New Fund.
----------------------------------------------
Section 1032(a) provides that no gain or loss shall be recognized to a
corporation on the receipt of money or other property in exchange for stock of
the corporation. Accordingly, we believe that no gain or loss will be
recognized to New Fund on its receipt of the Assets in exchange for New Fund
Shares and New Fund's assumption of the Liabilities.
IV. New Fund's Basis for the Assets Will Be a Carryover Basis, and Its Holding
--------------------------------------------------------------------------
Period Will Include Old Fund's Holding Period.
---------------------------------------------
Section 362(b) provides, in pertinent part, that if property is acquired by
a corporation in connection with a reorganization to which section 368 applies,
then the basis shall be the same as it would be in the hands of the transferor,
increased by the amount of gain recognized to the transferor on the transfer.
As noted above, it is our opinion that the Reorganization will constitute such a
reorganization and that no gain will be recognized to Old Fund as a result of
the Reorganization. Accordingly, we believe that New Fund's basis for the
Assets will be the same as the basis of the Assets in Old Fund's hands
immediately before the Reorganization.
Section 1223(2) provides that in determining the period for which a
taxpayer has held property, however acquired, there shall be included the period
for which the property was held by any other person, if under Chapter 1 of
Subtitle A of the Code (which includes section 362) the property has, for the
purpose of determining gain or loss from a sale or exchange, the same basis in
whole or in part in his hands as it would have in the hands of the other person.
As noted above, it is our opinion that New Fund's basis for the Assets will be
the same as the basis of the Assets in Old Fund's hands immediately before the
Reorganization. Accordingly, we believe that New Fund's holding period for the
Assets will include Old Fund's holding period therefor.
<PAGE>
The Prudential Institutional Fund
Prudential World Fund, Inc.
June 27, 1996
Page 15
V. No Gain or Loss Will Be Recognized to a Shareholder.
---------------------------------------------------
Section 354(a)(1) provides that no gain or loss shall be recognized if
stock or securities in a corporation a party to a reorganization are, in
pursuance of the plan of reorganization, exchanged solely for stock or
securities in that corporation or in another corporation a party to the
reorganization. We believe that the Plan constitutes a "plan of reorganization"
within the meaning of Treas. Reg. (S) 1.368-2(g). In the Reorganization, the
Shareholders will receive solely New Fund Shares for their Old Fund Shares.
Although section 354(a)(1) requires that the transferor corporation's
shareholders exchange their shares therein for shares of the acquiring
corporation, the courts and the Service have recognized that the Code does not
require taxpayers to perform useless gestures to come within the statutory
provisions. See, e.g., Eastern Color Printing Co., 63 T.C. 27, 36 (1974);
--- ---- --------------------------
Davant v. Commissioner, 366 F.2d 874 (5th Cir. 1966). Therefore, although
- ----------------------
Shareholders will not actually surrender certificates for Old Fund Shares in
exchange for New Fund Shares, their Old Fund Shares will be canceled on the
issuance of New Fund Shares to them (all of which will be reflected on New
Fund's share records) and will be treated as having been exchanged therefor.
See Rev. Rul. 81-3, 1981-1 C.B. 125; Rev. Rul. 79-257, 1979-2 C.B. 136.
- ---
Accordingly, we believe that no gain or loss will be recognized to a Shareholder
on the constructive exchange of its Old Fund Shares solely for New Fund Shares.
VI. A Shareholder's Basis for New Fund Shares Will Be a Substituted Basis, and
--------------------------------------------------------------------------
its Holding Period therefor Will Include its Holding Period for its Old
-----------------------------------------------------------------------
Fund Shares.
-----------
Section 358(a)(1) provides, in pertinent part, that in the case of an
exchange to which section 354 applies, the basis of the property permitted to be
received thereunder without the recognition of gain or loss shall be the same as
that of the property exchanged. As noted above, it is our opinion that the New
Fund Shares to be received in the Reorganization by the Shareholders will be
received under section 354 without the recognition of gain or loss.
Accordingly, we believe that the basis of the New Fund Shares received by a
Shareholder will be the same as the adjusted basis of the Shareholder's Old Fund
Shares constructively surrendered in exchange therefor.
Section 1223(1) provides, in pertinent part, that in determining the period
for which a taxpayer has held property received in an exchange, there shall be
included the period for which he held the property exchanged if, under Chapter 1
of Subtitle A of the Code (which includes section 358), the property has, for
the purpose of determining gain or loss from a sale or exchange, the same basis
in whole or in part in his hands as the property exchanged and, in the case of
such exchanges after March 1, 1954, the property exchanged was a capital asset
as defined in section 1221 at the time of the exchange. As noted above, it is
our opinion that the
<PAGE>
The Prudential Institutional Fund
Prudential World Fund, Inc.
June 27, 1996
Page 16
basis of the New Fund Shares received by a Shareholder will be the same as the
adjusted basis of the Shareholder's Old Fund Shares constructively surrendered
in exchange therefor. Accordingly, we believe that the holding period of the
New Fund Shares received by a Shareholder will include the Shareholder's holding
period for the Old Fund Shares constructively surrendered in exchange therefor,
provided those Old Fund Shares were held as capital assets on the Closing Date.
VII. Survival of Tax Attributes.
--------------------------
Treasury Regulation section 1.381(b)-1(a)(2) provides that in the case of
an F Reorganization, the acquiring corporation shall be treated (for purposes
of section 381) just as the transferor corporation would have been treated if
there had been no reorganization./5/ Thus, according to that section of the
Regulations, among other things, the transferor's taxable year shall not end on
the date of transfer merely because of the transfer and the tax attributes of
the transferor enumerated in section 381(c) shall be taken into account by the
acquiring corporation as if there had been no reorganization. As noted above,
it is our opinion that the Reorganization will qualify as an F Reorganization.
Accordingly, we believe that, for purposes of section 381, New Fund will be
treated just as Old Fund would have been if there had been no Reorganization.
Thus, Old Fund's taxable year will not end on the date of the Reorganization
merely because of the Reorganization, and Old Fund's tax attributes enumerated
in section 381(c) will be taken into account by New Fund as if there had been no
Reorganization. In addition, the part of Old Fund's taxable year before the
Reorganization and the part of New Fund's taxable year after the Reorganization
will constitute a single taxable year of New Fund. See Rev. Rul. 57-276, 1957-1
---
C.B. 126, 127-28.
We hereby consent to this opinion accompanying the Registration Statement
and to the references to our firm under the captions "Synopsis -- Federal Income
Tax Consequences of the
- -------------
/5/ We recognize that the Reorganization also may qualify as a reorganization
under other provisions of section 368(a)(1). However, Rev. Rul. 57-276, 1957-1
C.B. 126, states that if a corporate transaction comes within section
368(a)(1)(F), but also meets the requirements of sections 368(a)(1)(A), (C), or
(D), the transaction will be treated as an F Reorganization for purposes of
applying section 381.
<PAGE>
The Prudential Institutional Fund
Prudential World Fund, Inc.
June 27, 1996
Page 17
Proposed Conversion" and "The Proposed Transaction -- Federal Income Tax
Considerations" in the Proxy.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
By: /s/ Theodore L. Press
______________________________________
Theodore L. Press
<PAGE>
EXHIBIT 14
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Registration Statement on Form N-14 of Prudential
World Fund, Inc. of our reports on the financial statements of Prudential Global
Fund, Inc. dated December 13, 1995 and The Prudential Institutional Fund dated
November 16, 1996 (the "Portfolios"), which are incorporated by reference and
are a part of such Registration Statement, and to the references to use under
the headings "Financial Highlights" in the Prospectus of each of the Portfolios,
which are incorporated by reference in and/or are a part of such Registration
Statement, and "Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants" in the Statement of Additional Information of each of
the Portfolios, which are incorporated by reference in and/or are a part of such
Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
New York, New York
June 21, 1996
<PAGE>
EXHIBIT 17(A)
LOGO
PROXY
THE PRUDENTIAL INSTITUTIONAL FUND--INTERNATIONAL STOCK FUND
21 PRUDENTIAL PLAZA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
THIS PROXY IS SOLICITED ON BEHALF OF THE TRUSTEES
The undersigned hereby appoints S. Jane Rose, Marguerite E.H. Morrison and
Eugene S. Stark as Proxies, each with the power of substitution, and hereby
authorizes each of them to represent and to vote, as designated below, all the
shares of The Prudential Institutional Fund--International Stock Fund, held of
record by the undersigned on , 1996, at the Special Meeting of
Shareholders to be held on , 1996, or any adjournment thereof.
THE TRUSTEES RECOMMEND A VOTE "FOR" THE FOLLOWING PROPOSAL.
1. Approval or disapproval of the Agreement and Plan of Conversion and
Liquidation
[_] APPROVE [_] DISAPPROVE [_] ABSTAIN
2. IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
(over)
<PAGE>
(Continued from other side)
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY, USING THE ENCLOSED
ENVELOPE.
THIS PROXY WHEN EXECUTED WILL BE VOTED IN THE MANNER DESCRIBED HEREIN BY THE
UNDERSIGNED SHAREHOLDER. IF EXECUTED AND NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR PROPOSAL 1.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign.
When signing as attorney,
executor, administrator,
trustee or guardian, please
give full title as such. If a
corporation, please sign in
full corporate name by
president or other authorized
officer. If a partnership.
please sign in partnership
name by authorized person.
Dated , 1996
-----------------
------------------------------
Signature
------------------------------
Signature if held jointly
<PAGE>
EXHIBIT 17(B)
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant
hereby elects to register an indefinite number of shares of its Common Stock,
par value $.01 per share. The amount of the registration fee is $500.00.
<PAGE>
EXHIBIT 17(c)
Prudential World Fund, Inc.
(International Stock Series)
- -------------------------------------------------------------------------------
Prospectus dated September 18, 1996
- -------------------------------------------------------------------------------
The International Stock Series (the Series) is a series of Prudential World
Fund, Inc. (the Fund), an open-end, diversified management investment company.
Its investment objective is to achieve long-term growth of capital through
investment in equity securities of foreign issuers. Income is a secondary
objective. The Series seeks to achieve its objective primarily through
investment in a diversified portfolio of securities which will consist of equity
securities of foreign issuers. The Series will, under normal circumstances,
invest at least 65% of the value of its total assets in common stocks and
preferred stocks of issuers located in at least three foreign countries. The
Series may invest up to 35% of its total assets in (i) other equity-related
securities of foreign issuers; (ii) common stocks, preferred stocks, and other
equity-related securities of U.S. issuers; (iii) investment grade debt
securities of domestic and foreign corporations, governments, governmental
entities, and supranational entities; and (iv) high-quality domestic money
market instruments and short-term fixed income securities. The Series also may
engage in derivative transactions, such as those involving stock options,
options on debt securities, options on stock indices, and foreign currency
futures contracts and options thereon so as to hedge its portfolio and to
attempt to enhance return. There can be no assurance that the Series' investment
objective will be achieved. See "How the Series Invests--Investment Objective
and Policies". The Series' address is One Seaport Plaza, New York, New York
10292, and its telephone number is (800) 225-1852.
The Series is not intended to constitute a complete investment program. The
Series intends to pay, at least annually, 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 Series 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 Series Invests--Risks
and Special Considerations".
This Prospectus sets forth concisely the information about the Series that a
prospective investor should know before investing. Additional information about
the Series has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated September 18, 1996, which information
is incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Series, at the
address or telephone number noted above.
- -------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
SERIES HIGHLIGHTS
The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
What is Prudential World Fund, Inc.?
Prudential World Fund, Inc. is a mutual fund whose shares are offered in
two series, each of which operates as a separate 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. Only shares of the International Stock Series are
offered through this Prospectus.
What is the Series' Investment Objective?
The Series' investment objective is to achieve long-term growth of capital
through investment in equity securities of foreign issuers. Income is a
secondary objective. The Series seeks to achieve its objective primarily through
investment in a diversified portfolio of equity securities of foreign issuers.
There can be no assurance that the Series' objective will be achieved. See "How
the Series Invests--Investment Objective and Policies" at page 5.
Risk Factors and Special Characteristics
While the Series is not required to maintain any particular geographic or
currency mix of its investments, under normal circumstances the Series intends
to invest at least 65% of its total assets in common stocks and preferred stocks
of issuers located in at least three foreign countries. The Series may invest up
to 35% of its total assets in (i) other equity-related securities of foreign
issuers; (ii) common stocks, preferred stocks, and other equity-related
securities of U.S. issuers; (iii) investment grade debt securities of domestic
and foreign corporations, governments, governmental entities, and supranational
entities; and (iv) high-quality domestic money market instruments and short-term
fixed income securities. See "How the Series Invests--Investment Objective and
Policies" at page 5. 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 Series Invests--Risks and Special Considerations" at page 12. The
Series may also engage in hedging and return 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 Series Invests--Hedging and Return Enhancement Strategies"
at page 7.
Who Manages the Series?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager
of the Series and is compensated for its services at an annual rate of 1% of the
Series' average daily net assets. As of May 31, 1996, PMF served as manager or
administrator to 60 investment companies, including 38 mutual funds, with
aggregate assets of approximately $52 billion. The Mercator Asset Management,
L.P. (Mercator or the Subadviser) furnishes investment advisory services in
connection with the management of the Series under a Subadvisory Agreement with
PMF. See "How the Series is Managed--Manager" at page 13. The management fee is
higher than that paid by most other investment companies.
Who Distributes the Series' Shares?
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Series' Class A, Class B, Class C and Class Z shares and is
paid an annual distribution and service fee which is currently being charged at
the rate of .30 of 1% of the average daily net assets of the Class A shares, and
at the annual rate of up to 1% of the average daily net assets of each of the
Class B and Class C shares. Prudential Securities incurs the expense of
distributing the Series' Class Z shares under a Distribution Agreement with the
Fund, none of which is reimbursed or paid for by the Series. See "How the Series
is Managed--Distributor" at page 14.
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. Class Z shares are subject to a $10 million
minimum initial investment requirement which is waived for certain benefit plans
and other eligible investors and for shareholders who have accumulated at least
$10 million in shares of any class of the Series. The minimum subsequent
investment is $100 for all classes, except for Class Z shares for which there is
no such minimum. There is no minimum investment requirement for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors and for purchases made in connection with the "Best Minds" program
sponsored by the Distributor. 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 Series" at page 20 and "Shareholder
Guide--Shareholder Services" at page 28.
How Do I Purchase Shares?
You may purchase shares of the Series 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). Class Z shares are offered to a
limited group of investors at net asset value without any sales charge. See "How
the Series Values Its Shares" at page 16 and "Shareholder Guide--How to Buy
Shares of the Series" at page 20.
What Are My Purchase Alternatives?
The Series offers four classes of shares:
o Class A Shares: Sold with an initial sales charge of up to 5% of the
offering price.
o 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.
o 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.
o Class Z Shares: Sold without either an initial or contingent deferred
sales charge to a limited group of investors.
See "Shareholder Guide--Alternative Purchase Plan" at page 21.
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 24.
How are Dividends and Distributions Paid?
The Series 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
Series 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>
<TABLE>
SERIES EXPENSES
<CAPTION>
Shareholder Transactions Expenses+ Class A Shares Class B Shares Class C Shares Class Z Shares
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 5% None None None
Maximum Sales Load or Deferred Sales Load
Imposed on Reinvested Dividends ................ None 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 None
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 None
Exchange Fees .................................. None None None None
<CAPTION>
Annual Series Operating Expenses
(as a percentage of average net assets) Class A Shares Class B Shares Class C Shares Class Z Shares
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Management Fees ................................ 1.00% 1.00% 1.00% 1.00%
12b-1 Fees ..................................... .25%@ 1.00% 1.00% None
Other Expenses ................................. .48% .48% .48% .48%
Total Series Operating Expenses ................ 1.73% 2.48% 2.48% 1.48%
<CAPTION>
1 3
Example Year Years
---- -----
<S> <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 ............................................................................. $67 $102
Class B ............................................................................. $75 $107
Class C ............................................................................. $35 $ 77
Class Z ............................................................................. $15 $ 47
You would pay the following expenses on the same investment, assuming no redemption:
Class A ............................................................................. $67 $102
Class B ............................................................................. $25 $ 77
Class C ............................................................................. $25 $ 77
Class Z ............................................................................. $15 $ 47
</TABLE>
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 Series will bear, whether directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "How the Series is Managed". "Other Expenses" includes operating expenses of
the Series, for the fiscal year ending October 31, 1996, such as Directors' and
professional fees, registration fees, reports to shareholders, transfer agency
and custodian fees and franchise taxes.
- ----------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
+ 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 Series may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
the Series rather than on a per shareholder basis. Therefore long-term
shareholders of the Series may pay more in total sales charges than the
economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Series is Managed--Distributor."
@ Although the Class A Distribution and Service Plan provides the Series may
pay a distribution fee of up to .30 of 1% per annum of the average daily
net assets of the Class A Shares, the Distributor has agreed to limit its
distribution fees with respect to Class A shares of the Series to no more
than .25 of 1% of the average daily net assets of the Class A shares for
the fiscal year ending October 31, 1996. Total operating expenses of the
Class A shares without such limitation would be 1.78%.
4
<PAGE>
HOW THE SERIES INVESTS
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Series is to achieve long-term growth of
capital through investment in equity securities of foreign companies. Income is
a secondary objective. There can be no assurance that the Series will achieve
its investment objective. See "Investment Objective and Policies" in the
Statement of Additional Information.
The Series' investment objective is a fundamental policy and, therefore,
may not be changed without the approval of the holders of a majority of the
Series' outstanding voting securities as defined in the Investment Company Act
of 1940 (the Investment Company Act). The investment policies and practices of
the Series, however, are not fundamental. Series' policies that are not
fundamental may be modified by the Board of Directors.
The Series will, under normal circumstances, invest at least 65% of the
value of its total assets in common stocks and preferred stocks of issuers
located in at least three foreign countries. The Series will invest primarily in
seasoned companies (i.e., companies with an established operating record of 3
years or greater) that are incorporated, organized, or that do business
primarily outside the United States. The Series will invest in securities of
such foreign issuers through direct market purchases on foreign stock exchanges
and established over-the-counter markets as well as through the purchase of
American Depository Receipts (ADRs), European Depository Receipts (EDRs) or
other similar securities.
The Series intends to broadly diversify its holdings among issuers located
in developed and developing countries having national financial markets.
Mercator, the Subadviser for the Series, believes that broad diversification
provides a prudent means of reducing volatility while permitting the Series to
take advantage of the potentially different movements of major equity markets.
While the Series may invest anywhere outside the United States, it expects that
most of its investments will be made in securities of issuers located in
developed countries in North America, Western Europe, and the Pacific Basin. In
allocating the Series' investments among different countries and geographic
regions, Mercator will consider such factors as relative economic growth,
expected levels of inflation, government policies affecting business conditions,
and market trends throughout the world. In selecting companies within those
countries and geographic regions, Mercator seeks to identify those companies
that are best positioned and managed to benefit from the factors listed above.
Investing in securities of foreign issuers generally involves greater risks
than investing in the securities of domestic companies. These risks are often
heightened for investments in emerging or developing countries.
The Series does not currently expect to invest 25% or more of its net
assets in any one country. For temporary defensive purposes, the Series may
invest up to 100% of its assets in common stocks, preferred stocks and other
equity-related securities of U.S. issuers.
The Series may invest up to 35% of the value of its total assets in: (i)
other equity-related securities of foreign issuers; (ii) common stocks,
preferred stocks and other equity-related securities of U.S. issuers; (iii)
investment grade debt securities of domestic and foreign corporations,
governments, governmental entities, and supranational entities (such as the
Asian Development Bank, the European Coal and Steel Community, the European
Economic Community, and the International Bank for Reconstruction and
Development (the "World Bank")); and (iv) high-quality domestic money market
instruments and short-term fixed income securities. The Series' use of money
market instruments and short-term debt securities generally will reflect the
Subadviser's overall measure of optimism relating to the global equity markets,
and the Series will use such securities to reduce downside volatility during
uncertain or declining market conditions.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for hedging or return enhancement purposes, the Series may: (i)
enter into repurchase agreements, when-issued, delayed-delivery and forward
commitment transactions; (ii) lend its portfolio securities; and (iii) purchase
and sell put and call options on any securities in which it may invest and
options on any securities index based on securities in which the Series may
invest. In order to attempt to reduce risks associated with currency
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fluctuations, the Series may (i) purchase and sell currency spot contracts; (ii)
purchase and sell currency futures contracts and currency forward contracts; and
(iii) purchase and sell put and call options on currencies and on foreign
currency futures contracts. See "Hedging and Return Enhancement Strategies."
The Series may hold a portion of its assets in money market instruments in
amounts designed to pay expenses, to meet anticipated redemptions, pending
investments or to margin its purchases and sales of futures contracts in
accordance with its objective and policies. These instruments may be purchased
on a forward commitment, when-issued or delayed-delivery basis. In addition, the
Series may for temporary defensive purposes invest, without limitation, in
high-quality money market instruments. The Series may also purchase
non-investment grade fixed income securities and retain investment grade fixed
income securities that have been downgraded to non-investment grade provided
that no more than 5% of the Series' net assets is invested in non-investment
grade fixed income securities, which are considered to be high risk securities,
i.e. "junk" bonds. See "Fixed Income Securities" below and "Investment Objective
and Policies" in the Statement of Additional Information for a fuller
description of these securities.
Equity-Related Securities. The Series may invest in equity-related
securities. Equity-related securities are common stock, preferred stock, rights,
warrants and debt securities or preferred stock which are convertible or
exchangeable for common stock or preferred stock.
With respect to equity securities, the Series may purchase ADRs. ADRs are
U.S. dollar-denominated certificates issued by a United States bank or trust
company and represent the right to receive securities of a foreign issuer
deposited in a domestic bank or foreign branch of a United States bank and
traded on a United States exchange or in an over-the-counter market. Generally,
ADRs are in registered form. There are no fees imposed on the purchase or sale
of ADRs when purchased from the issuing bank or trust company in the initial
underwriting, although the issuing bank or trust company may impose charges for
the collection of dividends and the conversion of ADRs into the underlying
securities. Investment in ADRs has certain advantages over direct investment in
the underlying foreign securities since: (i) ADRs are U.S. dollar-denominated
investments that are registered domestically, easily transferable, and for which
market quotations are readily available; and (ii) issuers whose securities are
represented by ADRs are usually subject to auditing, accounting, and financial
reporting standards comparable to those of domestic issuers.
Fixed Income Securities. Fixed income securities are considered
high-quality if they are rated at least AA/Aa by S&P or by Moody's or an
equivalent rating by any nationally recognized statistical rating association
(NRSRO) or, if unrated, are determined to be of comparable investment quality by
the Subadviser. High-quality fixed income securities are considered to have a
very strong capacity to pay principal and interest. Fixed income securities are
considered medium quality if they are rated, for example, at least BBB/Baa by
S&P or by Moody's or an equivalent rating by any NRSRO or, if not rated, are
determined to be of comparable investment quality by the Subadviser. Medium
quality fixed income securities are regarded as having an adequate capacity to
pay principal and interest. Securities rated in the lowest category of
investment grade debt have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher grade
bonds.
Investment grade fixed income securities are securities rated BBB or better
by S&P or Baa or better by Moody's (or an equivalent rating by any NRSRO) or, if
not rated, are deemed by the Subadviser to be of comparable investment quality.
Non-investment grade securities are rated lower than BBB/Baa (or an
equivalent rating by any NRSRO) or, if not rated, are deemed by the Subadviser
to be of comparable investment quality and are commonly referred to as high risk
or high yield securities, i.e. "junk" bonds. High yield securities are generally
riskier than higher quality securities and are subject to more credit risk,
including risk of default, and are more volatile than higher quality securities.
In addition, such securities may have less liquidity and experience more price
fluctuation than higher quality securities. See the discussion of corporate bond
ratings in "Description of S&P, Moodys and Duff & Phelps Ratings" in the
Appendix to the Statement of Additional Information.
The maturity of debt securities may be considered long (ten plus years),
intermediate (three to ten years) or short term (three years or less). In
general, the principal values of longer-term securities fluctuate more widely in
response to changes in interest rates than those of shorter-term securities,
providing greater opportunity for capital gain or risk of capital loss. A
decline in interest rates usually produces an increase in the value of debt
securities, while an increase in interest rates generally reduces their value.
U.S. Government Securities. The Series may invest in fixed income
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Obligations of the U.S. Government consist of various types
of marketable securities issued by the U.S.
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Treasury, i.e., bills, notes and bonds, and are direct obligations of the
U.S. Government. Obligations of agencies and instrumentalities of the U.S.
Government are not direct obligations of the U.S. Government and are either: (i)
guaranteed by the U.S. Treasury (e.g., Government National Mortgage Association
("GNMA") mortgage-backed securities); (ii) supported by the issuing agency's or
instrumentality's right to borrow from the U.S. Treasury at the discretion of
the U.S. Treasury (e.g., Federal National Mortgage Association ("FNMA") Discount
Notes); or (iii) supported by only the issuing agency's or instrumentality's
credit (e.g., each of the Federal Home Loan Banks).
HEDGING AND RETURN ENHANCEMENT STRATEGIES
The Series may also engage in various portfolio strategies, including
derivatives, to reduce certain risks of its investments and to attempt to
enhance return. These strategies include the purchase and sale of put and call
options on any security in which the Series may invest and options on any
securities index based on securities in which the Series may invest, In order to
reduce the risks associated with currency fluctuations, the series may (i)
purchase and sell currency spot contracts, (ii) purchase and sell currency
futures contracts and currency forward contracts, and (iii) purchase and sell
put and call options on currencies and on foreign currency contracts. The
Subadviser will use such techniques as market conditions warrant. The Series'
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 Series may use these new investments
and techniques to the extent consistent with its investment objective and
policies.
Options Transactions
Options on Securities and Securities Indices. The Series may purchase and
sell put and call options on any securities in which it may invest or options on
any securities index based on securities in which the Series may invest. The
Series is also authorized to enter into closing purchase and sale transactions
in order to realize gains or minimize losses on options sold or purchased by the
Series.
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 Series writes a call option, the Series 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 Series as the writer of a put option might, therefore,
be obligated to purchase underlying securities for more than their current
market price.
The Series would normally purchase call options to attempt to hedge against
an increase in the market value of the type of securities in which the Series
may invest. The purchase of a call option would entitle the Series, in return
for the premium paid, to purchase specified securities at a specified price,
upon exercise of the option, during the option period. The Series would
ordinarily realize a gain if, during the options period, the value of such
securities exceeds the sum of the exercise price, the premium paid and
transaction costs; otherwise, the Series would realize a loss on the purchase of
the call option. The Series may also write a put option, which can serve as a
limited long hedge because increases in value of the hedged investment would be
offset to the extent of the premium received for writing the option. However, if
the security depreciates to a price lower than the exercise price of the put
option, it can be expected that the option will be exercised and the Series will
be obligated to buy the security at more than its market value.
The Series would normally purchase put options to hedge against a decline
in the market value of securities in its portfolio ("protective puts"). The
purchase of a put option would entitle the Series, in exchange for the premium
paid, to sell specified securities at a specified price, upon exercise of the
option, during the option period. Gains and losses on the purchase of protective
puts would tend to be offset
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by countervailing changes in the value of underlying Series' securities. The
Series would ordinarily realize a gain if, during the option period, the value
of the underlying securities decreases below the exercise price sufficiently to
cover the premium and transaction costs; otherwise, the Series would realize a
loss on the purchase of the put option. The Series may also write a call option,
which can serve as a limited short hedge because decreases in value of the
hedged investment would be offset to the extent of the premium received for
writing the option. However, if the security appreciates to a price higher than
the exercise price of the call option, it can be expected that the option will
be exercised and the Series will be obligated to sell the security at less than
its market value.
Options on securities indices are similar to options on equity securities
except that, rather than the right to take or make delivery of the securities at
a specified price, an option on a securities 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 securities 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 Series may purchase and sell put and call options on securities indices
for hedging against a decline in the value of the securities owned by the Series
or against an increase in the market value of the type of securities in which
the Series may invest. Securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. Options on securities indices are
similar to options on securities, except that the exercise of securities index
options requires cash payments and does not involve the actual purchase or sale
of securities. Purchasing or selling securities index options is subject to the
risk that the value of its portfolio securities may not change as much as or
more than the index because the Series' investments generally will not match the
composition of the index. See "Investment Objective and Policies -- Options on
Securities and Securities Indices" in the Statement of Additional Information.
Over-the-Counter Options. The Series may also purchase and write (i.e.,
sell) put and call options on equity and debt securities and on stock indices in
the over-the-counter market (OTC options). Unlike exchange-traded options, OTC
options are contracts between the Series 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
Series' 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 Objective and
Policies--Special Risks of Purchasing OTC Options" in the Statement of
Additional Information.
Risks of Hedging and Return Enhancement Strategies
Participation in the options or futures markets involves investment risks
and transaction costs to which the Series would not be subject absent the use of
these strategies. If the Subadviser's prediction of movements in the direction
of the securities markets is inaccurate, the adverse consequences to the Series
may leave the Series in a worse position than if such strategies were not used.
Risks inherent in the use of options 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 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 Series 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 Series to sell a portfolio security at a disadvantageous time, due to the
need for the Series 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
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(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 Series invests in foreign securities, the Series may enter into
forward contracts in several circumstances to protect the value of its
portfolio. The Series 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 Series may enter.
However, the Series' 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 Series generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Series' expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency. The Series will not speculate in forward contracts. The
Series 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 Series enters into a contract for the purchase or sale of a
security denominated in a foreign currency, or when the Series anticipates the
receipt in a foreign currency of dividends or interest payments on a security
which it holds, the Series 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 Series 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 Subadviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, the
Series 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 Series denominated in such foreign currency.
Requirements under the Internal Revenue Code for qualification as a regulated
investment company may limit the Series' 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 Series 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 to protect against the effect of adverse
changes on foreign currencies. The Series 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
Series 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 Series' providing or receiving cash
that reflects any decline or increase in the contract's value, a process known
as "marking to market".
The Series 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 Series is subject or to which the Series 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 Series
also intends to engage in such transactions when they are economically
appropriate for the reduction of risks inherent in the ongoing management of the
Series.
Options On Foreign Currencies
The Series 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
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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 Series has the right to take or make delivery of a specified
amount of foreign currency, rather than stock.
The Series may purchase and write options to hedge the Series' portfolio
securities denominated in foreign currencies. If there is a decline in the
dollar value of a foreign currency in which the Series' portfolio securities are
denominated, the dollar value of such securities will decline even though the
foreign currency value remains the same. See "Risks and Special Considerations"
below. To hedge against the decline of the foreign currency, the Series 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 Series 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
Series received for the option.
If, on the other hand, the Subadviser 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 Series 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 Series 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 Series' 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 Subadviser'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 Series 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 Series' net income
would be less than if the Series 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 Series purchases these instruments to
hedge against currency advances before it invests in securities denominated in
such currency and the currency market declines, the Series might incur a loss on
the futures contract. The Series' ability to establish and maintain positions
will depend on market liquidity. The ability of the Series 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 Stock
Options" and "Risks of Transactions in Futures Contracts" under "Investment
Objective and Policies" in the Statement of Additional Information.
OTHER INVESTMENT PRACTICES
Repurchase Agreements
The Series may enter into repurchase agreements, whereby the seller of a
security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' 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 if the value of the instruments
declines, the Series will require additional collateral. In the event of
bankruptcy or default of certain sellers of repurchase agreements, the Series
could experience costs and delays in liquidating the underlying security held as
collateral and might incur a loss if such collateral declines in value during
this period. The Series may participate in a joint repurchase account managed by
Prudential Mutual Fund Management, Inc.
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Segregated Accounts. The Series will establish a segregated account with
State Street Bank and Trust Company (State Street or Custodian) in which it will
maintain cash, U.S. Government securities or other liquid high-grade debt
obligations equal in value to its obligations in respect of potentially
leveraged transactions including forward contracts, when-issued and
delayed-delivery securities, repurchase and reverse repurchase agreements,
forward rolls, dollar rolls, futures contracts, written options and, options on
futures contracts (unless otherwise covered). The assets deposited in the
segregated account will be marked-to-market daily.
Forward Rolls, Dollar Rolls and Reverse Repurchase Agreements
The Series may commit up to 20% of the value of its net assets to
investment techniques such as dollar rolls, forward rolls and reverse repurchase
agreements. A forward roll is a transaction in which the Series sells a security
to a financial institution, such as a bank or broker-dealer, and simultaneously
agrees to repurchase the same or similar security from the institution at a
later date at an agreed-upon price. With respect to mortgage-related securities,
such transactions are often called "dollar rolls." In dollar roll transactions,
the mortgage-related securities that are repurchased will bear the same coupon
rate as those sold, but generally will be collateralized by different pools of
mortgages with different prepayment histories than those sold. During the roll
period, the Series forgoes principal and interest paid on the securities and is
compensated by the difference between the current sales price and the forward
price for the future purchase as well as by interest earned on the cash proceeds
of the initial sale. A "covered roll" is a specific type of dollar roll for
which there is an offsetting cash position or a cash equivalent security
position which matures on or before the forward settlement date of the dollar
roll transaction.
Reverse repurchase agreements involve sales by the Series of portfolio
securities to a financial institution concurrently with an agreement by the
Series to repurchase the same securities at a later date at a fixed price.
During the reverse repurchase agreement period, the Series continues to receive
principal and interest payments on these securities.
Reverse repurchase agreements, forward rolls and dollar rolls involve the
risk that the market value of the securities purchased by the Series with the
proceeds of the initial sale may decline below the price of the securities the
Series has sold but is obligated to repurchase under the agreement. In the event
the buyer of securities under a reverse repurchase agreement, forward roll or
dollar roll files for bankruptcy or becomes insolvent, the Series' use of the
proceeds of the agreement may be restricted pending a determination by the other
party, or its trustee or receiver, whether to enforce the Series' obligations to
repurchase the securities. The staff of the SEC has taken the position that
reverse repurchase agreements, forward rolls and dollar rolls are to be treated
as borrowings for purposes of the percentage limitations discussed in the
section entitled "Borrowings" below. The Series expects that under normal
conditions most of the borrowings of the Series will consist of such investment
techniques rather than bank borrowings. See Investment Objective and
Policies--Borrowings" in the Statement of Additional Information.
When-Issued and Delayed-Delivery Securities
The Series may purchase securities on a when-issued or delayed-delivery
basis. When the Series purchases securities on a when-issued or delayed-delivery
basis, the price of such securities is fixed at the time of the commitment, but
delivery and payment for the securities may take place up to 120 days after the
date of the commitment to purchase. The securities so purchased are subject to
market fluctuation, and no interest accrues to the purchaser during this period.
When-issued and delayed-delivery securities involve a risk of loss if the value
of the security to be purchased declines prior to the settlement date or
increases in value and there is a failure to deliver the security.
Liquidity Puts
The Series may purchase instruments together with the right to resell the
instruments at an agreed-upon price or yield, within a specified period prior to
the maturity date of the instruments. This instrument is commonly known as a
"liquidity put" or a "tender option bond".
Illiquid Securities
The Series may hold up to 10% if its net assets in illiquid securities.
Illiquid securities include repurchase agreements which have a maturity of
longer than seven days, securities with legal or contractual restrictions on
resale (restricted securities) and securities that are
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not readily marketable in securities markets either within or outside of the
United States. 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 Series intends to
comply with any applicable state blue sky laws restricting the Series'
investments in illiquid securities. See "Investment Restrictions" in the
Statement of Additional Information. The Series' investment in Rule 144A
securities could have the effect of increasing illiquidity to the extent that
qualified institutional buyers become, for a time, uninterested in purchasing
Rule 144A securities. The Series' Subadvisers will monitor the liquidity of such
restricted securities under the supervision of the Manager and 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 OTC options and
the assets used as "cover" for written OTC options are illiquid securities
unless the Series and the counterparty have provided for the Series, at the
Series' election, to unwind the over-the-counter option. The exercise of such an
option ordinarily would involve the payment by the Series of an amount designed
to reflect the counterparty's economic loss from an early termination, but does
allow the Series to treat the assets used as "cover" as "liquid". The Series
will also treat non-U.S. Government IOs and POs as illiquid so long as the staff
of the SEC maintains its position that such securities are illiquid.
Securities Lending
The Series 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 collateral in an amount equal to at least 100%
of the market value of the securities loaned. During the time the Series'
securities are on loan, the borrower will pay the Series an amount equivalent to
any dividend or interest paid on such securities and the Series may invest any
cash collateral it receives and earn additional income, or it may receive an
agreed-upon amount of interest income from the borrower. In these transactions,
there are risks of delay in recovery and in some cases even loss of rights in
the collateral should the borrower of the securities fail financially. The
Series may lend up to 30% of the value of its total assets.
Borrowings
The Series may borrow from banks or through forward rolls, dollar rolls, or
reverse repurchase agreements an amount equal to no more than 20% of the value
of its total assets to take advantage of investment opportunities, for
temporary, extraordinary, or emergency purposes or for the clearance of
transactions and may pledge up to 20% of the value of its total assets to secure
such borrowings.
RISKS AND SPECIAL CONSIDERATIONS
Investing in securities of foreign companies and countries involves certain
risks and considerations 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 Series 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 Series 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
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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 Series can be expected to be higher than
that of an investment company investing exclusively in domestic securities since
the expenses of the Series, such as custodial costs, valuation costs and
communication costs, as well as the rate of the management fee (1% of the
Series' 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 Series 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
Series' outstanding voting securities. See "Investment Restrictions" in the
Statement of Additional Information.
HOW THE SERIES IS MANAGED
The Fund has a Board of Directors which, in addition to overseeing the
actions of the Series' Manager, Subadviser and Distributor, as set forth below,
decides upon matters of general policy. The Series' Manager conducts and
supervises the daily business operations of the Series. The Series' Subadviser
furnishes daily investment advisory services.
MANAGER
Prudential Mutual Fund Management, Inc. (PMF or the Manager), One Seaport
Plaza, New York, New York 10292, is the Manager of the Series and is compensated
for its services at an annual rate of 1% of the Series' average daily net
assets. It was incorporated in May 1987 under the laws of the State of Delaware.
See "Manager" in the Statement of Additional Information.
As of May 31, 1996, PMF served as the manager of 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator of 22 closed-end investment companies, with aggregate assets of
approximately $52 billion.
PMF is a wholly-owned subsidiary of The Prudential Insurance Company of
America (Prudential), a major diversified insurance and financial services
company.
Under the Management Agreement with the Fund, PMF manages the investment
operations of the Fund and also administers the corporate affairs. See "Manager"
in the Statement of Additional Information.
SUBADVISER
Pursuant to a Subadvisory Agreement with PMF, Mercator Asset Management,
L.P. (Mercator or the Subadvisor) furnishes investment advisory services in
connection with the management of the Series and is compensated by PMF for its
services at an annual rate of .75 of 1% of the Series' average daily net assets
up to and including $50 million and .60 of 1% of the Series' average daily net
assets in excess of $50 million and up to and including $300 million and .45 of
1% of the Series' average daily net assets in excess of $300 million.
Under the Subadvisory Agreement, Mercator, subject to the supervision of
PMF, is responsible for managing the assets of the Series in accordance with its
investment objective, investment program and policies. Mercator determines what
securities and other instruments are purchased and sold for the Series and is
responsible for obtaining and evaluating financial data relevant to the Series.
Peter F. Spano is responsible for the day-to-day management of the
portfolio of the Series. Mr. Spano has managed the portfolio of the Series since
its inception in November, 1992 and has been employed as a portfolio manager
with Mercator since its founding in 1984.
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Mercator is a registered investment adviser and a Delaware limited
partnership with $1.8 billion in assets under management as of December 31,
1995. Mercator's general partners are four Florida corporations: JZT Corp., PXS
Corp., KXB Corp. and MXW Corp. Mercator's limited partner is The Prudential
Asset Management Company, Inc., a wholly-owned indirect subsidiary of
Prudential. John G. Thompson, Peter F. Spano, Kenneth B. Brown, and Michael A.
Williams are the sole shareholders of JZT Corp., PXS Corp., KXB Corp. and MXW
Corp., respectively. The address of each of the general partners is 2400 East
Commercial Blvd., Suite 810, Fort Lauderdale, Florida 33308. Mercator serves as
adviser to various institutional investors and mutual funds.
Pursuant to a subadvisory agreement with PMF, The Prudential Investment
Corporation (PIC) provides investment advisory services to the Series with
respect to (i) the management of short-term assets, including cash, money market
instruments and repurchase agreements and (ii) the lending of portfolio
securities in connection with the management of the International Stock Series.
For these services, PMF will reimburse PIC for reasonable costs and expenses
incurred by PIC determined in a manner acceptable to PMF. PIC is an indirect,
wholly-owned subsidiary of Prudential.
DISTRIBUTOR
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 A,
Class B, Class C and Class Z shares of the Series. 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 Series
under Rule 12b-1 under the Investment Company Act and separate distribution
agreements (the Distribution Agreements), Prudential Securities (also the
Distributor) incurs the expenses of distributing the Series' Class A, Class B
and Class C shares. (Prudential Securities also incurs the expenses of
distributing the Series' Class Z shares under the Distribution Agreement, none
of which is reimbursed or paid for by the Series.) These expenses include
commissions and account servicing fees paid to, or on account of, financial
advisers of Prudential Securities and representatives of Pruco Securities
Corporation (Prusec), an affiliated broker-dealer, commissions and account
servicing fees paid to, or on account of, other broker-dealers or financial
institutions (other than national banks) which have entered into agreements with
the Distributor, advertising expenses, the cost of printing and mailing
prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Series shares,
including lease, utility, communications and sales promotion expenses. The State
of Texas requires that shares of the Series may be sold in that state only by
dealers or other financial institutions which are registered there as
broker-dealers.
Under the Plans, the Series 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 Series 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 Series may pay Prudential Securities 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.
Under the Class B Plan, the Series pays Prudential Securities for its
distribution-related activities with respect to Class B shares at an annual rate
of 1% of average daily net assets of the Class B shares. Under the Class C Plan,
the Series pays Prudential Securities for its distribution-related activities
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 .75 of 1% of the
average daily net assets of the Class B and Class C shares, respectively, 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."
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Distribution expenses attributable to the sale of Class A, Class B or Class
C shares of the Series will be allocated to each class based upon the ratio of
sales of each class to the sales of all shares of the Series 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 Series, including a
majority of the Directors who are not "interested persons" of the Series (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
Series. The Series will not be obligated to pay distribution and service fees
incurred under any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series 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 Series. 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.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition
of a $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Series is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Series' assets which are held by State Street Bank & Trust Company, an
independent custodian, are separate and distinct from PSI.
FEE WAIVERS AND SUBSIDY
PMF may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Series. Fee waivers
and expense subsidies will increase the Series' total return.
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PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant
for the Series 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 Series' portfolio securities
and cash and, in that capacity, maintains certain financial and accounting books
and records pursuant to an agreement with the Series. Its mailing address is
P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc., (PMFS), 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 Series. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE SERIES VALUES ITS SHARES
The Series' 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 of the Fund has
fixed the specific time of day for the computation of the Series' 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 Funds' Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
The Series 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 Series or days on which changes in
the value of the Series' 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. See "Net Asset Value" in the Statement of
Additional Information.
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 and Class Z 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 each class 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 SERIES CALCULATES PERFORMANCE
From time to time the Series 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, Class C and Class Z 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 Series would
have increased (decreased) over a specified period of time (i.e., one, five or
ten years or since inception of the Series) assuming that all distributions and
dividends by the Series were reinvested on the reinvestment dates during the
period and less all recurring fees. The "aggregate" total
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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 smoothes 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 Series 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 Series may also include comparative performance information
in advertising or marketing the Series' 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. Further
performance information is contained in the Series' 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 Series
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under the Internal Revenue Code. Accordingly, the
Series 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 Series may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). In general, PFICs are foreign corporations that own mostly
passive assets or that derive 75% or more of their income from passive sources.
For tax purposes, the Series' investments in PFICs may subject the Series to
federal income taxes and a charge in the nature of interest with respect to
certain gains and income realized by the Series. Under proposed Treasury
regulations, the Series would be able to avoid such taxes and interest by
electing to "mark-to-market" its investments in PFICs 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, futures and forward contracts (Section 1256 contracts). At the
end of each year, such investments held by the Series will be required to be
"marked to market" for federal income tax 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
Any dividends out of net taxable investment income, together with
distributions of net short-term capital gains (i.e., the excess of net
short-term capital gains over net long-term capital losses) distributed to
shareholders, 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 Series will be eligible for the 70%
dividends-received deduction for corporate shareholders to the extent that the
Series' income is derived from certain dividends received from domestic
corporations. Capital gains distributions are not eligible for the 70%
dividends-received deduction. Under tax proposals included in the budget plan
released by the Clinton Administration on December 7, 1995, the
dividends-received deduction allowed to corporate shareholders would be reduced
from 70% to 50% of eligible
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dividends and would be subject to additional limitations. It is currently
uncertain whether, when or in what form these proposals or other changes to the
dividends-received deduction will be enacted into law.
Distributions by the Series to a shareholder that is a qualified retirement
plan would generally not be taxable to participants in the plan. Distributions
from a qualified retirement plan (or non-qualified arrangement) to a participant
or beneficiary are subject to special rules. Because the effect of these rules
varies greatly with individual situations, potential investors are urged to
consult with their own tax advisers.
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 or Class Z shares or the exchange of Class
A shares for Class Z 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 Series 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 Series from sources within foreign
countries may be subject to foreign income taxes withheld at source. If the
Series 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 Series' present intention, the Series 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, subject to generally applicable limitations.
Dividends and Distributions
The Series expects to distribute annually to its shareholders all of its
net investment income and any net capital gains. Dividends paid by the Series
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 of net capital gains, if any, will be paid in the same amount for
each class of shares. See "How the Series Values its Shares."
Dividends and distributions will be paid in additional Series 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 08906-5015. The Series will notify each shareholder after
the close of the Series' 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 Series 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.
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GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Prudential World Fund, Inc. (the "Fund") was incorporated in Maryland
on February 28, 1984. The Fund is authorized to issue 1 billion shares of common
stock, $.01 par value per share, which are currently divided into two portfolios
or series, the International Stock Series and the Global Series, each of which
consists of 500 million authorized shares. The shares of each series are divided
into four classes, designated Class A, Class B, Class C and Class Z common
stock, each consisting of 125 million authorized shares. Only shares of the
International Stock Series are offered hereby. Each class of common stock
represents an interest in the same assets of the Series and is identical in all
respects except that (i) each class (with the exception of Class Z shares) is
subject to different sales charges and distribution and/or service fees which
may affect performance, (ii) each class has exclusive voting rights on any
matter submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, (iii) each
class has a different exchange privilege, (iv) only Class B shares have a
conversion feature. Currently, the Series is offering four classes, designated
Class A, Class B, Class C and Class Z shares. In accordance with the Fund's
Articles of Incorporation, the Board of Directors may authorize the creation of
additional series and classes within such series, with such preferences,
privileges, limitations and voting and dividend rights as the Board of Directors
may determine.
The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of the Series, 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 Series 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 (with the
exception of Class Z shares which are not subject to any distribution or service
fees) bears the expenses related to the distribution of its shares. Except for
the conversion feature applicable to the Class B shares, there are no
conversion, preemptive or other subscription rights. In the event of
liquidation, each share of common stock of the Series is entitled to its portion
of all of the Series' assets after all debt and expenses of the Series have been
paid. Since Class B and Class C shares generally bear higher distribution
expenses than Class A shares, the liquidation proceeds to shareholders of those
classes are likely to be lower than to Class A shareholders and to Class Z
shareholders whose shares are not subject to any distribution and/or service
fees. The Series' 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. 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.
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SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE SERIES
You may purchase shares of the Series 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 offering price per
share 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). Class Z shares are offered to a
limited group of investors at net asset value without any sales charge. 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 minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares except that the minimum initial investment
for Class C shares may be waived from time to time. Class Z shares are subject
to a $10 million minimum initial investment requirement which is waived for
certain benefit plans and other eligible investors and for shareholders who have
accumulated at least $10 million in shares of the Series. The minimum subsequent
investment is $100 for all classes, except for Class Z shares for which there is
no such minimum. All minimum investment requirements are waived for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors and for purchases made in connection with the "Best Minds" program
sponsored by the Distributor. For purchases through the Automatic Savings
Accumulation Plan, the minimum initial and subsequent investment is $50. See
"Shareholder Services."
The Series reserves the right to reject any purchase order (including an
exchange into the Series) 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 Series.
The Distributor reserves the right to cancel any purchase order for which
payment has not been received by the third business day following the
investment.
Transactions in Series' shares may be subject to postage and handling
charges imposed by your dealer.
Purchase By Wire. For an initial purchase of shares of the Series by wire,
you must first telephone PMFS at (800) 225-1852 (toll-free) to receive an
account number. The following information will be requested: your name, address,
tax identification number, class election, dividend distribution election,
amount being wired and wiring bank. Instructions should then be given by you to
your bank to transfer funds by wire to State Street Bank and Trust Company
(State Street), Boston, Massachusetts, Custody and Shareholder Services
Division, Attention: Prudential World Fund, Inc. (International Stock Series),
specifying on the wire the account number assigned by PMFS and your name and
identifying the sales charge alternative (Class A, Class B, Class C or Class Z
shares).
If you arrange for receipt by State Street of federal funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential World Fund, Inc.,
Class A, Class B, Class C or Class Z shares and your name and individual account
number. It is not necessary to call PMFS to make subsequent purchase orders
utilizing federal funds. The minimum amount which may be invested by wire is
$1,000.
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<PAGE>
ALTERNATIVE PURCHASE PLAN
The Series offers four classes of shares (Class A, Class B, Class C and
Class Z shares) which allow you to choose the most beneficial sales charge
structure for your individual circumstances given the amount of the purchase,
the length of time you expect to hold the shares and other relevant
circumstances (Alternative Purchase Plan).
<TABLE>
<CAPTION>
Annual 12b-1 Fees
(as a % of average daily
Sales Charge net assets) Other Information
------------------------------------- ------------------------ --------------------------------------
<S> <C> <C> <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
Class Z None None Sold to a limited group of investors
</TABLE>
The four classes of shares represent an interest in the same portfolio of
investments of the Series 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 on any matter submitted to
shareholders that relates solely to its arrangement and has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of any other class, and (iii) only Class B
shares have a conversion feature. The four 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 (if any) 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 and Class Z shares.
Financial advisers and other sales agents who sell shares of the Series
will receive different compensation for selling Class A, Class B, Class C and
Class Z shares and will generally receive more compensation initially for
selling Class A and Class B shares than for selling Class C or Class Z 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 Series:
If you intend to hold your investment in the Series 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.
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<PAGE>
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 and Class C shares for the higher
cumulative annual distribution-related fee on those shares to exceed the initial
sales charge plus cumulative annual distribution-related 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 when 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. All purchases
of $10 million or more and purchases by certain benefit plans and other eligible
investors as described below, must be for Class Z shares. See "Class Z Shares"
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:
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
- ------------------- --------------- ----------------- -----------------
$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
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
Series 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 Series
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 of 1986, as
amended (the Code) and deferred compensation and annuity plans under Sections
457 and 403(b)(7) of the 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 1,250 eligible employees or participants. 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.
PruArray and SmartPath Plans. Class A shares may be purchased at NAV by
certain retirement and deferred compensation plans, qualified or non-qualified
under the Code, including pension, profit-sharing, stock-bonus or other employee
benefit plans under Section 401 of the Code and deferred compensation and
annuity plans under Sections 457 and 403(b)(7) of the Code that participate in
22
<PAGE>
Prudential's PruArray and SmartPath Programs benefit plan record keeping
services (hereafter referred to as a PruArray or SmartPath Plan); provided (i)
that the plan has at least $1 million in existing assets or 1,250 eligible
employees or participants and (ii) that Prudential Mutual Funds constitute at
least one-half of the plan's investment options. The term "existing assets" for
this purpose includes stock issued by a PruArray or SmartPath Plan sponsor and
shares of non-money market Prudential Mutual Funds and shares of certain
unaffiliated non-money market mutual funds that participate in the PruArray or
SmartPath Program (Participating Funds). "Existing assets" also include shares
of money market funds acquired by exchange from a Participating Fund.
Special Rules Applicable to Retirement Plans. After a Benefit Plan or
PruArray or SmartPath Plan qualifies to purchase Class A shares at NAV, all
subsequent purchases will be made at NAV.
Other Waivers. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers and current and former Directors/Trustees of the Prudential Mutual
Funds (including the Series), (b) employees of Prudential Securities and PMF and
their subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees and special agents of Prudential and its subsidiaries and all persons
who have retired directly from active service with Prudential or one of 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, or within one year in the case of Benefit Plans, (ii) the
purchase is made with proceeds of a redemption of shares of any open-end fund
sponsored by the financial adviser's previous employer (other than a money
market or other no-load fund which imposes a distribution or service fee of .25
of 1% or less) 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
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Series Shares--Reduction and Waiver of Initial Sales
Charges--Class A Shares" in the Statement of Additional Information.
Class B and Class C Shares
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
Class Z Shares
Class Z shares are available for purchase by (i) pension, profit sharing or
other employee benefit plans qualified under Section 401 of the Internal Revenue
Code, deferred compensation and annuity plans under Sections 457 and 403 (b) (7)
of the Internal Revenue Code, and non-qualified plans (Benefit Plans), provided
such plans (in combination with other plans sponsored by the same employer or
group of related employers) have at least $50 million in defined contribution
assets or make a single investment in a single PMF fund of $10 million or more,
(ii) investors who make a single investment in a single PMF fund of $10 million
or more in a single account (or who have $10 million or more; invested in shares
of the Series held in a single account); (iii) participants in the Fund Advisory
Program (a mutual fund allocation program sponsored by Prudential Securities)
for which the Series is an available option; and (iv) investors who are, or have
executed a letter of intent to become, stockholders of The Prudential
Institutional Fund at the time the Series is reorganized or who at that time
have exchangeability into The Prudential Institutional Fund.
After a Benefit Plan qualifies to purchase Class Z shares, all subsequent
purchases will be for Class Z shares. Other investors who qualify to purchase
Class Z shares by virtue of having made a single investment of $10 million or
more or having accumulated at least $10 million in shares of the Series will
continue to so qualify unless the value of their investments should fall below
$10 million due to a redemption. In such cases, investors may continue to have
dividends and distributions earned on their remaining Class Z shares
automatically reinvested in Class Z shares. Such investors will not, however,
otherwise qualify to make additional purchases of Class Z
23
<PAGE>
shares unless they bring their total investment in shares of the Series (held in
a single account) back to at least $10 million through a single transaction.
HOW TO SELL YOUR SHARES
You can redeem shares of the Series 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 Series 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 Series 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 Series
in care of its Transfer Agent, Prudential Mutual Fund Services, Inc., Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Prudential Preferred Financial Services offices.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent of the certificate and/or written
request except as indicated below. If you hold shares through Prudential
Securities, payment for shares presented for redemption will be credited to your
Prudential Securities account, unless you indicate otherwise. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Series 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 Series 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 Series to
make payment wholly or partly in cash, the Series may pay the redemption price
in whole or in part by a distribution in kind of securities from the investment
portfolio of the Series, 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 Series Values Its Shares." If
your shares are redeemed in kind, you would incur transaction costs in
converting the assets into cash. The Series, 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 Series during any 90-day period for any one
shareholder.
Involuntary Redemption. In order to reduce expenses of the Series, 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
24
<PAGE>
than $500 due to a redemption. The Series 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 such
involuntary redemption.
90-Day Repurchase Privilege. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Series at the net asset
value next determined after the order is received, which must be within 90 days
after the date of the redemption. Any contingent deferred sales charge or CDSC
paid in connection with such redemption will be credited (in shares) to your
account. (If less than a full repurchase is made, the credit will be on a pro
rata basis.) You must notify the Series' Transfer Agent, either directly or
through Prudential Securities, at the time the repurchase privilege is exercised
to adjust your account for the CDSC you previously paid. Thereafter, any
redemptions will be subject to the CDSC applicable at the time of the
redemption. See "Contingent Deferred Sales Charge" below. Exercise of the
repurchase privilege will generally not affect federal tax treatment of any gain
realized upon redemption. However, if the redemption was made within a 30 day
period of the repurchase and if the redemption resulted in a loss, some or all
of the loss, depending on the amount reinvested, may not be allowed for federal
income tax purposes.
Contingent Deferred Sales 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
acquired 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 Series is Managed--Distributor" above
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."
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 Series shares made during the preceding
six years (five years for Class B shares purchased prior to January 22, 1990);
then
25
<PAGE>
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 a 401(k) plan, the CDSC will also be waived upon the
redemption of shares purchased with amounts used to repay loans made from the
account to the participant and from which a CDSC was previously deducted.
In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Series.
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 Series Shares--Waiver of the
Contingent Deferred Sales Charge--Class B Shares" 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. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Series 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
26
<PAGE>
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 Series 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 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" 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 Series 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, Class C and Class Z shares may be exchanged for Class A, Class B, Class
C and Class Z 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 Series 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, the Series or their agents will be liable for
any loss, liability or cost which results from acting upon
27
<PAGE>
instructions reasonably believed to be genuine under the foregoing procedures.
(The Series or its agents could be subject to liability if they fail to employ
reasonable 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 Series' 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. 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 and to shareholders who qualify to purchase Class Z shares (See
"Alternative Purchase Plan--Class Z Shares" 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 for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B or Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities or Prusec that
they are eligible for this special exchange privilege.
The Exchange Privilege may be modified or terminated at any time on 60
days' notice.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Series, 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 Series 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 Series' 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.
Best Minds Program. The Distributor sponsors the Best Minds program
pursuant to which the total dollar amount of a client's investment in the
program will be allocated equally among shares of the Series and other
Prudential Mutual Funds. For more information about this program, you should
contact your Prudential Securities financial adviser or Prusec representative.
28
<PAGE>
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 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." See also "Shareholder Investment
Account--Systematic Withdrawal Plan" in the Statement of Additional Information.
Reports to Shareholders. The Series 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 Series 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 Series at One
Seaport Plaza, New York, NY 10292. In addition, monthly unaudited financial data
is available upon request from the Series.
Shareholder Inquiries. Inquiries should be addressed to the Series 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.
29
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Fund at 1
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
Taxable Bond Funds
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
Tax-Exempt Bond Funds
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
Global Funds
Prudential Europe Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Global Utility Fund, Inc.
The Global Government Plus Fund, Inc.
The Global Total Health Fund, Inc.
Equity Funds
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential Jennison Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Money Market Funds
o Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
o Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
o Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
o Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations, other than those
contained in this Prospectus, in connection with the offer contained herein,
and, if given or made, such other information or representations must not be
relied upon as having been authorized by the Fund or the Distributor. This
Prospectus does not constitute an offer by the Fund or by the Distributor to
sell or a solicitation of any offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful to make such
offer in such jurisdiction.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
----
SERIES HIGHLIGHTS ................................................... 2
Risk Factors and Special Characteristics ........................... 2
SERIES EXPENSES ..................................................... 4
HOW THE SERIES INVESTS .............................................. 5
Investment Objective and Policies .................................. 5
Hedging and Return Enhancement Strategies .......................... 7
Other Investment Practices ......................................... 10
Risks and Special Considerations ................................... 12
Investment Restrictions ............................................ 13
HOW THE SERIES IS MANAGED ........................................... 13
Manager ............................................................ 13
Subadviser ......................................................... 13
Distributor ........................................................ 14
Fee Waivers and Subsidy ............................................ 15
Portfolio Transactions ............................................. 16
Custodian and Transfer and Dividend Disbursing
Agent ............................................................. 16
HOW THE SERIES VALUES ITS SHARES .................................... 16
HOW THE SERIES CALCULATES
PERFORMANCE ........................................................ 16
TAXES, DIVIDENDS AND DISTRIBUTIONS .................................. 17
GENERAL INFORMATION ................................................. 19
Description of Common Stock ........................................ 19
Additional Information ............................................. 19
SHAREHOLDER GUIDE ................................................... 20
How to Buy Shares of the Series .................................... 20
Alternative Purchase Plan .......................................... 21
How to Sell Your Shares ............................................ 24
Conversion Feature--Class B Shares ................................. 26
How to Exchange Your Shares ........................................ 27
Shareholder Services ............................................... 28
THE PRUDENTIAL MUTUAL FUND FAMILY ................................... A-1
- -------------------------------------------------------------------------------
115A 444010J
CUSIP NOS:
Class A: 743969503
Class B: 743969602
Class C: 743969701
Class Z: 743969800
Prudential
World
Fund, Inc.
(International Stock Series)
Prudential Mutual Funds
BUILDING YOUR FUTURE [LOGO]
ON OUR STRENGTH(SM)
PROSPECTUS
September 18, 1996
<PAGE>
EXHIBIT 17(d)
- --------------------------------------------------------------------------------
THE PRUDENTIAL INSTITUTIONAL FUND
ThePRUDENTIAL[LOGO] Prospectus dated February 1, 1996
- --------------------------------------------------------------------------------
The Prudential Institutional Fund is a no-load mutual fund that is designed
to provide a range of investment alternatives for certain retirement programs
and arrangements and other institutional investors. The Prudential Institutional
Fund consists of the following seven investment funds:
GROWTH STOCK FUND seeks to achieve long-term growth of capital through
investment primarily in equity securities of established companies with
above-average growth prospects.
STOCK INDEX FUND seeks to provide investment results that correspond to the
price and yield performance of Standard & Poor's 500 Composite Stock Price
Index.
INTERNATIONAL STOCK FUND seeks to achieve long-term growth of capital through
investment in equity securities of foreign issuers. Income is a secondary
objective.
ACTIVE BALANCED FUND seeks to achieve total returns approaching equity returns,
while accepting less risk than an all-equity portfolio, through an
actively-managed portfolio of equity securities, fixed income securities and
money market instruments.
BALANCED FUND seeks to realize long-term total return consistent with moderate
portfolio risk.
INCOME FUND seeks to achieve a high level of income over the longer term while
providing reasonable safety of capital.
MONEY MARKET FUND seeks to achieve high current income, preservation of
principal and maintenance of liquidity, while striving to maintain a $1.00 net
asset value per share.
INVESTMENTS IN THE MONEY MARKET FUND (OR IN ANY OTHER FUND) ARE NEITHER
INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT
THE MONEY MARKET FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00
PER SHARE.
PROSPECTIVE INVESTORS SHOULD NOTE THAT ALL OF THE FUNDS RESERVE THE RIGHT
TO BORROW MONEY FOR TEMPORARY AND EXTRAORDINARY PURPOSES AND (EXCEPT FOR THE
MONEY MARKET FUND) IN ORDER TO TAKE ADVANTAGE OF INVESTMENT OPPORTUNITIES, WHICH
MAY BE CONSIDERED SPECULATIVE DUE TO THE INCREASED COSTS AND EXPENSES INVOLVED.
The Prudential Institutional Fund is designed to meet the needs of
retirement program sponsors, program participants, individual retirement
accounts and certain institutional investors who seek the expertise, service,
and commitment to quality that organizations within The Prudential family of
investment service companies can provide. The Prudential affiliates provide
experienced investment management, investor services, recordkeeping, and
administrative services to The Prudential Institutional Fund.
----------
This Prospectus gives you information about The Prudential Institutional
Fund that you should be aware of before investing. Additional information about
The Prudential Institutional Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information, dated February 1,
1996, which information is incorporated herein by reference and is available,
without charge, upon written request to The Prudential Institutional Fund, 21
Prudential Plaza, 751 Broad Street, Newark, New Jersey 07102-3777.
PLEASE READ THIS PROSPECTUS AND KEEP IT FOR FUTURE REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
Introduction to the Funds ...................... 1
Expense Information ............................ 2
Financial Highlights ........................... 3
The Funds ...................................... 6
Risk Factors and Investment Practices and
Policies of the Fund .......................... 9
Management of the Company ...................... 10
Investors Guide to Services .................... 12
Other Considerations ........................... 13
Performance and Yield Information .............. 15
Other Investment Practices, Risk Conditions,
and Policies of the Funds ..................... 15
More Facts About the Company ................... 22
<PAGE>
INTRODUCTION TO THE FUNDS
The Company. The Prudential Institutional Fund (the "Company") is a no-load,
open-end diversified management investment company, commonly known as a mutual
fund. The Company is organized as a Delaware business trust.
The Funds. The Company is comprised of seven investment portfolios (the
"Funds"), each of which is diversified. Each Fund has its own investment
objectives and policies, which are summarized below and described in detail
beginning on page 6.
The Advisers. Each Fund is managed by a registered investment adviser
("Adviser") that is a direct or indirect subsidiary of, or is otherwise
affiliated with, The Prudential Insurance Company of America ("The Prudential").
The Advisers operate under the supervision of Prudential Institutional Fund
Management, Inc., the Company's investment manager ("Manager").
Opening an Account. The Administrator of your retirement plan or your employee
benefits office can provide you with detailed information on how to participate
in your plan and how to select a Fund as an investment option.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name of Fund Investment Objective Invests Primarily in Investment Adviser
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Stock Fund Seeks to achieve long-term A diversified portfolio of equity Jennison Associates Capital
growth of capital securities of established companies Corp. ("Jennison")
with above average growth prospects
- ------------------------------------------------------------------------------------------------------------------------------------
Stock Index Fund Seeks to provide investment A diversified portfolio of equity The Prudential
results that correspond to the securities, which as a group is Investment Corporation
price and yield performance of designed to approximate the price ( "PIC ")
Standard & Poor's 500 Composite and yield performance of the S&P 500
Stock Price Index Index
("S&P 500 Index")
- ------------------------------------------------------------------------------------------------------------------------------------
International Stock Fund Seeks to achieve long-term A diversified portfolio of equity Mercator Asset
growth of capital; income is a securities of foreign issuers Management, L.P.
secondary objective ("Mercator")
- ------------------------------------------------------------------------------------------------------------------------------------
Active Balanced Fund Seeks to achieve total returns An actively-managed portfolio of Jennison
approaching equity returns, equity securities, fixed income
while accepting less risk than securities and money market
an all-equity portfolio instruments
- ------------------------------------------------------------------------------------------------------------------------------------
Balanced Fund Seeks to achieve long-term A diversified portfolio that PIC
total return consistent with allocates its assets among equity
moderate portfolio risk securities, fixed income securities
and money market instruments
- ------------------------------------------------------------------------------------------------------------------------------------
Income Fund Seeks to achieve a high level Debt securities, including corporate PIC
of income over the longer term debt obligations, mortgage-backed
while providing reasonable and asset-backed securities, U.S.
safety of capital Government obligations, and U.S.
dollar-denominated debt securities
of foreign issuers
- ------------------------------------------------------------------------------------------------------------------------------------
Money Market Fund Seeks to achieve high current A diversified portfolio of PIC
income, preservation of high-quality domestic and U.S.
principal and maintenance of dollar-denominated foreign money
liquidity, while striving to market instruments that present
maintain a $1.00 net asset minimal credit risks
value per share
</TABLE>
Each Fund may be expected to have different investment results and different
market and financial risks, which are described in detail beginning on page 5.
Since shares of a Fund represent an interest in an investment in securities with
fluctuating market prices, the net asset value per share of each Fund, other
than the Money Market Fund, and the value of a shareholder's holdings will vary
as the aggregate value of a Fund's portfolio securities increases or decreases.
It is anticipated that shares of the Money Market Fund will be purchased,
redeemed or exchanged at a net asset value of $1.00 per share, although there
can be no assurance that the Fund will be able to maintain a constant net asset
value per share. For information on how to purchase and redeem shares, or to
exchange the shares of one Fund for shares of another Fund, please refer to
pages 11-12.
The dividends paid by each Fund will vary proportionally to the income
received from its investments and the expenses incurred by the Fund. Dividends
and other distributions of each Fund are declared in cash and automatically
reinvested in additional shares of the Fund. While shareholders may not elect to
receive dividends and other distributions in cash, the same effect may be
achieved at any time by redeeming shares of the Fund.
The investment objectives of each Fund set forth above are fundamental and
may not be changed without a vote of the shareholders of that Fund. However, the
investment policies and practices of each Fund, unless otherwise specifically
stated, are not fundamental. There can be no assurance that a Fund will achieve
its investment objective.
The Prudential Institutional Fund Prospectus 1
<PAGE>
EXPENSE INFORMATION
The following table, including the examples below, is included to assist your
understanding of the various costs and expenses that an investor will incur
directly and indirectly as a shareholder in each of the Funds based upon each
Fund's annual operating expenses. The fees and expenses set forth below for the
Funds are based on data for the Fund's fiscal year ended September 30, 1995. The
example should not be considered a representation of past or future performance.
Actual fees and expenses for each of the Funds for the current year may be
greater or less than those stated below.
<TABLE>
<CAPTION>
Shareholder Growth Stock International Active Money
Transaction Stock Index Stock Balanced Balanced Income Market
Expenses Fund Fund Fund Fund Fund Fund Fund
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales Load Imposed on Purchase None None None None None None None
Sales Load Imposed on Reinvested Dividends None None None None None None None
Deferred Sales Load Imposed on Redemptions None None None None None None None
Redemption Fee None None None None None None None
Exchange Fee None None None None None None None
Annual Operating Expenses (as a percentage of average daily net assets)
- --------------------------------------------------------------------------------------------------------------------------
Management Fees (Before Reduction) .70% .40% 1.15% .70% .70% .50% .45%
Distribution Expenses None None None None None None None
Other Expenses (Before Reduction) .31% .48% .49% .35% .40% .48% .47%
Total Operating Expenses (Before Reduction) 1.01% .88% 1.64% 1.05% 1.10% .98% .92%
Total Operating Expenses (After Reduction)<F1> 1.00% .60% 1.60% 1.00% 1.00% .70% .60%
- ----------
<FN>
<F1> In the interest of limiting the expenses of the Funds, the Manager has
agreed, until September 30, 1996, to bear any expenses that would cause the
ratio of expenses payable by each Fund to average daily net assets ("Fund
Operating Expenses") to exceed the Fund's Total Operating Expenses (After
Reduction) as specified above. Expenses paid or assumed under this
agreement are subject to recoupment by the Manager from the relevant Fund
in later years, provided that (a) no recoupment will be made, in any year,
if it would result in the Fund's expense ratio for a year exceeding the
estimated Total Operating Expenses (After Reduction) and (b) no recoupment
will be made after December 31, 1996. Each Fund's organizational expenses
will be charged to that Fund over a period not to exceed 60 months.
</FN>
</TABLE>
Examples: An investor in each Fund would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2) redemption at the end of each
future time period*:
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
Growth Stock Fund $10 $32 $55 $122
- --------------------------------------------------------------------------------
Stock Index Fund $ 6 $19 $33 $ 75
- --------------------------------------------------------------------------------
International Stock Fund $16 $50 $87 $190
- --------------------------------------------------------------------------------
Active Balanced Fund $10 $32 $55 $122
- --------------------------------------------------------------------------------
Balanced Fund $10 $32 $55 $122
- --------------------------------------------------------------------------------
Income Fund $ 7 $22 $39 $ 87
- --------------------------------------------------------------------------------
Money Market Fund $ 6 $19 $33 $ 75
- ----------
* There are no charges imposed upon redemption.
The above examples should not be considered to be a representation of past or
future expenses for each Fund. Actual expenses may be greater or less than those
shown above. Similarly, the annual rate of return assumed in the above examples
is not an estimate or guarantee of future investment performance, but is
included for illustrative purposes only.
2 The Prudential Institutional Fund Prospectus
<PAGE>
FINANCIAL HIGHLIGHTS (for a share outstanding throughout the indicated period)
The following financial highlights have been audited by Deloitte & Touche LLP,
independent accountants, whose report thereon was unqualified. This information
is derived from and 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 share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated.
<TABLE>
<CAPTION>
Growth Stock Fund Stock Index Fund
---------------------------------------- --------------------------------
November 5, November 5,
Year Ended 1992(a) Year Ended 1992(a)
September 30, Through September 30, Through
------------------ September ----------------- September
1995 1994 30, 1993 1995 1994 30, 1993
-------- -------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period ........... $ 12.00 $ 12.10 $ 10.00 $ 11.27 $ 11.12 $10.00
-------- -------- ------- -------- ------- ------
Income from investment
operations:
Net investment income(b) ....................... -- -- .04 .23 .26 .23
Net realized and unrealized gain
(loss) on investment and foreign
currency transactions ......................... 4.22 (.06) 2.08 2.97 .11 .94
-------- -------- ------- -------- ------- ------
Total from investment
operations .................................. 4.22 (.06) 2.12 3.20 .37 1.17
-------- -------- ------- -------- ------- ------
Less distributions:
Dividends from net investment income ........... (.01) (.01) (.02) (.22) (.18) (.05)
Distributions from net realized gains .......... -- (.03) -- (.03) (.04) --
-------- -------- ------- -------- ------- ------
Total distributions ............................ (.01) (.04) (.02) (.25) (.22) (.05)
-------- -------- ------- -------- ------- ------
Net asset value, end of period ................. $ 16.21 $ 12.00 $ 12.10 $ 14.22 $ 11.27 $11.12
======== ======== ======= ======== ======= ======
TOTAL RETURN(d): ............................... 35.14% (0.50)% 21.22% 29.02% 3.33% 11.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ................ $220,505 $106,956 $47,998 $101,945 $50,119 $27,142
Average net assets (000) ....................... $149,985 $ 71,449 $17,592 $ 71,711 $38,098 $18,807
Ratios to average net assets(b):
Expenses ...................................... 1.00% 1.00% 1.00%(c) .60% .60 .60%(c)
Net investment income (loss) .................. (.07)% .04% .31%(c) 2.55% 2.34% 2.41%(c)
Portfolio turnover rate ........................ 64% 65% 84% 11% 2% 1%
</TABLE>
- ----------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) 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 other distributions. Total return for periods
of less than a full year are not annualized. Total return includes the
effect of expense subsidies.
3 The Prudential Institutional Fund Prospectus
<PAGE>
FINANCIAL HIGHLIGHTS (for a share outstanding throughout the indicated period)
The following financial highlights have been audited by Deloitte & Touche LLP,
independent accountants, whose report thereon was unqualified. This information
is derived from and 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 share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated.
<TABLE>
<CAPTION>
International Stock Fund Active Balanced Fund
---------------------------------------- --------------------------------
November 5, January 4,
Year Ended 1992(a) Year Ended 1993(a)
September 30, Through September 30, Through
------------------ September --------------------- September
1995 1994 30, 1993 1995 1994 30, 1993
-------- -------- ------ -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period ........ $ 14.84 $ 12.35 $ 10.00 $ 10.92 $ 11.05 $ 10.00
-------- -------- ------- -------- ------- -------
Income from investment
operations:
Net investment income(b) .................... .18 .13 .16 .33 .24 .21
Net realized and unrealized gain
(loss) on investment and foreign
currency transactions ...................... .66 2.54 2.21 1.54 (.12) .84
-------- -------- ------- -------- ------- -------
Total from investment
operations ............................... .84 2.67 2.37 1.87 .12 1.05
-------- -------- ------- -------- ------- -------
Less distributions:
Dividends from net investment income ........ (.10) (.03) (.02) (.29) (.14) --
Distributions from net realized gains ....... (.33) (.15) -- (.04) (.11) --
-------- -------- ------- -------- ------- -------
Total distributions ......................... (.43) (.18) (.02) (.33) (.25) --
-------- -------- ------- -------- ------- -------
Net asset value, end of period .............. $ 15.25 $ 14.84 $ 12.35 $ 12.46 $ 10.92 $ 11.05
======== ======== ======= ======== ======= =======
TOTAL RETURN(d) ............................. 5.95% 21.71% 23.74% 17.66% 1.07% 10.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ............. $136,685 $102,824 $31,708 $133,352 $81,176 $38,786
Average net assets (000) .................... $118,927 $ 68,476 $14,491 $104,821 $58,992 $12,815
Ratios to average net assets:(b) ............
Expenses ................................... 1.60% 1.60% 1.60%(c) 1.00% 1.00% 1.00%(c)
Net investment income ...................... 1.58% 1.08% 1.44%(c) 3.53% 3.06% 2.68%(c)
Portfolio turnover rate ..................... 20% 21% 15% 30% 40% 47%
</TABLE>
- ----------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) 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 other distributions. Total return for periods
of less than a full year are not annualized. Total return includes the
effect of expense subsidies.
The Prudential Institutional Fund Prospectus 4
<PAGE>
FINANCIAL HIGHLIGHTS (for a share outstanding throughout the indicated period)
The following financial highlights have been audited by Deloitte & Touche LLP,
independent accountants, whose report thereon was unqualified. This information
is derived from and 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 share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated.
<TABLE>
<CAPTION>
Balanced Fund Income Fund Money Market Fund
----------------------------- --------------------------- ----------------------------
November 5, March 1, January 4,
Year Ended 1992(a) Year Ended 1993(a) Year Ended 1993(a)
September 30, Through September 30, Through Sepember 30, Through
---------------- September --------------- September --------------- September
1995 1994 30, 1993 1995 1994 30, 1993 1995 1994 30, 1993
------- ------- --------- ------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period ........ $ 11.08 $ 11.80 $ 10.00 $ 9.38 $ 10.33 $ 10.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations:
Net investment income(b) .... .18 .31 .31 .59 .52 .27 .05 .03 .02
Net realized and unrealized
gain (loss) on investment
and foreign currency
transactions ............... 1.53 (.52) 1.54 .60 (.91) .33 -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations ............... 1.71 (.21) 1.85 1.19 (.39) .60 .05 .03 .02
------- ------- ------- ------- ------- ------- ------- ------- -------
Less distributions:
Dividends from net
investment income .......... (.25) (.23) (.05) (.59) (.52) (.27) (.05) (.03) (.02)
Distributions from net
realized gains ............. (.05) (.28) -- -- (.04) -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions ......... (.30) (.51) (.05) (.59) (.56) (.27) (.05) (.03) (.02)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of period .............. $ 12.49 $ 11.08 $ 11.80 $ 9.98 $ 9.38 $ 10.33 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN(d) ............. 15.90% (1.88)% 18.58% 13.11% (3.91)% 6.11% 5.47% 3.32% 2.08%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (000) ............... $82,110 $64,313 $27,663 $52,297 $41,401 $35,015 $58,054 $46,331 $30,235
Average net assets (000) .... $70,914 $44,048 $17,401 $46,386 $37,802 $25,626 $52,446 $38,170 $25,296
Ratios to average
net assets:(b)
Expenses .................. 1.00% 1.00% 1.00%(c) .70% .70% .70%(c) .60% .60% .60%(c)
Net investment income ..... 3.19% 2.86% 3.16%(c) 6.17% 5.24% 4.62%(c) 5.37% 3.34% 2.73%(c)
Portfolio turnover rate ..... 65% 52% 74% 145% 83% 93% -- -- --
</TABLE>
- ----------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) 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 other distributions. Total return for periods
of less than a full year are not annualized. Total return includes the
effect of expense subsidies.
5 The Prudential Institutional Fund Prospectus
<PAGE>
================================================================================
THE FUNDS
Growth Stock Fund. The objective of the Growth Stock Fund is to achieve
long-term growth of capital through investment primarily in equity securities of
established companies with above-average growth prospects. Current income, if
any, is incidental to this objective.
Under normal market conditions, at least 65% of the value of the total assets of
the Fund will be invested in common stocks and preferred stocks of companies
that exceed $1 billion in market capitalization. Stocks will be selected on a
company-by-company basis primarily through use of fundamental analysis.
Jennison, the Adviser for the Fund, looks for companies that have demonstrated
growth in earnings and sales, high returns on equity and assets, or other strong
financial characteristics, and, in the judgment of Jennison, are attractively
valued. These companies tend to have a unique market niche, a strong new product
profile or superior management.
The Fund also may invest up to 35% of its total assets in: (i) common stocks,
preferred stocks and other equity-related securities of companies that are
undergoing changes in management or product and marketing dynamics that have not
yet been reflected in reported earnings but that are expected to impact earnings
in the intermediate term--these securities often lack investor recognition and
are often favorably valued, (ii) other equity-related securities; (iii) with
respect to a maximum of 20% of its total assets, common stocks, preferred stocks
and other equity-related securities of foreign issuers; (iv) fixed income
securities and mortgage-backed securities rated Baa or higher by Moody's
Investor Services ("Moody's") or BBB or higher by Standard & Poor's Ratings
Services or another nationally rated statistical rating organization ("NRSRO")
or, if not rated, determined by the adviser to be of comparable quality to
securities so rated ("investment grade"); and (v) obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities.
The effort to achieve superior investment return necessarily involves a risk of
exposure to declining values. Securities in which the Fund primarily may invest
have historically been more volatile than the S&P 500 Index. Accordingly, during
periods when stock prices decline generally, it can be expected that the value
of the Fund may decline more than the market indices. However, on a long-term
basis, Jennison anticipates that the investment return of the Fund should exceed
that of the market indices.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for hedging or incidental income purposes, the Fund may: (i)
enter into repurchase agreements, when-issued, delayed-delivery and forward
commitment transactions; (ii) lend its portfolio securities; (iii) purchase and
sell put and call options on securities and stock indices; and (iv) purchase and
sell futures contracts on stock indices and options thereon.
Stock Index Fund. The Stock Index Fund seeks to provide investment results that
correspond to the price and yield performance of the S&P 500 Index. The S&P 500
Index is an unmanaged, market-weighted index of 500 stocks selected by Standard
& Poor's Corporation ("S&P") on the basis of their market size, liquidity and
industry group representation. Inclusion in the S&P 500 Index in no way implies
an opinion by S&P as to a stock's attractiveness as an investment. The S&P 500
Index, composed of stocks representing more than 70% of the total market value
of all publicly traded U.S. common stocks, is widely regarded as representative
of the performance of the U.S. stock market as a whole. "Standard & Poor's(R)",
"S&P(R)", "S&P 500(R)", "Standard & Poor's 500", and "500" are trademarks of
McGraw-Hill, Inc. and have been licensed for use by The Prudential Insurance
Company of America and its affiliates and subsidiaries. The Fund is not
sponsored, endorsed, sold or promoted by S&P and S&P makes no representation
regarding the advisability of investing in the Fund. See "The Funds--Stock Index
Fund" in the Statement of Additional Information regarding certain additional
disclaimers and limitations of liability on behalf of S&P.
Traditional methods of security analysis will not be used in connection with the
management of this Fund by PIC, the Adviser for the Fund, in making investment
decisions. Instead, PIC will use a passive, indexing approach. To achieve its
investment objective, the Fund will purchase equity securities that as a group
reflect the price and yield performance of the S&P 500 Index. The Fund intends
to purchase all 500 stocks included in the S&P 500 Index in approximately the
same proportions as they are represented in the S&P 500 Index. In addition, from
time to time adjustments may be made in the Fund's holdings due to changes in
the composition of the S&P 500 Index or due to receipt of distributions of
securities of companies spun off from S&P 500 companies. The Fund will not adopt
a temporary defensive investment posture in times of generally declining market
conditions, and investors in the Fund, therefore, will bear the risk of such
market conditions.
PIC believes that this investment approach will provide an effective method of
tracking the performance of the S&P 500 Index. Nevertheless, PIC does not expect
that the Fund's performance will precisely correspond to the performance of the
S&P 500 Index. The Fund will attempt to achieve a correlation between its
performance and that of the S&P 500 Index of at least 0.95, without taking into
account expenses. A correlation of 1.00 would indicate perfect correlation,
which would be achieved when the Fund's net asset value, including the value of
its dividends and capital gains distributions, increases or decreases in exact
proportion to changes in the S&P 500 Index. PIC will, of course, attempt to
minimize any tracking differential (i.e., the statistical measure of the
difference between the investment results of the Fund and those of the S&P 500
Index). Tracking will be monitored at least on a monthly basis. All tracking
maintenance activities will be reviewed regularly to determine whether any
changes in policies or techniques are necessary. However, in addition to
potential tracking differences, brokerage and other transaction costs, as well
as other Fund expenses, may cause the Fund's return to be lower than the return
of the S&P 500 Index. Consequently, there can be no assurance as to how closely
the Fund's performance will correspond to the performance of the S&P 500 Index.
The Fund intends that at least 80% of the value of its total assets will be
invested in securities included in the S&P 500 Index. The Fund may invest the
balance of its assets in: (i) other equity-related securities; (ii) obligations
issued or guaranteed by the U.S. Government, its agencies and instrumentalities;
(iii) put and call options on securities and stock indices; and (iv) futures
contracts on stock indices and options thereon.
6 The Prudential Institutional Fund Prospectus
<PAGE>
Options, futures contracts, and options on futures contracts are used, if at
all, primarily to invest uncommitted cash balances, to maintain liquidity to
meet redemptions, to facilitate tracking, to reduce transaction costs or to
hedge the Fund's portfolio.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for incidental return enhancement purposes, the Fund may also:
(i)enter into repurchase agreements, when-issued, delayed-delivery and forward
commitment transactions; and (ii) lend its portfolio securities.
International Stock Fund. The International Stock Fund seeks to achieve
long-term growth of capital through investment in equity securities of foreign
companies. Income is a secondary objective. The Fund will, under normal
circumstances, invest at least 65% of the value of its total assets in common
stocks and preferred stocks of issuers located in at least three foreign
countries. The Fund will invest primarily in seasoned companies (i.e., companies
with an established operating record of 3 years or greater) that are
incorporated, organized, or that do business primarily outside the United
States. The Fund will invest in securities of such foreign issuers through
direct market purchases on foreign stock exchanges and established
over-the-counter markets as well as through the purchase of American Depository
Receipts ("ADRs"), European Depository Receipts ("EDRs") or other similar
securities.
The Fund intends to broadly diversify its holdings among issuers located in
developed and developing countries having national financial markets. Mercator,
the Adviser for the Fund, believes that broad diversification provides a prudent
means of reducing volatility while permitting the Fund to take advantage of the
potentially different movements of major equity markets. While the Fund may
invest anywhere outside the United States, it expects that most of its
investments will be made in securities of issuers located in developed countries
in North America, Western Europe, and the Pacific Basin. In allocating the
Fund's investments among different countries and geographic regions, Mercator
will consider such factors as relative economic growth, expected levels of
inflation, government policies affecting business conditions, and market trends
throughout the world. In selecting companies within those countries and
geographic regions, Mercator seeks to identify those companies that are best
positioned and managed to benefit from the factors listed above.
Investing in securities of foreign issuers generally involves greater risks than
investing in the securities of domestic companies. These risks are often
heightened for investments in emerging or developing countries. The Fund does
not currently expect to invest 25% or more of its net assets in any one country.
For temporary defensive purposes, the Fund may invest up to 100% of its assets
in common stocks, preferred stocks and other equity-related securities of U.S.
issuers.
The Fund may invest up to 35% of the value of its total assets in: (i) other
equity-related securities of foreign issuers; (ii) common stocks, preferred
stocks and other equity-related securities of U.S. issuers; (iii) investment
grade debt securities of domestic and foreign corporations, governments,
governmental entities, and supranational entities (such as the Asian Development
Bank, the European Coal and Steel Community, the European Economic Community,
and the International Bank for Reconstruction and Development (the "World
Bank")); and (iv) invest in high-quality domestic money market instruments and
short-term fixed income securities. The Fund's use of money market instruments
and short-term debt securities generally will reflect Mercator's overall measure
of optimism relating to the global equity markets, and the Fund will use such
securities to reduce downside volatility during uncertain or declining market
conditions.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for hedging or incidental return enhancement purposes, the Fund
may: (i) enter into repurchase agreements, when-issued, delayed-delivery and
forward commitment transactions; (ii) lend its portfolio securities; and (iii)
purchase and sell put and call options on any securities in which it may invest
and options on any securities index based on securities in which the Fund may
invest. In order to attempt to reduce risks associated with currency
fluctuations, the Fund may (i) purchase and sell currency spot contracts; (ii)
purchase and sell currency futures contracts and currency forward contracts; and
(iii) purchase and sell put and call options on currencies and on foreign
currency futures contracts.
Active Balanced Fund. The objective of this Fund is to seek to achieve total
returns approaching equity returns, while accepting less risk than an all-equity
portfolio, through an actively-managed portfolio of equity securities, fixed
income securities, and money market instruments.
Jennison, the Adviser to the Fund, uses the following ranges as the normal
operating parameters for the securities to be purchased by the Fund: (i) 40-75%
of the total assets of the Fund will be invested in common stocks, preferred
stocks and other equity-related securities; (ii) 25-60% of the total assets of
the Fund will be invested in investment grade fixed income securities; and (iii)
0-35% of the total assets of the Fund will be invested in money market
instruments. Within these parameters, at least 25% of the Fund's total assets
will be invested in fixed income senior securities.
Unlike the Balanced Fund discussed below, the Active Balanced Fund's investments
will actively be shifted among these asset classes in order to capitalize on
intermediate term (i.e., 12 to 18 months) valuation opportunities and to
maximize the Fund's total investment return. The equity component of this Fund
will be invested in the common stocks, preferred stocks and other equity-related
securities of companies that are expected to generate superior earnings growth
or are attractively valued. The fixed income component of this Fund will be
invested primarily in fixed income securities rated "A" or better by Moody's or
S&P or, if not rated, determined by Jennison to be of comparable quality to
securities so rated. However, the Fund also may invest up to 20% of the fixed
income portion of its portfolio in securities rated Baa/BBB (or the equivalent
rating of another NRSRO) or, if not rated, determined by Jennison to be of
comparable quality to securities so rated. The weighted average maturity of the
fixed income component of the Fund will normally be between 5 and 25 years.
Under normal market conditions at least 65% of the value of the Fund's total
assets will be invested according to the above allocations. Within these
allocations, the Fund's assets may be invested as follows: (i) up to 15% of the
Fund's total assets, in common stocks, preferred stocks and other equity-related
securities of foreign issuers; (ii) up to 20% of the Fund's total assets, in
investment grade fixed income securities of foreign issuers; (iii) in
mort-
The Prudential Institutional Fund Prospectus 7
<PAGE>
gage-backed securities; (iv) in custodial receipts and asset-backed securities;
and (v) in obligations issued or guaranteed by the U.S. Government, its agencies
and instrumentalities.
In order to invest uncommitted cash balances, to maintain liquidity to meet
redemptions, or for hedging or incidental return enhancement, the Fund may: (i)
enter into repurchase agreements, when-issued, delayed-delivery and forward
commitment transactions; (ii) lend its portfolio securities; (iii) purchase and
sell put and call options on securities, stock indices and interest rate
indices; (iv) purchase and sell futures contracts on stock indices and interest
rate indices and options thereon and (v) purchase and sell futures contracts on
securities.
The Fund also may: (i) purchase and sell currency spot contracts; (ii) purchase
and sell currency futures contracts and currency forward contracts; and (iii)
purchase and sell put and call options on currencies and on foreign currency
futures contracts in each case to attempt to reduce risks associated with
currency fluctuations.
Balanced Fund. The Balanced Fund seeks to realize long-term total return
consistent with moderate portfolio risk. To achieve its objective, the Balanced
Fund will allocate at least 65% of its total assets among (i) common stocks,
preferred stocks and other equity-related securities (including ADRs); (ii)
investment grade fixed income securities with a weighted average maturity of 10
years or less, and (iii) high-quality money market instruments and other
short-term investment grade debt securities.
PIC will adjust the mix of investments among these three asset categories to
capitalize on perceived variations in the potential for return resulting from
the interaction of changing economic and financial market conditions, taking
into consideration the risks associated with each type of security. PIC uses the
following ranges as the normal operating parameters for each type of security to
be purchased for the Fund: (i) 25-50% of the Fund's total assets will be
invested in common stocks, preferred stocks and other equity-related securities
(including ADRs); (ii) 30-60% of the Fund's total assets will be invested in
investment grade fixed income securities with a weighted average maturity of 10
years or less; and (iii) 0-45% of the Fund's total assets will be invested in
money market instruments. Within these parameters, at least 25% of the Fund's
total assets will be invested in fixed income senior securities. The equity
portion of the Fund will be invested using an approach that combines a value
orientation to stock valuations with an in-depth analysis of individual
companies. Stock prices will be evaluated relative to a company's profitability,
estimated earnings growth, quality of management and other factors such as
underlying asset value and the presence of problems that are believed to be
temporary. While the majority of the Fund's holdings are expected to be in
larger, well-established companies, the Fund also may invest in the equity
securities of smaller companies. Adjustments to the investment mix of the
Balanced Fund normally will be made in a gradual manner over a period of time,
depending on market and economic conditions.
The Fund also may invest up to 35% of the value of its total assets in:
(i) common stocks, preferred stocks and other equity-related securities of
foreign issuers not traded in the U.S. or denominated in U.S. dollars;
(ii) investment grade fixed income securities of foreign issuers;
(iii) mortgage-backed securities; (iv) custodial receipts and asset-backed
securities; and (v) obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities.
In order to invest uncommitted cash balances, to maintain liquidity to meet
redemptions, or for hedging or incidental return enhancement purposes, the Fund
may: (i) purchase and sell put and call options on securities, stock indices and
interest rate indices; (ii) purchase and sell futures contracts on securities,
stock indices and interest rate indices, and (iii) enter into interest rate swap
transactions.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for incidental return enhancement, the Fund may also: (i) enter
into repurchase agreements, when-issued, delayed-delivery and forward commitment
transactions; and (ii) lend its portfolio securities. With respect to the equity
component of the Fund's total assets, the Fund also may: (i) purchase and sell
currency spot contracts; (ii) purchase and sell currency futures contracts and
currency forward contracts; and (iii) purchase and sell put and call options on
currencies and on foreign currency futures contracts in each case to attempt to
reduce risks associated with currency fluctuations.
Income Fund. The Income Fund seeks a high level of income over the longer term
while providing reasonable safety of capital by investing in securities with a
low level of default risk, with the effect of seeking preservation of capital.
To achieve its objective, the Fund will invest, under normal circumstances, at
least 65% of the value of its total assets in fixed income securities. Such
securities include: (i) corporate debt obligations; (ii) mortgage-backed
securities; (iii) custodial receipts and asset-backed securities; (iv) U.S.
Government obligations (such as U.S. Treasury bills, notes and bonds), and
securities issued by its agencies or its instrumentalities; and (v) U.S.
dollar-denominated investment grade fixed income securities of foreign issuers.
The Fund will invest primarily in fixed income securities rated "A" or better by
Moody's or S&P (or the equivalent rating of another NRSRO) or, if not rated,
determined by PIC to be of comparable quality to securities so rated. However,
the Fund may also invest up to 20% of its portfolio in securities rated Baa/BBB
or above (or the equivalent rating of another NRSRO) or, if not rated,
determined by PIC to be of comparable quality to securities so rated.
The Fund has no maturity restrictions. However, PIC anticipates that the
securities in which the Fund will invest will primarily be intermediate to
long-term debt securities having an average maturity of between 5 and 20 years.
Movements in interest rates typically have a greater effect on the price of
longer-term bonds than shorter-term bonds. Normally, the value of the Fund's
investments will vary inversely with changes in interest rates. As interest
rates rise, the value of the Fund's investments will tend to decline and, as
interest rates fall, the value of the Fund's investments will tend to increase.
8 The Prudential Institutional Fund Prospectus
<PAGE>
In order to invest uncommitted cash balances, to maintain liquidity to meet
redemptions, or for hedging or incidental yield enhancement purposes, the Fund
may also: (i) purchase and sell put and call options on securities and interest
rate indices; (ii) purchase and sell futures contracts on securities, securities
indices and interest rate indices; and (iii) enter into interest rate swap
transactions, caps, collars and floors. To facilitate the Fund's investment
program, the Fund may also purchase and sell non-U.S. dollar denominated
investment grade fixed income securities of foreign issuers.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for additional income, the Fund may also: (i) enter into
repurchase agreements, when-issued, delayed-delivery and forward commitment
transactions; and (ii) lend its portfolio securities.
Money Market Fund. The Money Market Fund seeks to achieve high current income,
preservation of principal, and maintenance of liquidity. To achieve its
objectives, the Fund will invest in a diversified portfolio of high-quality
domestic and U.S. dollar-denominated foreign money market instruments that
present minimal credit risks and which, at the time of acquisition, are eligible
securities. Eligible securities include securities or issuers of securities
rated in one of the two highest credit categories for short-term debt
obligations assigned by any two NRSROs, or by one NRSRO, if only one has rated
the money market securities ("Requisite NRSROs") or, if unrated, are of
comparable investment quality. The Money Market Fund will invest at least 95% of
its total assets in eligible securities that are rated within the highest rating
category for short-term debt obligations by the Requisite NRSROs or unrated
securities of comparable investment quality. The Fund may also invest up to 50%
of the value of its total assets in U.S. dollar-denominated short-term
securities of foreign issuers.
The eligible money market securities in which the Fund may invest include: (i)
short-term obligations of the U.S. Government, its agencies, and
instrumentalities; (ii) short-term obligations of banks and savings and loan
associations, including certificates of deposit, banker's acceptances, and time
deposits; (iii) short-term corporate obligations, including notes and bonds with
remaining maturities of 397 days or less; (iv) commercial paper (unsecured
promissory notes having maturities of 9 months or less) issued by corporations
and finance companies; (v) repurchase agreements; and (vi) U.S.
dollar-denominated obligations of foreign issuers. Certain of these money market
securities may have adjustable rates of interest with periodic demand features.
The Fund will invest in eligible money market securities maturing in 397 days or
less and will maintain a dollar-weighted average portfolio maturity of 90 days
or less. These practices are designed to minimize any price fluctuation in the
Fund's portfolio securities. The Fund seeks to maintain a constant net asset
value of $1.00 per share, although in certain circumstances this may not be
possible.
PIC will actively manage the Fund, adjusting the composition of investments and
the average maturity of the Fund's portfolio according to its outlook for
short-term interest rates. During periods of rising interest rates, a shorter
average maturity may be expected, while a longer maturity may be more
appropriate when interest rates are falling.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for additional income, the Fund may (i) enter into repurchase
agreements, when-issued, delayed-delivery and forward commitment transactions
and (ii) lend its portfolio securities.
Risk Factors and Investment Practices and Policies of the Funds. As discussed
above under the section entitled "The Funds", an investment in each Fund is
subject to certain risks as a result of the particular investment practices and
policies followed by the Fund. For a fuller description of the types of
securities in which each of the Funds may invest, the investment techniques each
Fund may employ and the risks associated with these investments and techniques,
see the section entitled "Other Investment Practices, Risk Conditions and
Policies of the Funds" below and "Other Investment Practices, Risk Conditions
and Policies of the Funds" in the Statement of Additional Information.
The Prudential Institutional Fund Prospectus 9
<PAGE>
================================================================================
MANAGEMENT OF THE COMPANY
The Manager. Prudential Institutional Fund Management, Inc. (the "Manager") 30
Scranton Office Park, Moosic, Pennsylvania, 18507-1789 is the Manager of the
Company. The Manager is an indirect wholly-owned subsidiary of The Prudential,
one of the largest diversified insurance and financial services institutions in
the world. The Manager was incorporated on May 6, 1992 under the laws of the
Commonwealth of Pennsylvania. See "The Manager and Advisers" in the Statement of
Additional Information.
Subject to the supervision and direction of the Company's Trustees (the
"Trustees"), the Manager provides a continuous investment program for the
Company, monitors each Adviser's investment performance, and evaluates and
recommends whether each Adviser's contract should be renewed, modified, or
terminated. The Manager also supervises all matters relating to the Company's
operations and business affairs and may provide certain of the special
processing services described below.
Each Fund pays the Manager a fee for its services provided to the Fund that is
computed daily and paid monthly. For the year ended September 30, 1995, the
Manager was paid a management fee at the annual rate specified below, expressed
as a percentage of the Fund's average daily net assets:
Management Fee
Fund (Before Reduction)
- -----------------------------------------------------------
Growth Stock Fund .70%
- -----------------------------------------------------------
Stock Index Fund .40%
- -----------------------------------------------------------
International Stock Fund 1.15%*
- -----------------------------------------------------------
Active Balanced Fund .70%
- -----------------------------------------------------------
Balanced Fund .70%
- -----------------------------------------------------------
Income Fund .50%
- -----------------------------------------------------------
Money Market Fund .45%
- -----------------------------------------------------------
- ----------
* The Management Fee paid by the International Stock Fund is higher than that
charged to most investment companies.
The Manager may hereafter agree, from time to time, to further waive or modify
any waiver of its management fee and subsidize certain operating expenses of a
Fund.
The Advisers. The Manager has entered into Sub-Advisory Agreements (the
"Advisory Agreements") with PIC, Jennison and Mercator under which each
furnishes investment advisory services in connection with the management of the
various Funds. The Manager (not the Funds) compensates each Adviser for its
services. Under the Advisory Agreements, each Adviser, subject to the
supervision of the Manager and the Trustees, is responsible for managing the
assets of the respective Funds in accordance with their investment objectives,
investment programs, and policies. Each Adviser determines what securities and
other instruments are purchased and sold for its respective Fund and is
responsible for obtaining and evaluating financial data relevant to each Fund.
The Prudential Investment Corporation, 751 Broad Street, Newark, New Jersey
07102, serves as Adviser to the Stock Index Fund, the Balanced Fund, the Income
Fund, and the Money Market Fund. PIC also invests available cash balances for
all of the Funds which it may do through a joint repurchase agreement account.
The Manager reimburses PIC for the reasonable costs and expenses it incurs in
providing services to the Funds.
Prudential Diversified Investment Strategies (PDI Strategies), a unit of PIC, is
responsible for the asset allocation and overall management of the Balanced Fund
and for the day-to-day management of the Stock Index Fund. PDI Strategies
employs a team approach to the management of the Balanced Fund and has managed
the portfolio of the Fund since its commencement. Roger E. Ford, a Managing
Director of PIC, has had responsibility for the day-to-day portfolio management
of the equity portion of the Balanced Fund portfolio since February, 1995. Mr.
Ford has been employed by PIC as a portfolio manager since 1972. Kay T. Willcox,
Managing Director and Senior Portfolio Manager of Prudential Global Advisors, a
unit of PIC, has had responsibility for the day-to-day portfolio management of
the bond portion of the Balanced Fund since February, 1995. Ms. Willcox has been
a portfolio manager at PIC since 1987.
Prudential Global Advisors is also responsible for the day-to-day management of
the Income Fund and Money Market Fund. With respect to the Income Fund, Ms.
Willcox is responsible for the day-to-day portfolio management and has managed
the Income Fund since November, 1993.
PIC, a wholly-owned subsidiary of The Prudential, is a registered investment
adviser and a New Jersey corporation. PIC serves as adviser to institutional
investors, including The Prudential, and various other mutual funds.
Jennison Associates Capital Corp., 466 Lexington Avenue, New York, New York
10017, serves as Adviser to the Growth Stock Fund and the Active Balanced Fund.
The Manager compensates Jennison for its services at the annual rate of 0.30 of
1% of the Fund's average daily net assets.
David Poiesz, a Director and Senior Vice President of Jennison, is responsible
for the day-to-day portfolio management of the Growth Stock Fund. Mr. Poiesz has
managed the portfolio of the Growth Stock Fund since its inception in November,
1992. Mr. Poiesz joined Jennison in 1983 and has been an equity portfolio
manager since 1991.
Bradley L. Goldberg, a Director and Executive Vice President of Jennison, is
responsible for the day-to-day portfolio management of the Active Balanced Fund.
Mr. Goldberg has managed the portfolio of the Active Balanced Fund since its
inception in January 1993 and has been employed as an equity manager with
Jennison since 1974.
Jennison, a wholly-owned subsidiary of The Prudential, is a registered
investment adviser and a New York corporation with $29 billion in assets under
management, as of December 31, 1995. Jennison serves as adviser to various
institutional investors and other mutual funds.
Mercator Asset Management, L.P., 2400 East Commercial Boulevard, Fort
Lauderdale, Florida 33308, serves as Adviser to the International Stock Fund.
The Manager compensates Mercator for its services at an annual rate of 0.75 of
1% of the Fund's average daily net assets up to $50 million, 0.60 of 1% of the
Fund's average daily net assets between $50 million and $300 million and 0.45 of
1% of average daily net assets in excess of $300 million.
Peter F. Spano is responsible for the day-to-day management of the portfolio of
the International Stock Fund. Mr. Spano has managed the portfolio of
10 The Prudential Institutional Fund Prospectus
<PAGE>
the International Stock Fund since its inception in November, 1992 and has been
employed as a portfolio manager with Mercator since its founding in 1984.
Mercator is a registered investment adviser and a Delaware limited partnership
with $1.8 billion in assets under management as of December 31, 1995. Mercator's
general partners are four Florida corporations: JZT Corp., KXB Corp., TXB Corp.,
and MXW Corp. Mercator's limited partner is The Prudential Asset Management
Company, Inc., a wholly-owned indirect subsidiary of The Prudential. John G.
Thompson, Peter F. Spano, Kenneth B. Brown, and Michael A. Williams are the sole
shareholders of JZT Corp., PXS Corp., KXB Corp. and MXW Corp., respectively. The
address of each of the general partners is 2400 East Commercial Blvd., Suite
810, Fort Lauderdale, Florida 33308. Mercator serves as adviser to various
institutional investors and mutual funds.
The Administrator, Transfer Agent and Dividend Disbursing Agent. The Company has
entered into an administration, transfer agency and service agreement (the
"Administration Agreement"), with Prudential Mutual Fund Management, Inc.
("PMF"), One Seaport Plaza, New York, New York, 10292, which provides that PMF,
a Delaware corporation and an indirect wholly-owned subsidiary of The
Prudential, furnishes to the Company such services as the Company may require in
connection with administration of the Company's business affairs. Under the
Administration Agreement, the Company pays PMF a monthly fee at an annual rate
of .17% of the average daily net assets of the Company up to $250 million and
.15% of the Company's average daily net assets in excess of $250 million. PMF
also provides the Company with transfer agent and dividend disbursing services
for no additional fee, through its wholly-owned subsidiary, Prudential Mutual
Fund Services, Inc. ("PMFS" or "Transfer Agent"), Raritan Plaza One, Edison, New
Jersey 08837. Its mailing address is P.O. Box 15005, New Brunswick, New Jersey
08906-5005. PMF reimburses PMFS for certain of the out-of-pocket expenses PMFS
incurs in providing these services and the Company reimburses PMF for those
out-of-pocket expenses.
The Distributor. Prudential Retirement Services, Inc. (the "Distributor"), 751
Broad Street, Newark, New Jersey 07102, an affiliate of the Manager and a
corporation organized under the laws of New Jersey, has entered into a
Distribution Agreement (the "Distribution Agreement") with the Company pursuant
to which it serves as the Distributor of the Company's shares. Potential
investors may be introduced to the Distributor, and persons who introduce
investors may be compensated by the Distributor for such introductions.
The Prudential Institutional Fund Prospectus 11
<PAGE>
================================================================================
INVESTORS GUIDE TO SERVICES
Investment in the Company and Special Processing. As an institutional fund,
shares are offered exclusively to retirement programs and arrangements
("Programs") through their plan sponsors, to Individual Retirement Accounts
("IRAs") and to certain institutional investors. Sponsors of a Program or their
agents are referred to as "Program Sponsor(s)" or "Program Administrator(s)" and
individual employees participating in a Program are referred to as
"Participant(s)," and individual investors who separate from a program are
referred to as "Continuing Participant(s)." Endowments, foundations, insurance
companies and other institutional investors are referred to as "Other
Institutional Investors". The term "shareholders" refers to each or all of these
categories as well as to IRAs, as appropriate.
Investments by Participants are made through their Program Sponsor's
recordkeeper, who is responsible for transmitting all orders for the purchase,
redemption or exchange of Company shares. The availability of each Fund and the
procedures for investing depend upon the provisions of the Program and whether
the Program Sponsor has contracted with the Company or the Transfer Agent for
special processing services, including subaccounting. Continuing Participants,
Other Institutional Investors and IRA investors must arrange for services
through Prudential Institutional Fund Management, Inc., the Manager, by
contacting them at 30 Scranton Office Park, Moosic, PA 18507-1789. The following
services are offered specifically to sponsors of qualified retirement programs.
Purchasing Shares. Shares of a Fund may be purchased through a Program Sponsor's
recordkeeper or directly from the Transfer Agent. The purchase price for shares
of a Fund will be the net asset value per share next determined following
acceptance of a purchase order by the Program Sponsor's recordkeeper or PMFS. In
order for a purchase order to be accepted, it must include the information
necessary to determine the proper share allocation for each Participant. In
addition, the Manager may determine, at its own discretion, to require the
Program Sponsor's recordkeeper to deliver to PMFS the funds for initial
investment prior to accepting any purchase order. Plans should determine, prior
to investing in the Funds, whether the Manager will require the delivery of
funds for the initial investment prior to accepting a purchase order. The
Company reserves the right to reject any purchase order (including an exchange
order) or to suspend or modify the continuous offering of its shares.
The Program Sponsor and its recordkeeper and PMFS are responsible for forwarding
payment promptly to the Company. Except where funds are received prior to the
opening of the account, the Company reserves the right to cancel any purchase
order for which payment has not been received by the fifth business day
following the investment. On behalf of the Company, the Manager, in its sole
discretion, may require assurances from the Program Sponsor and its recordkeeper
concerning timely payment of funds and payment of damages for failure to deliver
funds and purchase orders on a timely basis.
The Company also may determine to accept eligible securities as payment for a
Program's initial investment in a Fund. Eligible securities include any security
that a Fund has authority to purchase, consistent with its investment
restrictions and operating policies as set forth in this Prospectus and the
Statement of Additional Information, and that the Company otherwise agrees to
accept. Acceptance of such securities is at the absolute discretion of the
Company, and the Company may refuse to accept any securities at any time.
Eligible securities are valued using the same methods the Fund uses to value its
portfolio securities, except that applicable stock transfer taxes, if any, may
reduce the amount exchanged. The exchange of securities by the investor pursuant
to this offer will constitute a taxable transaction and may result in a gain or
a loss for federal income tax purposes.
Redemptions. Requests to redeem shares where the proceeds are not immediately
invested in shares of another Fund (see the section entitled "Exchange
Privilege" below) must be made in writing (or by such other means as agreed upon
in advance by the Program Sponsor's recordkeeper and the Program Administrator)
to the Program Sponsor's recordkeeper. Requests for the redemption of shares are
considered received when all required information and any necessary signatures
have been provided. The Company generally will redeem for cash all full and
fractional shares. The redemption price is the net asset value per share next
determined after receipt by the Company of proper notice of redemption. The
payment of redemption proceeds will be made by check (or at the discretion of
the Program Recordkeeper, by electronic credit to the Participant's account at a
financial institution). Unless extraordinary circumstances exist, the payment of
proceeds will be made within seven days of the receipt of the request for
redemption. The Company has reserved the right to redeem shares in excess of
$250,000 or 1% of the net asset value of each Fund during any 90-day period for
any one shareholder by "distribution in kind" of securities (instead of cash)
from such Funds. The Company does not intend to exercise this right except in
special circumstances when it determines that it is in the interest of the
Company and its shareholders. Redemption in kind is not as liquid as cash
redemption. If redemption is made in kind, shareholders receiving portfolio
instruments and selling them before their maturity could receive less than the
redemption value of their securities and the redeeming shareholder will incur
transaction costs from disposing of such securities. The right of redemption may
be suspended under unusual circumstances, as permitted by law. If shares to be
redeemed were purchased with clearing house funds, the Company reserves the
right to delay payment until it is reasonably sure the funds have been credited
to its account. If shares were purchased by personal, corporate, or U.S.
government check, proceeds may be delayed until the check has been honored, but
in no event more than 15 calendar days from the date of receipt of the check.
This procedure does not apply to shares purchased by wire payment. Prior to the
time the redemption is effective, dividends on such shares will accrue and be
payable, and you will be entitled to exercise all other rights of beneficial
ownership.
Exchange Privilege. Shares of each Fund may be exchanged for shares of any other
available Fund (depending upon the provisions of the Program) by written,
facsimile, telecopy, telephone or electronic exchange request through the
Program's recordkeeper at the net asset value next determined after receipt by
the Transfer Agent or the Program Sponsor's recordkeeper of an exchange request
in good order. Exchanges are
12 The Prudential Institutional Fund Prospectus
<PAGE>
currently permitted at no charge, subject to any minimum investment
requirements, or any general limitations of the Fund into which an exchange is
sought. Currently, there are no such requirements or limitations. The exchange
privilege may be modified or withdrawn by the Company upon 60 days' notice to
shareholders.
Signatures. When a Program provides that redemption may only be made by written
request, the signature on a written redemption request must be exactly as shown
on the enrollment form. In addition to a Program Participant's signature, a
written request must include all other signatures required by the Program and
federal law.
Telephone Requests. Certain Programs may allow participants to effect exchanges
and other Fund transactions by telephone and telecopy. If the Program offers
such telephone and telecopy privileges, each Program participant will
automatically receive such privileges unless he or she declines those privileges
on a form that will be supplied by the Program Sponsor or Program Recordkeeper.
For the participant's protection and to prevent fraudulent exchanges, telephone
calls will be recorded and the participant will be asked to provide his or her
personal identification number or other identifying information. A written
confirmation of an exchange transaction will be sent to the participant. Neither
the Funds nor their 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. (The Fund or its agents could be subject to liability
if they fail to employ reasonable procedures.) All exchanges will be made on the
basis of the relative net asset value of the two Funds next determined after the
request is received in good order. Telephone and telecopy privileges are
available only if the Program Sponsor has so elected and only in states where
these privileges may legally be offered. The safeguards discussed above that are
employed by each Fund are designed to minimize unauthorized exercise of these
privileges. During time of extraordinary economic or market changes, telephone
privileges or telecopied instructions may be difficult to implement.
Other Services
-- Reinvestment of Distributions. Income dividends and capital gain
distributions with respect to a particular Fund are declared in cash and
automatically reinvested in additional shares of that Fund. Shares of each
Fund, including shares received as dividends and other distributions, may
be redeemed for cash at any time. See "Investors Guide to Services" below
for a further description of share redemptions.
-- Systematic Withdrawal Plan. A Systematic Withdrawal Plan may be established
by a Program Administrator subject to the requirements of its Program,
federal tax laws, and the Company's applicable procedures. The
shareholder's interest in each Fund designated for systematic withdrawals
or in other programs for which the Manager or its affiliates act as
investment manager, must have a minimum value of $5,000 when the Systematic
Withdrawal Plan begins, unless used for the purpose of satisfying minimum
distribution rules. The proceeds from scheduled redemption of shares are
forwarded to the shareholder on a monthly, quarterly, semi-annual or annual
basis. Payments are in equal dollar amounts and must be at least $250. A
fee may be charged for accommodating wire transfer requests. For the
protection of shareholders and the Company, wiring instructions must be on
file prior to executing any request for the wire transfer of systematic
withdrawal proceeds. A shareholder may change the bank account previously
designated by written request, including appropriate signature guarantees,
a copy of any applicable corporate resolution or other relevant
documentation.
- --------------------------------------------------------------------------------
FURTHER INFORMATION REGARDING THESE SERVICES MAY BE OBTAINED FROM A SERVICE
REPRESENTATIVE. EACH OF THESE SERVICES IS SUBJECT TO THE REQUIREMENTS AND
LIMITATIONS OF THE PROGRAM AND MAY HAVE TAX CONSEQUENCES THAT DEPEND ON THE
INDIVIDUAL TAX STATUS OF THE RECIPIENT.
================================================================================
OTHER CONSIDERATIONS
Net Asset Value. The net asset value for each Fund is determined by subtracting
from the value of all securities, cash and other assets of each Fund, the amount
of its liabilities (including accrued expenses and dividends payable), and
dividing the result by the number of outstanding shares of that Fund. For
valuation purposes, quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents. The Trustees have fixed the specific time
of day for the computation of the net asset value of all the Funds (except the
Money Market Fund) to be as of 4:15 p.m., New York time. The Money Market Fund
calculates net asset value as of 4:30 p.m., New York time.
Fund securities and other assets are valued based on market quotations, or, if
not readily available, at fair market value as determined in good faith under
procedures established by the Company's Trustees. See "Other Considerations--Net
Asset Value" in the Statement of Additional Information.
Each Fund computes its net asset value once daily on business days. Business
days are days when the NYSE is open for trading except on days on which no
orders to purchase, sell, or redeem shares have been received by the Company or
days on which changes in the value of the Company's portfolio securities do not
affect net asset value. The NYSE 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.
The Money Market Fund determines the value of its portfolio securities by the
amortized cost method. This method involves valuing an instrument at its cost
and thereafter assuming a constant amortization to maturity of any discount or
premium regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Money Market Fund would receive if it sold
the instrument. During these periods, the yield to an existing shareholder may
differ somewhat from that which could be obtained if the Fund marked its
portfolio securities to market each day. The Trustees have established
procedures designed to stabilize, to the extent reasonably possible, the net
asset value of the shares of the Money
The Prudential Institutional Fund Prospectus 13
<PAGE>
Market Fund at $1.00 per share. The Money Market Fund seeks to maintain a $1.00
share price at all times although there can be no assurance that the Fund will
do so. To achieve this, the Money Market Fund purchases only securities with
remaining maturities of thirteen months or less and limits the dollar-weighted
average maturity of its portfolio to 90 days or less. The Money Market Fund
cannot guarantee a $1.00 share price, but the Fund's maturity standards and
investments solely in high quality money market instruments minimize any price
decreases or increases.
Portfolio Transactions. It is expected that Prudential Securities Incorporated
("PSI"), a registered broker-dealer, which is an indirect wholly-owned
subsidiary of The Prudential, may act as broker for the Company, in conformity
with the securities laws and rules thereunder. In order for PSI to effect any
portfolio transactions for the Company on an exchange or board of trade, the
commissions received by PSI must be reasonable and fair compared to the
commissions paid to other brokers in connection with comparable transactions
involving similar securities or futures being purchased or sold on an exchange
or board of trade during a comparable period of time. This standard would allow
PSI to receive no more than the remuneration which would be expected to be
received by an unaffiliated broker or futures commission merchant in a
commensurate arm's-length transaction. The Trustees have approved procedures for
evaluating the reasonableness of commissions paid to PSI and periodically
reviews these procedures.
Distributions. Dividends and other distributions of each Fund are declared in
cash and automatically reinvested in additional shares of the Fund. While
shareholders may not elect to receive dividends and other distributions in cash,
the same effect may be achieved at any time by redeeming shares of the Fund. The
Income Fund and Money Market Fund expect to declare dividends of their net
investment income and, for the Money Market Fund, net short-term capital gains,
and losses, daily and to distribute such dividends monthly. Each other Fund
expects to declare and distribute a dividend of its net investment income, if
any, at least annually. Except for the Money Market Fund, each Fund expects to
declare and distribute its net capital gains (the excess of net long-term
capital gain over net short-term capital loss) and net short-term capital gain,
if any, at least annually. Distributions of income dividends and capital gains
distributions of each Fund are made on the payment date and reinvested at the
per share net asset value as of the record date or such other date as the Board
may determine. On the "ex-dividend" date, the net asset value per share excludes
the dividend (i.e., is reduced by the amount of the distribution).
Taxes. The following discussion is only a brief summary of some of the important
tax considerations affecting the Company, its Funds and its shareholders. For
further tax-related information see "Other Considerations--Taxes" in the
Statement of Additional Information. No attempt is made to present a detailed
explanation of all federal, state, and local income tax considerations, and this
discussion (as well as that in the Statement of Additional Information) is not
intended as a substitute for careful tax planning. Accordingly, investors are
urged to consult their own tax advisors with specific reference to their own tax
situation.
Tax Consequences to the Funds. Each Fund is treated as a separate entity for
federal income tax purposes, and thus the provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), applicable to regulated investment
companies generally are applied to each Fund separately, rather than to the
Company as a whole. Each Fund has elected to qualify and intends to remain
qualified as a regulated investment company under the Code. If so qualified,
each Fund is not subject to federal income taxes with respect to net investment
income and net realized capital gains, if any, that are distributed to its
shareholders, provided that the Fund distributes each year at least 90% of its
net investment income, (including net short term capital gains), and meets
certain other requirements set forth in the Code. Each Fund would be subject to
a 4% nondeductible excise tax on such Fund's taxable income to the extent such
Fund did not meet certain distribution requirements by the end of each calendar
year. Each Fund intends to make sufficient distributions to avoid application
of this excise tax.
Tax Consequences to the Shareholders. The Company's present intention is to
offer the Funds to qualified retirement programs, Continuing Participants, and
Other Institutional Investors.
Distributions from a qualified retirement program or other non-qualified
arrangements to a Participant or beneficiary will be subject to the provisions
in the Code and Treasury Regulations relating to taxation of such distributions.
Because the effect of these rules varies greatly with individual situations,
potential investors are urged to consult their own tax advisors.
Certain investments of the Funds, such as Passive Foreign Investment Companies
and zero coupon instruments involve special tax issues. The Statement of
Additional Information contains a general discussion of these matters.
Tax Consequences to Non-Exempt Shareholders.
Dividends from a Fund's investment company taxable income (consisting generally
of net investment income, net short-term capital gain and, when applicable, net
gains from foreign currency transactions) are taxable to its shareholders that
are not tax-exempt entities as ordinary income to the extent of the Fund's
earnings and profits. Distributions of a Fund's net capital gains, when
designated as such, are taxable to those shareholders as long-term capital
gains, regardless of the length of time they held their shares.
A portion of the dividends paid by a Fund, even though reinvested in additional
Fund shares, may be eligible for the dividends-received deduction allowed to
corporations. The eligible portion may not exceed the aggregate dividends
received by the Fund from U.S. corporations. However, dividends received by a
corporate shareholder and deducted by it pursuant to the dividends-received
deduction are subject indirectly to the alternative minimum tax. No dividends
paid by the Income Fund or the Money Market Fund, and only an insignificant part
of the dividends paid by the International Stock Fund, are expected to be
eligible for this deduction.
14 The Prudential Institutional Fund Prospectus
<PAGE>
A redemption of Fund shares will result in taxable gain or loss to a non-exempt
shareholder, depending on whether the redemption proceeds are more or less than
its adjusted basis for the redeemed shares. An exchange of Fund shares for
shares of any other fund generally will have similar tax consequences.
================================================================================
PERFORMANCE AND YIELD
INFORMATION
Money Market Fund. From time to time quotations of the Money Market Fund's
"yield" and "effective yield" may be included in marketing material and
communications to shareholders. Both yield figures are based on historical
earnings and are not intended to indicate future performance. The "yield" of the
Fund refers to the net income generated by an investment in the Fund over a
specified seven-day period. This income is then "annualized." That is, the
amount of income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is expressed similarly but, when annualized,
the income earned by an investment in the Fund is assumed to be reinvested. The
"effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment. "Yield" and "effective yield"
for the Fund will vary based on changes in market conditions, the level of
interest rates and the level of the Fund expenses.
From time to time, the average annual total return or cumulative total return of
the Fund may also be included in marketing material and communications to
shareholders. The average annual total return will be calculated as described
below.
Other Funds. From time to time a Fund, other than the Money Market Fund, may
publish its 30-day yield, average annual total return and/or its cumulative
total return in its marketing material and communications to shareholders. The
yield of a Fund will be calculated by dividing the net investment income per
share during a recent 30-day period by the maximum offering price (i.e., net
asset value) per share of the Fund on the last day of the period. The results
are compounded on a bond equivalent (semi-annual) basis and then annualized. A
Fund's average annual total return is determined by computing the annual
percentage change in value of $1,000 invested at the maximum public offering
price (i.e., net asset value) for specified periods ending with the most recent
calendar quarter, assuming reinvestment of all dividends and distributions at
net asset value.
Investors should note that the investment results of a Fund will fluctuate over
time, and any presentation of a Fund's yield or average annual total return for
any prior period should not be considered as a representation of what an
investment may earn or what an investor's yield or total return may be in any
future period. Because the method of calculating yield differs from the methods
used for other accounting purposes, a Fund's yield may not equal the
distributions to shareholders or the income reported in a Fund's financial
statements. See "Performance and Yield Information" in the Statement of
Additional Information for additional performance and yield information. The
Fund also may publish other measurements of return including calculating return
that is not annualized; provided, however, that any non-standardized measures of
return will be accompanied by the standard return required by the Securities and
Exchange Commission ("SEC").
Performance Information. Comparative performance information may be used from
time to time in advertising the Company's shares, including, but not limited to,
data from Lipper Analytical Services, Inc., the Standard & Poor's 500 Index, the
Salomon Brothers Broad Investment Grade Bond Index, the Dow Jones Industrial
Average, the Donoghue Money Market Averages, Morningstar, Inc., the Salomon
Brothers 1-3 years Treasury Index, the Morgan Stanley EAFE Index, the Lehman
Brothers Aggregate Index or Government/Corporate Index and other commonly used
indices or industry publications. The Fund's annual report to Shareholders for
its fiscal year ended September 30, 1995 contains additional performance
information and may be obtained by prospective investors without cost.
================================================================================
OTHER INVESTMENT PRACTICES,
RISK CONDITIONS, AND POLICIES
OF THE FUNDS
The investment objective(s) of each Fund are fundamental. Fundamental
objectives, policies and restrictions may be changed only with the approval of a
"majority of the outstanding voting securities" of that Fund. Each Fund's
investment program, unless otherwise specified, is not fundamental and may be
changed by the Board without shareholder approval. A "majority of the
outstanding voting securities" means the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
present in person or represented by proxy or (ii) more than 50% of the
outstanding shares. Each Fund's investment program is subject to further
restrictions as described in the Statement of Additional Information.
Each Fund may hold a portion of its assets in money market instruments in
amounts designed to pay expenses, to meet anticipated redemptions, pending
investments or to margin its purchases and sales of futures contracts in
accordance with its objectives and policies. These instruments may be purchased
on a forward commitment, when-issued or delayed-delivery basis. In addition,
each Fund (except for the Stock Index Fund and the Money Market Fund) may for
temporary defensive purposes invest, without limitation, in high-quality money
market instruments. Each Fund, except the Money Market Fund, may also purchase
non-investment grade fixed income securities and retain investment grade fixed
income securities that have been downgraded to non-investment grade provided
that no more than 5% of the Fund's net assets is invested in non-ivestment grade
fixed income securities, which are considered to be high risk securities, i.e.
"junk" bonds. See "Fixed Income Securities" below and "Other Investment
Practices, Risk Conditions, and Policies of the Funds--Fixed Income Securities"
in the Statement of Additional Information for a fuller description of
thesesecurities.
Each Fund, consistent with its investment objective, may invest in one or more
of the types of securities described below and may utilize a variety of
The Prudential Fund Prospectus 15
<PAGE>
the investment techniques described below. These securities and investment
techniques are more fully described in the Statement of Additional Information.
U.S. Government Securities. Each Fund may invest in fixed income securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities.
Obligations of the U.S. Government consist of various types of marketable
securities issued by the U.S. Treasury, i.e., bills, notes and bonds, and are
direct obligations of the U.S. Government. Obligations of agencies and
instrumentalities of the U.S. Government are not direct obligations of the U.S.
Government and are either: (i) guaranteed by the U.S. Treasury (e.g., Government
National Mortgage Association ("GNMA") mortgage-backed securities); (ii)
supported by the issuing agency's or instrumentality's right to borrow from the
U.S. Treasury at the discretion of the U.S. Treasury (e.g., Federal National
Mortgage Association ("FNMA") Discount Notes); or (iii) supported by only the
issuing agency's or instrumentality's credit (e.g., each of the Federal Home
Loan Banks).
Repurchase Agreements. Each Fund may enter into repurchase agreements, whereby
the seller of a security agrees to repurchase that security from the Fund at a
mutually agreed-upon time and price. The period of maturity is usually quite
short, possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Fund's money is
invested in the security. The Fund's repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily, and if the value of the instruments
declines, the Fund will require additional collateral. For the Money Market
Fund, the underlying security must either be a U.S. Government security or a
security rated in the highest rating category by the requisite NRSROs and must
be determined to present minimal credit risks. In the event of bankruptcy or
default of certain sellers of repurchase agreements, the Funds could experience
costs and delays in liquidating the underlying security held as collateral and
might incur a loss if such collateral declines in value during this period. Each
Fund may participate in a joint repurchase account managed by PIC.
Equity-Related Securities. Each Fund (except for the Income Fund and the Money
Market Fund) may invest in equity-related securities. Equity-related securities
are common stock, preferred stock, rights, warrants and debt securities or
preferred stock which are convertible or exchangeable for common stock or
preferred stock.
Fixed Income Securities. Fixed income securities are considered high-quality if
they are rated at least AA/Aa by S&P or by Moody's or an equivalent rating by
any NRSRO or, if unrated, are determined to be of comparable investment quality
by the Adviser. High-quality fixed income securities are considered to have a
very strong capacity to pay principal and interest. Fixed income securities are
considered medium quality if they are rated, for example, at least BBB/Baa by
S&P or by Moody's or an equivalent rating by any NRSRO or, if not rated, are
determined to be of comparable investment quality by the Adviser. Medium quality
fixed income securities are regarded as having an adequate capacity to pay
principal and interest. Securities rated in the lowest category of investment
grade debt have speculative characteristics and changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade bonds.
Investment grade fixed income securities are securities rated BBB or better by
S&P or Baa or better by Moody's (or an equivalent rating by any NRSRO) or, if
not rated, are deemed by the Adviser to be of comparable investment quality.
Non-investment grade securities are rated lower than BBB/Baa (or an equivalent
rating by any NRSRO) or, if not rated, are deemed by the Adviser to be of
comparable investment quality and are commonly referred to as high risk or high
yield securities, i.e. "junk" bonds. High yield securities are generally riskier
than higher quality securities and are subject to more credit risk, including
risk of default, and are more volatile than higher quality securities. In
addition, such securities may have less liquidity and experience more price
fluctuation than higher quality securities. See the discussion of corporate bond
ratings in "Description of S&P, Moodys and Duff & Phelps Ratings" in the
Appendix to the Statement of Additional Information.
The maturity of debt securities may be considered long (ten plus years),
intermediate (three to ten years) or short term (three years or less). In
general, the principal values of longer-term securities fluctuate more widely in
response to changes in interest rates than those of shorter-term securities,
providing greater opportunity for capital gain or risk of capital loss. A
decline in interest rates usually produces an increase in the value of debt
securities, while an increase in interest rates generally reduces their value.
Convertible Securities, Warrants and Rights. A convertible security is a bond,
debenture, corporate note, preferred stock or other similar security that may be
converted into or exchanged for a prescribed amount of common stock or other
equity security of the same or a different issuer within a particular period of
time at a specified price or formula. A warrant or right entitles the holder to
purchase equity securities at a specific price for a specific period of time.
Securities of Foreign Issuers. The International Stock Fund intends to invest
primarily in securities of foreign issuers. In addition, the other Funds may
invest a portion of their assets in fixed income securities and equity
securities of foreign issuers (denominated in either U.S. or foreign currency).
The Money Market Fund may only invest in U.S. dollar-denominated securities of
foreign issuers.
Foreign securities involve certain unique risks. These risks include political
or economic instability in the country of issue, the difficulty of predicting
international trade patterns, the possible imposition of exchange controls and
the risk of currency fluctuations. Such securities may be subject to greater
fluctuations in price than securities issued by U.S. corporations or issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. In
addition, there may be less publicly available information about a foreign
company than about a domestic company. Foreign companies generally are not
subject to uniform accounting, auditing, and financial reporting standards
comparable to those applicable to domestic companies.
16 The Prudential Institutional Fund Prospectus
<PAGE>
Dividends paid by foreign companies may be subject to withholding and other
foreign taxes that may decrease the net return on such investments as compared
to dividends and interest paid by the U.S. Government or by domestic companies.
There is generally less government regulation of securities exchanges, brokers
and listed companies abroad than in the United States, and, with respect to
certain foreign countries, there is a possibility of expropriation, confiscatory
taxation, or diplomatic developments which could affect investment in those
countries. Finally, in the event of a default of any such foreign fixed income
obligations, it may be more difficult for the Fund to obtain or to enforce a
judgment against the issuers of such securities. If the security is foreign
currency denominated, it may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations, and costs may be incurred in
connection with conversions between currencies.
Investments in emerging and less developed countries involve exposure to
economic structures that are generally less diverse and mature than in the U.S.
or other developed countries. A developing country can be considered to be a
country which is in the initial stages of its industrialization cycle.
Historically, markets of developing countries have been more volatile than the
markets of developed countries.
With respect to equity securities, each Fund (except for the Money Market Fund)
may purchase ADRs. ADRs are U.S. dollar-denominated certificates issued by a
United States bank or trust company and represent the right to receive
securities of a foreign issuer deposited in a domestic bank or foreign branch of
a United States bank and traded on a United States exchange or in an
over-the-counter market. Generally, ADRs are in registered form. There are no
fees imposed on the purchase or sale of ADRs when purchased from the issuing
bank or trust company in the initial underwriting, although the issuing bank or
trust company may impose charges for the collection of dividends and the
conversion of ADRs into the underlying securities. Investment in ADRs has
certain advantages over direct investment in the underlying foreign securities
since: (i) ADRs are U.S. dollar-denominated investments that are registered
domestically, easily transferable, and for which market quotations are readily
available; and (ii) issuers whose securities are represented by ADRs are usually
subject to comparable auditing, accounting, and financial reporting standards as
domestic issuers.
Segregated Accounts. Each Fund will establish a segregated account with its
Custodian in which it will maintain cash, U.S. Government securities or other
liquid high-grade debt obligations equal in value to its obligations in respect
of potentially leveraged transactions including, forward contracts, when-issued
and delayed-delivery securities, repurchase and reverse repurchase agreements,
forward rolls, dollar rolls, futures contracts, written options, options on
futures contracts (unless otherwise covered) and interest rate swaps. The assets
deposited in the segregated account will be marked-to-market daily.
Forward Rolls, Dollar Rolls and Reverse Repurchase Agreements. The Income Fund
and the Balanced Fund may each commit up to 33 1/3% of the value of its total
assets to investment techniques such as dollar rolls, forward rolls and reverse
repurchase agreements. The Growth Stock Fund, Stock Index Fund, International
Stock Fund, Active Balanced Fund and Money Market Fund may each commit up to 20%
of their net assets to these techniques. A forward roll is a transaction in
which a Fund sells a security to a financial institution, such as a bank or
broker-dealer, and simultaneously agrees to repurchase the same or similar
security from the institution at a later date at an agreed upon price. With
respect to mortgage-related securities, such transactions are often called
"dollar rolls." In dollar roll transactions, the mortgage-related securities
that are repurchased will bear the same coupon rate as those sold, but generally
will be collateralized by different pools of mortgages with different prepayment
histories than those sold. During the roll period, the Fund forgoes principal
and interest paid on the securities and is compensated by the difference between
the current sales price and the forward price for the future purchase as well as
by interest earned on the cash proceeds of the initial sale. A "covered roll" is
a specific type of dollar roll for which there is an offsetting cash position or
a cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction.
Reverse repurchase agreements involve sales by a Fund of portfolio securities to
a financial institution concurrently with an agreement by that Fund to
repurchase the same securities at a later date at a fixed price. During the
reverse repurchase agreement period, the Fund continues to receive principal and
interest payments on these securities.
Reverse repurchase agreements, forward rolls and dollar rolls involve the risk
that the market value of the securities purchased by the Fund with the proceeds
of the initial sale may decline below the price of the securities the Fund has
sold but is obligated to repurchase under the agreement. In the event the buyer
of securities under a reverse repurchase agreement, forward roll or dollar roll
files for bankruptcy or becomes insolvent, the Fund's use of the proceeds of the
agreement may be restricted pending a determination by the other party, or its
trustee or receiver, whether to enforce the Fund's obligations to repurchase the
securities. The Staff of the SEC has taken the position that reverse repurchase
agreements, forward rolls and dollar rolls are to be treated as borrowings for
purposes of the percentage limitations discussed in the section entitled
"Borrowings" below. The Company expects that under normal conditions most of the
borrowings of the Funds will consist of such investment techniques rather than
bank borrowings. See "Other Investment Practices, Risk Conditions, and Policies
of the Funds--Borrowings" below.
When-Issued and Delayed-Delivery Securities.
Each Fund may purchase securities on a when-issued or delayed-delivery basis.
When a Fund purchases securities on a when-issued or delayed-delivery basis, the
price of such securities is fixed at the time of the commitment, but delivery
and payment for the securities may take place up to 120 days
The Prudential Institutional Fund Prospectus 17
<PAGE>
after the date of the commitment to purchase. With respect to up to 5% of their
respective net assets, the Income Fund and the Balanced Fund may each purchase
securities to be delivered and paid for up to six months after the date of the
commitment to purchase. The securities so purchased are subject to market
fluctuation, and no interest accrues to the purchaser during this period.
When-issued and delayed-delivery securities involve a risk of loss if the value
of the security to be purchased declines prior to the settlement date or
increases in value and there is a failure to deliver the security.
Custodial Receipts. The Income Fund, the Balanced Fund and the Active Balanced
Fund may each acquire custodial receipts or certificates, such as CATS, TIGRs
and FIC Strips, underwritten by securities dealers or banks, that evidence
ownership of future interest payments, principal payments or both on certain
notes or bonds issued by the U.S. Government, its agencies, authorities or
instrumentalities. The underwriters of these certificates or receipts generally
purchase a U.S. Government security and deposit the security in an irrevocable
trust or custodial account with a custodian bank, which then issues receipts or
certificates that evidence ownership of the periodic unmatured coupon payments
and the final principal payment on the U.S. Government security. Custodial
receipts evidencing specific coupon or principal payments have the same general
attributes as zero coupon U.S. Government securities but are not U.S.
Government Securities and therefore are neither insured nor guaranteed by the
U.S. Government.
Mortgage-Backed Securities. Mortgage-backed securities represent interests in
pools of mortgages. Principal and interest payments made on the mortgages in the
pools are passed through to the holder of such securities. Payment of principal
and interest on some mortgage-backed securities (but not the market value of the
securities themselves) may be guaranteed by the full faith and credit of the
U.S. Government, or guaranteed by agencies or instrumentalities of the U.S.
Government. Mortgage-backed securities created by non-governmental issuers (such
as commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers, and other secondary market issuers) may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance, and letters of credit, which may be
issued by governmental entities, private insurers, or the mortgage poolers.
Mortgage-backed securities include collateralized mortgage obligations (CMOs),
which are obligations fully collateralized by the portfolio of mortgaged or
mortgage-related securities. Payments of principal and interest on the mortgages
are passed through to the holders of the CMO as they are received, although
certain classes of CMOs have priority over others for receipt of mortgage
pre-payments. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC
Certificates, but also may be collateralized by whole loans or private mortgage
pass-through securities (such collateral is referred to below as "Underlying
Assets").
CMOs may be issued by agencies or instrumentalities of the U.S. Government, or
by private originators of, or investors in, mortgage loans, including depository
institutions, mortgage banks, investment banks and special-purpose subsidiaries
of the foregoing. The issuer of a series of CMOs may elect to be treated as a
Real Estate Mortgage Investment Conduit ("REMIC").
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of a CMO, often referred to as a "tranche," is issued at a specific fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Underlying Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of CMOs on a monthly, quarterly or
semi-annual basis. The principal of and interest on the Underlying Assets may be
allocated among the several classes of a CMO series in a number of different
ways. Generally, the purpose of the allocation of the cash flow of a CMO to the
various classes is to obtain a more predictable cash flow to the individual
tranches than exists with the underlying collateral of the CMO. As a general
rule, the more predictable the cash flow on a CMO tranche, the lower the
anticipated yield will be on that tranche at the time of issuance compared to
prevailing market yields on mortgage-backed securities.
Unscheduled or early repayment of principal on mortgage pass-through securities
(arising from prepayments of principal due to the sale of the underlying
property, refinancing, or foreclosure, net of fees and costs which may be
incurred) may expose the Fund to a lower rate of return upon reinvestment of
principal. Like other fixed income securities, when interest rates rise, the
value of a mortgage-related security generally will decline; however, when
interest rates are declining, the value of mortgage-related securities with
prepayment features may not increase as much as other fixed-income securities.
Asset-Backed Securities. The Balanced Fund, the Active Balanced Fund and the
Income Fund may purchase asset-backed securities that represent either
fractional interests or participations in pools of leases, retail installment
loans, or revolving credit receivables held by a trust or limited purpose
finance subsidiary. Such asset-backed securities may be secured by the
underlying assets (such as certificates for automobile receivables or may be
unsecured (such as credit card receivable securities). Depending on the
structure of the asset-backed security, monthly or quarterly payments of
principal and interest or interest only are passed-through or paid through to
certificate holders. Asset-backed securities may be guaranteed up to certain
amounts by guarantees, insurance, or letters of credit issued by a financial
institution affiliated or unaffiliated with the originator of the pool.
Underlying automobile sales contracts and credit card receivables are, of
course, subject to prepayment (although to a lesser degree than mortgage
pass-through securities), which may shorten the securities' weighted average
life and reduce their overall return to certificate holders. On the other hand,
asset-backed securities may present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities often do not have the
benefit of a security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, some of which
may reduce the ability to obtain full payment. In the case of automo-
18 The Prudential Institutional Fund Prospectus
<PAGE>
bile receivables, the security interests in the underlying automobiles are often
not transferred when the pool is created, with the resulting possibility that
the collateral could be resold.
Unlike traditional fixed income securities, interest and principal payments on
asset-backed securities are made more frequently, usually monthly, and principal
may be prepaid at any time. As a result, if a Fund purchases such a security at
a premium, a prepayment rate that is faster than expected will reduce yield to
maturity, while a prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity. Alternatively, if a Fund
purchases these securities at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will reduce, yield to maturity.
Certificate holders may also experience delays in payment if the full amounts
due on underlying loans, leases, or receivables are not realized because of
unanticipated legal or administrative costs of enforcing the contracts or
because of depreciation or damage to the collateral (usually automobiles)
securing certain contracts, or other factors. If consistent with its investment
objective and policies, the Balanced Fund, the Active Balanced Fund and the
Income Fund may invest in other asset-backed securities that may be developed in
the future.
Types of Credit Enhancement. Mortgage-backed securities and asset-backed
securities are often backed by a pool of assets representing the obligations of
a number of different parties. To lessen the effect of failures by obligors on
underlying assets to make payments, those securities may contain elements of
credit support, which fall into two categories: (i) liquidity protection and
(ii) protection against losses resulting from ultimate default by an obligor on
the underlying assets. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to ensure that the
receipt of payments on the underlying pool occurs in a timely fashion.
Protection against losses resulting from default ensures ultimate payment of the
obligations on at least a portion of the assets in the pool. This protection may
be provided through guarantees, insurance policies or letters of credit obtained
by the issuer or sponsor from third parties, through various means of
structuring the transaction or through a combination of such approaches. The
Funds will not pay any fees for credit support, although the existence of credit
support may increase the price of a security.
Liquidity Puts. Each Fund may purchase instruments together with the right to
resell the instruments at an agreed-upon price or yield, within a specified
period prior to the maturity date of the instruments. This instrument is
commonly known as a "liquidity put" or a "tender option bond." However, the
Growth Stock Fund and Stock Index Fund will only use such instruments in
connection with the cash or cash equivalent portion of their portfolio.
Illiquid Securities. The Growth Stock Fund, Stock Index Fund, International
Stock Fund, Active Balanced Fund, Balanced Fund and the Money Market Fund may
each hold up to 10% of their net assets in illiquid securities and the Income
Fund may hold up to 15% of its net assets in illiquid securities. Illiquid
securities include repurchase agreements which have a maturity of longer than
seven days, securities with legal or contractual restrictions on resale
(restricted securities) and securities that are not readily marketable in
securities markets either within or outside of the United States. 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 Fund intends to comply with any applicable state blue sky laws
restricting the Fund's investments in illiquid securities. See "Investment
Restrictions" in the Statement of Additional Information. The Fund's investment
in Rule 144A securities could have the effect of increasing illiquidity to the
extent that qualified institutional buyers become, for a time, uninterested in
purchasing Rule 144A securities. The Funds' Advisers will monitor the liquidity
of such restricted securities under the supervision of the Manager and the
Trustees. 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 OTC options and the
assets used as "cover" for written OTC options are illiquid securities unless
the Fund and the counterparty have provided for the Fund, at 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." The Fund will
also treat non-U.S. Government IOs and POs as illiquid so long as the staff of
the SEC maintains its position that such securities are illiquid.
Securities Lending. Each 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 collateral in an amount equal
to at least 100% of the market value of the securities loaned. During the time
Fund 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 any
cash collateral it receives and earn additional income, or it may receive an
agreed-upon amount of interest income from the borrower. In these transactions,
there are risks of delay in recovery and in some cases even loss of rights in
the collateral should the borrower of the securities fail financially. Each Fund
(except the Money Market Fund) may lend up to 30% of the value of its total
assets. The Money Market Fund may lend up to 10% of the value of its total
assets.
Borrowings. Each Fund may borrow from banks or through forward rolls, dollar
rolls or reverse repurchase agreements an amount equal to no more than 20%
(except for the Balanced Fund, the Income Fund and the Money Market Fund) of the
value of its total assets to take advantage of investment opportunities, for
temporary, extraordinary, or emergency purposes or for the clearance of
transactions and may pledge up to 20% of the value of its total assets to secure
these borrowings. The Balanced Fund and the Income Fund may borrow from banks up
to 20% of the value of their respective total assets for the same purposes and
may pledge up to 20% of the value of their respective total assets to secure
such borrowings. In addition, the Balanced Fund and the Income Fund may engage
in investment techniques such as reverse repurchase agreements, forward rolls
and dollar rolls to the extent that their respective assets dedicated to such
techniques
The Prudential Institutional Fund Prospectus 19
<PAGE>
combined with the respective values of their bank borrowings do not exceed
33 1/3% of their respective total assets. Such investment techniques are deemed
"borrowings" by the SEC because the SEC considers these techniques to involve
the use of leverage. When a Fund enters into one of these transactions, it
places in a segregated account an amount equal to the Fund's obligations in that
transaction. If a Fund's asset coverage for borrowings falls below 300%, the
Fund will take prompt action to reduce its borrowings. See "Segregated Accounts"
above. If a Fund borrows to invest in securities, any investment gains made on
the securities in excess of interest paid on the borrowing will cause the net
asset value of the shares to rise faster than would otherwise be the case. On
the other hand, if the investment performance of the additional securities
purchased fails to cover their cost (including any interest paid on the money
borrowed) to the Fund, the net asset value of the Fund's shares will decrease
faster than would otherwise be the case. This is the speculative characteristic
known as leverage. The Money Market Fund may borrow an amount equal to no more
than 20% of the value of its total assets only for temporary, extraordinary or
emergency purposes.
Options on Securities and Securities Indices. Each Fund (other than the Money
Market Fund) may purchase and sell put and call options on any securities in
which it may invest or options on any securities index based on securities in
which the Fund may invest. Each Fund is also authorized to enter into closing
purchase and sale transactions in order to realize gains or minimize losses on
options sold or purchased by the Fund.
A Fund would normally purchase call options to attempt to hedge against an
increase in the market value of the type of securities in which the Fund may
invest. The purchase of a call option would entitle a Fund, in return for the
premium paid, to purchase specified securities at a specified price, upon
exercise of the option, during the option period. A Fund would ordinarily
realize a gain if, during the option period, the value of such securities
exceeds the sum of the exercise price, the premium paid and transaction costs;
otherwise, the Fund would realize a loss on the purchase of the call option. A
Fund may also write a put option, which can serve as a limited long hedge
because increases in value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the security
depreciates to a price lower than the exercise price of the put option, it can
be expected that the option will be exercised and the Fund will be obligated to
buy the security at more than its market value.
A Fund would normally purchase put options to hedge against a decline in the
market value of securities in its portfolio ("protective puts"). The purchase of
a put option would entitle a Fund, in exchange for the premium paid, to sell
specified securities at a specified price, upon exercise of the option, during
the option period. Gains and losses on the purchase of protective puts would
tend to be offset by countervailing changes in the value of underlying Fund
securities. A Fund would ordinarily realize a gain if, during the option period,
the value of the underlying securities decreases below the exercise price
sufficiently to cover the premium and transaction costs; otherwise, the Fund
would realize a loss on the purchase of the put option. A Fund may also write a
call option, which can serve as a limited short hedge because decreases in value
of the hedged investment would be offset to the extent of the premium received
for writing the option. However, if the security appreciates to a price higher
than the exercise price of the call option, it can be expected that the option
will be exercised and the Fund will be obligated to sell the security at less
than its market value.
A Fund may purchase and sell put and call options on securities indices for
hedging against a decline in the value of the securities owned by the Fund or
against an increase in the market value of the type of securities in which the
Fund may invest. Securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. Options on securities indices are
similar to options on securities, except that the exercise of securities index
options requires cash payments and does not involve the actual purchase or sale
of securities. A Fund purchasing or selling securities index options is subject
to the risk that the value of its portfolio securities may not change as much as
or more than the index because a Fund's investments generally will not match the
composition of the index. See "Other Considerations--Taxes" and "Other
Investment Practices, Risk Conditions, and Policies of the Funds" in the
Statement of Additional Information.
Futures Contracts and Options on Futures Contracts. The Balanced Fund, the
Active Balanced Fund and the Income Fund may enter into futures contracts on
securities, securities indices and interest rate indices. The Stock Index Fund
may enter into futures contracts on securities indices. The International Stock
Fund, the Balanced Fund and the Active Balanced Fund may also enter into
currency futures contracts and options thereon. The Growth Stock Fund, the Stock
Index Fund and the Active Balanced Fund may also purchase and sell options on
futures contracts on stock indices, and the Active Balanced Fund may also
purchase and sell options on futures contracts on interest rate indices. Each
Fund (except for the Money Market Fund) may enter into other types of futures
contracts when they become available, provided they correspond to securities
held by the relevant Fund. However, a Fund might not employ any of these
instruments.
To the extent that a Fund enters into futures contracts, options on futures
contracts, or options on foreign currencies traded on a Commodity Futures
Trading Commission (CFTC)-regulated exchange, in each case other than for bona
fide hedging purposes (as defined by the CFTC), the aggregate initial margin and
premiums required to establish those positions (excluding the amount by which
options are "in-the-money") will not exceed 5% of the liquidation value of the
Fund's portfolio, after taking into account unrealized profits and unrealized
losses on any contracts the Fund has entered into. In general, a call option on
a futures contract is "in-the-money" if the value of the underlying futures
contract exceeds the strike, i.e., exercise, price of the call; a put option on
a futures contract is "in-the-money" if the value of the underlying futures
contract is exceeded by the strike price of the put. This limitation does not
limit the percentage of a Fund's assets at risk to 5%. These transactions
involve brokerage costs, require margin deposits and require the Fund to
segregate assets to cover such contracts and options. In addition, a Fund's
activities in futures contracts and options thereon may be limited by the
requirements of the Inter-
20 The Prudential Institutional Fund Prospectus
<PAGE>
nal Revenue Code for qualification as a regulated investment company. See "Other
Considerations--Taxes" and "Other Investment Practices, Risk Conditions, and
Policies of the Funds" in the Statement of Additional Information.
Foreign Currency Forward Contracts, Options and Futures Transactions. The
International Stock Fund, the Balanced Fund and the Active Balanced Fund may
purchase and sell foreign currency forward contracts, futures contracts on
foreign currency, and options on futures contracts on foreign currency to
protect against the effect of adverse changes on foreign currencies. In addition
to the limitations on such practices described below, the Fund's ability to
engage in such practices may be limited by tax considerations. See "Other
Considerations--Taxes" and "Other Investment Practices, Risk Conditions, and
Policies of the Funds" in the Statement of Additional Information.
A forward foreign currency exchange contract involves an obligation to purchase
or sell a specific currency at a future date, at a price set at the time of the
contract. These contracts are traded in the market conducted directly between
currency traders (typically large commercial banks) and their customers. See
"Other Investment Practices, Risk Conditions, and Policies of the Funds--Foreign
Currency Forward Contracts, Options and Futures Transactions" in the Statement
of Additional Information.
When a Fund invests in foreign securities, it may enter into forward contracts
in several circumstances to protect the value of its assets. A Fund may not use
forward contracts, options on foreign currencies, futures contracts on foreign
currencies and options on such contracts in order to generate income, although
the use of such contracts may incidentally generate income. However, a Fund's
dealings in forward contracts will be limited to hedging involving either
specific transactions or portfolio positions. When a Fund enters into a contract
for the purchase or sale of a security denominated in a foreign currency, or
when a Fund anticipates the receipt in a foreign currency of dividends or
interest payments on a security that it holds, the Fund may desire to "lock in"
the U.S. dollar price of the security or the U.S. dollar equivalent of such
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, a Fund could 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 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 securities of the Fund denominated in such foreign
currency. Further a Fund may enter into a forward contract in one foreign
currency to hedge against the decline or increase in value of another foreign
currency.
A Fund's successful use of foreign currency forward contracts, options on
foreign currencies, futures contracts on foreign currencies and options on such
contracts depends upon the 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.
Risks of Investing in Options and Futures.
Participation in the options or futures markets involves investment risks and
transaction costs to which the Funds would not be subject absent the use of
these strategies. If an Adviser's prediction of movements in the direction of
the securities or currency markets or interest rates is inaccurate, the adverse
consequences to a Fund may leave the Fund in a worse position than if such
strategies were not used. Risks inherent in the use of options and futures
include (i) dependence on the Adviser's ability to predict correctly movements
in the direction of interest rates, securities prices and currency markets; (ii)
imperfect correlation, or even no correlation, between the price of options,
futures and options thereon and movements in the prices of the assets being
hedged; (iii) the fact that skills needed to use these strategies are different
from those needed to select portfolio securities; (iv) the possible absence of a
liquid secondary market for any particular instrument at any time; (v) the
possible need to defer closing out certain hedged positions to avoid adverse tax
consequences; (vi) the fact that, while hedging strategies can reduce the risk
of loss, they can also reduce the opportunity for gain, or even result in
losses, by offsetting favorable price movements in hedged investments; and (vii)
the possible inability of a Fund to purchase or sell a portfolio security at a
time when it would otherwise be favorable for it to do so, or the possible need
for a Fund to sell a 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 "Other Considerations--Taxes" and "Other Investment Practices, Risk
Conditions, and Policies of the Funds" in the Statement of Additional
Information.
Interest Rate Swap Transactions. The Balanced Fund and the Income Fund may enter
into interest rate swaps. Interest rate swaps involve the exchange by a Fund
with another party of their respective commitments to pay or receive interest,
for example, an exchange of floating rate payments for fixed rate payments. The
Funds expect to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of their portfolios or to protect
against any increase in the price of securities the Funds anticipate purchasing
at a later date. See "Other Investment Practices, Risk Conditions, and Policies
of the Funds--Other Investment Techniques" in the Statement of Additional
Information. The Income Fund will usually enter into interest rate swaps on a
net basis, i.e., the two payment streams are netted out, with the Fund receiving
or paying, as the case may be, only the net amount of the two payments. The
Balanced Fund may only enter into interest rate swaps on a net basis. The risk
of loss with respect to interest rate swaps entered into on a net basis is
limited to the net amount of interest payments that a Fund is contractually
obligated to make. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest rate swap will
The Prudential Institutional Fund Prospectus 21
<PAGE>
be accrued on a daily basis and an amount of cash or liquid high-grade debt
securities having an aggregate net asset value at least equal to the accrued
excess will be maintained in a segregated account by the Custodian. To the
extent that the Income Fund enters into interest rate swaps on other than a net
basis, the amount maintained in the segregated account will be the full amount
of the Fund's obligations, if any, with respect to such interest rate swaps,
accrued on a daily basis.
The use of interest rate swaps may involve investment techniques and risks
different from those associated with ordinary portfolio transactions. If a
Fund's Adviser is incorrect in its forecast of market values, interest rates and
other applicable factors, the investment performance of the Fund would diminish
compared to what it would have been if this investment technique had not been
used.
================================================================================
MORE FACTS ABOUT THE COMPANY
Organization and Capitalization. The Company was established as a Delaware
business trust on May 11, 1992. The Trustees are responsible for the overall
management and supervision of its affairs. The Manager conducts and supervises
the daily business operations of the Company. The Company is authorized to issue
unlimited shares of beneficial interest, $0.001 par value per share. Each share
issued with respect to a Fund has a pro-rata interest in the assets of that Fund
and has no interest in the assets of any other Fund. Each Fund bears its own
liabilities and its proportionate share of the general liabilities of the
Company and is not responsible for the liabilities of any other Fund. The Board
is empowered by the Company's Declaration of Trust and By-laws to establish
additional series and classes of shares. As of December 31, 1995, each of the
following entities owned more than 25% of the outstanding voting securities of
each of the portfolios indicated: Growth Stock Fund, Stock Index Fund and
International Stock Fund--Prudential Employee Savings Plan; Balanced Fund--PAMCO
VCA OA Account and Prudential Employee Savings Plan; Income Fund and Money
Market Fund--The Prudential Insurance Company of America.
Portfolio Turnover. Although no Fund purchases securities with a view to rapid
turnover, there are no limitations on the length of time that securities must be
held by any Fund and a Fund's annual portfolio turnover rate may vary
significantly from year to year. A portfolio turnover rate in excess of 100% may
exceed that of other investment companies with similar objectives. A higher
portfolio turnover rate may involve correspondingly greater transaction costs,
which would be borne directly by the Funds, as well as additional realized gains
and/or losses to shareholders.
Meetings and Voting Rights. The Company does not intend to hold annual
shareholder meetings. Shareholders have certain rights, as set forth in the
Agreement and Declaration of Trust, including the right to call a meeting of
shareholders for the purpose of voting on the removal of one or more Trustees.
Such removal may be effected upon the action of two-thirds of the outstanding
shares of the Company.
Shareholders are entitled to one vote per share. Shares of a Fund will be voted
only with respect to that Fund except for the election of Trustees and
ratification of independent accountants. Approval by the shareholders of one
Fund is effective as to that Fund. Shares have noncumulative voting rights, do
not have preemptive or subscription rights, and are transferable. Pursuant to
the Investment Company Act of 1940, as amended, shareholders of each Fund are
required to approve the adoption of any investment advisory agreement relating
to such Fund and of any changes in fundamental investment restrictions or
policies of the Fund.
Certificates. In the interest of economy and efficiency, the Company does not
issue stock certificates. Shareholders of uncertificated shares have the same
ownership rights as if certificates had been issued.
Shareholder Communications. Shareholders of the Company will receive annual
financial statements examined by the Company's independent accountants as well
as unaudited semi-annual financial statements. Each report will show the
investments owned by the Company and their respective market values thereof, and
will provide other financial information. Shareholders with inquiries regarding
the Company and individual accounts should contact the Manager at (800)
824-7513.
Custodian. The Company's Custodian is State Street Bank and Trust Company, P.O.
Box 1713, Boston, Massachusetts 02105.
Additional Information. This Prospectus, including the State- ment 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 Company
with the SEC under the Securities Act of 1933. Copies of the Registration
Statement may be obtained from the Commission or may be examined at the office
of the Commission in Washington, D.C.
22 The Prudential Institutional Fund Prospectus
<PAGE>
The Prudential Institutional Fund
21 Prudential Plaza
751 Broad Street
Newark, NJ 07102-3777
---------------
Bulk Rate
U.S. Postage
PAID
Permit No. 2145
Newark, N.J.
---------------
ThePRUDENTIAL[LOGO]
PIF 02-01-95
<PAGE>
EXHIBIT 17(e)
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 1, 1996
THE PRUDENTIAL INSTITUTIONAL FUND
Prudential Plaza
751 Broad Street
Newark, New Jersey 07102-3777
This Statement of Additional Information supplements the information
contained in the current Prospectus (the "Prospectus") of The Prudential
Institutional Fund (the "Company"), dated February 1, 1996, and should be read
in conjunction with the Prospectus. The Prospectus may be obtained by contacting
your Program Administrator or by writing the Company at the address listed
above. This Statement of Additional Information, although not in itself a
prospectus, is incorporated by reference into the Prospectus in its entirety.
TABLE OF CONTENTS
For ease of reference, the section headings used in this Statement of
Additional Information, where applicable, are identical to those used in the
Prospectus.
<TABLE>
<CAPTION>
Page
<S> <C>
THE FUNDS.................................................................................. B-2
Stock Index Fund........................................................................... B-2
Money Market Fund.......................................................................... B-2
MANAGEMENT OF THE COMPANY.................................................................. B-3
The Manager and Advisers................................................................... B-3
The Administrator.......................................................................... B-5
The Distributor............................................................................ B-5
Counsel and Auditors....................................................................... B-5
THE TRUSTEES and OFFICERS.................................................................. B-5
OTHER CONSIDERATIONS....................................................................... B-9
Net Asset Value............................................................................ B-9
Portfolio Transactions..................................................................... B-10
Taxes...................................................................................... B-11
PERFORMANCE AND YIELD INFORMATION.......................................................... B-14
Calculation of Money Market Fund Yield..................................................... B-14
Calculation of Fund Performance............................................................ B-14
Yield (except Money Market Fund)........................................................... B-14
Average Annual Total Return................................................................ B-14
Aggregate Total Return..................................................................... B-15
OTHER INVESTMENT PRACTICES, RISK CONDITIONS AND POLICIES OF THE FUNDS...................... B-15
U.S. Government Securities................................................................. B-15
Repurchase Agreements and Reverse Repurchase Agreements.................................... B-15
Fixed Income Securities.................................................................... B-16
When-Issued and Delayed Delivery Securities................................................ B-17
Forward Rolls and Dollar Rolls............................................................. B-17
Mortgage-Related Securities................................................................ B-17
Collateralized Mortgage Obligations........................................................ B-18
Asset-Backed Securities.................................................................... B-18
Custodial Receipts......................................................................... B-18
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Securities Lending......................................................................... B-19
Borrowing.................................................................................. B-19
Securities of Foreign Issuers.............................................................. B-19
Liquidity Puts............................................................................. B-19
Special Risks of Strategies Involving Options, Futures Contracts and Forward Contracts..... B-20
Options on Securities and Securities Indices............................................... B-20
Futures Contracts and Options on Futures Contracts......................................... B-21
Foreign Currency Forward Contracts, Options and Futures Transactions....................... B-22
Foreign Currency Strategies--Special Considerations........................................ B-23
Covered Forward Currency Contracts, Future Contracts and Options........................... B-23
Illiquid Securities........................................................................ B-24
Other Investment Techniques................................................................ B-24
INVESTMENT RESTRICTIONS.................................................................... B-25
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT.......................................... B-26
FINANCIAL STATEMENTS....................................................................... B-27
INDEPENDENT AUDITORS' REPORT............................................................... B-70
APPENDIX--DESCRIPTION OF S&P, MOODY'S AND DUFF & PHELPS RATINGS............................ A-1
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
THE FUNDS
The Prospectus discusses the investment objectives of the following funds
and the policies to be employed to achieve those objectives.
- Growth Stock Fund
- Stock Index Fund
- International Stock Fund
- Active Balanced Fund
- Balanced Fund
- Income Fund
- Money Market Fund
(collectively the "Funds")
Supplemental information is set out below concerning the types of
securities and other instruments in which the Funds may invest, the investment
policies and strategies that the Funds may utilize and certain risks attendant
to those investments, policies and strategies.
Stock Index Fund
If net cash outflows from the Stock Index Fund are anticipated, the Stock
Index Fund may sell stocks (in proportion to their weighting in the Standard &
Poor's 500 Composite Stock Price Index ("S&P 500 Index") in amounts in excess
of those needed to satisfy the cash outflows and hold the balance of the
proceeds in short-term investments if such a transaction appears, taking into
account transaction costs, to be more efficient than selling only the amount of
stocks needed to meet the cash requirements. The Stock Index Fund will not
increase its holdings of cash in anticipation of any decline in the value of the
S&P 500 Index or of the stock markets generally. If the Stock Index Fund does
hold un-hedged short-term investments as a result of the patterns of cash flows
to and from the Fund, such holdings may cause its performance to differ from
that of the S&P 500 Index.
THE "FUND" IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY STANDARD &
POOR'S CORPORATION ("S&P"). S&P MAKES NO REPRESENTATION OR WARRANTY, EXPRESS
OR IMPLIED, TO THE SHAREHOLDERS OF THE FUND OR ANY MEMBER OF THE PUBLIC
REGARDING THE ADVISABILITY OF INVESTING IN SECURITIES GENERALLY OR IN THE FUND
PARTICULARLY OR THE ABILITY OF THE S&P 500 INDEX TO TRACK GENERAL STOCK MARKET
PERFORMANCE. S&P'S ONLY RELATIONSHIP TO THE MANAGER AND ITS AFFILIATES IS THE
LICENSING OF CERTAIN TRADEMARKS AND TRADE NAMES OF S&P AND OF THE S&P 500 INDEX
WHICH IS DETERMINED, COMPOSED AND CALCULATED BY S&P WITHOUT REGARD TO THE
MANAGER OR THE FUND. S&P HAS NO OBLIGATION TO TAKE THE NEEDS OF THE MANAGER OR
THE SHAREHOLDERS INTO CONSIDERATION IN DETERMINING, COMPOSING OR CALCULATING THE
S&P 500 INDEX. S&P IS NOT RESPONSIBLE FOR AND HAS NOT PARTICIPATED IN THE
DETERMINATION OF THE PRICES AND AMOUNT OF THE FUND OR THE TIMING OF THE ISSUANCE
OR SALE OF THE SHARES OF THE FUND. S&P HAS NO OBLIGATION OR LIABILITY IN
CONNECTION WITH THE ADMINISTRATION, MARKETING OR TRADING OF THE FUND.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR
IMPLIED AS TO THE RESULTS TO BE OBTAINED BY MANAGER, SHAREHOLDERS, OR ANY OTHER
PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN.
S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY
OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL,
PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Money Market Fund
The Money Market Fund may also, consistent with the provisions of Rule 2a-7
of the Investment Company Act of 1940, as amended (the "1940 Act"), invest in
securities with a face maturity of more than 397 days, provided that either the
security is a variable or floating rate U.S. Government security, or it is a
floating or variable rate security with certain demand or interest rate reset
features.
The Money Market Fund uses the amortized cost method of valuing its
investments, which facilitates the maintenance of the Fund's per share net asset
value at $1.00. The amortized cost method, which is used to value all of the
Fund's securities, involves initially valuing a security at its cost and
thereafter amortizing to maturity any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
The extent of deviation between the Money Market Fund's net asset value
based upon available market quotations or market equivalents and $1.00 per share
based on amortized cost will be examined periodically by the Trustees. If such
deviation exceeds 1/2 of
B-2
<PAGE>
1%, the Trustees will promptly consider what action, if any, will be initiated.
In the event the Trustees determine that a deviation exists that may result in
material dilution or other unfair results to investors or existing shareholders,
they will cause the Money Market Fund to take such corrective action as they
regard to be necessary and appropriate to eliminate or reduce to the extent
reasonably practicable such dilution or unfair results. Such action may include
the sale of Money Market Fund instruments prior to maturity to realize capital
gains or losses or to shorten average portfolio maturity; withholding part or
all of dividends or payment of distributions from capital or capital gains;
redemptions of shares in kind; or establishing a net asset value per share by
using available market quotations or equivalents. In addition, in order to
stabilize the net asset value per share at $1.00, the Trustees have the
authority (i) to reduce or increase the number of shares outstanding on a pro
rata basis, and (ii) to offset each shareholder's pro rata portion of the
deviation between the net asset value per share and $1.00 from the shareholder's
accrued dividend account or from future dividends.
MANAGEMENT OF THE COMPANY
The Manager and Advisers
The Manager of the Company is Prudential Institutional Fund Management,
Inc.("PIFM" or the "Manager"), whose principal business address is 30
Scranton Office Park, Moosic, Pennsylvania 18507-1789.
Pursuant to an agreement with the Company and the Manager, subject to the
supervision of the Company's Trustees and in conformity with the stated policies
of the Company, manages both the investment operations of the Company and the
composition of the Company's Funds, including the purchase, retention,
disposition and loan of securities, and other instruments held by the Funds (the
"Management Agreement"). In connection therewith, the Manager is obligated to
keep certain books and records of the Company. The management services of the
Manager for the Company are not exclusive under the terms of the Management
Agreement and the Manager is free to, and does, render management services to
others.
The Manager has agreed, until September 30, 1996, to bear any expenses,
including management fees, which would cause the ratio of expenses payable by
each Fund to average daily net assets to exceed the estimated Total Operating
Expenses (After Reduction) for each Fund specified in the expense table at the
beginning of the Prospectus. The fees are computed daily and payable monthly.
The Management Agreement also provides that, in the event the expenses of the
Company (including the fees of the Manager, but excluding interest, taxes,
brokerage commissions, distribution fees and litigation and indemnification
expenses and other extraordinary expenses not incurred in the ordinary course of
the Company'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 Company's shares are qualified for
offer and sale, the compensation due to the Manager will be reduced by the
amount of such excess. Reductions in excess of the total compensation payable to
the Manager will be paid by the Manager to the relevant Fund. Currently, the
Company believes that the most restrictive expense limitation of state
securities commissions is 2 1/2% of the Company'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. The Company reserves the right to waive any
and all fees or a portion thereof at its discretion. Such waiver is subject to
later reimbursement by the applicable Fund for a period up to and including
December 31, 1996.
In connection with its management of the business affairs of the Company,
the Manager bears the following expenses:
(i) the salaries and expenses of all of its and the Company's personnel
except the fees and expenses of Trustees who are not affiliated persons of the
Manager or the Funds' Advisers;
(ii) all expenses incurred by the Manager or by the Company in connection
with managing the ordinary course of the Company's business, other than those
assumed by the Company as described below; and
(iii) the costs and expenses or fees payable to The Prudential Investment
Corporation ("PIC"), Jennison Associates Capital Corp. ("Jennison") and
Mercator Asset Management, L.P. ("Mercator") (collectively, the "Advisers")
pursuant to the subadvisory agreements between the Manager and the Advisers
(collectively, the "Advisory Agreements").
Under the terms of the Management Agreement, the Company is responsible for
the payment of the following expenses: (i) the fees payable to the Manager, (ii)
the fees and expenses of Trustees who are not affiliated persons of the Manager
or the Funds' Advisers, (iii) the fees and certain expenses of the Custodian and
Transfer and Dividend Disbursing Agent, including the cost of providing records
to the Manager and Plan Administrator in connection with its obligation of
maintaining required records of the Company, pricing the Funds' shares and the
cashiering function, (iv) the charges and expenses of legal counsel and
independent accountants for the Company, (v) brokerage commissions and any issue
or transfer taxes chargeable to the Company in connection with its securities
and futures transactions, (vi) all taxes and corporate fees payable by the
Company to governmental agencies, (vii) the fees of any trade associations of
which the Company may be a member, (viii) the cost of stock certificates
representing shares of Funds of the Company, if any, (ix) the cost of fidelity
and liability insurance, (x) the fees and expenses involved in registering and
maintaining registration of the Company and of its shares with the Securities
and Exchange Commission ("SEC"), registering the Company and qualifying its
shares under state securities laws, including the preparation and printing of
the Company's registration statements and prospectuses for such purposes,
B-3
<PAGE>
(xi) licensing fees, if any, (xii) allocable communications expenses with
respect to investor services and all expenses of shareholders' and Trustees'
meetings and of preparing, printing and mailing reports, proxy statements and
prospectuses to shareholders in the amount necessary for distribution to the
shareholders, (xiii) fees of the Administrator, and (xiv) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Company's business.
The Management Agreement provides that the Manager will not be liable for
any error of judgment or for any loss suffered by the Company 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 in
the event of its assignment (as defined in the 1940 Act, 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 1940 Act. The Management Agreement was last approved by the Trustees of the
Company, including all of the Trustees who are not parties to the contract or
interested persons of any such party as defined in the 1940 Act on November 16,
1995 and by the sole shareholder of the Company on October 12, 1992. The Manager
received, before any reduction due to the subsidy by the Manager of certain
expenses of the Fund, the following management fees from each Fund, expressed
both as a dollar amount and as a percentage of each Fund's average daily net
assets:
<TABLE>
<CAPTION>
Year ended Year ended Period ended
September 30, 1995 September 30, 1994 September 30, 1993
-------------------- ------------------ ------------------
Fund Amount Rate Amount Rate Amount Rate
------------ ----------- ---- --------- ---- --------- ----
<S> <C> <C> <C> <C> <C> <C>
Growth Stock $1,049,893 .70% $500,141 .70% $111,337 .70%
Stock Index 286,843 .40 152,392 .40 68,014 .40
International
Stock 1,367,665 1.15 787,473 1.15 150,665 1.15
Active
Balanced 733,748 .70 412,941 .70 66,355 .70
Balanced 496,395 .70 308,338 .70 110,128 .70
Income 231,931 .50 189,009 .50 75,122 .50
Money Market 236,009 .45 171,766 .45 84,206 .45
</TABLE>
During the same period the Manager subsidized certain expenses of the Fund. See
"Expense Information" and "Management of the Company--The Manager" in the
Prospectus.
The Manager has entered into Advisory Agreements with the "Advisers". The
Advisory Agreements provide that the Advisers furnish investment advisory
services in connection with the management of their respective Funds. For their
services as Advisers, Jennison and Mercator are each paid a portion of the fee
the Manager receives from each Fund. PIC is reimbursed by the Manager for the
reasonable costs and expenses incurred in furnishing its services. In connection
therewith, the Advisers are obligated to keep certain books and records of the
respective Funds to which they provide advisory services. The Manager continues
to have responsibility for all investment advisory services to all the Funds
pursuant to the Management Agreement and supervises the Advisers' performance of
such services.
Jennison advises the Growth Stock Fund and Active Balanced Fund. Founded in
1969 and acquired by The Prudential in 1985, Jennison is known for its highly
skilled investment team that has worked together for many years. Dedicated to
achieving superior investment results for institutional investors, Jennison
currently has $29 billion in assets under management, including more than $15
billion in investments managed with a "growth stock" orientation and $1.6
billion in actively managed balanced assets.
Mercator advises the International Stock Fund. Dedicated to global and
international common stock investing, Mercator was initially founded in 1984 by
senior professionals formerly associated with Templeton Investment Counsel as
Mercator Asset Management, Inc. ("Mercator, Inc."). On November 30, 1995
Mercator, a limited partnership organized under the laws of the State of
Delaware, assumed the investment advisory business of Mercator, Inc. Mercator
currently manages $1.8 billion for institutional clients.
PIC advises the Stock Index, Balanced, Income and Money Market Funds
through various of its specialized investment units discussed below.
Prudential Diversified Investment Strategies (PDI) manages the Stock Index
Fund and Balanced Fund. PDI is dedicated to equity index and balanced fund
investing for institutional clients. Founded in 1975, PDI is among the oldest
quantitatively-oriented balanced managers in the country. PDI currently manages
close to $21 billion in balanced and indexed assets.
Prudential Global Advisors (PGA) manages the Income Fund. PGA focuses on
fixed income investing. PGA is a recognized leader in asset/liability management
and other structured bond portfolios. PGA currently manages over $17 billion in
domestic fixed income assets.
B-4
<PAGE>
PGA also manages the Money Market Fund. PGA focuses on managing
institutional money market accounts and, as of December 31, 1995, manages
approximately $4 billion in short-term money market assets.
The Advisory Agreements, except the Advisory Agreement with Mercator, were
last approved by the Trustees, including a majority of the Trustees who are not
interested persons of the Company and who have no direct or indirect financial
interest in the Advisory Agreements, on November 16, 1995, and by the sole
shareholder of the Company on October 12, 1992. The Advisory Agreement with
Mercator was approved by the Trustees on October 2, 1995 and by the shareholders
of the International Stock Fund on November 16, 1995.
Each Advisory Agreement provides that it will terminate in the event of its
assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement. Each Advisory Agreement may be terminated by the Company,
the Manager or the relevant Adviser upon not more than 60 days', nor less than
30 days', written notice. Each Advisory 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 1940 Act.
The Administrator
The Company has entered into an Agreement with Prudential Mutual Fund
Management, Inc. ("PMF"), an affiliate of the Manager, which provides that PMF
will administer the Company's business affairs and, in connection therewith,
furnish the Company with office facilities, together with those ordinary
clerical and bookkeeping services which are not being furnished by State Street
Bank and Trust Company, the Company's Custodian (The "Administration
Agreement"). PMF will also act as the Company's Transfer and Dividend
Disbursing Agent for no additional fee through its wholly-owned subsidiary,
Prudential Mutual Fund Services, Inc. ("PMFS"), P.O. Box 15005, New Brunswick,
New Jersey 08906. Under the Administration Agreement, the Company will pay PMF a
monthly fee at an annual rate of .17% of the Company's average daily net assets
up to $250 million and .15% of the Company's average daily net assets in excess
of $250 million. PMF will reimburse PMFS for certain of the out-of-pocket
expenses PMFS may incur in providing the transfer agency and dividend disbursing
services and the Company will reimburse PMF for these out-of-pocket expenses.
For the years ended September 30, 1995 and 1994, and period from November 5,
1992 (commencement of operations) to September 30, 1993 the Administrator
received $972,783, $489,154 and $178,445, respectively, under the Administration
Agreement.
The Distributor
Prudential Retirement Services, Inc. ("PRSI") serves as the Distributor
of the Company's shares. The Company's distribution agreement with PRSI (the
"Distribution Agreement") has been approved by the Trustees, including a
majority of the Trustees who are not interested persons of the Company and who
have no direct or indirect financial interest in the Distribution Agreement, on
November 16, 1995. Potential investors may be introduced to the Distributor and
persons who introduce investors may be compensated for such introductions.
Counsel and Auditors
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W., Washington,
D.C. 20036-1800, serves as counsel to the Company. Deloitte & Touche, LLP, 2
World Financial Center, New York, NY 10281-1438, independent accountants, serve
as auditors of the Company.
THE TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position with Principal Occupations
Name, Address and Age Company During Past Five Years
- ---------------------- -------------- --------------------------------------------------------
<S> <C> <C>
Mark R. Fetting* (41) President and Chairman of the Board, President and Chief Operating
30 Scranton Office Trustee Officer, Prudential Institutional Fund Management,
Park Inc. (May, 1992 to date); Managing Director, The
Moosic, PA 18507-1789 Prudential Investment Corporation (October, 1991 to
date); Chairman of the Board, President and Chief
Executive Officer, Prudential Retirement Services,
Inc. (January 1993 to date); President of Prudential
Defined Contribution Services (April 1992 to date).
David A. Finley (63) Trustee Director, Executive Vice President, and Chief Financial
17 Bedford Center Road Officer, Broadway & Seymour Inc. (since January 1996);
Bedford Hills, NY Director of Legent Corp.; formerly Consultant (January
10507 1990 to January 1996).
</TABLE>
B-5
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupations
Name, Address and Age Company During Past Five Years
- ---------------------- -------------- --------------------------------------------------------
<S> <C> <C>
William E. Fruhan, Trustee Professor, Harvard Graduate School of Business
Jr.(52) Administration (1979 to date).
Harvard Business
School
Boston, MA 02163
August G. Olsen (66) Trustee Pensions and Investments Consultant, August G. Olsen
417 W. Hawthorne Ct. Consulting (1992 to date); Corporate Pension Fund
Lake Bluff, IL 60044 Officer and Investment Manager, Abbott Laboratories
(1987 to 1992).
Herbert G. Stolzer Trustee Retired. Formerly Executive Committee Member, Board of
(70) Directors,Member and Assistant to the Chairman of the
19 Yorktown Road Board of Directors, Johnson & Johnson (August 1987 to
East Brunswick, NJ January 1991).
08816
Thomas A. Early (41) Vice President Vice President and Secretary of Prudential Institutional
30 Scranton Office Fund Management, Inc. and Prudential Retirement
Park Services, Inc. (since July 1994); Vice President and
Moosic, PA 18507-1789 General Counsel, Prudential Defined Contribution
Services (since April 1994); Formerly Associate
General Counsel and Chief Financial Services Counsel
for Frank Russell & Company (April 1988-April 1994).
Robert F. Gunia (49) Vice President Chief Administrative Officer (since July 1990), Director
One Seaport Plaza (since January 1989), Executive Vice President,
New York, NY 10292 Treasurer and Chief Financial Officer (since June
1987) of Prudential Mutual Fund Management, Inc.
("PMF"), Senior Vice President (since March 1987) of
Prudential Securities Incorporated ("Prudential
Securities"); Executive Vice President, Treasurer,
Comptroller and Director (since March 1991),
Prudential Mutual Fund Distributors, Inc.; Director
(since June 1987), PMFS; Vice President and Director
of The Asia Pacific Fund, Inc. (since May 1989) and
Director of Nicholas Applegate Fund, Inc. (since
February 1992).
Walter E. Watkins, Jr. Vice President Vice President, Prudential Institutional Fund
(43) Management, Inc., (since April 1993) and Prudential
30 Scranton Office Retirement Services, Inc. (since March 1994); Director
Park of Mutual Fund Administration, Prudential Defined
Moosic, PA 18507-1789 Contribution Services (since November 1992). Formerly,
financial reporting consultant (August 1991-September
1992).
Eugene S. Stark (37) Treasurer First Vice President (since January 1990) of PMF; First
One Seaport Plaza Vice President (since January 1992) of Prudential
New York, NY 10292 Securities.
S. Jane Rose (49) Secretary Senior Vice President (since January 1991) and Senior
One Seaport Plaza Counsel (since June 1987) of PMF; Senior Vice
New York, NY 10292 President and Senior Counsel of Prudential Securities
(since July 1992); formerly Vice President and
Associate General Counsel of Prudential Securities.
Marguerite E.H. Assistant Vice President and Associate General Counsel (since June
Morrison (39) Secretary 1991) of PMF; Vice President and Associate General
One Seaport Plaza Counsel of Prudential Securities.
New York, NY 10292
- ---------------
* "Interested" Trustee, as defined in the 1940 Act, by reason of his affiliation with the Manager,
the Distributor or a Subadviser.
</TABLE>
B-6
<PAGE>
As of January 12, 1996, the Trustees and officers of the Fund, as a group
owned beneficially less than 1% of the stock of the Company. As of January 23,
1996, each of the following entities owned more than 5% of the outstanding
voting securities of each of the portfolios indicated:
<TABLE>
<CAPTION>
Portfolio Shares
- ------------------------- -----------------
<S> <C> <C>
Growth Stock Fund PAMCO VCA OA Account 943,399 (6%)
30 Scranton Office Park
Moosic, PA 18507-1774
Prudential Employee Savings Plan 4,378,426 (28.1%)
71 Hanover Road
Florham Park, NJ 07932-1502
Rite Aid Employee Investment
Opportunity Plan 1,913,760 (12.2%)
Rite Aid Corporation
30 Hunter Lane
Camp Hill, PA 17011
Stock Index Fund PAMCO VCA OA Account 1,619,698 (19%)
30 Scranton Office Park
Moosic, PA 18507-1774
Prudential Employee Savings Plan 2,460,902 (28.8%)
71 Hanover Road
Florham Park, NJ 07932-1502
Eden Brewery Thrift Savings Plan and
Fort Worth Brewery Thrift Savings Plan
Miller Brewing Company 533,960 (6.2%)
3939 West Highland Blvd.
Milwaukee, WI 53201-0482
International Stock Fund Prudential Employee Savings Plan 4,017,916 (41.8%)
71 Hanover Road
Florham Park, NJ 07932-1502
PAMCO VCA OA Account 1,235,510 (12.8%)
30 Scranton Office Park
Moosic, PA 18507-1774
Deferred Compensation Plan for
Employees of The Metropolitan
Transportation Authority, its
Subsidiaries and Affiliates and
Thrift Plan for Employees of The
Metropolitan Transportation Authority,
its Subsidiaries and Affiliates 543,152 (5.6%)
347 Madison Ave.
New York, NY 10017
Rite Aid Employee Investment
Opportunity Plan 572,074 (5.9%)
30 Hunter Lane
Camp Hill, PA 17011
Balanced Fund PAMCO VCA OA Account 1,840,795 (25.1%)
30 Scranton Office Park
Moosic, PA 18507-1774
Prudential Employee Saving Plan 1,911,531 (26%)
71 Hanover Road
Florham Park, NJ 07932-1502
</TABLE>
B-7
<PAGE>
<TABLE>
<CAPTION>
Portfolio Shares
- ------------------------- -----------------
<S> <C> <C>
Seibels, Bruce & Company 414,964 (5.6%)
Employees' Profit Sharing and
Savings Plan
1501 Lady Street
Columbia, SC 29202
Active Balanced Fund PAMCO VCA OA Account 1,575,825 (14%)
30 Scranton Office Park
Moosic, PA 18507-1774
Dobson Park Industries Inc. and Affiliates
Savings Plan and
Dobson Park Industries Inc. and Affiliates
Cash Balance Pension Plan
Dobson Technologies, Inc. 776,559 (6.9%)
c/o IRD Mechanalysis
6150 Huntley Road
Columbus, OH 43229
Rite Aid Employee Investment
Opportunity Plan 1,027,817 (9.1%)
Rite Aid Corporation
30 Hunter Lane
Camp Hill, PA 17011
Thompson & Knight Savings Plan and
Thompson & Knight Retirement Plan 1,196,886 (10.6%)
300 First City Center
1700 Pacific Ave.
Dallas, TX 75201
Income Fund Prudential Insurance Company 2,932,815 (52.7%)
of America
30 Scranton Office Park
Moosic, PA 18507-1789
Rite Aid Employee Investment
Opportunity Plan 738,345 (13.3%)
Rite Aid Corporation
30 Hunter Lane
Camp Hill, PA 17011
Money Market Fund Prudential Insurance Company 28,188,209
of America (48.4%)
30 Scranton Office Park
Moosic, PA 18507-1789
</TABLE>
The Prudential Insurance Company of America is a mutual life insurance
company incorporated in 1873 under the laws of the state of New Jersey. The
Prudential Employee Savings Plan is a defined contribution retirement plan. The
PAMCO VCA OA Account is a portion of The Prudential Variable Contract Investment
Fund, a separate account, established in 1962, of The Prudential Insurance
Company of America.
The interested trustees serve without compensation. The following table
sets forth the aggregate compensation paid by the Company to the Trustees who
are not affiliated with the Manager for the fiscal year ended September 30, 1995
and the aggregate compensation paid to such Trustees for service on the
Company's board and that of all other funds managed by Prudential Institutional
Fund Management, Inc. (Fund Complex) for the fiscal year ended September 30,
1995.
B-8
<PAGE>
<TABLE>
<CAPTION>
Compensation Table
- --------------------------------------------------------------------------------------------------------
Pension or Total
Retirement Compensation
Benefits Accrued Estimated from Company
Aggregate As Part of Annual and Fund
Compensation Company Benefits Upon Complex Paid
Name and Position From Company Expenses Retirement to Trustees
- ------------------------------ ------------- ----------------- -------------- -------------
<S> <C> <C> <C> <C>
David A. Finley--Trustee 15,$000 NONE N/A 15$,000(1/7)**
William E. Fruhan,
Jr.--Trustee 15,000 NONE N/A 15,000(1/7)**
August G. Olsen*--Trustee 15,000 NONE N/A 15,000(1/7)**
Herbert G. Stolzer*--Trustee 15,000 NONE N/A 15,000(1/7)**
* All of the compensation from the Company for the fiscal year ended September 30, 1995 represents
deferred compensation. Aggregate compensation from the Company and the Fund Complex for the fiscal
year ended September 30, 1995, including accrued income and appreciation, amounted to approximately
$18,339 for Mr. Olsen and approximately $21,792 for Mr. Stolzer.
**Indicates number of Funds/portfolios in Fund Complex to which aggregate compensation relates.
</TABLE>
OTHER CONSIDERATIONS
Net Asset Value
Portfolio securities of each Fund, except the Money Market Fund, are
generally valued as follows: (1) Securities for which the primary market is on
an exchange are valued at the last sale price on such exchange on the day of
valuation or, if there was no sale on such day, at the average of readily
available closing bid and asked prices on such day; (2) Securities that are
actively traded in the over-the-counter ("OTC") market, including listed
securities for which the primary market is believed to be over-the-counter, are
valued at the average of the most recently quoted bid and asked prices provided
by a principal market maker; (3) Securities issued in private placements are
valued at the mean between the bid and asked prices provided by primary market
dealers or, if no primary dealers are able to provide a market value, at fair
value determined by a valuation committee of Trustees (the "Valuation
Committee"); (4) U.S. Government securities for which market quotations are
available are valued at a price provided by an independent broker/dealer or
pricing service; (5) Short-term debt securities, including bonds, notes,
debentures and other debt securities, and money market instruments such as
certificates of deposit, commercial paper, bankers' acceptances and obligations
of domestic and foreign banks, with remaining maturities of more than 60 days
for which reliable market quotations are readily available, are valued at
current market quotations as provided by an independent broker/dealer or pricing
service; (6) Short-term investments with remaining maturities of 60 days or less
are valued at cost with interest accrued or discount amortized to the date of
maturity, unless the Trustees determine that such valuation does not represent
fair value; (7) Options on securities that are listed on an exchange are valued
at the last sales price at the close of trading on such exchange or, if there
was no sale on the applicable options exchange on such day, at the average of
the quoted bid and asked prices as of the close of such exchange; (8) Futures
contracts and options thereon traded on a commodities exchange or board of trade
are valued at the last sale price at the close of trading on such exchange or
board of trade or, if there was no sale on the applicable commodities exchange
or board of trade on such day, at the average of quoted bid and asked prices as
of the close of such exchange or board of trade; (9) Quotations of foreign
securities in a foreign currency shall be converted to U.S. dollar equivalents
at the current rate obtained from a recognized bank or dealer; (10) Forward
currency exchange contracts are valued at the current cost of covering or
offsetting such contracts; (11) OTC options are valued at the mean between bid
and asked prices provided by a dealer, with additional prices obtained for
comparison, monthly and as indicated by monitoring of the underlying securities;
(12) Securities for which market quotations are not available, other than
private placements, are valued at a price supplied by a pricing agent approved
by the Trustees; (13) Securities for which reliable market quotations are not
available or for which the pricing agent or principal market maker does not
provide a valuation or provides a valuation that, in the judgment of the
applicable Adviser, does not represent fair value, are valued by the Valuation
Committee on the basis of cost of the security, transactions in comparable
securities, relationships among various securities and other factors determined
by the Adviser to materially affect the value of the security. The Company may
engage pricing services to obtain any prices.
The Trustees have determined that in the best interests of shareholders the
best method currently available for valuing the Money Market Fund's securities
is amortized cost. The Trustees continuously review this method of valuation to
assure that the Money Market Fund's securities are valued at their fair value,
as determined by the Trustees in good faith. The Trustees are obligated, as a
particular responsibility within the overall duty of care owed to shareholders,
to establish procedures reasonably designed, taking into account current market
conditions and the Money Market Fund's investment objective, to stabilize the
net asset value per share as computed for the purpose of distribution and
redemption at $1.00 per share. The Trustees' procedures include periodically
monitoring, as appropriate and at such intervals as are reasonable in light of
current market conditions, the relationship between the amortized cost value per
share and a net asset value per share based upon available indications of market
value.
B-9
<PAGE>
While the amortized cost method provides certainty in valuation, it may
result in periods during which value, as determined by amortized cost, is higher
or lower than the price the Money Market Fund would receive if it sold the
instrument. During periods of declining interest rates, the quoted yield on
shares of the Money Market Fund may tend to be higher than a like computation
made by a fund with identical investments utilizing a method of valuation based
upon market prices and estimates of market prices for all of its portfolio
instruments. Thus, if the use of amortized cost by the Money Market Fund
resulted in a lower aggregate portfolio value on a particular day, a prospective
investor in the Money Market Fund would be able to obtain a somewhat higher
yield if he or she purchased shares of the Money Market Fund on that day, than
would result from investment in a fund utilizing solely market values, and
existing investors in the Money Market Fund would receive less investment
income. The converse would apply in a period of rising interest rates.
Portfolio securities traded on more than one U.S. national securities
exchange or foreign securities exchange are valued at the last sale price on the
business day as of which such value is being determined at the close of the
exchange representing the principal market for such securities. The value of all
assets and liabilities expressed in foreign currencies will be converted into
U.S. dollar values at the current rate obtained from a recognized bank or
dealer. If such quotations are not available, the rate of exchange will be
determined in good faith by or under procedures established by the Trustees of
the Company.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York (i.e., a day on which the New York Stock
Exchange ("NYSE") is open for trading). In addition, European or Far Eastern
securities trading generally or in a particular country or countries may not
take place on all business days in New York. Furthermore, trading takes place in
Japanese markets on certain Saturdays and in various foreign markets on days
which are not business days in New York and on which the Funds' net asset values
are not calculated. Such calculation does not take place contemporaneously with
the determination of the prices of the majority of the portfolio securities used
in such calculation. Events affecting the values of portfolio securities that
occur between the time their prices are determined and the close of the regular
trading on the NYSE will not be reflected in the Fund's calculation of net asset
values unless, pursuant to procedures adopted by the Trustees, the Adviser deems
that the particular event would materially affect net asset value, in which case
an adjustment will be made.
The proceeds received by each Fund for each issue or sale of its shares,
and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to such Fund and constitute the underlying assets of that Fund. The underlying
assets of each Fund will be segregated on the books of account, and will be
charged with the liabilities in respect to such Fund and with a share of the
general liabilities of the Company. Expenses with respect to any two or more
Funds are to be allocated in proportion to the net asset values of the
respective Funds except where allocations of direct expenses can otherwise be
fairly made.
Portfolio Transactions
Decisions to buy and sell assets for a Fund are made by the Fund's Adviser,
subject to the overall review of the Manager and the Trustees. Although
investment decisions for the Funds are made independently from those of the
other accounts managed by an Adviser, investments of the type that the Funds may
make also may be made for those other accounts. When a Fund and one or more
other accounts managed by an Adviser are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for sales
will be allocated in a manner believed by the Adviser to be equitable to each.
In some cases, this procedure may adversely affect the price paid or received by
a Fund or the size of the position obtained or disposed of by a Fund.
Transactions on U.S. stock exchanges and some foreign stock exchanges
involve the payment of negotiated brokerage commissions. On exchanges on which
commissions are negotiated, the cost of transactions may vary among different
brokers. On most foreign exchanges, commissions are generally fixed. No stated
commission is generally applicable to securities traded in U.S. over-the-counter
markets, but the prices of those securities includes commissions or mark-ups.
The cost of securities purchased from underwriters includes an underwriting
commission or concession and the prices at which securities are purchased from
and sold to dealers include a dealer's mark-up or mark-down. U.S. Government
securities generally are purchased from underwriters or dealers, although
certain newly-issued U.S. Government securities may be purchased directly from
the U.S. Treasury or from the issuing agency or instrumentality.
In selecting brokers or dealers to execute securities transactions on
behalf of a Fund, its Adviser seeks the best overall terms available. The Funds
have no obligation to do business with any broker-dealer or group of
broker-dealers in executing transactions in securities. In placing orders, the
Advisers are subject to the Company's policy to seek the most favorable price
and efficient execution taking into account such factors as price (including the
applicable commission or dealer spread), size, type, and difficulty of the
transaction, and the firm's general execution and operating facilities. In
assessing the best overall terms available for any transaction, the Adviser will
consider the factors that it deems relevant, including the breadth of the market
in the security, the price of the security, the financial condition and
execution capability of the broker or dealer and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis. In
addition, the Advisers, subject to seeking best price and execution, are
authorized to cause a Fund to pay broker-dealers that furnish brokerage and
research services (as defined by Section 28(e) of the Securities and Exchange
Act
B-10
<PAGE>
of 1934, as amended (the "1934 Act") a higher commission than another
broker-dealer that does not furnish such brokerage and research services might
charge. The Advisers must regard such higher commissions as reasonable in
relation to the brokerage and research services provided, viewed in terms of
each Adviser's responsibilities to the Fund or other accounts, if any, as to
which it exercises investment discretion. The fees under the Management
Agreement and the Advisory Agreements, respectively, are not reduced by reason
of a Fund's Adviser receiving brokerage and research services. The Trustees of
the Company will periodically review the commissions paid by a Fund to determine
if the commissions paid over representative periods of time were reasonable in
relation to the benefits inuring to the Fund. Over-the-counter purchases and
sales by a Fund are transacted directly with principal market makers except in
those cases in which better prices and executions may be obtained elsewhere.
To the extent consistent with applicable provisions of the 1940 Act and the
rules and exemptions adopted by the SEC under the 1940 Act, the Trustees have
determined that transactions for a Fund may be executed through Prudential
Securities Incorporated ("Prudential Securities" or "PSI") and other
affiliated broker-dealers if, in the judgment of the Adviser, the use of an
affiliated broker-dealer is likely to result in price and execution at least as
favorable as those of other qualified broker-dealers, and if, in the
transaction, the affiliated broker-dealer charges the Fund a fair and reasonable
rate. Furthermore, the Trustees of the Company, including a majority of the
Trustees who are not "interested" Trustees, have adopted procedures which are
reasonably designed to provide that any commissions, fees or other remuneration
paid to PSI are consistent with the foregoing standard. In accordance with
Section 11(a) 1934 Act, 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 in a written
contract executed by the Fund and Prudential Securities. Section 11(a) provides
that Prudential Securities must furnish to the Fund at least annually a
statement setting forth the total amount of all compensation retained by
Prudential Securities from transactions effected for the Fund during the
applicable period. Brokerage transactions with PSI also are subject to such
fiduciary standards as may be imposed by applicable law.
The Funds may use PSI and other affiliated broker-dealers as a futures
commission merchant in connection with entering into futures contracts and
options on futures contracts if, in the judgment of a Fund's Adviser, the
affiliated broker-dealer charges the Fund a fair and reasonable rate. This
standard would allow PSI 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.
The Company does not market its shares through intermediary brokers or
dealers; therefore, it is not the Company's practice to allocate brokerage or
principal business on the basis of sales of its shares which may be made through
such firms. However, the Advisers may place portfolio orders with qualified
broker-dealers who recommend the Company to clients, and may, when a number of
brokers and dealers can provide best price and execution on a particular
transaction, consider such recommendations by a broker or dealer in selecting
among broker-dealers.
Transactions in options and futures by a Fund will be subject to
limitations established by each of the exchanges and boards of trade governing
the maximum position which may be written or held by a single investor or group
of investors acting in concert, regardless of whether the options and futures
are written or held on the same or different exchanges or are written or held in
one or more accounts or though one or more brokers. Thus, the number of options
and futures which a Fund may write or hold may be affected by options and
futures written or held by the Adviser and other investment advisory clients of
the Adviser. An exchange or board of trade may order the liquidation of
positions found to be in excess of these limits, and it may impose certain other
sanctions.
The Funds will not purchase any security, including U.S. Government
securities, during the existence of any underwriting or selling group relating
thereto of which PSI is a member, except to the extent permitted by SEC rules.
During the years ended September 30, 1995 and 1994 and the period from
November 5, 1992 (commencement of operations) through September 30, 1993, the
Company paid $965, $3,247 and $1,528, respectively in brokerage commissions to
Prudential Securities.
Taxes
The following is a brief summary of some of the more important tax
considerations affecting the Company, the Funds and their shareholders. No
attempt is made to present a detailed explanation of all federal, state, local,
and foreign income tax considerations. Neither this discussion nor the tax
discussion in the Prospectus is intended to substitute for careful individual
tax planning. Accordingly, potential investors are urged to consult their own
tax advisers with specific reference to their own tax situation.
Tax Consequences to the Funds
As a separate entity for federal tax purposes, each Fund intends to
continue to qualify separately for tax treatment as a regulated investment
company ("RIC") under subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). If so qualified, each Fund will not be subject to
federal income tax with respect to its net investment income and net realized
capital gains, if any, that are distributed to its shareholders. In order to
qualify for treatment as a RIC, each Fund will have to meet income
diversification, distribution,
B-11
<PAGE>
and certain other requirements set forth in the Code. If, in any year, a Fund
should fail to qualify under the Code for tax treatment as a RIC, the Fund would
incur a regular federal corporate income tax on its taxable income, if any, for
that year.
The following Funds will elect to treat net losses incurred in the eleven
month period ended September 30, 1995 as having been incurred in the following
fiscal year:
<TABLE>
<CAPTION>
Capital Currency
----------- ---------
<S> <C> <C>
Growth Stock Fund -- $4,000
International Fund $3,066,000 $169,000
Balanced Fund -- $1,000
</TABLE>
For federal income tax purposes, the following Funds have a capital loss
carryforward as of September 30, 1995 which expires in 2003:
<TABLE>
<S> <C>
Growth Stock Fund $2,825,300
Income Fund $723,300
</TABLE>
Income and Diversification Requirements. The income tests require each Fund
to derive (i) at least 90% of its gross income in each taxable year from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of stock, securities, or foreign currencies, or
other income (including gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies ("Income Requirement") and (ii) less than 30% of its gross income
in each taxable year from the sale or other disposition of (A) stock or
securities held for less than three months, (B) options, futures, or forward
contracts (other than those on foreign currencies) held for less than three
months, and (C) foreign currencies (or options, futures, or forward contracts on
foreign currencies) held for less than three months but only if such currencies
(or options, futures, or forward contracts) are not directly related to the
Fund's principal business of investing in stock or securities (or options or
futures with respect to stock or securities) ("Short-Short Limitation"). Each
Fund also must diversify its holdings so that, at the end of each quarter of its
taxable year, (i) at least 50% of the value of the Fund's total assets is
represented by cash and cash items, U.S. Government securities, securities of
other RICs, and other securities, with such other securities limited, in respect
of any one issuer, to an amount not greater in value than 5% of the Fund's total
assets and not more than 10% of the outstanding voting securities, and (ii) not
more than 25% of the value of its total assets is invested in the securities of
any one issuer (other than U.S. Government securities or the securities of other
RICs).
Distribution Requirement. Each Fund must distribute (or be deemed to have
distributed) 90% or more of its investment company taxable income (generally
consisting of net investment income, net short-term capital gain, and net gains
from certain foreign currency transactions) for each taxable year. Each Fund
also must meet certain other distribution requirements to avoid a 4%
nondeductible excise tax (these requirements are collectively referred to below
as the "RIC distribution requirements").
Zero Coupon Securities and Original Issue Discount. The Funds may invest in
zero coupon securities and other securities issued with original issue discount.
Such securities generate current income subject to the distribution requirements
without providing cash available for distribution. The Funds do not anticipate
that such investments will adversely affect their ability to meet the RIC
distribution requirements.
Foreign Investments. If the International Stock Fund or any other Fund
purchases shares in certain foreign corporations called "passive foreign
investment companies" ("PFICs"), the Fund may be subject to U.S. federal
income tax on a portion of any "excess distribution" or gain from the
disposition of such shares even if such income is distributed as a dividend by
the Fund to its shareholders. Because a credit for this tax could not be passed
through to shareholders, the tax effectively would reduce the Fund's economic
return from its PFIC investment. Additional charges in the nature of interest
may be imposed on a PFIC investor in respect of deferred taxes arising from such
distributions or gains. If a Fund were to invest in a PFIC and elected to treat
the PFIC as a "qualified electing fund" under the Code, then in lieu of the
foregoing tax and interest, the Fund might be required to include in income each
year a portion of the ordinary earnings and net capital gains of the qualified
electing fund, even if not distributed to the Fund, and such amounts would be
subject to the RIC distribution requirements. Management of the Company will
consider these potential tax consequences in evaluating whether to invest in a
PFIC.
Net investment income or capital gains earned by the Funds investing in
foreign securities may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries that entitle the Funds to a reduced rate of tax or exemption from tax
on this related income and gains. It is impossible to determine the effective
rate of foreign tax in advance since the amount and the countries in which the
Funds' assets will be invested are not known. The Funds intend to operate so as
to qualify for treaty-reduced rates of tax where applicable.
Currency Fluctuations--Section 988 Gains and Losses. Gains or losses
attributable to fluctuations in exchange rates between the time a Fund accrues
dividends, interest or other receivables or accrues expenses or other
liabilities denominated in a foreign currency and the time a Fund actually
collects such receivables or pays such liabilities, generally will be treated as
ordinary income or loss.
B-12
<PAGE>
Similarly, gains or losses on the disposition of foreign currencies or debt
securities held by a Fund denominated in a foreign currency, if any, to the
extent attributable to fluctuations in exchange rates between the acquisition
and disposition dates, generally will also be treated as ordinary income or
loss. These gains and losses are referred to under the Code as "Section 988"
gains and losses.
Furthermore, foreign currency gains and losses attributable to certain
forward contracts, futures contracts that are not "regulated futures
contracts," equity options and unlisted non-equity options also will be treated
as Section 988 gains and losses. (In certain circumstances, however, the Company
may elect capital gain or loss treatment for such transactions.) Section 988
gains and losses will increase or decrease the amount of the Company's
investment company taxable income available for distribution. The Company does
not anticipate that any Section 988 gains and losses the Funds may realize will
adversely affect the ability of any Fund to qualify as a RIC under the Code.
Option and Futures Transactions. The use of hedging strategies, such as
writing (selling) and purchasing options and futures contracts and entering into
forward contracts, involves complex rules that will determine for income tax
purposes the character and timing of recognition of the gains and losses each
Fund realizes in connection therewith. Income from foreign currencies (except
certain gains therefrom that may be excluded by future regulations), and income
from transactions in options, futures, and forward contracts derived by a Fund
with respect to its business of investing in stock, securities, or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short-Short Limitation
if they are held for less than three months. Income from the disposition of
foreign currencies, and options, futures, and forward contracts thereon, that
are not directly related to the Fund's principal business of investing in stock
or securities (or options and futures with respect thereto) also will be subject
to the Short-Short Limitation if they are held for less than three months.
If a Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease
in value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. Each
Fund will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent a Fund does not so qualify, it may be forced
to defer the closing out of certain options, futures, and forward contracts
beyond the time when it otherwise would be advantageous to do so, in order for
the Fund to qualify as a RIC.
Under Section 1256 of the Code, gain or loss on certain options, futures
contracts, options on futures contracts ("Section 1256 contracts"), other than
Section 1256 contracts that are part of a "mixed straddle" with respect to
which a Fund has made an election not to have the following rules apply, will be
treated as 60% long-term and 40% short-term capital gain or loss ("blended gain
or loss"). In addition, Section 1256 contracts held by a Fund at the end of
each taxable year will be required to be treated as sold at fair market value on
the last day of such taxable year for federal income tax purposes and the
resulting gain or loss will be treated as blended gain or loss and will affect
the amount of distributions required to be made by a Fund in order to satisfy
the RIC distribution requirements.
Offsetting positions held by a Fund involving certain futures and options
transactions may be considered to constitute "straddles" which are subject to
special rules under the Code. Under these rules, depending on different
elections which may be made by the Company, the amount, timing and character of
gain and loss realized by the Company and its shareholders may be affected.
Tax Consequences to Shareholders
Ordinarily, distributions of a RIC's investment company taxable income
would be taxable to shareholders as ordinary income to the extent of the
earnings and profits of the RIC. To the extent that a distribution exceeds the
RIC's earnings and profits, it would be treated as a nontaxable return of
capital to the extent of the shareholder's tax basis in the shares of the RIC.
Distributions of net capital gain ordinarily would be taxable as long-term
capital gains. The rules discussed in this paragraph generally would apply
regardless of the length of time a shareholder holds the shares of the RIC.
The Company's present intention is to offer shares of the Funds primarily
to qualified retirement plans and other tax-exempt investors to whom the
foregoing rules do not apply. The Funds intend to satisfy the RIC distribution
requirements by distributions in the form of additional shares to its
shareholders. However, shareholders may redeem their shares, including shares
received as dividends or distributions, at any time for cash. Distributions are
generally not taxable to the participants in the shareholder plans.
Distributions from a qualified retirement plan to a participant or beneficiary
are subject to special rules. Because the effect of these rules varies greatly
with individual situations, potential investors are urged to consult their own
tax advisers.
Tax Consequences to Non-Exempt Shareholders. Dividends and other
distributions declared by a Fund in October, November or December of any year
and payable to shareholders of record on a date in any of those months are
deemed to have been paid by the Fund and received by the shareholders on
December 31 of that year if the distributions are paid by the Fund during the
following January. Accordingly, those distributions will be taxed to
shareholders that are not tax-exempt entities for the year in which that
December 31 falls.
B-13
<PAGE>
If shares of a Fund are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received on those shares.
Non-exempt investors also should be aware that if shares are purchased shortly
before the record date for a dividend or other distribution, the purchaser will
receive some portion of the purchase price back as a taxable distribution.
PERFORMANCE AND YIELD INFORMATION
From time to time, the Company may quote a Fund's yield or total return in
advertisements or in advertisements, sales literature, reports and other
communications to shareholders.
Calculation of Money Market Fund Yield
The Money Market Fund will prepare a current quotation of yield daily. The
yield quoted will be the simple annualized yield for an identified
seven-calendar-day period. The yield calculation will be based on a hypothetical
account having a balance of exactly one share at the beginning of the seven-day
period. The base return will be the change in the value of the hypothetical
account during the seven-day period, including dividends declared on any shares
purchased with dividends on the shares, but excluding any capital changes. The
yield will vary as interest rates and market conditions change. Yield also
depends on the quality, length of maturity and type of instruments in the Money
Market Fund, and its operating expenses. The Fund may also prepare an effective
annual yield computed by compounding the unannualized seven-day period return as
follows: by adding 1 to the unannualized seven-day period return, raising the
sum to a power equal to 365 divided by 7, and subtracting 1 from the result. The
Fund's seven-day current yield and effective yield as of September 30, 1995 was
5.47% and 5.63% respectively.
Calculation of Fund Performance
Yield (except Money Market Fund)
The Income Fund's 30-day yield is calculated according to a formula
prescribed by the Securities and Exchange Commission ("SEC"), expressed as
follows:
YIELD = 2 [ ( a - b +1)6 - 1]
cd
Where: a=dividends and interest earned during the period.
b=expenses accrued for the period.
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.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by a Fund at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.
Investors should recognize that, in periods of declining interest rates, a
Fund's yield will tend to be somewhat higher than prevailing market rates and,
in periods of rising interest rates, will tend to be somewhat lower. In
addition, when interest rates are falling, the inflow of net new money to a Fund
from the continuous sale of its shares will likely be invested in instruments
producing lower yields than the balance of its portfolio of securities, thereby
reducing the current yield of the Fund. In periods of rising interest rates the
opposite can be expected to occur. The yield for the 30-day period ended
September 30, 1995 for the Income Fund was 6.11%.
Average Annual Total Return
A Fund's "average annual total return" is computed according to a formula
prescribed by the SEC, expressed as follows:
P ( 1+T ) n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value ("ERV") at the end of a 1-, 5-or 10-year
period (or fractional portion thereof) of a hypothetical $1,000
investment made at the beginning of a 1-, 5-or 10-year period
assuming reinvestment of all dividends and distributions and the
effect of the maximum annual fee for participation in the Company.
The ERV assumes complete redemption of the hypothetical investment at the
end of the measuring period. A Fund's net investment income changes in response
to fluctuations in interest rates and the expenses of the Fund. The Average
Annual Total Return for the year ended September 30, 1995 and for the period
from commencement of each Fund's operations (November 5, 1992 for the Growth
Stock
B-14
<PAGE>
Fund, Stock Index Fund, International Stock Fund and Balanced Fund and March 1,
1993 for the Income Fund and January 4, 1993 for the Active Balanced Fund and
Money Market Fund) through September 30, 1995 was: Growth Stock, 35.14% and
18.34%, respectively; Stock Index, 29.02% and 14.72%, respectively;
International Stock, 5.95% and 17.48%, respectively; Active Balanced, 17.66% and
10.49%, respectively; Balanced, 15.90% and 10.85%, respectively; Income, 13.11%
and 5.68%; and Money Market, 5.48% and 3.97%, respectively. These amounts are
computed by assuming a hypothetical initial payment of $1,000. It was then
assumed that all of the dividends and distributions paid by the Fund over the
relevant time period were reinvested. It was then assumed that at the end of the
time period, the entire amount was redeemed.
Aggregate Total Return
A Fund's aggregate total return represents the cumulative change in the
value of an investment in the Fund for the specified period and is computed by
the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1,000.
ERV = Ending Redeemable Value at the end of a 1-, 5-or 10-year period (or
fractional portion thereof) of a hypothetical $1,000 investment made
at the beginning of the 1-, 5-or 10-year period assuming
reinvestment of all dividends and distributions and the effect of
the maximum annual fee for participation in the Company.
The ERV assumes complete redemption of the hypothetical investment at the
end of the measuring period.
A Fund's net investment income changes in response to fluctuations in
interest rates and the expenses of the Fund. Consequently, the given performance
quotations should not be considered as representative of the Fund's performance
for any specified period in the future.
A Fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of a Fund's performance for any specified period in the future.
In addition, because performance will fluctuate, it may not provide a basis for
comparing an investment in the Fund with certain bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors
comparing a Fund's performance with that of other mutual funds should give
consideration to the quality and maturity of the respective investment
companies' portfolio securities. The aggregate total return for the period from
commencement of each Fund's operations through September 30, 1995 was: Growth
Stock, 63.00%; Stock Index, 48.96% International Stock, 59.57%; Active Balanced,
31.40%; Balanced 34.84%; Income, 15.35%; and Money Market, 11.24%.
OTHER INVESTMENT PRACTICES, RISK CONDITIONS, AND POLICIES OF THE FUNDS
U.S. Government Securities
Securities issued or guaranteed by the U.S. Government or one of its
agencies, authorities or instrumentalities in which the Funds may invest include
debt obligations of varying maturities issued by the U.S. Treasury or issued or
guaranteed by an agency or instrumentality of the U.S. Government, including the
Federal Housing Administration, Farmers Home Administration, Export-Import Bank
of the U.S., Small Business Administration, Government National Mortgage
Association ("GNMA"), General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Home Loan Banks, Federal Home
Loan Mortgage Corporation ("FHLMC"), Federal Intermediate Credit Banks,
Federal Land Banks, Federal National Mortgage Association ("FNMA"), Maritime
Administration, Tennessee Valley Authority, District of Columbia Armory Board,
Student Loan Marketing Association and Resolution Trust Corporation. Direct
obligations of the U.S. Treasury include a variety of securities that differ in
their interest rates, maturities and dates of issuance. Because the U.S.
Government is not obligated by law to provide support to an instrumentality that
it sponsors, a Fund will invest in obligations issued by an instrumentality of
the U.S. Government only if the Fund's Adviser determines that the
instrumentality's credit risk does not render its securities unsuitable for
investment by the Fund. For further information, see "Mortgage-Related
Securities" below.
Repurchase Agreements and Reverse Repurchase Agreements
Each Fund may enter into repurchase and reverse repurchase agreements with
banks and securities dealers which meet the creditworthiness standards
established by the Company's Trustees ("Qualified Institutions"). The Adviser
will monitor the continued creditworthiness of Qualified Institutions, subject
to the oversight of the Company's Trustees. The resale price of the securities
purchased reflects the purchase price plus an agreed upon market rate of
interest which is unrelated to the coupon rate or date of maturity of the
purchased security. The Fund receives collateral equal to the repurchase price
plus accrued interest, which is
B-15
<PAGE>
marked-to-market daily. These agreements permit the Fund to keep all its assets
earning interest while retaining "overnight" flexibility to pursue investments
of a longer-term nature.
The use of repurchase agreements and reverse repurchase agreements involve
certain risks. For example, if the seller of securities under a repurchase
agreement defaults on its obligation to repurchase the underlying securities, as
a result of its bankruptcy or otherwise, the Fund will seek to dispose of such
securities, which action could involve costs or delays. If the seller becomes
insolvent and subject to liquidation or reorganization under applicable
bankruptcy or other laws, the Fund's ability to dispose of the underlying
securities may be restricted. Finally, it is possible that the Fund may not be
able to substantiate its interest in the underlying securities. To minimize this
risk, the securities underlying the agreement will be held by the Custodian at
all times in an amount at least equal to the repurchase price, including accrued
interest. If the counterparty fails to resell or repurchase the securities, the
Fund may suffer a loss to the extent proceeds from the sale of the underlying
collateral are less than the repurchase price. Reverse repurchase agreements
involve the risk that the market value of the securities retained in lieu of
sale by the Fund may decline below the price of the securities the Fund has sold
but is obligated to repurchase.
Fixed Income Securities
In general, the ratings of Moody's Investors Service ("Moody's"),
Standard & Poor's Ratings Services ("S&P Ratings"), Duff and Phelps, Inc.
("Duff & Phelps") and other nationally recognized statistical rating
organizations ("NRSROs") represent the opinions of those organizations as to
the quality of debt obligations that they rate. These ratings are relative and
subjective, are not absolute standards of quality and do not evaluate the market
risk of securities. These ratings will be among the initial criteria used for
the selection of portfolio securities. Among the factors that the rating
agencies consider are the long-term ability of the issuer to pay principal and
interest and general economic trends.
Subsequent to its purchase by a Fund, an issue of debt obligations may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Fund. Neither event will require the sale of the debt obligation
by the Fund, but the Fund's Adviser will consider the event in its determination
of whether the Fund should continue to hold the obligation. In addition, to the
extent that the ratings change as a result of changes in rating organizations or
their rating systems or owing to a corporate restructuring of Moody's, S&P
Ratings, Duff & Phelps or other NRSRO, the Fund will attempt to use comparable
ratings as standards for its investments in accordance with its investment
objectives and policies. The Appendix to this Statement of Additional
Information contains further information concerning the ratings of Moody's, S&P
Ratings and Duff & Phelps and their significance.
All Funds, except the Money Market Fund and the Stock Index Fund may
invest, to a limited extent, in medium, lower-rated and unrated debt securities.
Debt securities rated in the lowest category of investment grade debt (i.e., Baa
by Moody's or BBB by S&P Ratings) may have speculative characteristics, and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than is the case
with higher grade bonds.
Non-investment grade fixed income securities are rated lower than Baa/BBB
(or the equivalent rating or, if not rated, determined by the relevant Adviser
to be of comparable quality to securities so rated) and are commonly referred to
as high risk or high yield securities or "junk" bonds. High yield securities
are generally riskier than higher quality securities and are subject to more
credit risk, including risk of default, and the prices of such securities are
more volatile than higher quality securities. Such securities may also have less
liquidity than higher quality securities. None of the Funds is authorized to
invest in excess of 5% of its net assets in non-investment grade fixed income
securities.
The markets in which medium and lower-rated securities (or unrated
securities that are equivalent to medium and lower-rated securities) are traded
are generally more limited than those in which higher-rated securities are
traded. The existence of limited markets may make it more difficult for the
Funds to obtain accurate market quotations for purposes of valuing its portfolio
and calculating its net asset value. Moreover, the lack of liquid trading market
may restrict the availability of debt securities for a Fund to purchase and may
also have the effect of limiting the ability of a Fund to sell debt securities
at their fair value either to meet redemption requests or to respond to changes
in the economy or the financial markets.
Lower-rated fixed income securities present risks based on payment
expectations. If an issuer calls the obligation for redemption, a Fund may have
to replace the security with a lower-yielding security, resulting in a decreased
return for investors. Also, as the principal value of fixed income securities
moves inversely with movements in interest rates, in the event of rising
interest rates, the value of the securities held by a Fund may decline
proportionately more than a Fund consisting of higher-rated securities.
Investments in zero coupon bonds may be more speculative and subject to greater
fluctuations in value due to changes in interest rates than bonds that pay
interest currently. If a Fund experiences unexpected net redemptions, it may be
forced to sell its higher-rated bonds, resulting in a decline in the overall
credit quality of the securities held by the Fund and increasing the exposure of
the Fund to the risks of lower-rated securities.
B-16
<PAGE>
When-Issued and Delayed Delivery Securities
To secure prices deemed advantageous at a particular time, each Fund may
purchase securities on a when-issued or delayed delivery basis, in which case
delivery of the securities occurs beyond the normal settlement period; payment
for or delivery of the securities would be made at the same time or prior to the
reciprocal delivery or payment by the other party to the transaction. A Fund
will enter into when-issued or delayed delivery transactions for the purpose of
acquiring securities and not for the purpose of leverage. When-issued securities
purchased by a Fund may include securities purchased on a "when, as and if
issued" basis under which the issuance of the securities depends on the
occurrence of a subsequent event, such as approval of a merger, corporate
reorganization or debt restructuring.
Securities purchased on a when-issued or delayed delivery basis may expose
a Fund to risk because the securities may experience fluctuations in value prior
to their actual delivery. A Fund does not accrue income with respect to a
when-issued or delayed-delivery security prior to its stated delivery date.
Purchasing securities on a when-issued or delayed delivery basis may involve the
additional risk that the yield available in the market when the delivery takes
place may be higher than that obtained in the transaction itself.
Forward Rolls and Dollar Rolls
Forward roll and dollar roll transactions involve the risk that the market
value of the securities sold by a Fund may decline below the repurchase price of
those securities. At the time the Fund enters into a forward roll transaction,
it will place in a segregated account with its Custodian cash, U.S. Government
securities and other liquid high grade debt securities having a value equal to
the repurchase price (including accrued interest) and will subsequently mark the
account to market.
Mortgage-Related Securities
Mortgage-backed securities may be classified as private, governmental or
government related, depending on the issuer or guarantor. Private
mortgage-backed securities represent pass-through pools consisting principally
of conventional residential mortgage loans created by non-governmental issuers,
such as commercial banks, savings and loan associations and private mortgage
insurance companies. Governmental mortgage-backed securities are backed by the
full faith and credit of the United States. GNMA, the principal U.S. guarantor
of such securities, is a wholly-owned corporate instrumentality of the United
States within the Department of Housing and Urban Development. Pass-through
securities issued by FNMA are guaranteed as to timely payment of principal and
interest by FNMA, which guarantee is not backed by the full faith and credit of
the U.S. Government. FHLMC is a corporate instrumentality of the United States,
the stock of which is owned by the Federal Home Loan Banks. Participation
certificates representing interests in mortgages from FHLMC's national portfolio
are guaranteed as to the timely payment of interest and ultimate, but generally
not timely collection of principal by FHLMC. The obligations of the FHLMC under
its guarantee are obligations solely of FHLMC and are not backed by the full
faith and credit of the U.S. Government.
The Funds expect that private and governmental entities may create mortgage
loan pools offering pass-through investments in addition to those described
above. The mortgages underlying these securities may be alternative mortgage
instruments, that is, mortgage instruments whose principal or interest payments
may vary or whose terms to maturity may be shorter than previously customary. As
new types of mortgage-backed securities are developed and offered to investors,
the Funds, consistent with their respective investment objectives and policies,
will consider making investments in those new types of securities.
The Funds may also invest in pass-through securities backed by adjustable
rate mortgages that have been issued by GNMA, FNMA and FHLMC or private issuers.
These securities bear interest at a rate that is adjusted monthly, quarterly or
annually. The prepayment experience of the mortgages underlying these securities
may vary from that for fixed rate mortgages.
The average maturity of pass-through pools of mortgage-related securities
varies with the maturities of the underlying mortgage instruments. In addition,
a pool's stated maturity may be shortened by unscheduled payments on the
underlying mortgages. Factors affecting mortgage prepayments include the level
of interest rates, general economic and social conditions, the location of the
mortgaged property and age of the mortgage. Because prepayment rates of
individual pools vary widely, it is not possible to predict accurately the
average life of a particular pool. Common practice is to assume that prepayments
will result in an average life ranging from two to ten years for pools of fixed
rate 30-year mortgages. Pools of mortgages with other maturities or different
characteristics will have varying average life assumptions.
Because prepayments of principal generally occur when interest rates are
declining, it is likely that a Fund will have to reinvest the proceeds of
prepayments at lower interest rates than those at which the assets were
previously invested. If this occurs, a Fund's yield will correspondingly
decline. Thus, mortgage-related securities may have less potential for capital
appreciation in periods of falling interest rates than other fixed-income
securities of comparable maturity, although these securities may have a
comparable risk of decline in market value in periods of rising interest rates.
To the extent that a Fund purchases mortgage-related securities at a premium,
unscheduled prepayments, which are made at par, will result in a loss equal to
any unamortized premium.
B-17
<PAGE>
Government stripped mortgage-related interest-only ("IOs") and principal
only ("POs") securities are currently traded in an over-the-counter market
maintained by several large investment banking firms. There can be no assurance
that a Fund will be able to effect a trade of IOs or POs at a time when it
wishes to do so. The Funds will acquire IOs and POs only if, in the opinion of
the Fund's Adviser, a secondary market for the securities exists at the time of
acquisition, or is subsequently expected. A Fund will treat IOs and POs that are
not U.S. Government securities as illiquid and will limit its investments in
these securities, together with other illiquid investments, in order not to hold
more than 15% (10% in the case of the Money Market Fund) of its net assets in
illiquid securities. With respect to IOs and POs that are issued by the U.S.
Government, the Advisers, subject to the supervision of the Trustees, may
determine that such securities are liquid, if they determine the securities can
be disposed of promptly in the ordinary course of business at a value reasonably
close to that used in the calculation of net asset value per share.
Investing in IOs and POs involves the risks normally associated with
investing in government and government agency mortgage-related securities. In
addition, the yields on IOs and POs are extremely sensitive to the prepayment
experience on the mortgage loans underlying the certificates collateralizing the
securities. If a decline in the level of prevailing interest rates results in a
rate of principal prepayments higher than anticipated, distributions of
principal will be accelerated, thereby reducing the yield to maturity on IOs and
increasing the yield to maturity on POs. Sufficiently high prepayment rates
could result in a Fund not fully recovering its initial investment in an IO.
Mortgage-related securities may not be readily marketable. To the extent
any of these securities are not readily marketable in the judgment of the Fund's
Adviser, the investment restriction limiting a Fund's investment in illiquid
instruments will apply.
Collateralized Mortgage Obligations
The Funds also may invest in, among other things, parallel pay CMOs and
Planned Amortization Class CMOs (PAC Bonds). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds always are
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
In reliance on SEC rules and orders, the Funds' investments in certain
qualifying CMOs, including CMOs that have elected to be treated as Real Estate
Mortgage Investment Conduits (REMICs), are not subject to the 1940 Act's
limitation on acquiring interests in other investment companies. In order to be
able to rely on the SEC's interpretation, the CMOs and REMICs must be unmanaged,
fixed-asset issuers that (i) invest primarily in mortgage-backed securities,
(ii) do not issue redeemable securities, (iii) operate under general exemptive
orders exempting them from all provisions of the 1940 Act, and (iv) are not
registered or regulated under the 1940 Act as investment companies. To the
extent that a Fund selects CMOs or REMICs that do not meet the above
requirements, the Fund may not invest more than 10% of its assets in all such
entities and may not acquire more than 3% of the voting securities of any single
such entity.
Asset-Backed Securities
The value of these securities may change because of changes in the market's
perception of the creditworthiness of the servicing agent for the pool, the
originator of the pool, or the financial institution providing credit support
enhancement for the pool.
Custodial Receipts
Each Fund, other than the Growth Stock Fund, the Stock Index Fund, the
International Fund and the Money Market Fund, may acquire custodial receipts or
certificates, such as CATS, TIGRs and FICO Strips, underwritten by securities
dealers or banks, that evidence ownership of future interest payments, principal
payments or both on certain notes or bonds issued by the U.S. Government, its
agencies, authorities or instrumentalities. The underwriters of these
certificates or receipts purchase a U.S. Government security and deposit the
security in an irrevocable trust or custodial account with a custodian bank,
which then issues receipts or certificates that evidence ownership of the
periodic unmatured coupon payments and the final principal payment on the U.S.
Government security. Custodial receipts evidencing specific coupon or principal
payments have the same general attributes as zero coupon U.S. Government
securities.
There are a number of risks associated with investments in custodial
receipts. Although, typically, under the terms of a custodial receipt, a Fund is
authorized to assert its rights directly against the issuer of the underlying
obligation, the Fund may be required to assert through the custodian bank such
rights as may exist against the underlying issuer. Thus, in the event the
underlying issuer fails to pay principal and/or interest when due, a Fund may be
subject to delays, expenses and risks that are greater than those that would
have been involved if the Fund had purchased a direct obligation of the issuer.
In addition, in the event that the trust or custodial account in which the
underlying security has been deposited is determined to be an association
taxable as a corporation, instead of a non-taxable entity, the yield on the
underlying security would be reduced in respect of any taxes paid.
B-18
<PAGE>
Securities Lending
A Fund will enter into securities lending transactions only with Qualified
Institutions. A Fund will comply with the following conditions whenever it lends
securities: (i) the Fund must receive at least 100% cash collateral or
equivalent securities from the borrower; (ii) the value of the loan is
"marked-to-market" on a daily basis; (iii) the Fund must be able to terminate
the loan at any time; (iv) the Fund must receive reasonable interest on the
loan, as well as any dividends, interest or other distributions on the loaned
securities and any increase in market value; (v) the Fund may pay only
reasonable custodian fees in connection with the loan; and (vi) voting rights on
the loaned securities may pass to the borrower except that, if a material event
adversely affecting the investment in the loaned securities occurs, the Fund
must terminate the loan and regain the right to vote the securities. A Fund may
pay reasonable finders', administrative and custodial fees in connection with a
loan of its securities. In these transactions, there are risks of delay in
recovery and in some cases even of loss of rights in the collateral should the
borrower of the securities fail financially.
Borrowing
Each Fund (except for the Money Market Fund) may borrow from time to time,
at its Adviser's discretion, to take advantage of investment opportunities, when
yields on available investments exceed interest rates and other expenses of
related borrowing, or when, in the Adviser's opinion, unusual market conditions
otherwise make it advantageous for the Fund to increase its investment capacity.
A Fund will only borrow when there is an expectation that it will benefit the
Fund after taking into account considerations such as interest income and
possible losses upon liquidation. Borrowing by a Fund creates an opportunity for
increased net income but, at the same time, creates risks, including the fact
that leverage may exaggerate changes in the net asset value of Fund shares and
in the yield on the Fund. A Fund may also borrow for temporary, extraordinary or
emergency purposes and for the clearance of transactions.
Securities of Foreign Issuers
The value of a Fund's foreign investments may be significantly affected by
changes in currency exchange rates. The dollar value of a foreign security
generally decreases when the value of the dollar rises against the foreign
currency in which the security is denominated and tends to increase when the
value of the dollar falls against such currency. In addition, the value of a
Fund's assets may be affected by losses and other expenses incurred in
converting between various currencies in order to purchase and sell foreign
securities and by currency restrictions and exchange control regulation.
The economies of many of the countries in which the Stock Index Fund and
other Funds may invest are not as developed as the economy of the U.S. and may
be subject to significantly different forces. Political or social instability,
expropriation or confiscatory taxation, and limitations on the removal of funds
or other assets, could also adversely affect the value of investments.
Foreign companies are generally not subject to the regulatory controls
imposed on U.S. issuers and, in general, there is less publicly available
information about foreign securities than is available about domestic
securities. Many foreign companies are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to domestic companies. Income from foreign
securities owned by a Fund may be reduced by a withholding tax at the source
which would reduce dividend income payable to shareholders.
Brokerage commission rates in foreign countries, which are generally fixed
rather than subject to negotiation as in the U.S. are likely to be higher. The
securities markets in many of the countries in which a Fund may invest will have
substantially less trading volume than the principal U.S. markets. As a result,
the securities of some companies in these countries may be less liquid and more
volatile than comparable U.S. securities. There is generally less government
regulation and supervision of foreign stock exchanges, brokers and issuers which
may make it difficult to enforce contractual obligations.
Liquidity Puts
Each Fund, other than the Growth Stock Fund and the Stock Index Fund, may
purchase instruments together with the right to resell the instruments at an
agreed-upon price or yield, within a specified period prior to the maturity date
of the instruments. This instrument is commonly known as a "put bond" or a
"tender option bond."
Consistent with each Fund's investment objective, a Fund may purchase a put
so that it will be fully invested in securities while preserving the necessary
liquidity to purchase securities on a when-issued basis, to meet unusually large
redemptions and to purchase at a later date securities other than those subject
to the put. A Fund will generally exercise the puts or tender options on their
expiration date when the exercise price is higher than the current market price
for the related fixed income security. Puts or tender options may be exercised
prior to the expiration date in order to fund obligations to purchase other
securities or to meet redemption requests. These obligations may arise during
periods in which proceeds from sales of Fund shares and from recent sales of
portfolio securities are insufficient to meet such obligations or when the funds
available are otherwise allocated for investment. In addition, puts may be
exercised prior to the expiration date in the event the Adviser for the Fund
revises its evaluation of the creditworthiness of the issuer of the underlying
security. In determining whether to exercise puts or tender options prior to
their expiration date and in selecting which puts or
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tender options to exercise in such circumstances, the Fund's Adviser considers,
among other things, the amount of cash available to the Fund, the expiration
dates of the available puts or tender options, any future commitments for
securities purchases, the yield, quality and maturity dates of the underlying
securities, alternative investment opportunities and the desirability of
retaining the underlying securities in the Fund.
These instruments are not deemed to be "put options" for purposes of any
Fund's investment restriction.
Special Risks of Strategies Involving Options, Futures Contracts and Forward
Contracts
The use of options, futures contracts and forward currency contracts
(collectively, "Instruments") involves special considerations and risks, as
described below. Risks pertaining to particular hedging strategies are described
in the sections that follow.
(1) Successful use of most Instruments depends upon an Adviser's ability to
predict movements in the overall securities and currency markets, and interest
rates, which requires different skills than predicting changes in the prices of
individual securities. While the Advisers are experienced in the use of
Instruments, there can be no assurance that any particular strategy adopted will
succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of an Instrument and price movements of the investments being
hedged. For example, if the value of an Instrument used in a short hedge
increased by less than the decline in value of the hedged investment, the hedge
would not be fully successful. Such a lack of correlation might occur due to
factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which Instruments are traded.
The effectiveness of hedges using Instruments on indices will depend on the
degree of correlation between price movements in the index and price movements
in the investments being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if a Fund entered into a short
hedge because its Adviser projected a decline in the price of a security in the
Fund's portfolio, and the price of that security increased instead, the gain
from that increase might be wholly or partially offset by a decline in the price
of the hedging instrument. Moreover, if the price of the hedging instrument
declined by more than the increase in the price of the security, the Fund could
suffer a loss. In either such case, the Fund would have been in a better
position had it not hedged at all.
(4) As described below, a Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in Instruments involving obligations to third parties (i.e.
Instruments other than purchased options). If a Fund were unable to close out
its positions in such Instruments, it might be required to continue to maintain
such assets or accounts or make such payments until the position expired or
matured. The requirements might impair the Fund's ability to sell a portfolio
security or make an investment at a time when it would otherwise be favorable to
do so, or require that the Fund sell a portfolio security at a disadvantageous
time. A Fund's ability to close out a position in an Instrument prior to
expiration or maturity depends on the existence of a liquid secondary market or,
in the absence of such a market, the ability and willingness of the other party
to the transaction ("contra party") to enter into a transaction closing out
the position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to a Fund.
Options on Securities and Securities Indices
A number of risk factors are associated with options transactions. There is
no assurance that a liquid secondary market on an options exchange will exist
for any particular option, at any particular time. If a Fund is unable to effect
a closing purchase transaction with respect to covered options it has written, a
Fund will not be able to sell the underlying securities or dispose of assets
held in a segregated account until the options expire or are exercised.
Similarly, if a Fund is unable to effect a closing sale transaction with respect
to options it has purchased, it would have to exercise the options in order to
realize any profit and may incur transaction costs upon the purchase or sale of
underlying securities. The ability to terminate over-the-counter ("OTC")
option positions is more limited than the ability to terminate exchange-traded
option positions because a Fund would have to negotiate directly with a contra
party. In addition, with OTC options, there is a risk that the contra party in
such transactions will not fulfill its obligations.
A Fund pays brokerage commissions or spreads in connection with its options
transactions, as well as for purchases and sales of underlying securities. The
writing of options could result in significant increases in a Fund's turnover
rate. A Fund's transactions in options may be limited by the requirements of the
Internal Revenue Code for qualification as a regulated investment company.
The risks of investment in index options may be greater than options on
securities. Because index options are settled in cash, when a Fund writes a call
option on an index it cannot provide in advance for its potential settlement
obligations by acquiring and holding the underlying securities. A Fund can
offset some of the risk of writing a call index option position by holding a
diversified portfolio of securities similar to those on which the underlying
index is based. However, the Fund cannot, as a practical matter, acquire and
hold a
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portfolio containing exactly the same securities as underlie the index and, as a
result, bears a risk that the value of the securities held will vary from the
value of the index.
Even if a Fund could assemble a securities portfolio that exactly
reproduced the composition of the underlying index, it still would not be fully
covered from a risk standpoint because of the "timing risk" inherent in
writing index options. When an index option is exercised, the amount of cash
that the holder is entitled to receive is determined by the difference between
the exercise price and the closing index level on the date when the option is
exercised. As with other kinds of options, the Fund as the call writer will not
know that it has been assigned until the next business day at the earliest. The
time lag between exercise and notice of assignment poses no risk for the writer
of a covered call on a specific underlying security, such as a common stock,
because there the writer's obligation is to deliver the underlying security, not
to pay its value as of a fixed time in the past. So long as the writer already
owns the underlying security, it can satisfy its settlement obligations by
simply delivering it, and the risk that its value may have declined since the
exercise date is borne by the exercising holder. In contrast, even if the writer
of an index call holds securities that exactly match the composition of the
underlying index, it will not be able to satisfy its assignment obligations by
delivering those securities against payment of the exercise price. Instead, it
will be required to pay cash in an amount based on the closing index value on
the exercise date; and by the time it learns that it has been assigned, the
index may have declined, with a corresponding decline in the value of its
securities portfolio. This "timing risk" is an inherent limitation on the
ability of index call writers to cover their risk exposure by holding securities
positions.
If a Fund has purchased an index option and exercises it before the closing
index value for that day it available, it runs the risk that the level of the
underlying index may subsequently change. If such a change causes the exercised
option to fall out-of-the-money, the Fund will be required to pay the difference
between the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer.
A Fund will not purchase put options or call options if, after any such
purchase, the aggregate premiums paid for such options would exceed 20% of the
Fund's net assets. The aggregate value of the obligations underlying put options
will not exceed 25% of a Fund's net assets.
Futures Contracts and Options on Futures Contracts
A futures contract on securities or currency is an agreement to buy and
sell securities or currency at a specified price at a designated date. Futures
contracts and options thereon may be entered into for hedging purposes and for
the other purposes described in the Funds' Prospectus. A Fund may enter into
futures contracts in order to hedge against changes in interest rates, stock
market prices or currency exchange rates.
The purchase of futures or call options thereon can serve as a long hedge,
and the sale of futures or the purchase of put options thereon can serve as a
short hedge. Writing call options on futures contracts can serve as a limited
short hedge, and writing put options on futures contracts can serve as a limited
long hedge.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract, a Fund is required to deposit "initial
margin," consisting of cash, U.S. government securities or other liquid,
high-grade debt securities, in an amount generally equal to 10% or less of the
contract value. Margin must also be deposited when writing a call or put option
on a futures contract, in accordance with applicable exchange rules. Unlike
margin in securities transactions, initial margin does not represent a
borrowing, but rather is in the nature of a performance bond or good-faith
deposit that is returned to the Fund at the termination of the transaction if
all contractual obligations have been satisfied. Under certain circumstances,
such as periods of high volatility, a Fund may be required by an exchange to
increase the level of its initial margin payment.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of a Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs are all that is at risk. In contrast, when a Fund purchases or
sells a futures contract or writes a call or put option thereon, it is subject
to daily variation margin calls that could be substantial in the event of
adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
Each Fund intends to enter into futures and options on futures transactions only
on exchanges or boards of trade where there appears to be a liquid secondary
market. However, there can be no assurance that such a market will exist for a
particular contract at a particular time.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or option on a futures contract can
vary from the previous day's settlement price; once that limit is reached, no
trades may be made that day at a price
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beyond the limit. Daily price limits do not limit potential losses because
prices could move to the daily limit for several consecutive days with little or
no trading, thereby preventing liquidation of unfavorable positions.
If a Fund were unable to liquidate a futures or option on a futures
contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the future or option or to maintain cash or securities
in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or options on futures contracts
might not correlate perfectly with movements in the prices of the investments
being hedged. For example, all participants in the futures and options on
futures contracts markets are subject to daily variation margin calls and might
be compelled to liquidate futures or options on futures contract positions whose
prices are moving unfavorably to avoid being subject to further calls. These
liquidations could increase price volatility of the instruments and distort the
normal price relationship between the futures or options and the investments
being hedged. Also, because initial margin deposit requirements in the futures
market are less onerous than margin requirements in the securities markets,
there might be increased participation by speculators in the futures markets.
This participation also might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities markets involving
arbitrage, "program trading" and other investment strategies might result in
temporary price distortions.
Foreign Currency Forward Contracts, Options and Futures Transactions
There is no limitation on the value of forward contracts into which a Fund
may enter. However, a Fund's transactions 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 securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to security positions denominated or quoted in
that currency. A 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, denominated or
quoted in, or currently convertible into, such currency. A forward contract
generally has no deposit requirements, and no commissions are charged for such
trades.
A Fund may enter into a forward contract to hedge against risk in the
following circumstances: (i) during the time period when a Fund contracts for
the purchase or sale of a security denominated in a foreign currency, or (ii)
when a Fund anticipates the receipt in a foreign currency of dividends or
interest payments on a security which it holds. 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, a 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 a Fund's 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 securities of the Fund denominated in such foreign
currency. Further, a Fund may enter into a forward contract in one foreign
currency, or basket of currencies, to hedge against the decline or increase in
value in another foreign currency. Use of a different currency or basket of
currencies magnifies the risk that movements in the price of the forward
contract will not correlate or will correlate unfavorably with the foreign
currency being hedged.
Forward currency contracts (i) are traded in an interbank market conducted
directly between currency traders (typically commercial banks or other financial
institutions) and their customers, (ii) generally have no deposit requirements
and (iii) are typically consummated without payment of any commissions. Failure
by a Fund's contra party to make or take delivery of the underlying currency at
the maturity of the forward contract would result in the loss to the Fund of any
expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the contra party. Thus, there can be no assurance
that a Fund will in fact be able to close out a forward currency contract at a
favorable price prior to maturity. In addition, in the event of insolvency of
the contra party, a Fund might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the Fund would continue
to be subject to market risk with respect to the position, and would continue to
be required to maintain a position in the securities or currencies that are the
subject of the hedge or to maintain cash or securities in a segregated account.
A Fund may purchase and write put and call options on foreign currencies
traded on securities exchanges or boards of trade (foreign and domestic) and OTC
options for hedging purposes in a manner similar to that in which forward
foreign currency exchange contracts
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and futures contracts on foreign currencies will be employed. Options on foreign
currencies are similar to options on securities, except that a Fund has the
right to take or make delivery of a specified amount of foreign currency, rather
than securities.
Generally, the OTC foreign currency options used by a Fund are
European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
If a Fund's 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 or write put options
on the foreign currency. A Fund could also enter into a long forward contract or
a long futures contract on such currency, or purchase a call option, or write a
put option, on a currency futures contract. The use of such instruments could
offset, at least partially, the effects of the adverse movements of the exchange
rates.
Foreign Currency Strategies--Special Considerations
A Fund may use options on foreign currencies, futures on foreign
currencies, options on futures on foreign currencies and forward currency
contracts, to hedge against movements in the values of the foreign currencies in
which the Fund's securities are denominated. Such currency hedges can protect
against price movements in a security that the Fund owns or intends to acquire
that are attributable to changes in the value of the currency in which it is
denominated. Such hedges do not, however, protect against price movements in the
securities that are attributable to other causes.
A Fund might seek to hedge against changes in the value of a particular
currency when no futures contract, forward contract or option involving that
currency is available or one of such contracts is more expensive than certain
other contracts. In such cases, the Fund may hedge against price movements in
that currency by entering into a contract on another currency or basket of
currencies, the values of which the Fund's Adviser believes will have a positive
correlation to the value of the currency being hedged. The risk that movements
in the price of the contract will not correlate perfectly with movements in the
price of the currency being hedged is magnified when this strategy is used.
The value of futures contracts, options on futures contracts, forward
contracts and options on foreign currencies depends on the value of the
underlying currency relative to the U.S. dollar. Because foreign currency
transactions occurring in the interbank market might involve substantially
larger amounts than those involved in the use of futures contracts, forward
contracts or options, a Fund could be disadvantaged by dealing in the odd lot
market (generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirements that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the futures contracts or options until they
reopen.
Settlement of futures contracts, forward contracts and options involving
foreign currencies might be required to take place within the country issuing
the underlying currency. Thus, a Fund might be required to accept or make
delivery of the underlying foreign currency in accordance with any U.S. or
foreign regulations regarding the maintenance of foreign banking arrangements by
U.S. residents and might be required to pay any fees, taxes and charges
associated with such delivery assessed in the issuing country.
Covered Forward Currency Contracts, Futures Contracts and Options
Transactions using forward currency contracts, futures contracts and
options (other than options that a Fund has purchased) expose the Fund to an
obligation to another party. A Fund will not enter into any such transactions
unless it owns either (1) an offsetting ("covered") position in securities,
currencies, or other options, forward currency contracts or futures contracts,
or (2) liquid assets with a value sufficient at all times to cover its potential
obligations not covered as provided in (1) above. Each Fund will comply with SEC
guidelines regarding cover for these instruments and, if the guidelines so
require, set aside cash, U.S. government securities or other liquid, high-grade
debt securities in a segregated account with its Custodian in the prescribed
amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding forward currency contract, futures contract or
option is open, unless they are replaced with similar assets. As a result, the
commitment of a large portion of a Fund's assets to cover or segregated accounts
could impede portfolio management or the Fund's ability to meet redemption
requests or other current obligations.
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Illiquid Securities
The Growth Stock Fund, International Stock Fund, Stock Index Fund, Active
Balanced Fund, Balanced Fund and the Money Market Fund may each hold up to 10%
of their net assets in illiquid securities. The Income Fund may hold up to 15%
of its net assets in illiquid securities. Illiquid securities include repurchase
agreements which have a maturity of longer than seven days and securities that
are illiquid by virtue of the absence of a readily available market 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 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 of the Securities Act allows for a broader institutional trading
market for securities otherwise subject to restriction on resale to the general
public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
will expand further as a result of this new regulation and the development of
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the NASD.
Restricted securities eligible for resale pursuant to Rule 144A and
commercial paper for which there is a readily available market will not be
deemed illiquid. The Advisers will monitor the liquidity of such restricted
securities, subject to the supervision of the Trustees. In reaching liquidity
decisions, Advisers will consider, among other things, 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.
Other Investment Techniques
In order to protect the value of the Funds from interest rate fluctuations,
the Balanced Fund and the Income Fund may enter into interest rate swaps. The
Funds intend to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of its portfolio or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. In addition, the Income Fund may, engage in the purchase or
sale of interest rate caps, floors and collars. The purchase of an interest rate
cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a
contractually-based principal amount from the party selling such interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually-based principal amount from the
party selling such interest rate floor.
A Fund may enter into interest rate swaps, caps and floors, on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities. The Income Fund will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these techniques are entered into for good faith hedging
purposes, the Manager and each Adviser believe such obligations do not
constitute senior securities and, accordingly, will not treat them as being
subject to a Fund's borrowing restrictions. When a Fund enters into interest
rate swaps on a net basis, the net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis and an amount of cash or liquid securities having an
aggregate net asset value at
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least equal to the accrued excess will be maintained in a segregated account by
the Custodian. To the extent that a Fund enters into an interest rate swap other
than on a net basis, or sells caps or floors, the amount maintained in the
segregated account will be the full amount of the Fund's obligations. When a
Fund enters into interest rate swaps on other than a net basis, the entire
amount of the Fund's obligations, if any, with respect to such interest rate
swaps will be treated as illiquid. To the extent that a Fund enters into
interest rate swaps on a net basis, the net amount of the excess, if any, of the
Fund's obligations over its entitlements with respect to each interest rate swap
will be treated as illiquid. If there is a default by the other party to such a
transaction, the Fund will have contractual remedies pursuant to the agreements
related to the transaction.
Each Fund may take advantage of opportunities in the area of options and
futures contracts and any other derivative instruments that are not presently
contemplated for use by such Fund or that are not currently available but that
may be developed, to the extent such opportunities are both consistent with its
investment objective and legally permissible for the Fund. Before entering into
such transactions or making any such investment, the Fund will provide
appropriate disclosure in its prospectus.
INVESTMENT RESTRICTIONS
The investment restrictions listed below have been adopted by the Company
as fundamental policies of the Funds, except as otherwise indicated. Under the
1940 Act, a fundamental policy of a Fund may not be changed without the vote of
a majority of the outstanding voting securities of the Fund. As defined in the
1940 Act, a "majority of a Fund's outstanding voting securities" means the
lesser of (i) 67% of the shares represented at a meeting at which more than 50%
of the outstanding shares are present in person or represented by proxy or (ii)
more than 50% of the outstanding shares. For purposes of the following
limitations: (i) all percentage limitations apply immediately after a purchase
or initial investment; and (ii) any subsequent change in any applicable
percentage resulting from market fluctuations does not require elimination of
any asset from Fund.
A Fund may not:
1. Purchase any security if, as a result, with respect to 75% of the Fund's
total assets, more than 5% of the value of its total assets (determined at the
time of investment) would then be invested in the securities of any one issuer.
2. Purchase a security if more than 10% of the outstanding voting
securities of any one issuer would be held by the Fund.
3. Purchase a security if, as a result, 25% or more of the value of its
total assets (determined at the time of investment) would be invested in
securities of one or more issuers having their principal business activities in
the same industry. This restriction does not apply to obligations issued or
guaranteed by the United States Government, its agencies or instrumentalities
and, in the case of the Money Market Fund, to the securities of domestic banks
(including all banks which are organized under the laws of the United States or
a state (as defined in the 1940 Act) and U.S. branches of foreign banks that are
subject to the same regulations as U.S. banks.
4. Purchase or sell real estate or interests therein (including limited
partnership interests), although a Fund may purchase securities of issuers which
engage in real estate operations and securities which are secured by real estate
or interests therein.
5. Purchase or sell commodities or commodity futures contracts, except that
all Funds (other than the Money Market Fund) may purchase and sell financial
futures contracts and options thereon and that forward contracts are not deemed
to be commodities or commodity futures contracts.
6. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that a Fund may invest in the
securities of companies which operate, invest in or sponsor such programs.
7. Issue senior securities, borrow money or pledge its assets, except that
each Fund may borrow from banks or through forward rolls, dollar rolls or
reverse repurchase agreements up to 20% (except for the Balanced Fund, the
Income Fund and the Money Market Fund) of the value of its total assets to take
advantage of investment opportunities, for temporary, extraordinary or emergency
purposes, or for the clearance of transactions and may pledge up to 20% of the
value of its total assets to secure such borrowings. The Balanced Fund and the
Income Fund may borrow from banks up to 20% of the value of their respective
total assets for the same purposes and may pledge up to 20% of the value of
their respective total assets to secure such borrowings. In addition, the
Balanced Fund and the Income Fund may engage in investment techniques such as
reverse repurchase agreements, forward rolls and dollar rolls to the extent that
their respective assets dedicated to such techniques combined with the
respective values of their bank borrowings do not exceed 33 1/3% of their
respective total assets. The Money Market Fund may borrow an amount equal to no
more than 20% of the value of its total assets only for temporary, extraordinary
or emergency purposes. For purposes of this restriction, the purchase or sale of
securities on a "when-issued" or delayed-delivery basis; the purchase and sale
of options, financial futures contracts and options thereon; the entry into
repurchase agreements and collateral and margin arrangements with respect to any
of the foregoing, will not be deemed to be a pledge of assets nor the issuance
of senior securities.
B-25
<PAGE>
8. Make loans except by the purchase of fixed income securities in which a
Fund may invest consistently with its investment objective and policies or by
use of reverse repurchase and repurchase agreements, forward rolls, dollar rolls
and securities lending arrangements.
9. Make short sales of securities.
10. Purchase securities on margin, except for such short-term loans as are
necessary for the clearance of purchases of portfolio securities. (For the
purpose of this restriction, the deposit or payment by any Fund of initial or
maintenance margin in connection with financial futures contracts is not
considered the purchase of a security on margin.)
11. 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. The Fund has no limit with respect to
investments in restricted securities.
The Funds will not as a matter of operating policy:
1. Invest in oil, gas and mineral leases or development programs.
2. Purchase a security if, as a result, more than 15% of its total assets
would be invested in securities which are restricted as to disposition. This
restriction shall not apply to mortgage-backed securities or obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities.
3. Purchase or retain the securities of any issuer if any officer or
Trustee of the Company or the Company's Manager or any Adviser owns more than
1/2 of 1% of the outstanding securities of such issuer, and such officers and/or
Trustees, who own more than 1/2 of 1% own in the aggregate more than 5% of the
outstanding securities of such issuer.
4. Purchase warrants if, as a result, the Company would then 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 NYSE or American Stock Exchange or a major
foreign exchange will be limited to 2% of the Company's total assets (determined
at the time of investment). For purposes of this limitation, warrants acquired
in units or attached to securities are deemed to be without value.
5. Purchase securities of other investment companies except in compliance
with the 1940 Act and applicable state law.
6. Invest in companies for the purpose of exercising control or management
of any other issuer, except in connection with a merger, consolidation,
acquisition or reorganization.
7. Invest more than 15% of its total assets in securities of unseasoned
issuers, including their predecessors, which have been in operation for less
than three years.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of a 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 a Fund's asset
coverage for borrowings falls below 300%, the Fund will take prompt action to
reduce its borrowings, as required by applicable law.
In order to comply with the rules and regulations of certain State
securities commissions, the Funds have agreed (i) that over-the-counter options
transactions shall be entered into only when such options are not available on a
national securities exchange, and (ii) broker-dealers with whom the Fund shall
enter into such transaction shall have a minimum net worth, at the time of the
transaction is entered into, of $20 million. In addition, the Fund will only buy
and sell puts and calls on securities, stock index futures, or financial futures
or options on financial futures, if such options are written by other persons,
and if;
i) the aggregate premiums paid on all such options which are held at any
time do not exceed 20% of the Fund's total net assets; and
ii) the aggregate margin deposits required on all such futures or options
thereon held at any time do not exceed 5% of the Fund's total assets.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Company's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting books
and records pursuant to an agreement with the Company.
PMF serves as the Transfer Agent and Dividend Disbursing Agent of the
Company through its wholly-owned subsidiary, Prudential Mutual Fund Services,
Inc., Raritan Plaza One, Edison, New Jersey 08837. PMFS provides customary
transfer agency services to the Company, 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. PMFS is also reimbursed for its out-of-pocket expenses, including,
but not limited to, postage, stationery, printing, allocable communications
expenses and other costs.
B-26
<PAGE>
THE PRUDENTIAL GROWTH STOCK FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS
Common Stocks--98.7%
Aerospace/Defense--2.4%
78,200 Boeing Co.......................... $ 5,337,150
-----------
Airlines--1.9%
56,900 AMR Corp.(a)....................... 4,103,913
-----------
Beverages--3.0%
49,500 Coca-Cola Co....................... 3,415,500
61,000 PepsiCo Inc........................ 3,111,000
-----------
6,526,500
-----------
Commercial Services--1.4%
90,850 CUC International, Inc.(a)......... 3,168,394
-----------
Computer Software & Services--14.3%
55,400 America Online Inc................. 3,808,750
78,300 AutoDesk, Inc...................... 3,425,625
85,300 Cisco Systems, Inc.(a)............. 5,885,700
Computer Associates International,
72,150 Inc.............................. 3,048,337
36,400 Macromedia Inc..................... 2,079,350
52,900 Microsoft Corp.(a)................. 4,787,450
64,600 SAP AG (ADR) (Germany)............. 3,544,925
62,300 Silicon Graphics Inc.(a)........... 2,141,563
87,400 Symbol Technologies, Inc.(a)....... 2,895,125
-----------
31,616,825
-----------
Cosmetics & Soaps--1.7%
79,300 Gillette Co........................ 3,776,663
-----------
Drugs & Medical Supplies--7.4%
109,000 Astra AB Class A (Sweden).......... 3,904,135
44,900 Lilly (Eli) & Co................... 4,035,388
62,900 Merck & Co., Inc................... 3,522,400
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
Smith Kline Beecham PLC (ADR)
94,300 (United Kingdom)................. $ 4,773,937
-----------
16,235,860
-----------
Electronics--11.1%
104,400 Hewlett-Packard Co................. 8,704,350
131,500 Intel Corp......................... 7,906,437
102,000 Motorola, Inc...................... 7,790,250
-----------
24,401,037
-----------
Financial Services--7.3%
43,900 Federal National Mortgage Assn..... 4,543,650
35,900 First Financial Mgmt. Corp......... 3,504,737
27,200 Morgan Stanley Group, Inc.......... 2,614,600
61,500 Mutual Risk Management, Ltd........ 2,429,250
61,800 The PMI Group Inc.................. 2,927,775
-----------
16,020,012
-----------
Health Care Services--0.6%
53,800 Value Health, Inc.(a).............. 1,425,700
-----------
Hospital Management--1.9%
86,100 United Healthcare Corp............. 4,208,138
-----------
Insurance--1.1%
American International Group,
29,450 Inc.............................. 2,503,250
-----------
Leisure--3.8%
94,300 Disney (Walt) Co................... 5,410,462
99,600 Harrahs Entertainment Inc.(a)...... 2,913,300
-----------
8,323,762
-----------
Lodging--0.8%
75,300 Promus Cos., Inc.(a)............... 1,713,075
-----------
Machinery--1.2%
78,300 Harnischfeger Industries, Inc...... 2,613,263
-----------
</TABLE>
See Notes to Financial Statements.
B-27
<PAGE>
THE PRUDENTIAL GROWTH STOCK FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Media--7.1%
Clear Channel Communications,
44,400 Inc.(a).......................... $ 3,363,300
News Corp. Ltd. (ADR)
120,100 (Australia)...................... 2,642,200
48,900 Omnicom Group...................... 3,184,613
Reuters Holdings PLC (ADR)
70,100 (United Kingdom)................. 3,706,537
43,800 Scholastic Corp.(a)................ 2,748,450
-----------
15,645,100
-----------
Miscellaneous Basic Industry--4.2%
36,000 Applied Materials, Inc.(a)......... 3,681,000
62,400 Cerner Corp.(a).................... 2,137,200
27,300 ITT Corp........................... 3,385,200
-----------
9,203,400
-----------
Miscellaneous Consumer Growth--0.9%
29,900 Eastman Kodak Co................... 1,771,575
7,000 Luxottica Group (ADR) (Italy)...... 342,125
-----------
2,113,700
-----------
Office Equipment & Supplies--1.3%
58,000 Compaq Computer Corp.(a)........... 2,805,750
-----------
Railroads--1.1%
37,800 Union Pacific Corp................. 2,504,250
-----------
Restaurants--2.5%
Lone Star Steakhouse & Saloon,
69,400 Inc.(a).......................... 2,845,400
68,000 McDonald's Corp.................... 2,601,000
-----------
5,446,400
-----------
Retail--4.6%
122,300 AutoZone, Inc.(a).................. 3,118,650
85,350 Dollar General Corp................ 2,507,156
55,533 Home Depot, Inc.................... 2,214,379
46,400 Kohls Corp. (a).................... 2,407,000
-----------
10,247,185
-----------
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
Technology--10.8%
74,600 Adobe Systems, Inc................. $ 3,860,550
37,800 Broderbund Software Inc............ 2,877,525
34,233 Chiron Corp.(a).................... 3,098,086
35,700 Cirrus Logic, Inc.(a).............. 2,043,825
59,500 Intuit Inc......................... 2,796,500
123,900 LSI Logic Corp.(a)................. 7,155,225
101,800 Pyxis Corp.(a)..................... 1,972,375
-----------
23,804,086
-----------
Telecommunications--4.8%
74,700 Nokia Corp. (ADR) (Finland)........ 5,210,325
46,800 Tellabs, Inc.(a)................... 1,971,450
Vodafone Group PLC (ADR)
82,100 (United Kingdom)................. 3,366,100
-----------
10,547,875
-----------
Transportation--1.5%
Wisconsin Central Transportation
48,900 Corp.(a)......................... 3,264,075
-----------
Total common stocks
(cost $163,489,413)................ 217,555,363
-----------
Principal
Amount
(000) SHORT-TERM INVESTMENT
- --------
Repurchase Agreement--2.2%
$ 4,819 Joint Repurchase Agreement Account,
6.39%, 10/2/95 (Note 5)
(cost $4,819,000)................ 4,819,000
-----------
Total Investments--100.9%
(cost $168,308,413; Note 4)........ 222,374,363
Liabilities in excess of other
assets--(0.9%)................... (1,868,969)
-----------
Net Assets--100%................... $220,505,394
-----------
-----------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
See Notes to Financial Statements.
B-28
<PAGE>
THE PRUDENTIAL STOCK INDEX FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS
Common Stocks and Equivalents--81.7%
Aerospace/Defense--1.7%
5,400 Allied-Signal, Inc................. $ 238,275
6,600 Boeing Co.......................... 450,450
1,200 General Dynamics Corp.............. 65,850
3,830 Lockheed Corp...................... 257,089
1,700 Loral Corp......................... 96,900
2,200 McDonnell Douglas Corp............. 182,050
1,000 Northrop Corp...................... 60,875
2,400 Raytheon Co........................ 204,000
4,200 Rockwell International Corp........ 198,450
-----------
1,753,939
-----------
Airlines--0.3%
1,450 AMR Corp.(a)....................... 104,581
1,000 Delta Airlines, Inc................ 69,250
2,700 Southwest Airlines Co.............. 68,175
1,200 USAir Group Inc.(a)................ 13,800
-----------
255,806
-----------
Aluminum--0.4%
4,400 Alcan Aluminum Ltd................. 142,450
3,400 Aluminum Co. of America............ 179,775
1,250 Reynolds Metals Co................. 72,188
-----------
394,413
-----------
Automobiles & Trucks--2.0%
7,400 Chrysler Corp...................... 392,200
800 Cummins Engine, Inc................ 30,800
2,000 Dana Corp.......................... 57,750
1,200 Echlin Inc......................... 42,900
20,700 Ford Motor Co...................... 644,287
14,400 General Motors Corp................ 675,000
2,400 Genuine Parts Co................... 96,300
800 Johnson Controls, Inc.............. 50,600
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
1,420 Navistar International Corp.(a).... $ 17,040
1,200 Safety Kleen Corp.................. 17,550
-----------
2,024,427
-----------
Banking--5.1%
7,637 Banc One Corp...................... 278,750
2,200 Bank of Boston Corp................ 104,775
3,700 Bank of New York Co., Inc.......... 172,050
7,200 BankAmerica Corp................... 431,100
1,500 Bankers Trust NY Corp.............. 105,375
1,900 Barnett Banks, Inc................. 107,588
2,500 Boatmen's Bancshares............... 92,500
3,400 Chase Manhattan Corp............... 207,825
4,900 Chemical Banking Corp.............. 298,287
7,700 Citicorp........................... 544,775
2,700 CoreStates Financial Corp.......... 98,888
1,700 First Chicago Corp................. 116,662
1,500 First Fidelity Bancorp, Inc........ 101,250
1,500 First Interstate Bank Corp......... 151,125
3,300 First Union Corp................... 168,300
2,700 Fleet Financial Group, Inc......... 101,925
1,100 Golden West Financial Corp......... 55,550
2,700 Great Western Financial Corp....... 64,125
2,300 H.F. Ahmanson & Co................. 58,363
4,400 KeyCorp............................ 150,700
2,825 Mellon Bank Corp................... 126,066
3,600 Morgan (J.P.) & Co., Inc........... 278,550
2,900 National City Corp................. 89,538
5,300 NationsBank Corp................... 356,425
3,000 NBD Bancorp, Inc................... 114,750
6,200 Norwest Corp....................... 203,050
4,400 PNC Financial Corp................. 122,650
1,100 Republic New York Corp............. 64,350
2,400 Shawmut National Corp.............. 80,700
2,200 Suntrust Banks, Inc................ 145,475
1,800 U.S. Bancorp....................... 50,850
900 Wells Fargo & Co................... 167,062
-----------
5,209,379
-----------
</TABLE>
See Notes to Financial Statements.
B-29
<PAGE>
THE PRUDENTIAL STOCK INDEX FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Beverages--3.0%
800 Adolph Coors Co.................... $ 14,500
4,900 Anheuser Busch Cos., Inc........... 305,637
1,200 Brown-Forman Corp.................. 46,650
24,400 Coca-Cola Co....................... 1,683,600
15,200 PepsiCo Inc........................ 775,200
7,200 Seagram Co., Ltd................... 258,300
-----------
3,083,887
-----------
Chemicals--2.1%
2,200 Air Products & Chemicals, Inc...... 114,675
550 Albemarle Corp..................... 10,313
5,200 Dow Chemical Co.................... 387,400
10,700 duPont (E.I.) de Nemours & Co...... 735,625
1,600 Eastman Chemical Co................ 102,400
1,800 Grace (W.R.) & Co.................. 120,150
2,200 Hercules, Inc...................... 127,600
2,300 Monsanto Co........................ 231,725
1,300 Nalco Chemical Co.................. 44,362
1,300 Rohm & Haas Co..................... 78,487
1,000 Sigma-Aldrich...................... 48,500
2,600 Union Carbide Corp................. 103,350
-----------
2,104,587
-----------
Chemical-Specialty--0.4%
2,625 Engelhard Corp..................... 66,609
400 First Mississippi Corp............. 15,950
1,300 Great Lakes Chemical Corp.......... 87,913
2,800 Morton International, Inc.......... 86,800
2,600 Praxair, Inc....................... 69,550
900 Raychem Corp....................... 40,500
-----------
367,322
-----------
Commercial Services--0.2%
3,350 CUC International, Inc.(a)......... 116,831
1,500 Deluxe Corp........................ 49,687
600 Harland (John H.) Co............... 13,275
1,900 Moore Corp. Ltd.................... 38,238
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
800 Ogden Corp......................... $ 18,800
-----------
236,831
-----------
Computer Software & Services--3.0%
900 AutoDesk, Inc...................... 39,375
2,800 Automatic Data Processing, Inc..... 190,750
1,400 Cabletron Systems, Inc.(a)......... 92,225
900 Ceridian Corp.(a).................. 39,937
5,200 Cisco Systems, Inc.(a)............. 358,800
Computer Associates International,
4,600 Inc.............................. 194,350
1,050 Computer Sciences Corp.(a)......... 67,594
1,000 Intergraph Corp.(a)................ 12,125
4,000 Micron Technology Inc.............. 318,000
11,300 Microsoft Corp.(a)................. 1,022,650
6,900 Novell, Inc.(a).................... 125,925
8,350 Oracle Systems Corp.(a)............ 320,431
3,000 Silicon Graphics Inc.(a)........... 103,125
1,800 Sun Microsystems Inc.(a)........... 113,400
1,900 Tandem Computers Inc.(a)........... 23,275
-----------
3,021,962
-----------
Construction--0.1%
1,600 Fluor Corp......................... 89,600
700 Foster Wheeler Corp................ 24,762
600 Kaufman & Broad Home Corp.......... 7,575
500 Pulte Corp......................... 14,188
-----------
136,125
-----------
Consumer Goods--0.5%
600 Centex Corp........................ 17,400
600 Fleetwood Enterprises, Inc......... 11,925
3,100 Lowes Companies, Inc............... 93,000
3,200 Masco Corp......................... 88,000
2,200 Maytag Corp........................ 38,500
1,000 Owens-Corning Fiberglas Corp.(a)... 44,625
Pioneer Hi Bred International,
1,600 Inc.............................. 73,600
</TABLE>
See Notes to Financial Statements.
B-30
<PAGE>
THE PRUDENTIAL STOCK INDEX FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Consumer Goods, cont'd.
900 Stanley Works...................... $ 39,038
1,500 Whirlpool Corp..................... 86,625
-----------
492,713
-----------
Containers--0.1%
600 Ball Corp.......................... 17,775
900 Bemis, Inc......................... 24,863
1,700 Crown Cork & Seal, Inc.(a)......... 65,875
-----------
108,513
-----------
Cosmetics & Soaps--1.9%
500 Alberto Culver Co.................. 15,250
1,350 Avon Products, Inc................. 96,863
1,000 Clorox Co.......................... 71,375
2,800 Colgate-Palmolive Co............... 186,550
8,600 Gillette Co........................ 409,575
International Flavors & Fragrances
2,150 Inc.............................. 103,737
13,300 Procter & Gamble Co................ 1,024,100
-----------
1,907,450
-----------
Diversified Gas--0.1%
2,100 Coastal Corp....................... 70,613
400 Eastern Enterprises, Inc........... 12,850
1,400 Enserch Corp....................... 23,100
1,000 NICOR Inc.......................... 27,250
500 Oneok Inc.......................... 11,625
-----------
145,438
-----------
Drugs & Medical Supplies--7.1%
15,300 Abbott Laboratories................ 652,162
1,600 ALZA Corp.(a)...................... 36,800
6,000 American Home Products Corp........ 509,250
5,100 Amgen, Inc.(a)..................... 254,362
1,000 Bard (C.R.), Inc................... 30,500
1,100 Bausch & Lomb, Inc................. 45,513
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
5,300 Baxter International Inc........... $ 217,962
1,300 Becton Dickinson & Co.............. 81,738
2,300 Biomet, Inc.(a).................... 39,675
2,900 Boston Scientific Corp.(a)......... 123,613
9,850 Bristol-Myers Squibb Co............ 717,819
12,500 Johnson & Johnson Co............... 926,562
5,700 Lilly (Eli) & Co................... 512,287
4,500 Medtronic, Inc..................... 241,875
23,900 Merck & Co., Inc................... 1,338,400
12,200 Pfizer Inc......................... 651,175
7,200 Schering-Plough Corp............... 370,800
900 St. Jude Medical, Inc.(a).......... 56,925
1,100 United States Surgical Corp........ 29,425
3,300 Upjohn Co.......................... 147,263
2,600 Warner Lambert Co.................. 247,650
-----------
7,231,756
-----------
Electronics--4.0%
2,000 Advanced Micro Devices, Inc.(a).... 58,250
2,500 Amdahl Corp.(a).................... 24,063
4,184 AMP Inc............................ 161,084
2,400 Apple Computer, Inc................ 89,400
400 Cray Research, Inc.(a)............. 8,850
400 Data General Corp.(a).............. 4,150
2,800 Digital Equipment Corp.(a)......... 127,750
1,100 EG&G, Inc.......................... 21,450
4,300 Emerson Electric Co................ 307,450
800 Harris Corp........................ 43,900
9,900 Hewlett-Packard Co................. 825,412
15,900 Intel Corp......................... 955,987
11,400 Motorola, Inc...................... 870,675
2,300 National Semiconductors Corp.(a)... 63,538
800 Perkin Elmer Corp.................. 28,500
1,300 Tandy Corp......................... 78,975
600 Tektronix, Inc..................... 35,400
3,700 Texas Instruments Inc.............. 295,537
350 Thomas & Betts Corp................ 22,619
900 Zenith Electronics Corp.(a)........ 7,763
-----------
4,030,753
-----------
</TABLE>
See Notes to Financial Statements.
B-31
<PAGE>
THE PRUDENTIAL STOCK INDEX FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Financial Services--2.4%
9,400 American Express Co................ $ 417,125
1,000 Beneficial Corp.................... 52,250
2,000 Block (H&R), Inc................... 76,000
3,258 Dean Witter Discover & Co.......... 183,262
3,500 Federal Home Loan Mortgage Corp.... 241,937
5,350 Federal National Mortgage Assn..... 553,725
2,300 First Data Corp.................... 142,600
1,900 Household International Corp....... 117,800
2,850 MBNA Corp.......................... 118,631
3,400 Merrill Lynch & Co., Inc........... 212,500
1,500 Morgan Stanley Group, Inc.......... 144,188
2,100 Salomon, Inc....................... 80,325
1,350 Transamerica Corp.................. 96,188
-----------
2,436,531
-----------
Food & Beverage--2.3%
10,596 Archer-Daniels-Midland Co.......... 162,910
4,800 Campbell Soup Co................... 241,200
4,700 ConAgra, Inc....................... 186,237
2,900 CPC International, Inc............. 191,400
700 Fleming Cos., Inc.................. 16,800
3,050 General Mills, Inc................. 170,038
1,200 Giant Foods, Inc................... 37,650
4,700 Heinz (H.J.) Co.................... 215,025
1,500 Hershey Foods Corp................. 96,563
4,250 Kellogg Co......................... 307,594
2,600 Quaker Oats Co..................... 86,125
2,000 Ralston Purina Co.................. 115,750
9,200 Sara Lee Corp...................... 273,700
3,500 Sysco Corp......................... 95,375
2,300 Wrigley (W.M.) Junior Co........... 116,150
-----------
2,312,517
-----------
Forest Products--1.5%
900 Boise Cascade Corp................. 36,338
1,900 Champion International Corp........ 102,362
160 Crown Vantage Inc.(a).............. 3,560
900 Federal Paper Board, Inc........... 34,538
1,750 Georgia Pacific Corp............... 153,125
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
4,900 International Paper Co............. $ 205,800
1,600 James River Corp................... 51,200
3,100 Kimberly Clark Corp................ 208,087
2,100 Louisiana Pacific Corp............. 50,663
1,000 Mead Corp.......................... 58,625
600 Potlatch Corp...................... 24,525
2,900 Scott Paper Co..................... 140,650
1,900 Stone Container Corp............... 36,100
1,100 Temple Inland Inc.................. 58,575
1,300 Union Camp Corp.................... 74,912
1,300 Westvaco Corp...................... 59,313
3,900 Weyerhaeuser Co.................... 177,937
1,000 Willamette Industries, Inc......... 66,750
-----------
1,543,060
-----------
Gas Pipelines--0.5%
3,018 Cinergy Corp....................... 84,127
1,000 Columbia Gas System, Inc.(a)....... 38,625
1,800 Consolidated Natural Gas Co........ 72,675
4,900 Enron Corp......................... 164,150
2,300 Noram Energy Corp.................. 18,112
2,900 Panhandle Eastern Corp............. 79,025
700 Peoples Energy Corp................ 19,250
2,000 Williams Cos., Inc................. 78,000
-----------
553,964
-----------
Hospital Management--0.9%
1,900 Beverly Enterprises, Inc.(a)....... 26,125
8,552 Columbia Healthcare Corp........... 415,841
700 Community Psychiatric Centers...... 8,225
1,200 Manor Care, Inc.................... 40,800
1,800 Service Corp. International........ 70,425
500 Shared Medical Systems Corp........ 20,750
4,000 Tenet Healthcare Corp.(a).......... 69,500
3,000 U.S. HealthCare Inc................ 106,125
3,300 United Healthcare Corp............. 161,287
-----------
919,078
-----------
Housing Construction
700 Armstrong World Industries......... 38,850
-----------
</TABLE>
See Notes to Financial Statements.
B-32
<PAGE>
THE PRUDENTIAL STOCK INDEX FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Insurance--3.1%
2,200 Aetna Life & Casualty Co........... $ 161,425
Alexander & Alexander Services,
800 Inc.............................. 19,400
8,574 Allstate Corp...................... 303,305
4,000 American General Corp.............. 149,500
American International Group,
9,212 Inc.............................. 783,020
1,650 Chubb Corp......................... 158,400
1,450 CIGNA Corp......................... 150,981
1,600 General Re Corp.................... 241,600
950 Jefferson-Pilot Corp............... 61,038
1,800 Lincoln National Corp.............. 84,825
1,400 Marsh & McLennan Cos............... 123,025
1,900 Providian Corp..................... 78,850
1,200 SAFECO Corp........................ 78,750
1,600 St. Paul Companies, Inc............ 93,400
1,450 Torchmark Corp..................... 61,081
6,131 Travelers, Inc..................... 325,709
1,400 UNUM Corp.......................... 73,850
2,300 USF&G Corp......................... 44,563
750 USLIFE Corp........................ 21,938
3,300 Wachovia Corp...................... 142,312
-----------
3,156,972
-----------
Leisure--0.9%
1,100 Bally Entertainment Group(a)....... 11,963
2,000 Brunswick Corp..................... 40,500
10,100 Disney (Walt) Co................... 579,487
400 Handleman Co....................... 3,550
1,900 Harrahs Entertainment Inc.(a)...... 55,575
1,800 Hasbro, Inc........................ 56,025
700 King World Productions, Inc.(a).... 25,637
4,250 Mattel, Inc........................ 124,844
300 Outboard Marine Corp............... 6,450
-----------
904,031
-----------
Lodging--0.1%
900 Hilton Hotels Corp................. 57,488
2,400 Marriott International, Inc........ 89,700
-----------
147,188
-----------
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
Machinery--0.9%
600 Briggs & Stratton Corp............. $ 24,150
3,800 Caterpillar Inc.................... 216,125
700 Cincinnati Milacron, Inc........... 22,050
2,000 Cooper Industries, Inc............. 70,500
1,700 Deere & Co......................... 138,337
2,200 Dover Corp......................... 84,150
1,600 Eaton Corp......................... 84,800
700 Giddings & Lewis, Inc.............. 12,206
1,000 Harnischfeger Industries, Inc...... 33,375
2,100 Ingersoll Rand Co.................. 78,750
802 PACCAR Inc......................... 37,494
1,450 Parker Hannifin Corp............... 55,100
800 Snap-On Tools Corp................. 30,400
600 Timken Co.......................... 25,575
800 Varity Corp.(a).................... 35,600
-----------
948,612
-----------
Media--2.1%
3,000 Capital Cities/ABC, Inc............ 352,875
1,220 CBS, Inc........................... 97,447
4,550 Comcast Corp....................... 91,000
3,000 Donnelley (R.R.) & Sons, Co........ 117,000
1,800 Dow Jones & Co., Inc............... 66,375
3,300 Dun & Bradstreet Corp.............. 190,987
2,750 Gannett, Inc....................... 150,219
1,500 Interpublic Group Cos., Inc........ 59,625
950 Knight-Ridder, Inc................. 55,694
1,000 McGraw Hill, Inc................... 81,750
600 Meredith Corp...................... 23,850
1,700 New York Times Co.................. 46,538
7,500 Time Warner, Inc................... 298,125
2,100 Times Mirror Co.................... 60,375
1,300 Tribune Co......................... 86,288
6,939 Viacom Inc.(a)..................... 345,215
-----------
2,123,363
-----------
Mineral Resources--0.8%
800 ASARCO Inc......................... 25,200
Barrick Gold Corp. (ADR)
6,900 (Canada)......................... 178,537
</TABLE>
See Notes to Financial Statements.
B-33
<PAGE>
THE PRUDENTIAL STOCK INDEX FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Mineral Resources, cont'd.
1,850 Cyprus Minerals Co................. $ 52,031
2,400 Echo Bay Mines, Ltd................ 26,100
Freeport-McMoRan Copper & Gold
3,800 Inc.............................. 97,375
2,500 Homestake Mining Co................ 42,500
2,300 INCO, Ltd.......................... 78,775
1,698 Newmont Mining Corp................ 72,165
1,300 Phelps-Dodge Corp.................. 81,413
800 Pittston Minerals Group............ 21,700
4,600 Placer Dome, Inc................... 120,750
2,240 Santa Fe Pacific Gold Corp......... 28,280
-----------
824,826
-----------
Miscellaneous Basic Industry--4.4%
1,700 Applied Materials, Inc.(a)......... 173,825
Bassett Furniture Industries,
225 Inc.............................. 5,653
4,100 Browning Ferris Industries, Inc.... 124,537
600 Crane Co........................... 20,700
1,300 Ecolab, Inc........................ 35,913
750 FMC Corp.(a)....................... 57,000
32,800 General Electric Co................ 2,091,000
1,000 General Signal Corp................ 29,250
1,000 Grainger (W.W.) Inc................ 60,375
2,300 Illinois Tool Works, Inc........... 135,412
2,300 ITT Corp........................... 285,200
1,100 Loews Corp......................... 160,050
1,500 Mallinckrodt Group Inc............. 59,438
900 Millipore Corp..................... 33,750
400 Morrison Knudsen Corp.............. 3,100
150 NACCO Industries, Inc.............. 8,906
2,033 Pall Corp.......................... 47,267
3,900 PPG Industries, Inc................ 181,350
1,127 Teledyne, Inc...................... 30,212
1,600 Textron, Inc....................... 109,200
600 Trinova Corp....................... 20,250
1,200 TRW Inc............................ 89,250
1,500 Tyco International Ltd............. 94,500
2,400 United Technologies Corp........... 212,100
7,500 Westinghouse Electric Corp......... 112,500
9,300 WMX Technologies, Inc.............. 265,050
Value
Shares Description (Note 1)
- ------------------------------------------------------------
100 Zurn Industries, Inc............... $ 2,538
-----------
4,448,326
-----------
Miscellaneous Consumer Growth--1.8%
1,300 Allergan, Inc...................... 43,388
1,400 American Greetings Corp............ 42,700
1,600 Black & Decker Corp................ 54,600
4,500 Corning, Inc....................... 128,812
1,900 Dial Corp.......................... 47,025
6,600 Eastman Kodak Co................... 391,050
700 Jostens, Inc....................... 16,450
Minnesota Mining & Manufacturing
8,100 Co............................... 457,650
800 Polaroid Corp...................... 31,800
1,300 Premark International Inc.......... 66,137
3,000 Rubbermaid, Inc.................... 82,875
3,100 Unilever N.V....................... 403,000
2,000 Whitman Corp....................... 41,250
-----------
1,806,737
-----------
Office Equipment & Supplies--1.9%
1,100 Alco Standard Corp................. 93,225
1,000 Avery Dennison Corp................ 42,000
5,100 Compaq Computer Corp.(a)........... 246,712
2,500 Honeywell, Inc..................... 107,188
International Business Machines
11,000 Corp............................. 1,038,125
2,900 Pitney Bowes, Inc.................. 121,800
3,500 Unisys Corp.(a).................... 27,563
2,150 Xerox Corp......................... 288,906
-----------
1,965,519
-----------
Petroleum--6.7%
1,800 Amerada Hess Corp.................. 87,525
9,600 Amoco Corp......................... 615,600
1,100 Ashland Oil, Inc................... 36,713
3,150 Atlantic Richfield Co.............. 338,231
2,400 Burlington Resources Inc........... 93,000
12,600 Chevron Corp....................... 612,675
24,050 Exxon Corp......................... 1,737,612
</TABLE>
See Notes to Financial Statements.
B-34
<PAGE>
THE PRUDENTIAL STOCK INDEX FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Petroleum, cont'd.
1,000 Kerr McGee Corp.................... $ 55,500
700 Louisiana Land & Exploration Co.... 24,938
7,700 Mobil Corp......................... 767,112
6,300 Occidental Petroleum Corp.......... 138,600
900 Pennzoil Co........................ 39,488
5,100 Phillips Petroleum Co.............. 165,750
Royal Dutch Petroleum Co. (ADR)
10,400 (Netherlands).................... 1,276,600
Santa Fe Energy Resources,
1,700 Inc.(a).......................... 16,150
1,500 Sun Co., Inc....................... 38,625
3,500 Tenneco, Inc....................... 161,875
5,000 Texaco, Inc........................ 323,125
4,800 Unocal Corp........................ 136,800
5,600 USX Marathon Corp.................. 110,600
1,100 Western Atlas, Inc.(a)............. 52,112
-----------
6,828,631
-----------
Petroleum Services--0.6%
2,600 Baker Hughes Inc................... 52,975
3,400 Dresser Industries, Inc............ 81,175
2,200 Halliburton Co..................... 91,850
500 Helmerich & Payne, Inc............. 14,063
1,000 McDermott International, Inc....... 19,750
1,900 Oryx Energy Co.(a)................. 24,700
1,400 Rowan Cos., Inc.(a)................ 10,500
4,700 Schlumberger, Ltd.................. 306,675
1,600 Sonat Inc.......................... 51,200
-----------
652,888
-----------
Railroads--0.8%
1,765 Burlington Northern Inc............ 127,975
1,500 Consolidated Rail Corp............. 103,125
2,000 CSX Corp........................... 168,250
2,500 Norfolk Southern Corp.............. 186,875
4,000 Union Pacific Corp................. 265,000
-----------
851,225
-----------
Restaurants--0.6%
3,150 Darden Restaurants Inc............. 36,225
Value
Shares Description (Note 1)
- ------------------------------------------------------------
400 Luby's Cafeterias, Inc............. $ 8,600
13,400 McDonald's Corp.................... 512,550
Ryan's Family Steak Houses,
900 Inc.(a).......................... 7,088
700 Shoney's Inc.(a)................... 7,700
2,100 Wendy's International, Inc......... 44,362
-----------
616,525
-----------
Retail--4.3%
4,900 Albertsons, Inc.................... 167,212
2,800 American Stores Co................. 79,450
300 Brown Group, Inc................... 5,513
39 Bruno's, Inc....................... 444
1,700 Charming Shoppes, Inc.............. 7,650
1,900 Circuit City Stores, Inc........... 60,087
1,400 Dayton Hudson Corp................. 106,225
2,200 Dillard Department Stores, Inc..... 70,125
2,800 Gap, Inc........................... 100,800
Great Atlantic & Pacific Tea
700 Inc.............................. 19,600
1,300 Harcourt General, Inc.............. 54,438
9,266 Home Depot, Inc.................... 369,482
8,800 K mart Corp........................ 127,600
2,400 Kroger Co.(a)...................... 81,900
7,000 Limited, Inc....................... 133,000
1,500 Liz Claiborne, Inc................. 37,875
400 Longs Drug Stores Corp............. 16,600
4,800 May Department Stores Co........... 210,000
2,000 Melville Corp...................... 69,000
700 Mercantile Stores, Inc............. 31,500
3,200 Newell Co.......................... 79,200
1,400 NIKE, Inc.......................... 155,575
1,600 Nordstrom, Inc..................... 66,800
4,400 Penney (J.C.), Inc................. 218,350
1,200 Pep Boys - Manny, Moe & Jack....... 32,550
3,752 Price Costco, Inc.(a).............. 64,253
1,600 Reebok International, Ltd.......... 55,000
1,500 Rite-Aid Corp...................... 42,000
7,500 Sears Roebuck & Co................. 276,562
1,600 Sherwin Williams Co................ 56,000
1,100 Stride Rite Corp................... 12,513
1,400 Supervalue, Inc.................... 41,125
1,400 TJX Companies, Inc................. 16,625
</TABLE>
See Notes to Financial Statements.
B-35
<PAGE>
THE PRUDENTIAL STOCK INDEX FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Retail, cont'd.
5,300 Toys 'R' Us Inc.(a)................ $ 143,100
44,400 Wal-Mart Stores, Inc............... 1,104,450
4,800 Walgreen Co........................ 134,400
1,500 Winn-Dixie Stores, Inc............. 89,437
2,600 Woolworth Corp..................... 40,950
-----------
4,377,391
-----------
Rubber--0.2%
1,700 Cooper Tire & Rubber............... 41,225
500 Goodrich (B.F.) Co................. 32,938
2,900 Goodyear Tire & Rubber Co.......... 114,187
-----------
188,350
-----------
Steel--0.2%
1,900 Armco Inc.(a)...................... 12,350
1,800 Bethlehem Steel Corp.(a)........... 25,425
1,000 Inland Steel Industries, Inc....... 22,750
1,700 Nucor Corp......................... 76,075
1,500 USX Corp. - U.S. Steel Group....... 46,500
1,850 Worthington Industries, Inc........ 33,994
-----------
217,094
-----------
Telecommunications--1.3%
3,700 ALLTEL Corp........................ 110,538
750 Andrew Corp.(a).................... 45,844
2,200 DSC Communications Corp.(a)........ 130,350
13,000 MCI Communications Corp............ 338,812
4,900 Northern Telecom Ltd............... 174,562
1,500 Scientific Atlanta, Inc............ 25,313
6,800 Sprint Corp........................ 238,000
12,500 Tele Communications, Inc.(a)....... 218,750
1,700 Tellabs, Inc.(a)................... 71,613
-----------
1,353,782
-----------
Textiles--0.2%
1,500 Fruit of the Loom, Inc.(a)......... 30,938
National Service Industries,
1,000 Inc.............................. 29,250
700 Russell Corp....................... 17,850
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
400 Springs Industries, Inc............ $ 15,700
1,200 VF Corp............................ 61,200
-----------
154,938
-----------
Tobacco--1.6%
3,700 American Brands Inc................ 156,325
16,250 Philip Morris Cos., Inc............ 1,356,875
3,800 UST, Inc........................... 108,775
-----------
1,621,975
-----------
Trucking & Shipping--0.2%
900 Consolidated Freightways, Inc...... 22,275
1,100 Federal Express Corp.(a)........... 91,300
5,600 Laidlaw Inc........................ 49,000
800 Roadway Services, Inc.............. 39,800
1,400 Ryder System, Inc.................. 35,525
400 Yellow Corp........................ 5,500
-----------
243,400
-----------
Utility-Communications--6.6%
9,600 AirTouch Communications(a)......... 294,000
10,700 Ameritech Corp..................... 557,737
30,700 AT&T Corp.......................... 2,018,525
8,500 Bell Atlantic Corp................. 521,687
9,600 BellSouth Corp..................... 702,000
18,700 GTE Corp........................... 733,975
8,300 NYNEX Corp......................... 396,325
8,200 Pacific Telesis Group.............. 252,150
11,800 SBC Communications Inc............. 649,000
9,100 U.S. West, Inc..................... 428,838
4,200 Unicom Corp........................ 127,050
-----------
6,681,287
-----------
Utility-Electric--2.8%
3,600 American Electric Power, Inc....... 130,950
2,700 Baltimore Gas & Electric Co........ 69,863
3,000 Carolina Power & Light Co.......... 100,875
</TABLE>
See Notes to Financial Statements.
B-36
<PAGE>
THE PRUDENTIAL STOCK INDEX FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Utility - Electric, cont'd.
3,600 Central & South West Corp.......... $ 91,800
4,500 Consolidated Edison Co............. 136,687
2,800 Detroit Edison Co.................. 90,300
3,400 Dominion Resources, Inc............ 127,925
4,000 Duke Power Co...................... 173,500
4,300 Entergy Corp....................... 112,337
3,600 FPL Group, Inc..................... 147,150
2,200 General Public Utilities Corp...... 68,475
2,500 Houston Industries, Inc............ 110,312
2,800 Niagara Mohawk Power Corp.......... 36,750
1,300 Northern States Power Co........... 58,988
3,000 Ohio Edison Co..................... 68,250
1,700 Pacific Enterprises................ 42,713
8,200 Pacific Gas & Electric Co.......... 244,975
5,400 Pacificorp......................... 102,600
4,300 PECO Energy Co..................... 123,087
4,700 Public Service Enterprise Group.... 139,825
8,700 SCE Corp........................... 154,425
12,800 Southern Co........................ 302,400
4,400 Texas Utilities Co................. 153,450
2,000 Union Electric Co.................. 74,750
-----------
2,862,387
-----------
Total common stocks
(cost $67,756,491)................. 83,284,748
-----------
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS--12.9%
U. S. Government--0.7%
United States Treasury Bills
$ 550(b) 5.31%, 12/14/95................... $ 544,003
150(b) 5.41%, 12/14/95................... 148,350
-----------
692,353
-----------
Repurchase Agreement--12.2%
12,494 Joint Repurchase Agreement
Account,
6.39%, 10/2/95 (Note 5)........... 12,494,000
-----------
Total short-term investments
(cost $13,186,353)................ 13,186,353
-----------
Total Investments--94.6%
(cost $80,942,844; Note 4)........ 96,471,101
Other assets in excess of
liabilities--5.4%............... 5,473,465
-----------
Net Assets--100%.................. $101,944,566
-----------
-----------
</TABLE>
--------
(a) Non-income producing security.
(b) Pledged as initial margin on futures contracts.
ADR--American Depository Receipt.
See Notes to Financial Statements.
B-37
<PAGE>
THE PRUDENTIAL INTERNATIONAL STOCK FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
LONG-TERM INVESTMENTS
Common Stocks--94.5%
Argentina--2.3%
35,000 Telecom Argentina (ADR) ......... $ 1,465,625
(Utilities)
95,000 YPF Sociedad Anonima (ADR) ...... 1,710,000
(Oil & Gas) -----------
3,175,625
-----------
Australia--7.3%
800,000 CSR, Ltd. ....................... 2,662,008
(Multi-Industry)
540,000 Mayne Nickless Ltd. ............. 2,560,519
(Multi-Industry)
270,000 National Australia Bank Ltd. .... 2,389,001
(Commercial Banking)
900,000 Pioneer International Ltd. ...... 2,382,195
(Building Materials & -----------
Components)
9,993,723
-----------
Canada--4.6%
100,000 Bank of Nova Scotia ............. 2,104,675
(Commercial Banking)
Canadian Tire Corp., Ltd.,
210,000 Class A ......................... 2,366,362
(Automotive Parts)
145,000 MacMillan Bloedel Ltd. .......... 1,782,455
(Forestry & Paper) -----------
6,253,492
-----------
<CAPTION>
Value
Shares Description (Note 1)
- -------------------------------------------------------------
<C> <S> <C>
Finland--2.5%
140,000 Enso-Gutzeit Oy, Class R ........ $ 1,186,316
(Forestry & Paper)
124,000 Outokumpu Oy .................... 2,205,966
(Metals - Non Ferrous) -----------
3,392,282
-----------
France--5.7%
12,000 Chargeurs S.A. .................. 2,484,523
(Multi-Industry)
30,075 Christian Dior S.A. ............. 2,734,923
(Textiles & Apparel)
19,000 Peugeot S.A. .................... 2,595,555
(Automobile Manufacturing) -----------
7,815,001
-----------
Germany--1.7%
7,000 Volkswagen A.G. ................. 2,272,059
(Automobile Manufacturing) -----------
Italy--0.7%
890,000 Bca Fideuram S.P.A. ............. 992,565
(Financial Services) -----------
Japan--5.9%
263,000 Hitachi Ltd. .................... 2,857,545
(Electrical Equipment)
165,000 Matsushita Electric Industrial 2,523,139
Co., Ltd. .
(Electrical Equipment)
51,000 Sony Corp. ...................... 2,637,223
(Electronics) -----------
8,017,907
-----------
</TABLE>
See Notes to Financial Statements.
B-38
<PAGE>
THE PRUDENTIAL INTERNATIONAL STOCK FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
Netherlands--11.3%
20,000 AKZO N.V. ....................... $ 2,400,650
(Chemicals)
30,000 Gamma Holding N.V. .............. 1,349,663
(Textiles & Apparel)
52,000 Internationale - Nederlanden Groep 3,018,495
N.V. .
(Insurance)
77,000 KLM Royal Dutch Airlines ........ 2,699,138
(Airline/Military Technology)
65,000 Knp Bt (kon) Nv ................. 1,929,205
(Forestry & Paper)
84,000 Pakhoed Holdings N.V. ........... 2,461,635
(Energy Equipment & Services)
63,000 Stork N.V. ...................... 1,574,606
(Machinery & Engineering) -----------
15,433,392
-----------
New Zealand--3.6%
700,000 Fisher & Paykel Industries Ltd. 2,165,471
...............................
(Consumer Durable Goods)
1,320,000 Lion Nathan Ltd. ................ 2,762,851
(Beverages & Tobacco) -----------
4,928,322
-----------
Norway--7.5%
195,000 Aker A.S. ....................... 2,827,438
(Multi-Industry)
101,000 Hafslund Nycomed A.S. ........... 2,623,168
(Health & Personal Care)
65,000 Orkla A.S. ...................... 2,899,936
(Food & Household Products)
127,900 Unitor Shipping Service, A.S. ... 1,956,405
(Business & Public Services) -----------
10,306,947
-----------
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
South Korea--7.4%
85,000 Korea Zinc ...................... $ 2,135,512
(Metals - Non Ferrous)
30,575 Lucky Development Co. ........... 704,475
(Construction & Housing)
4,500 Pohang Iron & Steel Co., Ltd. ... 388,375
(Metals - Steel)
13,134 Samsung Electronics Co., Ltd. ... 2,829,572
(Manufacturing)
2,599 Samsung Electronics Co., Ltd., new
shares.......................... 556,542
(Manufacturing)
35,000 Sam Yang Co. .................... 1,298,490
(Misc. Materials & Commodities)
60,020 Tong Yang Cement Corp. .......... 2,117,342
(Construction & Housing) -----------
10,030,308
-----------
Spain--5.9%
87,000 Banco Bilbao Vizcaya ............ 2,678,116
(Commercial Banking)
21,000 Banco de Andalucia .............. 2,726,963
(Commercial Banking)
355,000 Iberdrola ....................... 2,685,974
(Utilities) -----------
8,091,053
-----------
Sweden--7.5%
47,000 Electrolux AB ................... 2,245,708
(Appliances)
95,000 Pharmacia AB .................... 2,854,971
(Commercial Banking)
132,000 SKF International AB ............ 2,910,967
(Consumer Goods)
</TABLE>
See Notes to Financial Statements.
B-39
<PAGE>
THE PRUDENTIAL INTERNATIONAL STOCK FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
Sweden, cont'd.
90,000 Volvo AB ........................ $ 2,205,278
(Automobile Manufacturing) -----------
10,216,924
-----------
Switzerland--11.0%
4,100 Ciba-Geigy Ltd. ................. 3,284,256
(Chemicals)
3,500 Hero ............................ 1,680,363
(Food & Household Products)
11,000 Merkur Holding AG ............... 2,531,142
(Merchandising)
4,000 SMH-Swiss Corp. for
Microelectronics and Watchmaking
Industries Ltd.................. 2,595,156
(Electronics)
4,500 Sulzer Brothers Ltd. ............ 2,608,131
(Machinery & Engineering)
8,500 Zurich Insurance Co. ............ 2,382,353
(Insurance) -----------
15,081,401
-----------
United Kingdom--9.6%
270,076 Allied-Domecq PLC ............... 2,293,666
(Beverages & Tobacco)
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
445,000 Lloyds Abbey Life PLC ........... $ 3,173,557
(Insurance)
210,000 National Westminster Bank PLC ... 2,105,613
(Commercial Banking)
385,000 Takare .......................... 1,363,888
(Commercial Banking)
470,000 Tesco PLC ....................... 2,319,116
(Food & Household Products)
196,000 Whitbread PLC ................... 1,900,144
(Beverages & Tobacco) -----------
13,155,984
-----------
Total common stocks
(cost $111,841,426)............... 129,156,985
-----------
Principal
Amount
(000) SHORT-TERM INVESTMENT
- ----------
Repurchase Agreement--6.0%
$ 8,175 Joint Repurchase Agreement
Account,
6.39%, 10/2/95 (Note 5)
(cost $8,175,000)................. 8,175,000
-----------
Total Investments--100.5%
(cost $120,016,426; Note 4)....... 137,331,985
Liabilities in excess of other
assets--(0.5%).................. (646,763)
-----------
Net Assets--100%.................. $136,685,222
-----------
-----------
</TABLE>
- ---------------
ADR--American Depository Receipt.
See Notes to Financial Statements.
B-40
<PAGE>
THE PRUDENTIAL ACTIVE BALANCED FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--80.9%
Common Stocks--47.3%
Aerospace/Defense--0.5%
10,500 Boeing Co.......................... $ 716,625
-----------
Airlines--1.4%
12,100 Delta Airlines, Inc................ 837,925
6,300 UAL Corp........................... 1,076,513
-----------
1,914,438
-----------
Automobiles & Trucks--1.8%
51,600 General Motors Corp................ 2,418,750
-----------
Banking--2.8%
38,400 Boatmen's Bancshares............... 1,420,800
9,300 Chemical Banking Corp.............. 566,138
17,800 Fleet Financial Group, Inc......... 671,950
102,300 Hibernia Corp...................... 1,035,787
-----------
3,694,675
-----------
Capital Goods--0.7%
20,900 Duracell International, Inc........ 937,888
-----------
Chemicals--0.8%
41,600 Dexter Corp........................ 1,060,800
-----------
Commercial Services--1.5%
19,850 CUC International, Inc.(a)......... 692,269
30,900 York International Corp............ 1,301,662
-----------
1,993,931
-----------
Computer Software & Services--0.4%
6,800 Novell, Inc.(a).................... 124,100
13,700 Symbol Technologies, Inc.(a)....... 453,812
-----------
577,912
-----------
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
Diversified Gas--0.3%
10,300 Coastal Corp....................... $ 346,338
-----------
Drugs & Medical Supplies--0.9%
Smith Kline Beecham PLC (ADR)
17,700 (United Kingdom)................. 896,063
19,600 Vertex Pharmaceuticals, Inc........ 367,500
-----------
1,263,563
-----------
Electronics--3.1%
22,000 Hewlett-Packard Co................. 1,834,250
22,700 Intel Corp......................... 1,364,837
24,700 International Rectifier Corp.(a)... 994,175
-----------
4,193,262
-----------
Financial Services--0.5%
13,000 The PMI Group Inc.................. 615,875
-----------
Forest Products--0.9%
13,900 Georgia Pacific Corp............... 1,216,250
-----------
Insurance--2.8%
8,000 Aetna Life & Casualty Co........... 587,000
30,700 CIGNA Corp......................... 3,196,637
-----------
3,783,637
-----------
Leisure--0.6%
37,200 Brunswick Corp..................... 753,300
-----------
Lodging--1.2%
24,500 Hilton Hotels Corp................. 1,564,938
-----------
Machinery--0.6%
23,547 Harnischfeger Industries, Inc...... 785,881
-----------
Media--5.5%
17,700 Dow Jones & Co., Inc............... 652,688
</TABLE>
See Notes to Financial Statements.
B-41
<PAGE>
THE PRUDENTIAL ACTIVE BALANCED FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Media, cont'd.
13,800 Dun & Bradstreet Corp.............. $ 798,675
11,900 McGraw-Hill, Inc................... 972,825
News Corp. Ltd. (ADR)
35,400 (Australia)...................... 778,800
71,800 New York Times Co.................. 1,965,525
10,300 Omnicom Group...................... 670,787
8,100 Scholastic Corp.(a)................ 508,275
14,700 Tribune Co......................... 975,712
-----------
7,323,287
-----------
Mineral Resources--1.5%
47,974 Newmont Mining Corp................ 2,038,895
-----------
Miscellaneous Basic Industry--6.4%
62,900 Avalon Properties, Inc............. 1,281,587
20,200 Champion International Corp........ 1,088,275
11,200 ITT Corp........................... 1,388,800
26,400 Mead Corp.......................... 1,547,700
25,300 Reynolds Metals Co................. 1,461,075
8,500 United Technologies Corp........... 751,188
40,000 Wellman Inc........................ 980,000
-----------
8,498,625
-----------
Miscellaneous Consumer Growth--0.4%
8,600 Eastman Kodak Co................... 509,550
-----------
Office Equipment & Supplies--2.0%
41,200 Apple Computer, Inc................ 1,534,700
9,300 Compaq Computer Corp.(a)........... 449,887
5,000 Xerox Corp......................... 671,875
-----------
2,656,462
-----------
Petroleum--0.5%
15,700 Tenneco, Inc....................... 726,125
-----------
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Petroleum Services--1.4%
18,500 Anadarko Petroleum Corp............ $ 876,438
43,400 Dresser Industries, Inc............ 1,036,175
-----------
1,912,613
-----------
Railroads--1.4%
10,901 Southern Pacific Rail Corp.(a)..... 264,349
24,400 Union Pacific Corp................. 1,616,500
-----------
1,880,849
-----------
Retail--1.5%
9,800 Harcourt General, Inc.............. 410,375
84,000 Limited, Inc....................... 1,596,000
-----------
2,006,375
-----------
Steel--0.3%
12,300 USX Corp. - U.S. Steel Group....... 381,300
-----------
Technology--1.8%
19,700 Adobe Systems, Inc................. 1,019,475
8,605 Chiron Corp.(a).................... 778,753
30,600 Pyxis Corp.(a)..................... 592,875
-----------
2,391,103
-----------
Telecommunications--2.8%
78,300 MCI Communications Corp............ 2,040,694
17,300 QUALCOMM Inc.(a)................... 793,637
Vodafone Group PLC (ADR) (United
20,600 Kingdom)......................... 844,600
-----------
3,678,931
-----------
Trucking & Shipping--1.0%
50,700 Ryder System, Inc.................. 1,286,513
-----------
Total common stocks
(cost $52,575,805)................. 63,128,691
-----------
</TABLE>
See Notes to Financial Statements.
B-42
<PAGE>
THE PRUDENTIAL ACTIVE BALANCED FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
DEBT OBLIGATIONS--33.6%
U. S. Government Securities
United States Treasury Notes,
$ 3,015 8.875%, 11/15/98................. $ 3,263,255
5,510 7.50%, 11/15/01.................. 5,900,879
17,435 6.25%, 2/15/03................... 17,532,985
14,750 5.75%, 8/15/03................... 14,351,308
United States Treasury Bonds,
3,230 7.875%, 2/15/21.................. 3,703,905
------------
Total debt obligations
(cost $43,190,765)............... 44,752,332
------------
Total long-term investments
(cost $95,766,570)............... 107,881,023
------------
SHORT-TERM INVESTMENTS
Repurchase Agreement--19.2%
25,625 Joint Repurchase Agreement Account,
6.39%, 10/2/95 (Note 5)
(cost $25,625,000)............. 25,625,000
------------
Total Investments--100.1%
(cost $121,391,570; Note 4)...... 133,506,023
Liabilities in excess of other
assets--(0.1%)................. (154,136)
------------
Net Assets--100%................. $133,351,887
------------
------------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
See Notes to Financial Statements.
B-43
<PAGE>
THE PRUDENTIAL BALANCED FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--89.7%
Common Stocks--45.7%
Aerospace/Defense--0.5%
15,100 Martin Marietta Corp............... $ 296,338
2,100 Rockwell International Corp........ 99,225
-----------
395,563
-----------
Automobiles & Trucks--1.3%
4,700 Allied Signal Automotive, Inc...... 207,387
5,000 Danaher Corp....................... 163,750
General Motors Corp.
4,000 Class E............................ 182,000
10,000 Class H............................ 410,000
3,700 Modine Manufacturing Co............ 105,450
-----------
1,068,587
-----------
Banking--2.8%
7,400 Bank of Boston Corp................ 352,425
16,800 Bank of New York, Inc.............. 781,200
1,900 First Chicago Corp................. 130,387
2,700 First Interstate Bank Corp......... 272,025
23,600 Norwest Corp....................... 772,900
-----------
2,308,937
-----------
Building Materials & Components--0.3%
9,000 USG Corp.(a)....................... 252,000
-----------
Capital Goods--0.6%
Fisher Scientific International,
15,000 Inc.............................. 485,625
-----------
Chemicals--3.9%
7,000 Agrium, Inc........................ 256,845
2,000 Air Products & Chemicals, Inc...... 104,250
10,400 Cytec Industries, Inc.(a).......... 601,900
<CAPTION>
Value
Shares Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
8,000 duPont (E.I.) de Nemours & Co...... $ 550,000
3,000 Eastman Chemical Co................ 192,000
9,000 Grace (W.R.) & Co.................. 600,750
Imperial Chemical Inds. (ADR)
8,000 (United Kingdom)................. 406,000
6,600 Olin Corp.......................... 453,750
-----------
3,165,495
-----------
Chemical-Specialty--1.0%
7,500 Hanna (M.A.) Co.................... 197,812
10,600 Mississippi Chemical Corp.......... 222,600
3,100 OM Group, Inc...................... 94,163
36,100 Uniroyal Chemical Corp.(a)......... 324,900
-----------
839,475
-----------
Commercial Services--0.6%
11,000 York International Corp............ 463,375
-----------
Computer Software & Services--0.5%
6,000 Automatic Data Processing, Inc..... 408,750
-----------
Construction--0.5%
32,000 Giant Cement Holding Inc.(a)....... 388,000
-----------
Consumer Goods--1.6%
13,000 Ethan Allen Interiors, Inc.(a)..... 279,500
13,000 Libbey, Inc........................ 310,375
16,000 Owens Corning Fiberglas Corp.(a)... 714,000
-----------
1,303,875
-----------
Drugs & Medical Supplies--1.8%
10,100 Baxter International Inc........... 415,362
8,000 Schering-Plough Corp............... 412,000
30,000 Whitman Corp....................... 618,750
-----------
1,446,112
-----------
</TABLE>
See Notes to Financial Statements.
B-44
<PAGE>
THE PRUDENTIAL BALANCED FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Electrical Equipment--0.9%
14,000 Anixter International Inc.(a)...... $ 579,250
6,800 UCAR International Inc.(a)......... 185,300
-----------
764,550
-----------
Electronics--1.0%
6,000 Emerson Electric Co................ 429,000
7,200 Oak Industries, Inc.(a)............ 216,900
2,500 Sundstrand Corp.................... 161,875
-----------
807,775
-----------
Financial Services--1.6%
12,400 Dean Witter Discover & Co.......... 697,500
10,500 Equitable Companies, Inc........... 388,500
4,700 Finova Group, Inc.................. 209,150
-----------
1,295,150
-----------
Food & Beverage--0.1%
4,000 Sbarro, Inc........................ 92,000
-----------
Forest Products--0.4%
7,000 Pentair, Inc....................... 315,000
-----------
Freight Transportation--0.3%
9,000 Pittston Services Group............ 244,125
-----------
Furniture
1,900 INTERCO Inc.(a).................... 14,963
-----------
Gas Pipelines--1.9%
19,400 Cabot Oil & Gas Corp............... 264,325
12,900 Enron Corp......................... 280,575
15,700 Mesa, Inc.(a)...................... 74,575
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
11,000 Parker & Parsley Petroleum Co...... $ 220,000
6,700 Seagull Energy Corp.(a)............ 135,675
20,000 Total S.A. (ADR) (France).......... 602,500
-----------
1,577,650
-----------
Health Care--0.3%
10,000 Quorum Health Group(a)............. 226,250
-----------
Hospital Management--1.3%
10,400 Columbia Healthcare Corp........... 505,700
33,000 Tenet Healthcare Corp.(a).......... 573,375
-----------
1,079,075
-----------
Insurance--3.7%
7,300 Emphesys Financial Group, Inc...... 271,013
7,000 John Alden Financial Corp.......... 158,375
3,900 NAC Re Corp........................ 141,375
9,700 National Re Corp................... 343,137
16,000 Penncorp Financial Group, Inc...... 382,000
Reinsurance Group of America,
17,200 Inc.............................. 606,300
15,000 TIG Holdings, Inc.................. 403,125
6,000 Travelers, Inc..................... 318,750
28,900 Western National Corp.............. 397,375
-----------
3,021,450
-----------
Machinery--1.5%
Gardner Denver Machinery,
26,000 Inc.(a).......................... 442,000
10,000 IDEX Corp.......................... 357,500
17,100 United Dominion Inds............... 412,537
-----------
1,212,037
-----------
Manufacturing--0.2%
4,500 Parker-Hannifin Corp............... 171,000
-----------
</TABLE>
See Notes to Financial Statements.
B-45
<PAGE>
THE PRUDENTIAL BALANCED FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Media--2.2%
10,000 Comcast Corp....................... $ 198,750
14,900 Cox Communications, Inc.(a)........ 301,725
9,400 Gannett, Inc....................... 513,475
News Corp. Ltd. (ADR)
6,000 (Australia)...................... 119,250
10,000 Time Warner, Inc................... 397,500
9,437 Times Mirror Co.................... 271,314
-----------
1,802,014
-----------
Medical Technology--0.3%
8,200 Guidant Corp....................... 239,850
-----------
Mineral Resources--0.5%
23,500 INDRESCO, Inc.(a).................. 420,063
-----------
Miscellaneous Basic Industry--4.5%
21,100 ADT Ltd.(a)........................ 290,125
15,600 Belden, Inc........................ 409,500
6,900 Crane Co........................... 238,050
19,500 Ferro Corp......................... 485,062
7,000 FMC Corp.(a)....................... 532,000
9,000 Illinois Tool Works, Inc........... 529,875
17,960 Mark IV Industries, Inc............ 399,610
10,000 Tyco International Ltd............. 630,000
2,500 United Technologies Corp........... 220,938
-----------
3,735,160
-----------
Office Equipment & Supplies--0.6%
12,100 Honeywell, Inc..................... 518,788
-----------
Oil & Gas-Equipment & Services--0.8%
20,700 Frontier Corp...................... 551,138
5,400 Vintage Petroleum, Inc............. 113,400
-----------
664,538
-----------
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Petroleum--1.2%
30,000 Cross Timbers Oil Co............... $ 427,500
18,000 Occidental Petroleum Corp.......... 396,000
Santa Fe Energy Resources,
15,000 Inc.(a).......................... 142,500
-----------
966,000
-----------
Petroleum Services--0.5%
33,300 Oryx Energy Co..................... 432,900
-----------
Publishing--0.3%
17,000 American Publishing Co., Class A... 212,500
-----------
Railroads--1.5%
6,400 Burlington Northern Inc............ 464,000
8,900 Illinois Central Corp.............. 348,212
7,000 Union Pacific Corp................. 463,750
-----------
1,275,962
-----------
Restaurants--0.1%
4,300 Shoney's Inc.(a)................... 47,300
-----------
Retail--1.4%
50,000 Best Products, Inc.(a)............. 425,000
12,000 Dillard Department Stores, Inc..... 382,500
4,900 Eckerd Corp.(a).................... 196,000
4,100 Harcourt General, Inc.............. 171,687
-----------
1,175,187
-----------
Rubber--0.4%
9,000 Goodyear Tire & Rubber Co.......... 354,375
-----------
Steel--0.1%
3,000 Carpenter Technology Corp.......... 117,375
-----------
</TABLE>
See Notes to Financial Statements.
B-46
<PAGE>
THE PRUDENTIAL BALANCED FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Technology--0.8%
14,500 Coltec Inds., Inc.(a).............. $ 174,000
10,400 Litton Industries Inc.(a).......... 452,400
-----------
626,400
-----------
Telecommunications--1.5%
20,900 MCI Communications Corp............ 544,706
36,500 Tele Communications, Inc.(a)....... 706,275
-----------
1,250,981
-----------
Utility-Communications--0.4%
9,100 AirTouch Communications(a)......... 278,688
600 WorldCom Inc.(a)................... 19,275
-----------
297,963
-----------
Total common stocks
(cost $31,721,047)................. 37,484,175
-----------
Principal
Amount
(000) DEBT OBLIGATIONS--44.0%
- --------
Asset Backed Securities--0.5%
Standard Credit Card Master Trust
I,
Series 1995 Class - A1
$ 400 8.25%, 1/7/07 (cost $444,938)...... 438,872
-----------
Corporate Bonds--7.2%
African Development Bank,
400 7.70%, 7/15/02..................... 424,732
(Banking)
American General Finance Corp.,
400 7.25%, 5/15/05..................... 412,132
(Financial Services)
Comdisco Inc.,
300 6.50%, 6/15/00..................... 296,730
(Commercial Services)
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Consolidated Edison Co., Inc.,
$ 300 6.625%, 2/1/02.................... $ 299,175
(Utilities)
Detroit Edison Co.,
350 6.34%, 3/15/00.................... 346,038
(Utilities)
Federal Express Corp.,
350 10.00%, 9/1/98.................... 381,836
(Shipping)
Ford Motor Credit Co.,
400 9.375%, 12/15/97.................. 424,116
(Financial Services)
General Electric Capital Corp.,
400 8.75%, 11/26/96................... 411,024
(Financial Services)
General Motors Acceptance Corp.,
400 9.625%, 5/15/00................... 447,896
(Financial Services)
Greyhound Financial Corp.,
100 8.50%, 5/1/98..................... 104,629
(Financial Services)
Hanson PLC.,
400 7.375%, 1/15/03................... 413,828
(Industrial) (United Kingdom)
International Lease Finance Corp.,
200 5.50%, 4/1/97..................... 197,634
(Financial Services)
Lehman Brothers, Inc.,
200 7.125%, 7/15/02................... 198,082
(Financial Services)
Norwest Corp.,
300 7.125%, 4/1/00.................... 307,899
(Banking)
Salomon, Inc.,
200 8.64%, 2/27/98.................... 207,340
(Financial Services)
</TABLE>
See Notes to Financial Statements.
B-47
<PAGE>
THE PRUDENTIAL BALANCED FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
Corporate Bonds, cont'd.
Sears Roebuck & Co.,
$ 100 9.48%, 7/24/01.................... $ 113,359
(Retail)
Sears Roebuck Acceptance Corp.,
300 6.75%, 9/15/05.................... 297,726
(Financial Services)
Texas Utilities Co.,
300 6.375%, 8/1/97.................... 299,787
(Utilities)
Union Oil Co.,
300 7.75%, 4/20/05.................... 316,758
-----------
(Petroleum)
Total corporate bonds
(cost $5,852,940)................. 5,900,721
-----------
U. S. Government Securities--36.3%
United States Treasury Bonds,
1,600 10.75%, 8/15/05................... 2,120,256
6,300 11.25%, 2/15/15................... 9,473,625
United States Treasury Notes,
3,700 6.00%, 11/30/97................... 3,709,250
400 5.625%, 1/31/98................... 397,688
4,325 9.00%, 5/15/98.................... 4,644,661
5,500 6.375%, 1/15/99................... 5,565,285
2,000 7.50%, 10/31/99................... 2,105,940
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
- ------------------------------------------------------------
<C> <S> <C>
United States Treasury Notes,
$ 150 7.75%, 11/30/99................... $ 159,421
1,100 6.375%, 8/15/02................... 1,116,324
500 7.25%, 8/15/04.................... 534,610
-----------
Total U. S. Government Securities
(cost $29,249,979).............. 29,827,060
-----------
Total debt obligations
(cost $35,547,857).............. 36,166,653
-----------
Total long-term investments
(cost $67,268,904).............. 73,650,828
-----------
SHORT-TERM INVESTMENT
Repurchase Agreement--8.9%
7,338 Joint Repurchase Agreement
Account,
6.39%, 10/2/95 (Note 5)
(cost $7,338,000)............... 7,338,000
-----------
Total Investments--98.6%
(cost $74,606,904; Note 4)........ 80,988,828
Other assets in excess of
liabilities--1.4%................. 1,121,118
-----------
Net Assets--100%.................. $82,109,946
-----------
-----------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
See Notes to Financial Statements.
B-48
<PAGE>
THE PRUDENTIAL INCOME FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
LONG-TERM INVESTMENTS--95.9%
Asset Backed Securities--4.0%
Nationsbank Credit Card Trust,
$ 500 Series 1995-1, 6.45%, 4/15/03.... $ 501,875
Prime Credit Card
500 Series 1995-1, 6.75%, 11/15/05... 500,000
Standard Credit Card Trust,
500 Series 1994-4, 8.25%, 11/07/03... 541,090
500 Series 1995-1, 8.25%, 1/07/07.... 548,590
------------
Total asset backed securities
(cost $2,084,823)................ 2,091,555
------------
Corporate Bonds--23.9%
African Development Bank,
500 7.75%, 12/15/01.................. 529,150
(Financial Services)
American General Finance Corp.,
500 7.25%, 5/15/05................... 515,165
(Financial Services)
Associates Corp. of North
America,
(Financial Services)
500 6.625%, 6/15/05.................. 493,845
400 7.25%, 5/15/98................... 409,296
Columbia Healthcare Corp,
500 7.58%, 9/15/25................... 512,500
(Hospital Management)
Comdisco Inc.,
500 6.50%, 6/15/00................... 494,550
(Commercial Services)
Detroit Edison Co.,
500 6.34%, 3/15/00................... 494,340
(Utilities)
Digital Equipment Corp.,
250 7.125%, 10/15/02................. 243,505
(Electronics)
Dresdner Bank AG,
500 7.25%, 9/15/15................... 501,040
(Banking) (Germany)
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
- -------------------------------------------------------------
<C> <S> <C>
Equity Lord Realty Corp.,
$ 300 10.50%, 12/30/97................. $ 316,875
(Real Estate)
Federal Express Corp.,
500 10.00%, 9/01/98.................. 545,480
(Shipping)
General Electric Capital Corp.,
500 7.95%, 2/02/98................... 518,360
(Financial Services)
General Motors Acceptance Corp.,
350 8.00%, 4/10/97................... 358,981
(Financial Services)
Grand Metropolitan Investment
Corp.,
800 Zero Coupon, 1/06/04............. 454,656
(Financial Services) (United Kingdom)
Household Finance Corp.,
1,000 6.375%, 6/30/00.................. 993,560
(Financial Services)
Hydro Quebec,
500 8.00%, 2/01/13................... 525,450
(Utilities) (Canada)
IC Industries Financial Corp.,
705 8.00%, 7/01/96................... 714,166
(Financial Services)
Intermediate American Development
Bank,
435 8.50%, 3/15/11................... 501,046
(Banking)
International Lease Finance
Corp.,
300 5.50%, 4/01/97................... 296,451
(Financial Services)
Lehman Brothers Holdings, Inc.,
400 7.625%, 7/15/99.................. 409,120
(Financial Services)
Petroliam Nasional Berhad,
500 7.75%, 8/15/15................... 511,100
(Petroleum)
</TABLE>
See Notes to Financial Statements.
B-49
<PAGE>
THE PRUDENTIAL INCOME FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
Corporate Bonds, cont'd.
Salomon, Inc.,
$ 400 8.64%, 2/27/98................... $ 414,680
(Financial Services)
Sears Roebuck Acceptance Corp.,
500 6.75%, 9/15/05................... 496,210
(Financial Services)
SunAmerica, Inc.,
275 6.58%, 1/15/02................... 270,281
(Insurance)
Tenneco Credit Corp.,
400 10.125%, 12/01/97................ 428,396
(Financial Services)
Time Warner Inc.,
300 9.15%, 2/01/23................... 325,533
(Media)
Union Bank Finland, Ltd.,
250 5.25%, 6/15/96................... 247,670
------------
(Banking) (Finland)
Total corporate bonds
(cost $12,342,321)............... 12,521,406
------------
Foreign Government Obligations--1.9%
New Zealand Government Bond,
500 10.50%, 7/16/00.................. 541,721
Province of Quebec,
400 9.00%, 5/08/01................... 438,952
------------
Total foreign government
obligations
(cost $1,015,099)................ 980,673
------------
U.S. Government and Agency Securities--66.1%
Federal Home Loan Mortgage Corp.,
802 7.00%, 7/01/08................... 804,823
500 7.00%, 8/15/23................... 486,405
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
Federal National Mortgage Assn.,
$ 500 6.50%, 2/25/24................... $ 463,905
1,000(a) 6.50%, 15 yr..................... 986,250
1,000(a) 6.50%, 30 yr..................... 964,370
2,268 7.00%, 9/25/23 - 7/01/24......... 2,236,387
2,000(a) 7.50%, 30 yr..................... 2,012,500
1,444 8.00%, 9/01/09 - 7/01/24......... 1,478,962
1,493 9.50%, 1/01/25 - 3/01/25......... 1,577,843
Government National Mortgage
Assn.,
843 7.00%, 2/15/09................... 849,303
2,441(b) 7.00%, 30 yr..................... 2,413,594
697 7.50%, 12/15/22 - 7/15/23........ 707,019
1,261 9.00%, 9/15/19 - 7/15/21......... 1,336,782
Tennessee Valley Authority,
600 7.25%, 7/15/43................... 590,646
United States Treasury Bonds,
200 7.625%, 2/15/25.................. 226,468
450 9.00%, 11/15/18.................. 573,327
200 9.25%, 2/15/16................... 257,406
1,000 10.75%, 8/15/05.................. 1,325,160
1,350 12.00%, 8/15/13.................. 1,986,403
United States Treasury Notes,
3,350 5.25%, 7/31/98................... 3,292,414
650 5.625%, 1/31/98.................. 646,243
1,500 5.75%, 10/31/97.................. 1,496,955
500 5.875%, 3/31/99.................. 498,670
600 6.25%, 2/15/03................... 603,372
150 6.375%, 8/15/02.................. 152,226
2,400 6.375%, 1/15/99.................. 2,428,488
2,100 8.625%, 8/15/97.................. 2,202,375
United States Treasury Strips,
1,500 Zero Coupon, 2/15/08............. 676,680
2,000 Zero Coupon, 8/15/08............. 870,400
700 Zero Coupon, 8/15/11............. 244,657
500 Zero Coupon, 11/15/11............ 171,485
------------
Total U.S. government and
agency securities
(cost $33,818,383)............... 34,561,518
------------
</TABLE>
See Notes to Financial Statements.
B-50
<PAGE>
THE PRUDENTIAL INCOME FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
- -------------------------------------------------------------
<C> <S> <C>
Total long-term investments
(cost $49,260,626)............... $ 50,155,152
------------
SHORT-TERM INVESTMENT
Repurchase Agreement--14.3%
Joint Repurchase Agreement
$ 7,478 Account,
6.39%, 10/2/95 (Note 5)
(cost $7,478,000)................ 7,478,000
------------
Total Investments--110.2%
(cost $56,738,626; Note 4)....... 57,633,152
Liabilities in excess of other
assets--(10.2%).................. (5,335,785)
------------
Net Assets--100%................. $ 52,297,367
------------
------------
</TABLE>
- ---------------
(a) Mortgage dollar roll, see Note 1.
(b) $2,000,000 of principal amount is a mortgage dollar roll, see Note 1.
See Notes to Financial Statements.
B-51
<PAGE>
THE PRUDENTIAL MONEY MARKET FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
BANK HOLDING PAPER--4.8%
Bank of New York, Inc.,
5.87%, 10/27/95
$ 2,800 (amortized cost $2,788,129)...... $ 2,788,129
------------
COMMERCIAL PAPER -
DOMESTIC--36.6%
Aristar, Inc.,
2,000 5.80%, 10/17/95.................. 1,994,844
800 5.82%, 10/19/95.................. 797,672
Caterpillar Financial Services
N.V.,
489 5.67%, 11/21/95.................. 485,072
Chrysler Financial Corp.,
400 5.85%, 10/27/95.................. 398,310
Countrywide Funding Corp.,
2,050 5.80%, 10/31/95.................. 2,040,092
Dayton Hudson Corp.,
2,800 5.78%, 10/25/95.................. 2,789,211
Finova Capital Corp.,
2,100 5.83%, 10/11/95.................. 2,096,599
735 5.90%, 11/2/95................... 731,145
Honeywell, Inc.,
470 5.80%, 11/13/95.................. 466,744
IBM Credit Corp.,
1,300 5.80%, 10/16/95.................. 1,296,858
ITT Corp.,
2,100 5.83%, 10/3/95................... 2,099,320
349 5.85%, 10/4/95................... 348,830
Nike Inc.,
988 6.75%, 10/2/95................... 987,815
Nynex Corp.,
2,800 6.80%, 10/2/95................... 2,799,471
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
- -------------------------------------------------------------
<C> <S> <C>
Public Service Elec. & Gas Co.,
$ 1,150 5.78%, 10/17/95.................. $ 1,147,046
Smith Barney, Inc.,
770 5.75%, 10/18/95.................. 767,909
------------
Total commercial paper - domestic
(amortized cost $21,246,938)..... 21,246,938
------------
CORPORATE BONDS--12.6%
Associates Corp. of North
America,
500 6.00%, 12/1/95................... 500,058
400 4.50%, 2/15/96................... 397,922
1,000 8.80%, 3/1/96.................... 1,008,706
Ford Motor Credit Corp.,
1,000 8.25%, 5/15/96................... 1,013,983
600 8.875%, 8/1/96................... 613,532
General Electric Co.,
840 7.875%, 5/1/96................... 849,202
General Motors Acceptance Corp.,
100 8.75%, 2/1/96.................... 100,850
Household Finance Corp.,
900 9.375%, 2/15/96.................. 908,981
International Lease Finance
Corp.,
430 6.875%, 12/15/95................. 430,568
375 6.625%, 6/1/96................... 376,208
NationsBank Corp.,
500 5.375%, 12/1/95.................. 499,554
Transamerica Finance Corp.,
600 8.55%, 6/15/96................... 610,567
------------
Total corporate bonds
(amortized cost $7,310,131)...... 7,310,131
------------
</TABLE>
See Notes to Financial Statements.
B-52
<PAGE>
THE PRUDENTIAL MONEY MARKET FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
DEPOSIT NOTES--2.6%
Society National Bank Cleveland,
$ 1,000 6.70%, 4/15/96................... $ 1,004,941
500 6.00%, 4/25/96................... 498,649
------------
Total deposit notes
(amortized cost $1,503,590)...... 1,503,590
------------
VARIABLE RATE OBLIGATIONS(a)--28.5%
American Express Centurion Bank,
1,000 6.26%, 10/2/95................... 1,000,245
Bank One Columbus N.A.,
2,700 6.08%, 10/2/95................... 2,698,150
FCC National Bank,
1,400 6.15%, 10/2/95................... 1,399,944
Ford Motor Credit Corp.,
200 6.14%, 12/18/95.................. 200,233
Goldman Sachs Group, L.P.,
2,700 6.00%, 10/30/95.................. 2,700,000
IBM Credit Corp.,
1,500 5.615%, 10/16/95................. 1,499,775
John Deere Capital Corp.,
1,000 6.095%, 10/23/95................. 1,001,783
John Deere Owner Trust,
1,460 5.8125%, 10/16/95................ 1,460,089
Key Bank New York,
1,400 6.49%, 10/2/95................... 1,398,953
Lehman Brothers, Inc.,
1,000 6.11%, 10/24/95.................. 1,000,000
Merrill Lynch & Co., Inc.,
500 5.885%, 10/2/95.................. 500,000
Money Market Auto Loan Trust,
700 6.005%, 10/16/95................. 700,000
Morgan Stanley Group, Inc.,
1,000 6.00%, 11/15/95.................. 1,000,000
------------
Total variable rate obligations
(amortized cost $16,559,172)..... 16,559,172
------------
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
- -------------------------------------------------------------
LOAN PARTICIPATIONS--4.8%
Engelhard Corp.,
$ 800 6.20%, 10/2/95................... $ 800,000
General Electric Capital Corp.,
2,000 6.00%, 10/2/95................... 2,000,000
------------
Total loan participations
(amortized cost $2,800,000)...... 2,800,000
------------
MEDIUM-TERM OBLIGATIONS--9.1%
Associates Corp. of North
America,
100 4.68%, 3/29/96................... 99,143
Deere & Co.,
1,000 8.47%, 3/18/96................... 1,011,224
Ford Motor Credit Corp.,
1,000 5.15%, 3/15/96................... 993,295
General Motors Acceptance Corp.,
2,100 4.80%, 11/15/95.................. 2,095,777
570 4.75%, 2/14/96................... 567,268
International Lease Finance
Corp.,
500 5.00%, 5/28/96................... 496,536
------------
Total medium-term obligations
(amortized cost $5,263,243)...... 5,263,243
------------
Total Investments--99.0%
(amortized cost
$57,471,203(b))................ 57,471,203
Other assets in excess of
liabilities--1.0%.............. 582,874
------------
Net Assets--100%................. $ 58,054,077
------------
------------
</TABLE>
- ---------------
(a) For purposes of amortized cost valuation, the maturity
date of these instruments is considered to be the next
date on which the security can be redeemed at par or the
next date on which the rate of interest is adjusted.
(b) The cost of securities for federal income tax purposes is
substantially the same as for financial reporting
purposes.
See Notes to Financial Statements.
B-53
<PAGE>
THE PRUDENTIAL MONEY MARKET FUND
[LOGO] INSTITUTIONAL PORTFOLIO OF INVESTMENTS
FUND SEPTEMBER 30, 1995
The industry classification of portfolio holdings and other net
assets shown as a percentage of net assets as of September 30,
1995 were as follows:
<TABLE>
<S> <C>
Personal Credit Institutions.......... 20.1%
Business Credit (Finance)............. 11.6
Bank Holding Co....................... 10.3
Security Brokers & Dealers............ 10.3
Commercial Banks...................... 9.1
Financial Services.................... 9.0
Telecommunications.................... 4.8
Variety Store......................... 4.8
Asset Backed.......................... 3.7
Mortgage Bankers...................... 3.5
Farm Machinery........................ 3.5
Equip. Rental & Leasing............... 2.2
Electric Services..................... 2.0
Footwear.............................. 1.7
Chemicals-Specialty................... 1.4
Regulating Controls................... 1.0
Other assets in excess of liabilities 1.0
-----
100.0%
-----
-----
</TABLE>
See Notes to Financial Statements.
B-54
<PAGE>
THE PRUDENTIAL STATEMENT OF ASSETS
[LOGO] INSTITUTIONAL AND LIABILITIES
FUND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
GROWTH STOCK INTERNATIONAL ACTIVE MONEY
STOCK INDEX STOCK BALANCED BALANCED INCOME MARKET
FUND FUND FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C>
------------ ------------ ------------- ------------ ----------- ----------- -----------
Assets
Investments, at value
(a)...................... $222,374,363 $ 96,471,101 $137,331,985 $133,506,023 $80,988,828 $57,633,152 $57,471,203
Cash....................... -- -- 184 417 872 897 440
Foreign currency, at value
(cost $153,643).......... -- -- 153,891 -- -- -- --
Receivable for investments
sold..................... 1,199,509 5,941,403 -- 176,030 1,133,257 -- --
Interest and dividends
receivable............... 162,987 206,021 404,440 641,767 685,304 563,134 386,072
Receivable for Fund shares
sold..................... 789,547 361,069 323,593 191,349 207,730 58,336 227,193
Due from Manager........... -- 1,754 -- -- -- 4,635 --
Deferred expenses and other
assets................... 29,670 32,252 29,485 30,735 28,919 31,988 30,486
------------ ------------ ------------- ------------ ----------- ----------- -----------
Total assets........... 224,556,076 103,013,600 138,243,578 134,546,321 83,044,910 58,292,142 58,115,394
------------ ------------ ------------- ------------ ----------- ----------- -----------
Liabilities
Payable for investments
purchased................ 2,555,583 872,222 987,689 1,013,369 667,995 5,934,375 --
Payable for Fund shares
reacquired............... 1,286,353 85,455 314,389 46,984 155,532 11,863 34,386
Accrued expenses........... 77,378 70,888 148,784 51,045 44,922 42,870 16,633
Due to broker-variation
margin................... -- 29,670 -- -- -- -- --
Management fee payable..... 107,403 -- 92,756 68,472 57,582 -- 3,953
Administration fee
payable.................. 23,965 10,799 14,738 14,564 8,933 5,667 6,345
------------ ------------ ------------- ------------ ----------- ----------- -----------
Total liabilities...... 4,050,682 1,069,034 1,558,356 1,194,434 934,964 5,994,775 61,317
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net Assets................. $220,505,394 $101,944,566 $136,685,222 $133,351,887 $82,109,946 $52,297,367 $58,054,077
------------ ------------ ------------- ------------ ----------- ----------- -----------
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net assets were comprised
of:
Shares of beneficial
interest, at par......... $ 13,604 $ 7,169 $ 8,964 $ 10,703 $ 6,576 $ 5,238 $ 58,054
Paid-in capital in excess
of par................... 169,441,843 80,650,936 121,007,773 116,928,121 71,932,999 52,130,203 57,996,023
------------ ------------ ------------- ------------ ----------- ----------- -----------
169,455,447 80,658,105 121,016,737 116,938,824 71,939,575 52,135,441 58,054,077
Undistributed net
investment income........ -- 1,562,991 1,582,613 2,883,961 1,706,435 -- --
Accumulated net realized
gain (loss) on
investments.............. (3,016,003) 4,001,988 (3,235,336 ) 1,414,649 2,082,012 (732,600) --
Net unrealized appreciation
(depreciation) on
investments and foreign
currencies............... 54,065,950 15,721,482 17,321,208 12,114,453 6,381,924 894,526 --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net assets, September 30,
1995..................... $220,505,394 $101,944,566 $136,685,222 $133,351,887 $82,109,946 $52,297,367 $58,054,077
------------ ------------ ------------- ------------ ----------- ----------- -----------
------------ ------------ ------------- ------------ ----------- ----------- -----------
Shares of beneficial
interest issued and
outstanding.............. 13,604,202 7,168,801 8,964,457 10,703,173 6,575,791 5,237,904 58,054,077
------------ ------------ ------------- ------------ ----------- ----------- -----------
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net asset value per
share.................... $ 16.21 $ 14.22 $ 15.25 $ 12.46 $ 12.49 $ 9.98 $ 1.00
------------ ------------ ------------- ------------ ----------- ----------- -----------
------------ ------------ ------------- ------------ ----------- ----------- -----------
(a) Identified cost........ $168,308,413 $ 80,942,844 $120,016,426 $121,391,570 $74,606,904 $56,738,626 $57,471,203
</TABLE>
See Notes to Financial Statements.
B-55
<PAGE>
THE PRUDENTIAL STATEMENT OF
[LOGO] INSTITUTIONAL OPERATIONS
FUND YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
GROWTH STOCK INTERNATIONAL ACTIVE MONEY
STOCK INDEX STOCK BALANCED BALANCED INCOME MARKET
FUND FUND FUND FUND FUND FUND FUND
------------ ------------ ------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Investment Income
Income
Interest................. $ 198,002 $ 637,099 $ 499,812 $ 3,847,389 $ 2,407,512 $ 3,187,231 $ 3,128,647
Dividends (a)............ 1,190,186 1,623,115 3,287,355 896,599 560,304 -- --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Total income........... 1,388,188 2,260,214 3,787,167 4,743,988 2,967,816 3,187,231 3,128,647
------------ ------------ ------------- ------------ ----------- ----------- -----------
Expenses
Management fee........... 1,049,893 286,843 1,367,665 733,748 496,395 231,931 236,009
Administration fee....... 201,075 96,138 159,439 140,527 95,069 62,187 70,311
Custodian's fees and
expenses................. 88,000 124,000 280,000 74,000 72,000 65,000 73,000
Registration fees........ 63,000 35,000 32,000 60,000 23,000 25,000 30,000
Transfer agent's fees and
expenses............... 36,092 17,256 28,618 25,224 17,064 11,162 12,621
Reports to
shareholders............. 25,000 25,000 25,000 13,000 25,000 13,000 13,000
Amortization of
organization
expenses............... 13,385 13,385 13,385 13,213 13,385 13,049 13,213
Legal fees............... 11,000 11,000 15,000 11,000 11,000 11,000 11,000
Audit fee................ 12,000 11,000 15,000 12,000 11,000 11,000 9,000
Trustees' fees........... 8,572 8,572 8,572 8,572 8,572 8,572 8,572
Miscellaneous............ 6,056 4,525 5,856 5,244 4,762 4,256 4,382
------------ ------------ ------------- ------------ ----------- ----------- -----------
Total expenses......... 1,514,073 632,719 1,950,535 1,096,528 777,247 456,157 481,108
Expense subsidy (Note
2)..................... (14,225) (202,456) (47,700) (48,317) (68,112) (131,453) (166,428)
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net expenses............... 1,499,848 430,263 1,902,835 1,048,211 709,135 324,704 314,680
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net investment income
(loss)................... (111,660) 1,829,951 1,884,332 3,695,777 2,258,681 2,862,527 2,813,967
------------ ------------ ------------- ------------ ----------- ----------- -----------
Realized and Unrealized
Gain (Loss) on Investment
and Foreign Currency
Transactions
Net realized gain (loss)
on:
Securities............... 820,651 1,869,439 (2,892,161) 1,585,229 2,197,085 92,951 --
Futures transactions..... -- 2,175,415 -- -- -- -- --
Foreign currency
transactions............. (5,798) -- (192,785) -- (1,009) -- --
------------ ------------ ------------- ------------ ----------- ----------- -----------
814,853 4,044,854 (3,084,946) 1,585,229 2,196,076 92,951 --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net change in unrealized
appreciation
(depreciation) on:
Securities and foreign
currencies............... 47,538,274 13,632,300 9,333,213 12,809,504 6,413,335 2,865,097 --
Financial futures
contracts................ -- 282,600 -- -- -- -- --
------------ ------------ ------------- ------------ ----------- ----------- -----------
47,538,274 13,914,900 9,333,213 12,809,504 6,413,335 2,865,097 --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net gain on investments and
foreign currencies....... 48,353,127 17,959,754 6,248,267 14,394,733 8,609,411 2,958,048 --
------------ ------------ ------------- ------------ ----------- ----------- -----------
Net Increase in Net Assets
Resulting from
Operations................. $ 48,241,467 $ 19,789,705 $8,132,599 $ 18,090,510 $10,868,092 $ 5,820,575 $ 2,813,967
------------ ------------ ------------- ------------ ----------- ----------- -----------
------------ ------------ ------------- ------------ ----------- ----------- -----------
(a)Net of foreign withholding taxes of $26,902, $11,248, $461,615, $3,187, $10,097, respectively.
</TABLE>
See Notes to Financial Statements.
B-56
<PAGE>
THE PRUDENTIAL STATEMENT OF CHANGES
[LOGO] INSTITUTIONAL IN NET ASSETS
FUND
<TABLE>
<CAPTION>
GROWTH STOCK INTERNATIONAL
STOCK INDEX STOCK
FUND FUND FUND
--------------------------- ---------------------------- -------------------------
Year Ended September 30, Year Ended September 30, Year Ended September 30,
--------------------------- ---------------------------- -------------------------
1995 1994 1995 1994 1995
------------ ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Assets
Operations
Net investment income
(loss)............... $(111,660) $25,287 $1,829,951 $892,321 $1,884,332
Net realized gain
(loss) on investments
and foreign currency
transactions......... 814,853 (3,778,648) 4,044,854 186,406 (3,084,946)
Net change in
unrealized
appreciation
(depreciation) on
investments and
foreign currencies... 47,538,274 3,531,929 13,914,900 380,870 9,333,213
------------ ------------- ------------- ------------- ------------
Net increase (decrease)
in net assets
resulting from
operations........... 48,241,467 (221,432) 19,789,705 1,459,597 8,132,599
------------ ------------- ------------- ------------- ------------
Net equalization
credits................. -- 44,776 -- 289,937 --
------------ ------------- ------------- ------------- ------------
Dividends and
distributions
Dividends to
shareholders from net
investment income.... (48,781) (43,709) (1,015,394) (481,228) (750,797)
------------ ------------- ------------ -------------- ------------
Distributions to
shareholders from net
realized gains....... -- (131,129) (165,297) (106,939) (2,440,090)
------------ ------------- ------------ -------------- ------------
Fund share transactions
Net proceeds from
shares sold.......... 138,943,130 80,605,272 52,960,096 29,356,230 93,624,206
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions........ 48,781 174,838 1,180,691 588,167 3,190,887
Cost of shares
redeemed............. (73,635,171) (21,470,653) (20,924,559) (8,128,767) (67,895,915)
------------ ------------- ------------- ------------- ------------
Net increase in net
assets from Fund
share transactions... 65,356,740 59,309,457 33,216,228 21,815,630 28,919,178
------------ ------------- ------------ ------------- ------------
Net increase............ 113,549,426 58,957,963 51,825,242 22,976,997 33,860,890
Net Assets
Beginning of year...... 106,955,968 47,998,005 50,119,324 27,142,327 102,824,332
------------ ------------- ------------ ------------- ------------
End of year...... ...... $220,505,394 $106,955,968 $101,944,566 $50,119,324 $136,685,222
------------ ------------- ------------ ------------- ------------
------------ ------------- ------------ ------------- ------------
<CAPTION>
INTERNATIONAL ACTIVE
STOCK BALANCED
FUND FUND
--------------------------- ----------------------------
Year Ended September 30, Year Ended September 30,
--------------------------- ----------------------------
1994 1995 1994
------------ ------------- ------------
<S> <C> <C> <C>
Increase (Decrease) in
Net Assets
Operations
Net investment income
(loss)............... $ 736,785 $ 3,695,777 $ 1,805,400
Net realized gain
(loss) on investments
and foreign currency
transactions........ . 2,235,681 1,585,229 119,065
Net change in
unrealized
appreciation
(depreciation) on
investments and
foreign currencies... 5,701,535 12,809,504 (1,395,057)
------------- ------------- -------------
Net increase (decrease)
in net assets
resulting from
operations......... .. 8,674,001 18,090,510 529,408
------------- ------------- -------------
Net equalization
credits................. 695,692 -- 296,744
------------- ------------- -------------
Dividends and
distributions
Dividends to
shareholders from net
investment incom e.... (98,619) (2,260,245) (503,768)
------------- ------------- -------------
Distributions to
shareholders from net
realized gains....... (493,097) (272,788) (395,817)
------------- ------------- -------------
Fund share transactions
Net proceeds from
shares sold.......... 86,220,384 54,908,716 56,588,609
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions........ 591,716 2,533,033 899,585
Cost of shares
redeemed............. (24,473,332) (20,823,769) (15,023,860)
------------- ------------- --------------
Net increase in net
assets from Fund
share transactions... 62,338,768 36,617,980 42,464,334
------------- ------------- --------------
Net increase............ 71,116,745 52,175,457 42,390,901
Net Assets
Beginning of year...... 31,707,587 81,176,430 38,785,529
------------- ------------- --------------
End of year............ $ 102,824,332 $ 133,351,887 $81,176,430
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
See Notes to Financial Statements.
B-57
<PAGE>
THE PRUDENTIAL STATEMENT OF CHANGES
[LOGO] INSTITUTIONAL IN NET ASSETS
FUND
<TABLE>
<CAPTION>
MONEY
BALANCED INCOME MARKET
FUND FUND FUND
------------------------------- ------------------------------- -------------------------------
Year Ended September 30, Year Ended September 30, Year Ended September 30,
------------------------------- ------------------------------- -------------------------------
1995 1994 1995 1994 1995 1994
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in
Net Assets
Operations
Net investment
income............... $ 2,258,681 $ 1,261,344 $ 2,862,527 $ 1,982,080 $ 2,813,967 $ 1,276,052
Net realized gain
(loss) on investments
and foreign currency
transactions......... 2,196,076 163,359 92,951 (826,533) -- 1,550
Net change in
unrealized
appreciation
(depreciation) on
investments and
foreign currencies... 6,413,335 (1,878,445) 2,865,097 (2,659,530) -- --
------------- ------------- ------------- ------------- ------------- -------------
Net increase (decrease)
in net assets
resulting from
operations........... 10,868,092 (453,742) 5,820,575 (1,503,983) 2,813,967 1,277,602
------------- ------------- ------------- ------------- ------------- -------------
Net equalization
credits................ -- 721,188 -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Dividends and
distributions
Dividends to
shareholders from net
investment income.... (1,529,788) (604,065) (2,862,527) (1,982,080) (2,813,967) (1,277,602)
------------- ------------- ------------- ------------- ------------- -------------
Distributions to
shareholders from net
realized gains....... (269,963) (735,383) -- (137,236) -- --
------------- ------------- ------------- ------------- ------------- -------------
Fund share transactions
Net proceeds from
shares sold.......... 26,091,264 42,441,610 11,549,255 15,768,473 55,919,976 32,311,167
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions........ 1,799,751 1,339,448 2,862,527 2,119,316 2,813,967 1,277,602
Cost of shares
redeemed............. (19,161,993) (6,059,058) (6,473,780) (7,878,160) (47,010,598) (17,493,001)
------------- ------------- ------------- ------------- ------------- -------------
Net increase in net
assets from Fund
share transactions... 8,729,022 37,722,000 7,938,002 10,009,629 11,723,345 16,095,768
------------- ------------- ------------- ------------- ------------- -------------
Net increase............ 17,797,363 36,649,998 10,896,050 6,386,330 11,723,345 16,095,768
Net Assets
Beginning of year...... 64,312,583 27,662,585 41,401,317 35,014,987 46,330,732 30,234,964
------------- ------------- ------------- ------------- ------------- -------------
End of year............ $ 82,109,946 $64,312,583 $52,297,367 $41,401,317 $ 58,054,077 $46,330,732
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
</TABLE>
See Notes to Financial Statements.
B-58
<PAGE>
THE PRUDENTIAL FINANCIAL HIGHLIGHTS
[LOGO] INSTITUTIONAL
FUND
<TABLE>
<CAPTION>
GROWTH STOCK
STOCK INDEX
FUND FUND
---------------------------------------------- ---------
November 5, Year Ended
1992(a) September
Year Ended September 30, Through 30,
---------------------------- September 30, ---------
1995 1994 1993 1995
--------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 12.00 $ 12.10 $ 10.00 $ 11.27
--------- ------------- ------------- ---------
Income from investment operations:
Net investment income(b)...................... -- -- .04 .23
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions................................. 4.22 (.06) 2.08 2.97
--------- ------------- ------------- ---------
Total from investment operations............. 4.22 (.06) 2.12 3.20
--------- ------------- ------------- ---------
Less distributions:
Dividends from net investment income.......... (.01) (.01) (.02) (.22)
Distributions from net realized gains......... -- (.03) -- (.03)
--------- ------------- ------------- ---------
Total distributions........................... (.01) (.04) (.02) (.25)
--------- ------------- ------------- ---------
Net asset value, end of period................ $ 16.21 $ 12.00 $ 12.10 $ 14.22
--------- ------------- ------------- ---------
--------- ------------- ------------- ---------
TOTAL RETURN(d)............................... 35.14% (0.50)% 21.22% 29.02%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 220,505 $ 106,956 $47,998 $ 101,945
Average net assets (000)...................... $ 149,985 $ 71,449 $17,592 $ 71,711
Ratios to average net assets: (b)
Expenses..................................... 1.00% 1.00% 1.00%(c) .60%
Net investment income........................ (.07)% .04% .31%(c) 2.55%
Portfolio turnover rate....................... 64% 65% 84% 11%
<CAPTION>
STOCK
INDEX
FUND
--------------------------------
November 5,
1992(a)
Year Ended Through
September 30, September 30,
1994 1993
------------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 11.12 $ 10.00
------------- -------------
Income from investment operations:
Net investment income(b)...................... .26 .23
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions................................. .11 .94
------------- -------------
Total from investment operations............. .37 1.17
------------- -------------
Less distributions:
Dividends from net investment income.......... (.18) (.05)
Distributions from net realized gains......... (.04) --
------------- -------------
Total distributions........................... (.22) (.05)
------------- -------------
Net asset value, end of period................ $ 11.27 $ 11.12
------------- -------------
------------- -------------
TOTAL RETURN(d)............................... 3.33% 11.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $50,119 $27,142
Average net assets (000)...................... $38,098 $18,807
Ratios to average net assets: (b)
Expenses..................................... .60% .60%(c)
Net investment income........................ 2.34% 2.41%(c)
Portfolio turnover rate....................... 2% 1%
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) 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 return for periods of less than a full year are not
annualized. Total return includes the effect of expense subsidies.
</TABLE>
See Notes to Financial Statements.
B-59
<PAGE>
THE PRUDENTIAL FINANCIAL HIGHLIGHTS
[LOGO] INSTITUTIONAL
FUND
<TABLE>
<CAPTION>
ACTIVE
BALANCED
INTERNATIONAL FUND
STOCK ---------
FUND
---------------------------------------------- Year
November 5, Ended
1992(a) September
Year Ended September 30, Through 30,
---------------------------- September 30, ---------
1995 1994 1993 1995
--------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 14.84 $ 12.35 $ 10.00 $ 10.92
--------- ------------- ------------- ---------
Income from investment operations:
Net investment income(b)...................... .18 .13 .16 .33
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions................................. .66 2.54 2.21 1.54
--------- ------------- ------------- ---------
Total from investment operations............. .84 2.67 2.37 1.87
--------- ------------- ------------- ---------
Less distributions:
Dividends from net investment income.......... (.10) (.03) (.02) (.29)
Distributions from net realized gains......... (.33) (.15) -- (.04)
--------- ------------- ------------- ---------
Total distributions........................... (.43) (.18) (.02) (.33)
--------- ------------- ------------- ---------
Net asset value, end of period................ $ 15.25 $ 14.84 $ 12.35 $ 12.46
--------- ------------- ------------- ---------
--------- ------------- ------------- ---------
TOTAL RETURN(d)............................... 5.95% 21.71% 23.74% 17.66%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 136,685 $ 102,824 $31,708 $ 133,352
Average net assets (000)...................... $ 118,927 $ 68,476 $14,491 $ 104,821
Ratios to average net assets:(b)
Expenses..................................... 1.60% 1.60% 1.60%(c) 1.00%
Net investment income........................ 1.58% 1.08% 1.44%(c) 3.53%
Portfolio turnover rate....................... 20% 21% 15% 30%
<CAPTION>
ACTIVE
BALANCE
FUND
--------------------------------
January 4,
1993(a)
Year Ended Through
September 30, September 30,
1994 1993
------------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 11.05 $ 10.00
------------- -------------
Income from investment operations:
Net investment income(b)...................... .24 .21
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions................................. (.12) .84
------------- -------------
Total from investment operations............. .12 1.05
------------- -------------
Less distributions:
Dividends from net investment income.......... (.14) --
Distributions from net realized gains......... (.11) --
------------- -------------
Total distributions........................... (.25) --
------------- -------------
Net asset value, end of period................ $ 10.92 $ 11.05
------------- -------------
------------- -------------
TOTAL RETURN(d)............................... 1.07% 10.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $81,176 $38,786
Average net assets (000)...................... $58,992 $12,815
Ratios to average net assets:(b)
Expenses..................................... 1.00% 1.00%(c)
Net investment income........................ 3.06% 2.68%(c)
Portfolio turnover rate....................... 40% 47%
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) 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 return for periods of less than a full year are not
annualized. Total return includes the effect of expense subsidies.
</TABLE>
See Notes to Financial Statements.
B-60
<PAGE>
THE PRUDENTIAL FINANCIAL HIGHLIGHTS
[LOGO] INSTITUTIONAL
FUND
<TABLE>
<CAPTION>
BALANCED INCOME
FUND FUND
---------------------------------------------- ---------
November 5,
1992(a) Year Ended
Year Ended September 30, Through September 30,
---------------------------- September 30, ---------
1995 1994 1993 1995
--------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 11.08 $ 11.80 $ 10.00 $ 9.38
--------- ------------- ------------- ---------
Income from investment operations:
Net investment income(b)...................... .18 .31 .31 .59
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions................................. 1.53 (.52) 1.54 .60
--------- ------------- ------------- ---------
Total from investment operations............. 1.71 (.21) 1.85 1.19
--------- ------------- ------------- ---------
Less distributions:
Dividends from net investment income.......... (.25) (.23) (.05) (.59)
Distributions from net realized gains......... (.05) (.28) -- --
--------- ------------- ------------- ---------
Total distributions........................... (.30) (.51) (.05) (.59)
--------- ------------- ------------- ---------
Net asset value, end of period................ $ 12.49 $ 11.08 $ 11.80 $ 9.98
--------- ------------- ------------- ---------
--------- ------------- ------------- ---------
TOTAL RETURN(d)............................... 15.90% (1.88)% 18.58% 13.11%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $82,110 $64,313 $27,663 $52,297
Average net assets (000)...................... $70,914 $44,048 $17,401 $46,386
Ratios to average net assets: (b)
Expenses..................................... 1.00% 1.00% 1.00%(c) .70%
Net investment income........................ 3.19% 2.86% 3.16%(c) 6.17%
Portfolio turnover rate....................... 65% 52% 74% 145%
<CAPTION>
INCOME
FUND
--------------------------------
March 1,
1993(a)
Year Ended Through
September 30, September 30,
1994 1993
------------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 10.33 $ 10.00
------------- -------------
Income from investment operations:
Net investment income(b)...................... .52 .27
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions................................. (.91) .33
------------- -------------
Total from investment operations............. (.39) .60
------------- -------------
Less distributions:
Dividends from net investment income.......... (.52) (.27)
Distributions from net realized gains......... (.04) --
------------- -------------
Total distributions........................... (.56) (.27)
------------- -------------
Net asset value, end of period................ $ 9.38 $ 10.33
------------- -------------
------------- -------------
TOTAL RETURN(d)............................... (3.91)% 6.11%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $41,401 $35,015
Average net assets (000)...................... $37,802 $25,626
Ratios to average net assets: (b)
Expenses..................................... .70% .70%(c)
Net investment income........................ 5.24% 4.62%(c)
Portfolio turnover rate....................... 83% 93%
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) 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 return for periods
of less than a full year are not annualized. Total return includes the
effect of expense subsidies.
See Notes to Financial Statements.
B-61
<PAGE>
THE PRUDENTIAL FINANCIAL HIGHLIGHTS
[LOGO] INSTITUTIONAL
FUND
<TABLE>
<CAPTION>
MONEY
MARKET
FUND
-----------------------------------------------------
January 4,
1993(a)
Year Ended September 30, Through
------------------------------- September 30,
1995 1994 1993
--------- ------------- -------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 1.00 $ 1.00 $ 1.00
Net investment income and net realized
gains(b)..................................... .05 .03 .02
Dividends from net investment income.......... (.05) (.03) (.02)
--------- ------------- -------------
Net asset value, end of period................ $ 1.00 $ 1.00 $ 1.00
--------- ------------- -------------
--------- ------------- -------------
TOTAL RETURN(d)............................... 5.47% 3.32% 2.08%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $58,054 $46,331 $30,235
Average net assets (000)...................... $52,446 $38,170 $25,296
Ratios to average net assets: (b)
Expenses..................................... .60% .60% .60%(c)
Net investment income........................ 5.37% 3.34% 2.73%(c)
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) 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 return for periods
of less than a full year are not annualized. Total return includes
the effect of expense subsidies.
See Notes to Financial Statements.
B-62
<PAGE>
THE PRUDENTIAL NOTES TO
[LOGO] INSTITUTIONAL FINANCIAL STATEMENTS
FUND
The Prudential Institutional Fund (the "Company") is registered under the
Investment Company Act of 1940 as an open-end, diversified management investment
company. The Company was established as a Delaware business trust on May 11,
1992 and consists of seven separate funds (Fund or Funds): Growth Stock Fund,
Stock Index Fund, International Stock Fund, Active Balanced Fund, Balanced Fund,
Income Fund and Money Market Fund. The Company had no operations until July 7,
1992 when 10,000 shares of beneficial interest (2,500 shares each of Growth
Stock Fund, Stock Index Fund, International Stock Fund and Balanced Fund) were
sold for $100,000 to Prudential Institutional Fund Management, Inc. ("PIFM").
Investment operations commenced on: November 5, 1992 for the Growth Stock Fund,
Stock Index Fund, International Stock Fund and Balanced Fund; January 4, 1993
for the Active Balanced Fund and Money Market Fund; and March 1, 1993 for the
Income Fund.
The Funds' investment objectives are as follows: Growth Stock Fund--long-term
growth of capital through investment primarily in equity securities of
established companies with above-average growth prospects; Stock Index
Fund--investment results that correspond to the price and yield performance of
Standard & Poor's 500 Composite Stock Price Index; International Stock
Fund--long-term growth of capital through investment in equity securities of
foreign issues with income as a secondary objective; Active Balanced Fund--total
returns approaching equity returns, while accepting less risk than an all-equity
portfolio, through an actively-managed portfolio of equity securities, fixed
income securities and money market instruments; Balanced Fund--long-term total
return consistent with moderate portfolio risk; Income Fund--a high level of
income over the longer term while providing reasonable safety of principal; and
Money Market Fund--high current income, preservation of principal and
maintenance of liquidity, while maintaining a $1.00 net asset value per share.
The ability of issuers of debt securities, other than those issued or
guaranteed by the U.S. Government, held by the Funds to meet their obligations
may be affected by economic developments in a specific industry, region, or
country.
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund.
Securities Valuations: Securities, including options, warrants, futures
contracts and options thereon, for which the primary market is on a national
securities exchange, commodities exchange or board of trade and NASDAQ national
market equity securities are valued at the last sale price on such exchange or
board of trade on the date of valuation or, if there was no sale on such day, at
the average of readily available closing bid and asked prices on such day.
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, shall be valued at the average of the most recently quoted bid
and asked prices provided by a principal market maker or dealer.
U.S. Government securities for which market quotations are available shall be
valued at a price provided by an independent broker/dealer or pricing service.
Securities for which reliable market quotations are not available or for
which the pricing agent or principal market maker does not provide a valuation
or provides a valuation that, in the judgment of one of the subadvisers, does
not represent fair value, shall be valued at fair value as determined under
procedures established by the Trustees.
Quotations of foreign securities in a foreign currency shall be converted to
U.S. dollar equivalents at the current rate obtained from a recognized bank or
dealer. Forward currency
B-63
<PAGE>
THE PRUDENTIAL NOTES TO
[LOGO] INSTITUTIONAL FINANCIAL STATEMENTS
FUND
exchange contracts shall be valued at the current cost of covering or offsetting
such contracts.
Securities held by the Money Market Fund are valued at amortized cost, which
approximates market value. The amortized cost method involves valuing a security
at its cost on the date of purchase and thereafter assuming a constant
amortization to maturity of the difference between the principal amount due at
maturity and cost. Short-term securities held by the other Funds which mature in
more than 60 days are valued at current market quotations and those which mature
in 60 days or less are valued at amortized cost. In the event that a Subadviser
determines that amortized cost does not represent fair value for certain
short-term securities with remaining maturities of 60 days or less, such
securities will be valued at market value.
In connection with transactions in repurchase agreements, it is the Company's
policy that its custodian or designated subcustodians, as the case may be under
triparty repurchase agreements, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults, and the value of the collateral declines or, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Company may be delayed or limited.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Fund is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the "initial margin." Subsequent payments, known as "variation
margin," are made or received by the Fund each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.
The Funds invest in financial futures contracts in order to hedge their
existing portfolio securities, or securities the Funds intend to purchase,
against fluctuations in value. Under a variety of circumstances, a Fund may not
achieve the anticipated benefits of the financial futures contracts and may
realized a loss. The use of futures transactions involves the risk of imperfect
correlation in movements in the price of futures contracts and the underlying
assets.
Dollar Rolls: The Fund may enter into dollar rolls in which the Fund sells
securities for delivery in the current month and simultaneously contracts to
repurchase somewhat similar securities on a specified future date. During the
roll period, the Fund forgoes principal and interest paid on the securities. The
Fund is compensated by the interest earned on the cash proceeds of the initial
sale and by the lower repurchase price at the future date.
Foreign Currency Translation: The books and records of the Funds are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(i) market value of investment securities, other assets and liabilities--at
the closing rates of exchange.
(ii) purchases and sales of investment securities, income and expenses--at
the rate of exchange
B-64
<PAGE>
THE PRUDENTIAL NOTES TO
[LOGO] INSTITUTIONAL FINANCIAL STATEMENTS
FUND
prevailing on the respective dates of such transactions.
Although the net assets of the Funds are presented at the foreign exchange
rates and market values at the close of the fiscal year, the Funds do not
isolate that portion of the results of operations arising as a result of changes
in the foreign exchange rates from the fluctuations arising from changes in the
market prices of securities held at the end of the fiscal year. Similarly, the
Funds do not isolate the effect of changes in foreign exchange rates from the
fluctuations arising from changes in the market prices of long-term portfolio
securities sold during the fiscal year. Accordingly, these realized foreign
currency gains (losses) are included in the reported net realized gains (losses)
on investment transactions.
Net realized losses on foreign currency transactions represent net foreign
exchange losses from holding of foreign currencies, currency gains or losses
realized between the trade and settlement dates of securities transactions, and
the difference between the amounts of dividends and foreign taxes recorded on
the Funds' books and the U.S. dollar equivalent amounts actually received or
paid. Net currency gains and losses from valuing foreign currency denominated
assets and liabilities at year end exchange rates are reflected as a component
of net unrealized appreciation/depreciation on securities and foreign
currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the level of governmental supervision and regulation of
foreign securities markets and the possibility of political or economic
instability.
Equalization: During the fiscal year ended September 30, 1995, the Funds
(except for the Income and Money Market Funds) discontinued the accounting
practice of equalization. Equalization is a practice whereby a portion of the
proceeds from sales and costs of repurchases of capital shares, equivalent on a
per-share basis to the amount of distributable net investment income on the date
of the transaction, is credited or charged to undistributed net investment
income. The following balances of undistributed net investment income at
September 30, 1994, resulting from equalization were transferred to paid-in
capital in excess of par for each of the respective Funds:
Growth Stock Fund $ 90,444
Stock Index Fund 398,227
International Stock Fund 881,462
Active Balanced Fund 788,116
Balanced Fund 899,912
Such reclassifications have no effect on net assets, results of operations,
or net asset value per share of the Funds.
Dividends and Distributions: Dividends and distributions of each Fund are
declared in cash and automatically reinvested in additional shares of the Fund.
The Income Fund and Money Market Fund will declare dividends of their net
investment income and, for the Money Market Fund, net capital gain (loss), daily
and distribute such dividends monthly. Each other Fund will declare and
distribute a dividend of its net investment income, if any, at least annually.
Except for the Money Market Fund, each Fund will declare and distribute its net
capital gains, if any, at least annually. Distributions of income dividends and
capital gains distributions of each Fund are made on the payment date and
reinvested at the per share net asset value as of the record date or such other
date as the Board may determine. On the "ex-dividend" date, the net asset
value per share excludes the dividend (i.e., is reduced by the amount of the
distribution).
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
B-65
<PAGE>
THE PRUDENTIAL NOTES TO
[LOGO] INSTITUTIONAL FINANCIAL STATEMENTS
FUND
Taxes: It is the Funds' policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance
with the Funds' understanding of the applicable country's tax rules and rates.
Reclassification of Capital Accounts: The Company accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies.
For the year ended September 30, 1995, the application of this statement
affected undistributed net investment income ("UNI"), accumulated net realized
gain (loss) on investments ("G/L") and paid-in capital in excess of par
("PIC") by the following amounts:
<TABLE>
<CAPTION>
UNI G/L PIC
--------- -------- ---------
<S> <C> <C> <C>
Growth Stock Fund $ 141,451 $ 5,798 $(147,249)
International Stock Fund (81,325) 81,325 --
Active Balanced Fund (107,185) 107,185 --
Balanced Fund (112,634) 112,634 --
</TABLE>
Net investment income, net realized gains and net assets were not affected by
this change.
Deferred Organizational Expenses: Approxi-
mately $450,000 of costs were incurred in connection with the organization and
initial registration of the Company and have been deferred and are being
amortized ratably over the period of benefit not to exceed 60 months from the
date each of the Funds' commenced investment operations.
Note 2. Agreements
The Company has entered into a management agreement with PIFM. Pursuant to
this agreement, PIFM has responsibility for all investment advisory services and
supervises the subadviser's performance of such services. PIFM is an indirect,
wholly-owned subsidiary of The Prudential Insurance Company of America
(Prudential).
PIFM has entered into subadvisory agreements with The Prudential Investment
Corporation ("PIC"), Jennison Associates Capital Corp. ("Jennison") and
Mercator Asset Management, Inc. ("Mercator"), each a wholly-owned subsidiary
of Prudential. Each subadviser will furnish investment advisory services in
connection with the management of the various Funds. Jennison serves as
subadviser to the Growth Stock Fund and the Active Balanced Fund. PIC serves as
subadviser to the Balanced Fund, the Stock Index Fund, the Income Fund and the
Money Market Fund. Mercator serves as subadviser to the International Stock
Fund. PIFM will pay for the costs and expenses attributable to the subadvisory
agreements and the salaries and expenses of all personnel of the Company except
for fees and expenses of unaffiliated Trustees. The Funds will bear all other
costs and expenses.
Each Fund will pay PIFM a fee for its services provided to the Fund. The fees
are computed daily and payable monthly at the annual rates specified below of
the value of each Funds' average daily net assets:
Fund Management Fee
- -------------------------- ---------------
Growth Stock Fund .70%
Stock Index Fund .40
International Stock Fund 1.15
Active Balanced Fund .70
Balanced Fund .70
Income Fund .50
Money Market Fund .45
PIFM has voluntarily agreed to subsidize a portion of the operating expenses
of the Funds until September 30, 1996. Such expenses may be recovered by PIFM
through December 31, 1996 so
B-66
<PAGE>
THE PRUDENTIAL NOTES TO
[LOGO] INSTITUTIONAL FINANCIAL STATEMENTS
FUND
long as the total expense ratios do not exceed certain predetermined levels set
forth in the Company's prospectus. For the year ended September 30, 1995, PIFM
subsidized the following amounts:
<TABLE>
<CAPTION>
Percentage
of Average Amount per
Fund Net Assets Share
- ------------------------- ------------- ------------------
<S> <C> <C>
Growth Stock Fund .01% $ .001
Stock Index Fund .28 .025
International Stock Fund .04 .002
Active Balanced Fund .05 .004
Balanced Fund .10 .005
Income Fund .28 .027
Money Market Fund .32 .001
</TABLE>
The Company has entered into an administration agreement with Prudential
Mutual Fund Management, Inc. ("PMF"), an indirect wholly-owned subsidiary of
Prudential. The administration fee paid PMF will be computed daily and payable
monthly, at an annual rate of .17% of the Company's daily net assets up to $250
million and .15% of the Company's average daily net assets in excess of $250
million. PMF will furnish to the Company such services as the Company may
require in connection with the administration of the Company's business affairs.
PMF will also provide certain transfer agent services through its wholly-owned
subsidiary, Prudential Mutual Fund Services, Inc. ("PMFS"). For such services,
PMFS will be paid .03% of the Company's daily net assets up to $250 million and
.02% of the Company's average daily net assets in excess of $250 million from
the administration fee paid to PMF.
Note 3. Other Transactions with Affiliates
For the year ended September 30, 1995, Prudential Securities Incorporated, an
affiliate of PIFM, earned approximately $1,000 in brokerage commissions from
portfolio transactions executed on behalf of the Balanced Fund.
Note 4. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term
investments, for the year ended September 30, 1995 were as follows:
<TABLE>
<CAPTION>
Fund Purchases Sales
- ---------------------------- ------------ -----------
<S> <C> <C>
Growth Stock Fund $166,285,606 $94,901,288
Stock Index Fund 31,191,257 6,793,307
International Stock Fund 51,878,167 22,058,837
Active Balanced Fund 55,254,010 24,449,598
Balanced Fund 51,413,549 41,017,407
Income Fund 72,942,188 62,818,679
</TABLE>
On September 30, 1995, the Stock Index Fund purchased 62 financial futures
contracts on the S&P 500 Index expiring December, 1995. The cost of such
contracts was $18,040,975. The value of such contracts on September 30, 1995 was
$18,234,200, thereby resulting in an unrealized gain of $193,225.
The federal income tax basis and unrealized appreciation/depreciation of the
Fund's investments as of September 30, 1995 were as follows:
<TABLE>
<CAPTION>
Net Unrealized
Appreciation/ Gross Unrealized
Fund Basis Depreciation Appreciation Depreciation
- ------------------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
Growth Stock Fund $168,492,267 $ 53,882,096 $55,631,552 $1,749,456
Stock Index Fund 80,984,245 15,486,856 16,243,442 756,586
International Stock
Fund 120,016,426 17,315,559 19,620,167 2,304,608
Active Balanced
Fund 121,485,163 12,020,860 12,744,154 723,294
Balanced Fund 74,648,132 6,340,696 6,845,882 505,186
Income Fund 56,738,626 894,526 1,086,048 191,522
</TABLE>
The following Funds elected to treat net losses incurred in the eleven month
period ended September 30, 1994 as having occurred in the current fiscal year:
<TABLE>
<CAPTION>
Capital Currency
---------- --------
<S> <C> <C>
Growth Stock Fund $3,796,000 --
International Stock Fund -- $186,000
Income Fund 828,000 --
</TABLE>
B-67
<PAGE>
THE PRUDENTIAL NOTES TO
[LOGO] INSTITUTIONAL FINANCIAL STATEMENTS
FUND
The following Funds will elect to treat net losses incurred in the eleven
month period ended September 30, 1995 as having been incurred in the following
fiscal year:
<TABLE>
<CAPTION>
Capital Currency
---------- --------
<S> <C> <C>
Growth Stock Fund -- $ 4,000
International Stock Fund $3,066,000 169,000
Balanced Fund -- 1,000
</TABLE>
For federal income tax purposes, the following Funds have a capital loss
carryforward as of September 30, 1995 which expires in 2003:
Growth Stock Fund $2,825,300
Income Fund 723,300
The average monthly balance of dollar rolls outstanding during the year ended
September 30, 1995 for the Income Fund was approximately $4,142,000. The amount
of dollar rolls outstanding at September 30, 1995 was $5,940,665, which was
10.2% of total assets.
Note 5. Joint Repurchase Agreement Account
The Company, 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. At September 30,
1995, the Company had a 9.01% undivided interest, in the aggregate, in the
repurchase agreements in the joint account which represented $65,929,000 in
principal amount, in the aggregate, as follows:
<TABLE>
<CAPTION>
Percentage Principal
Company Interest Amount
- ---------------------------- ---------- -----------
<S> <C> <C>
Growth Stock Fund .66% $ 4,819,000
Stock Index Fund 1.71 12,494,000
International Stock Fund 1.12 8,175,000
Active Balanced Fund 3.50 25,625,000
Balanced Fund 1.00 7,338,000
Income Fund 1.02 7,478,000
</TABLE>
As of such date, each repurchase agreement in the joint account and the
collateral therefor was as follows:
Bear, Stearns & Co., Inc., 6.375%, in the principal amount of $225,000,000,
repurchase price $225,119,531, due 10/2/95. The value of the collateral
including accrued interest was $229,660,959.
BT Securities Corp., 6.10%, in the principal amount of $56,863,000,
repurchase price $56,891,905, due 10/2/95. The value of the collateral including
accrued interest was $58,082,904.
Goldman, Sachs & Co., 6.45%, in the principal amount of $225,000,000,
repurchase price $225,120,938, due 10/2/95. The value of the collateral
including accrued interest was $229,500,013.
Smith Barney, Inc., 6.43%, in the principal amount of $225,000,000,
repurchase price $225,120,563, due 10/2/95. The value of the collateral
including accrued interest was $229,500,366.
Note 6. Capital
Each Fund has authorized an unlimited number of shares of beneficial interest
at $.001 par value per share.
Transactions in shares of beneficial interest during the years ended
September 30, 1995 and 1994 were as follows:
Year ended September 30, 1995:
<TABLE>
<CAPTION>
Shares
Issued in
Reinvestment Increase
Shares of Dividends/ Shares in Shares
Fund Sold Distributions Redeemed Outstanding
- ----------------------- ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Growth Stock Fund 9,932,496 4,078 (5,248,506) 4,688,068
Stock Index Fund 4,340,797 107,238 (1,725,892) 2,722,143
International Stock
Fund 6,497,880 228,737 (4,691,305) 2,035,312
Active Balanced Fund 4,883,689 242,395 (1,856,069) 3,270,015
Balanced Fund 2,303,919 168,832 (1,702,980) 769,771
Income Fund 1,204,925 296,456 (675,384) 825,997
Money Market Fund 55,919,976 2,813,967 (47,010,598) 11,723,345
</TABLE>
B-68
<PAGE>
THE PRUDENTIAL NOTES TO
[LOGO] INSTITUTIONAL FINANCIAL STATEMENTS
FUND
Year ended September 30, 1994:
<TABLE>
<CAPTION>
Shares
Issued in
Reinvestment Increase
Shares of Dividends/ Shares in Shares
Fund Sold Distributions Redeemed Outstanding
- ---------------------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Growth Stock Fund 6,739,890 14,450 (1,804,735) 4,949,605
Stock Index Fund 2,697,792 52,328 (744,579) 2,005,541
International Stock
Fund 6,022,403 42,326 (1,702,734) 4,361,995
Active Balanced Fund 5,244,905 81,781 (1,404,380) 3,922,306
Balanced Fund 3,900,150 118,117 (556,779) 3,461,488
Income Fund 1,613,971 216,368 (809,032) 1,021,307
Money Market Fund 32,311,167 1,277,602 (17,493,001) 16,095,768
</TABLE>
Of the shares outstanding at September 30, 1995, PIFM and affiliates owned
the following shares:
<TABLE>
<CAPTION>
Fund Shares
- -------------------------- ----------
<S> <C>
Growth Stock Fund 4,724,608
Stock Index Fund 3,429,256
International Stock Fund 4,962,191
Active Balanced Fund 2,396,951
Balanced Fund 3,356,418
Income Fund 2,889,945
Money Market Fund 27,811,405
</TABLE>
B-69
<PAGE>
THE PRUDENTIAL INDEPENDENT
[LOGO] INSTITUTIONAL AUDITORS' REPORT
FUND
The Shareholders and Trustees of
The Prudential Institutional Fund:
We have audited the accompanying statements of assets and liabilities,
including the portfolios of investments, of The Prudential Institutional Fund
(consisting of the Growth Stock Fund, Stock Index Fund, International Stock
Fund, Active Balanced Fund, Balanced Fund, Income Fund and Money Market Fund),
as of September 30, 1995, the related statements of operations for the year then
ended and of changes in net assets for each of the two years in the period then
ended, and the financial highlights for the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
September 30, 1995, by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of each of the
respective portfolios constituting The Prudential Institutional Fund as of
September 30, 1995, the results of their operations, the changes in their net
assets, and the financial highlights for the periods presented in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
November 16, 1995
B-70
<PAGE>
APPENDIX
DESCRIPTION OF S&P, MOODY'S AND DUFF & PHELPS RATINGS
Description of S&P Corporate Bond Ratings:
AAA - Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC, C - Bonds rated BB, B, CCC, CC, or C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
represents the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
Description of Moody's Corporate Bond Ratings:
Aaa - Bonds rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of these issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well-safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds, and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 in the Aa and A rating
categories. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
A-1
<PAGE>
Description of Duff & Phelps Bond Ratings:
AAA - Bonds rated AAA by Duff & Phelps are considered to be of the highest
credit quality. The risk factors are negligible, being only slightly more than
for risk-free U.S. Treasury debt.
AA+, AA, AA--Bonds rated AA+, AA or AA-are considered to be of high credit
quality. Protection factors are strong. Risk is modest but may vary slightly
from time to time because of economic conditions.
A+, A, A--Bonds rated A+, A or A-have protection factors which are average
but adequate; however, risk factors are more variable and greater in periods of
economic stress.
BBB+, BBB, BBB--Bonds rated BBB+, BBB or BBB-have below average protection
factors but are still considered sufficient for prudent investment. These bonds
demonstrate considerable variability in risk during economic cycles.
BB+, BB, BB--Bonds rated BB+, BB, or BB-are below investment grade but are
still deemed likely to meet obligations when due. Present or prospective
financial protection factors fluctuate according to industry conditions or
company fortunes. Overall quality may move up or down frequently within this
category.
B+, B, B--Bonds rated B+, B, or B-are below investment grade and possess
the risk that obligations will not be met when due. Financial protection factors
will fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC - Bonds rated CCC are well below investment grade securities.
Considerable uncertainty exists as to timely payment of principal, interest or
preferred dividends. Protection factors are narrow and risk can be substantial
with unfavorable economic/industry conditions, and/or with unfavorable company
developments.
DD - Bonds rated DD are defaulted debt obligations. The issuer failed to
meet scheduled principal and/or interest payments.
Description of S&P Commercial Paper Ratings:
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted A-1+.
Capacity for timely payment on commercial paper rated A-2 is strong, but the
relative degree of safety is not as high as for issues designated A-1.
Description of Moody's Commercial Paper Ratings:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rated Prime-2 (or related supporting institutions) are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics of
issuers rated Prime-1 but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
Description of Duff & Phelps Commercial Paper Ratings:
Duff & Phelps commercial paper ratings are divided into three categories,
ranging from "1" for the highest quality obligations to "3" for the lowest.
No ratings are issued for companies whose paper is not deemed investment grade.
Issues assigned the Duff 1 rating are considered top grade. This category is
further divided into three gradations as follows: Duff 1 plus--highest certainty
of timely payment, short-term liquidity, including internal operating factors
and/or ready access to alternative sources of funds, is clearly outstanding and
safety is just below risk-free U.S. Treasury short-term obligations; Duff
1--very high certainty or timely payment, liquidity factors are excellent and
supported by strong fundamental protection factors, risk factors are minor; Duff
1 minus-high certainty of timely payment, liquidity factors are strong and
supported by good fundamental protection factors, risk factors are very small.
Issues rated Duff 2 represent a good certainty of timely payment; liquidity
factors and company fundamentals are sound; although ongoing internal funds
needs may enlarge total financing requirements, access to capital markets is
good; risk factors are small. Duff 3 represents a satisfactory grade;
satisfactory liquidity and other protection factors qualify issue as to
investment grade; risk factors are larger and subject to more variation;
nevertheless timely payment is expected.
A-2
