<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
INTERNATIONAL STOCK FUND
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
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. (the Portfolio) 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; 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 in 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 31, 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
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 portfolios, one of which is
International Stock Fund (International Stock Fund). Prudential World Fund,
Inc. (World Fund) is an open-end, diversified management investment company
comprised of two portfolios, 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. PIF
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 International Stock Fund's assets and assume
its liabilities. The Portfolio has adopted an identical investment objective
and substantially identical investment policies to International Stock Fund.
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 a proposed Agreement and Plan of Conversion and Liquidation
(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, and
if an order of exemption from certain provisions of the Investment Company Act
of 1940 is received from the SEC, 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 terminated.
This Prospectus and Proxy Statement sets forth concisely information about
the Portfolio that prospective investors should know before investing. SHARES
OF THE PORTFOLIO WILL NOT BE OFFERED TO THE GENERAL PUBLIC UNTIL ON OR ABOUT
SEPTEMBER 20, 1996. Additional information contained in a Statement of
Additional Information (SAI), dated July 31, 1996, relating to the Plan has
been filed with the SEC, is incorporated herein by reference and is available
without charge upon request to the address or toll-free phone number shown
above for World Fund. 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 PIF Prospectus and SAI are available without charge upon request to PIF at
the address or toll-free phone 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 31, 1996.
<PAGE>
PRUDENTIAL WORLD FUND, INC.--INTERNATIONAL STOCK SERIES
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292-1025
THE PRUDENTIAL INSTITUTIONAL FUND--INTERNATIONAL STOCK FUND
PRUDENTIAL PLAZA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
----------------
PROSPECTUS AND PROXY STATEMENT DATED JULY 31, 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 (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). (The International Stock Fund and The Prudential World Fund, Inc.
(World Fund) -- International Stock Series (the Portfolio) sometimes are
referred to herein individually as a Series and collectively as the Series.)
Shareholders should read this entire Prospectus and Proxy Statement carefully.
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 (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 or disapprove 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
thereafter will be distributed to the former shareholders of International
Stock Fund, and International Stock Fund will be terminated.
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 (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 terminated. (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). IF THE CONVERSION IS CONSUMMATED, 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," the
Board of PIF, including those Trustees who are not "interested persons" (as
that term is defined in the Investment Company Act) of PIF or World Fund
(Independent Trustees), has determined that the Conversion is in the best
interests of International Stock Fund and that the interests of the existing
shareholders of International Stock Fund will not be diluted as a result of
the Conversion. The Board of World Fund, including those Directors who are not
interested persons of PIF or World Fund (Independent Directors), similarly has
determined that the Conversion is in the best interests of World Fund and that
the interests of existing shareholders of World 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 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 THAT EXIST BETWEEN THEM. Each is a portfolio of an open-end,
diversified management investment company. The Portfolio is a newly created
series of World Fund, and its operations will be modeled after those of
International Stock Fund. Accordingly, the investment objective of the
Portfolio is identical, and the investment policies of the Portfolio are
substantially identical, to those 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.
3
<PAGE>
Mercator Asset Management, L.P. (Mercator) serves as the subadviser to
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 International Stock Fund's portfolio securities. Mr. Spano
has managed the portfolio of 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 OR WILL INCUR DIFFERENT EXPENSES,
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF) BELIEVES THAT IF THE PROPOSED
CONVERSION IS CONSUMMATED, THE RATIO OF TOTAL OPERATING EXPENSES TO AVERAGE
DAILY NET ASSETS OF THE PORTFOLIO CLASS Z SHARES WILL BE LOWER THAN THE RATIO
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 (each, a Prudential Mutual Fund) and
also may result in additional revenues to Mercator and PMF through growth in
the Portfolio's assets that might otherwise not have occurred. See also "The
Proposed Transaction--Reasons for the Conversion" below.
With respect to International Stock Fund, PIFM has agreed to bear any
expenses, including management fees through September 30, 1996, that would
cause the ratio of expenses to daily net assets of International Stock Fund to
exceed 1.60%. This subsidy may be terminated by PIFM at any time without
notice and there can be no assurance that such subsidy will continue after
September 30, 1996. In addition, if the Conversion is consummated, PMF has no
intention to continue the expense limitation after the Closing Date. 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 1.50% of its average daily net assets.
STRUCTURE OF THE SERIES
PIF is authorized to issue an unlimited number of shares of beneficial
interest. Each International Stock Fund share issued has a pro rata interest
in the assets of International Stock Fund 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,
divided into two series. Each World Fund series is divided into four classes
designated Class A, Class B, Class C and Class Z. There are 125 million
authorized shares allocated to each of the four classes of shares in each
series of 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
4
<PAGE>
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 sales charges and distribution 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 a different exchange privilege,
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
and Class Z shares bear no distribution and service fees, the liquidation
proceeds payable to shareholders of Classes B and C are likely to be lower
than to Class A shareholders and to Class Z shareholders. In accordance with
World Fund's Articles of Incorporation and PIF's Declaration of Trust, each
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.
The Boards of PIF and World Fund may increase or decrease the number of
authorized shares without shareholder approval. Shares of each Series, when
issued, are fully paid, nonassessable, fully transferable and redeemable at
the option of the holder. Shares also are redeemable at the option of each
Series under certain circumstances. Except for the conversion feature
applicable to Class B shares of the Portfolio (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 either Series, each share
thereof is entitled to its portion of that Series's assets after all of its
debt and expenses have been paid. Neither Series's 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 has 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 the Portfolio--Investment Objective 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 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 60 investment companies, with
aggregate assets of approximately $52 billion. If the proposed Conversion is
consummated, International Stock Fund's assets will be transferred to the
Portfolio and will be managed by PMF; however, Mercator will continue as a
subadviser to the Portfolio 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 International Stock Fund. Pursuant to a
5
<PAGE>
management agreement between PMF and World Fund, the Portfolio will pay PMF an
annualized management fee of 1.00% of the Portfolio's average daily net
assets. Pursuant to the management agreement between PIFM and PIF,
International Stock Fund currently pays PIFM an annualized management fee of
1.15% of International Stock Fund's 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
International Stock Fund.
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 International Stock Fund's average daily net assets. PMF, the
manager of the Portfolio, will be compensated pursuant to a management
agreement with the World Fund, at an annual rate of 1% of the Portfolio's
average daily net assets.
Under a subadvisory agreement between PIFM and Mercator, Mercator manages
the portfolio securities of International Stock Fund and is compensated by
PIFM at an annual rate of .75 of 1% of the average daily net assets of
International Stock Fund up to and including $50 million, .60 of 1% of the
average daily net assets of 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 proposed subadvisory agreement between PMF and Mercator,
Mercator will manage the portfolio securities of the Portfolio and will
receive the same rate of compensation from PMF as it currently receives from
PIFM. Under the terms of each subadvisory agreement, this fee is or will be
computed daily and paid monthly. PIFM and PMF 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 separate subadvisory agreement between PIFM and The Prudential
Investment Corporation (PIC), PIFM has retained PIC to provide investment
subadvisory services to International Stock Fund 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 International Stock Fund. For these
services, PIFM will reimburse PIC for reasonable costs and expenses incurred
by PIC determined in a manner acceptable to PIFM. PMF similarly intends to
enter into a subadvisory agreement with PIC on behalf of the Portfolio under
the same terms and to provide the same services to the Portfolio. 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 the State of New Jersey, serves as the distributor
of International Stock Fund's shares. No distribution or service fees are paid
to PRSI by International Stock Fund.
Prudential Securities Incorporated (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 by the Portfolio's Class Z shares.
6
<PAGE>
ADMINISTRATION FEES. PIF has entered into an administration, transfer agency
and service agreement (Administration Agreement) with PMF, which provides that
PMF will furnish 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 PIF's 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, PMFS,
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. The
Portfolio, pursuant to a proposed transfer agency and service agreement, will
pay 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 is 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.
EXPENSE RATIOS, 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 International Stock Fund and the
Portfolio, respectively. Fee waivers and expense subsidies may increase a
Series's yield and total return. Any fee waiver or subsidy may be terminated
at any time without notice, after which a Series's expenses may increase and
its yield and total return may be reduced. It is not anticipated that the
Portfolio's expenses will be subject to any fee waiver or subsidy in the near
future.
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%, (b) no
recoupment will be made after December 31, 1996 and (c) no recoupment will be
made after the Closing Date, if the Conversion is consummated.
The Portfolio has not yet commenced operations. Estimated total operating
expenses for the Portfolio Class Z shares are 1.50% for the fiscal year ending
October 31, 1996 as a percentage of average net assets.
Each Series's shareholder transaction expenses are shown below. Note that
International Stock Fund and Portfolio Class Z shares shareholder transaction
expenses are the same. THERE WILL NOT BE ANY SHAREHOLDER TRANSACTION 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's 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's Class Z shares, 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.
<TABLE>
<CAPTION>
ANNUAL SERIES OPERATING INTERNATIONAL THE PORTFOLIO
EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS) STOCK FUND CLASS Z(A)
------------------------------------------------ ------------- -------------
<S> <C> <C>
Management Fees................................... 1.15% 1.00%
12b-1 Fees........................................ None None
Other Expenses (Before Reduction) ................ .49 .50%(b)
---- ----
Total Fund Operating Expenses (Before Reduction).. 1.64% 1.50%
==== ====
Total Fund Operating Expenses (After Reduction)... 1.60%(c)
====
</TABLE>
- --------
(a) The Portfolio has not yet commenced operations. Class Z shares of the
Portfolio will not be offered to the general public until on or about
September 20, 1996.
(b) "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).
(c) 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%. If the Conversion is consummated, PMF will not continue this
expense limitation after the Closing Date. 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%, (b) no
recoupment will be made after December 31, 1996 and (c) no recoupment will
be made after the Closing Date, if the Conversion is consummated.
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, as-
suming (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's Class Z shares 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.
Class Z shares of the Portfolio will be offered to the general public on or
about September 20, 1996. At that time Class Z shares will be available for
purchase by (i) pension, profit sharing or other employee benefit plans
qualified under section 401 of the Internal Revenue Code of 1986, as amended
(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; (ii) participants (other than Benefit Plans and IRAs) in any fee-based
program sponsored by PSI that includes mutual funds as investment options and
for which the Portfolio is an available option; and (iii) investors who are,
or have executed a letter of intent to become, shareholders of any series of
PIF on or before the Closing Date or who on that date have investments in
certain products for which PIF provides exchangeability. After a Benefit Plan
qualifies to purchase Class Z shares, all subsequent purchases will be for
Class Z shares. There are no sales charges associated with the purchase or
redemption of the Portfolio's Class Z shares.
Shares of each Series may be redeemed at any time at the net asset value
next determined after the Program Sponsor's recordkeeper in the case of
International Stock 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 will 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 Prudential Mutual 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 Series shares and purchase of
the other fund's shares for tax purposes. Each Series's exchange privilege may
be modified or terminated at any time on sixty days' notice.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Portfolio expects to distribute and International Stock Fund currently
distributes at least annually to its shareholders dividends from all of its
net investment income and distributions of any net capital gains. Shareholders
of International Stock Fund receive, and shareholders of the Portfolio will
receive, dividends and other distributions in additional shares of the Series.
The Portfolio shareholders, unlike the International Stock Fund 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
9
<PAGE>
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. 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 to be 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 has 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 investing in International
Stock Fund. A complete discussion of the risks attendant to an investment in
the Portfolio, including the risks of investing in foreign securities,
purchasing and selling derivatives and borrowing for investment purposes, is
provided below under "Information About the Portfolio--Investment Objective
and Policies."
ANNUAL MEETING OF WORLD FUND SHAREHOLDERS
It is anticipated that an annual meeting of 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 World Fund is attached hereto as Appendix
C), (ii) ratifying the Board's selection of Deloitte & Touche LLP as World
Fund's independent public accountants, (iii) changing the World Fund--Global
Series's (Global Series) fundamental policy limiting investment in unseasoned
issuers to a non-fundamental policy (if this change is approved, the Global
Series would continue, as a matter of operating policy, however, not to
purchase any security if as a result of such purchase the Global Series would
have 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 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. Only World Fund shareholders of
record on August 9, 1996, will be entitled to vote on the above proposals.
There can be no assurance that any or all of these proposals will be approved
by the shareholders of World Fund.
10
<PAGE>
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 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, (ii) the constructive
distribution on the Closing Date of such Class Z shares to the shareholders of
International Stock Fund and (iii) the termination of International Stock
Fund.
The assets of International Stock Fund to be acquired by the Portfolio 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 on
the Closing Date. The Portfolio will assume from International Stock Fund all
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 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 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 Class Z
shares of the Portfolio immediately after the Conversion that, except for
rounding, will be 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.
Any transfer taxes payable upon issuance of shares of the Portfolio in a
name other than that of the registered holder of the 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.
11
<PAGE>
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 Conversion and that the 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 interests of World Fund shareholders will not be diluted as a result of
the Conversion and that the Conversion is in the best interests of World Fund.
The reasons for the proposed Conversion are summarized above under
"Synopsis--Reasons for the Proposed Conversion." The Boards of World Fund and
PIF 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 International
Stock Fund;
(3) the tax-free nature of the Conversion to each Series and its
shareholders; and
(4) the potential benefits to the shareholders of 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. For further discussion of the Portfolio Class Z shares, see
"Synopsis--Structure of the Series" above.
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 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"
within the meaning of section 368(b) of the Internal Revenue Code; (2) an
International Stock Fund shareholder will recognize no gain or loss on the
constructive exchange of all 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 Class Z shares of the Portfolio 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's Class Z
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 to be 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
12
<PAGE>
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 Class Z 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 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
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 WORLD FUND AND PIF
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, its By-Laws and
applicable Delaware law.
CAPITALIZATION. World Fund is authorized to issue one billion shares of
common stock, par value $.01 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's Declaration of Trust authorizes the Board 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 PIF and World Fund 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% of the Series's outstanding shares entitled to vote.
In addition, each Series is 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 was 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 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
13
<PAGE>
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).
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. PIF's 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 at a shareholder
meeting shall constitute a quorum for the transaction of business at a
shareholders' meeting.
SHAREHOLDER LIABILITY. Under Maryland law, shareholders of World Fund have
no personal liability as such for World Fund's acts or obligations. Under
Delaware law, International Stock Fund's shareholders similarly have no
personal liability as such 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 World 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 and under Delaware law, 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 or her own bad faith, willful misfeasance, gross negligence or
reckless disregard of his or her 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 or she
would otherwise be subject as a result of his or her willful misfeasance, bad
faith or gross negligence in the performance of his or her duties, or by
reason of reckless disregard of his or her 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.
PRO FORMA CAPITALIZATION AND RATIOS
The following table shows the capitalization of International Stock Fund at
March 31, 1996. The Portfolio will have no assets at the time of Conversion.
Accordingly, the capitalization of International Stock Fund is representative
of the pro forma capitalization of the combined Series at that date.
<TABLE>
<CAPTION>
INTERNATIONAL STOCK
FUND
-------------------
<S> <C>
Net Assets (000)............................................ $162,206
Net Asset Value per share................................... $ 15.79
Shares Outstanding (000).................................... 10,275
</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 Class Z shares
14
<PAGE>
of the Portfolio for the fiscal year ending October 31, 1996. No historical
financial information yet exists for Class Z shares to be issued by the
Portfolio.
<TABLE>
<CAPTION>
INTERNATIONAL STOCK THE PORTFOLIO
FUND(A) CLASS Z
------------------- -------------
<S> <C> <C>
Ratio of expenses to average net assets...... 1.60% 1.50%
Ratio of net investment income to average net
assets...................................... 0.56% 0.66%(b)
</TABLE>
- --------
(a) Net of expenses for the International Stock Fund. Through a period
scheduled to end on September 30, 1996, PIFM voluntarily reimburses
International Stock Fund for any expenses in excess of 1.60% of average
net assets. Absent such reimbursement, the ratio of expenses to average
net assets would be 1.64%. If the Conversion is consummated, PMF will not
continue this expense limitation after the Closing Date.
(b) Estimated net of expenses for the Portfolio.
INFORMATION ABOUT THE PORTFOLIO
SHARES OF THE PORTFOLIO WILL NOT BE OFFERED TO THE GENERAL PUBLIC UNTIL ON
OR ABOUT SEPTEMBER 20, 1996.
GENERAL
World Fund was incorporated in Maryland on February 28, 1984. World Fund is
an open-end, diversified management investment company.
INVESTMENT OBJECTIVE 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's outstanding voting securities as defined in 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.
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 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 American Depository Receipts (ADRs), European Depository
Receipts (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
15
<PAGE>
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 currently does not 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 or in high-grade money market
instruments of U.S. or foreign 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 fixed income 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-grade foreign or domestic
money market instruments and short-term fixed income securities. The
Portfolio's use of money market instruments and short-term fixed income
securities generally will reflect Mercator'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."
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 that 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 usually are subject to auditing,
accounting, and financial reporting standards comparable to that of domestic
issuers.
16
<PAGE>
FIXED INCOME SECURITIES. Fixed income securities are considered high-
quality if they are rated at least AA/Aa by Standard & Poors Ratings Services
(S&P), a division of the McGraw Hill Companies, or by Moody's Investors
Services, Inc. (Moody's) or an equivalent rating by any nationally recognized
statistical rating organization (NRSRO), or, if unrated, are determined to be
of comparable investment quality by Mercator. High-quality fixed income
securities are considered to have a very strong capacity to pay principal and
interest. Fixed income securities are considered investment grade 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 Mercator. Investment grade fixed income securities are
regarded as having an adequate capacity to pay principal and interest.
Securities rated in the lowest category of investment grade 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.
The Portfolio may 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 Portfolio's net
assets is invested in non-investment grade fixed income securities. 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 generally are
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 fixed income 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
fixed income securities, while an increase in interest rates generally reduces
their value.
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, e.g., 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 ALSO MAY 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
17
<PAGE>
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 also is 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.
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 normally would 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 ordinarily would 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 also may 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 normally would 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 ordinarily would 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 also may 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.
18
<PAGE>
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 ALSO MAY 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 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 Mercator'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.
19
<PAGE>
When the Portfolio invests in foreign securities, the Portfolio may enter
into forward contracts in several circumstances to protect the value of its
investment 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. 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.
20
<PAGE>
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 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, Mercator 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 MERCATOR'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.
21
<PAGE>
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 usually is 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 PMF.
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 fixed income securities 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
22
<PAGE>
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-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 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 15% of its net assets in
illiquid securities. Illiquid securities include repurchase agreements that
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 (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 restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act
(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. Mercator will monitor the liquidity of such
restricted securities under the supervision of the PMF 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 also
will treat non-U.S. Government stripped mortgage-related interest-only and
principal-only securities 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.
BORROWING. 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
23
<PAGE>
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 Portfolio only will borrow
when there is an expectation that doing so will benefit the Portfolio after
taking into account considerations such as interest income and possible losses
upon liquidation of assets pledged to secure such borrowing. Borrowing by the
Portfolio creates an opportunity for increased net income but at the same
time, creates risks, including the fact that leverage may exaggerate the rate
of change in the net asset value of the Portfolio's shares and in the yield on
the Portfolio. The Portfolio also may borrow for temporary, extraordinary or
emergency purposes and for the clearance of transactions.
RISKS AND SPECIAL CONSIDERATIONS
Investing in securities of foreign companies and countries involves certain
risks and considerations that are not typically associated with investing in
U.S. Government securities and those of domestic companies. Foreign companies
generally are not subject to uniform accounting, auditing and financial
standards and requirements comparable to those applicable to U.S. companies.
There also may 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 that may decrease the 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 that 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
generally are 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 generally
are less diverse and mature, and to political systems that 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.
BOARD OF DIRECTORS
World Fund has a Board that, 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. See Appendix C for
information on the nominated slate of Directors to be presented to World
Fund's shareholder's at an annual meeting in October 1996.
24
<PAGE>
MANAGER AND PORTFOLIO MANAGER
Manager
PMF, ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, WILL BE THE MANAGER OF
WORLD FUND AND WILL BE COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF 1% OF
THE PORTFOLIO'S AVERAGE DAILY NET ASSETS. It was incorporated in May 1987
under the laws of the State of Delaware. PMF is a wholly owned subsidiary of
Prudential.
As of June 30, 1996, PMF served as the manager or administrator to 60 open-
end investment companies, with aggregate assets of approximately $52 billion.
UNDER A PROPOSED MANAGEMENT AGREEMENT WITH WORLD FUND, PMF WILL MANAGE THE
INVESTMENT OPERATIONS OF THE PORTFOLIO AND ALSO WILL ADMINISTER ITS CORPORATE
AFFAIRS.
Subadvisor
PURSUANT TO A PROPOSED SUBADVISORY AGREEMENT WITH PMF, MERCATOR WILL FURNISH
INVESTMENT ADVISORY SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE
PORTFOLIO AND WILL BE 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 THE PORTFOLIO'S AVERAGE DAILY NET ASSETS IN EXCESS OF
$50 MILLION AND UP TO AND INCLUDING $300 MILLION AND .45 OF 1% OF THE
PORTFOLIO'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 has been portfolio manager for the investment 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. If
the Conversion is consummated, Mr. Spano will continue to be responsible for
the day-to-day management of the investment portfolio.
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. 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, PIC will 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.
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 may increase the Portfolio's total return.
25
<PAGE>
PORTFOLIO TRANSACTIONS
PSI 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, will serve as custodian for the Portfolio's portfolio
securities and cash and, in that capacity, will maintain certain financial and
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, will serve as Transfer
Agent and Dividend Disbursing Agent and in those capacities will maintain
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, PAR
VALUE $.01 PER SHARE, WHICH CURRENTLY ARE 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 will be subject to different sales
charges and distribution and/or service fees (with the exception of Class Z
shares, which will not be subject to any sales charges and distribution and/or
service fees), (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 a different exchange privilege, and (iv)
only Class B shares will have a conversion feature. In accordance with World
Fund's Articles of Incorporation, 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.
The Board 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 also are 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.
26
<PAGE>
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.
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 TAX 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 tax 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 gain (i.e., the excess of short-term
capital gains over short-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not
reinvested. Any net capital gain (i.e., the excess of net long-term capital
gains over net short-term capital losses) distributed to shareholders will be
taxable to them as long-term capital gains, 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 currently is 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 gain 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 currently is 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 generally would 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.
27
<PAGE>
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 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 will be 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
generally will 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 the 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 NET ASSET VALUE OF EACH CLASS ON THE RECORD DATE, OR SUCH
OTHER DATE AS WORLD FUND'S BOARD MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS
IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO
RECEIVE SUCH DIVIDENDS 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 PSI, you should contact your financial adviser to elect to receive
dividends and other distributions in cash.
WHEN THE PORTFOLIO GOES "EX-DIVIDEND," THE NET ASSET VALUE OF EACH CLASS IS
REDUCED BY THE AMOUNT OF THE DIVIDEND OR OTHER DISTRIBUTION ALLOCABLE TO THAT
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.
28
<PAGE>
PURCHASES OF SECURITIES BEING OFFERED
SHARES OF THE PORTFOLIO WILL NOT BE OFFERED TO THE GENERAL PUBLIC UNTIL ON
OR ABOUT SEPTEMBER 20, 1996.
INVESTORS WHO ARE, OR HAVE EXECUTED A LETTER OF INTENT TO BECOME,
STOCKHOLDERS OF ANY SERIES OF PIF ON OR BEFORE THE CLOSING DATE OR WHO ON THAT
DATE HAVE INVESTMENTS IN CERTAIN PRODUCTS FOR WHICH PIF PROVIDES
EXCHANGEABILITY, SHOULD CONTACT THEIR CLIENT REPRESENTATIVE FOR INFORMATION
REGARDING PURCHASES, EXCHANGES AND REDEMPTIONS OF CLASS Z SHARES OF THE
PORTFOLIO.
INVESTORS MAY PURCHASE SHARES OF THE PORTFOLIO THROUGH PSI, PRUSEC OR
DIRECTLY FROM WORLD FUND THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC., ATTENTION: INVESTMENT SERVICES, P.O. BOX 15020, NEW BRUNSWICK,
NEW JERSEY 08906-5020. The offering price per share will be the net asset
value next determined following receipt of an order by PMFS or PSI. Class Z
shares will be offered to a limited group of investors at net asset value
without any sales charge.
Application forms can be obtained from PMFS, PSI 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 PSI will not receive stock certificates.
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.
PSI 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.
For an initial purchase of shares of the Portfolio by wire through PSI,
Prusec or directly through the Portfolio's transfer agent, PMFS, 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 net asset value (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 will be 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
29
<PAGE>
least $50 million in defined contribution assets; (ii) participants (other
than Benefit Plans and IRAs) in any fee-based program sponsored by PSI that
includes mutual funds as investment options for which this Portfolio is an
available option; and (iii) investors who are, or have executed a letter of
intent to become, stockholders of any series of PIF on or before the Closing
Date or who on that date have exchangeability into PIF. After a Benefit Plan
qualifies to purchase Class Z shares, all subsequent purchases will be for
Class Z shares. There are no sales charges associated with the purchase or
redemption of the Portfolio's Class Z shares.
REDEMPTIONS
YOU CAN REDEEM SHARES OF THE PORTFOLIO AT ANY TIME FOR CASH AT THE NET ASSET
VALUE NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM
BY PMFS OR PSI.
IF YOU HOLD SHARES OF THE PORTFOLIO THROUGH PSI, YOU MUST REDEEM YOUR SHARES
BY CONTACTING YOUR PSI 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 PMFS 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 PMFS MUST BE SUBMITTED BEFORE SUCH
REQUEST WILL BE ACCEPTED. All correspondence and documents concerning
redemptions should be sent to the Portfolio in care of 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 PMFS'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. PMFS 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 PMFS OF THE CERTIFICATE AND/OR WRITTEN REQUEST
EXCEPT AS INDICATED BELOW. If you hold shares through PSI, payment for shares
presented for redemption will be credited to your PSI 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
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 PMFS 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 PMFS. 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
30
<PAGE>
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 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 NET ASSET VALUE. 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
PMFS AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call World
Fund at (800) 225-1852 to execute a telephone exchange of shares on weekdays,
except holidays, between the hours of 8:00 a.m. and 6:00 p.m., New York time.
For your protection and to prevent fraudulent exchanges, your telephone call
will be recorded and you will be asked to provide your personal identification
number. A written confirmation of the exchange transaction will be sent to
you. NEITHER 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 net asset value 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 PSI OR THROUGH A DEALER WHICH HAS ENTERED INTO A
SELECTED DEALER AGREEMENT WITH PSI, YOU MUST EXCHANGE YOUR SHARES BY
CONTACTING YOUR FINANCIAL ADVISER.
You also may 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 PMFS AT THE ADDRESS NOTED ABOVE.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice.
31
<PAGE>
NET ASSET VALUE
THE PORTFOLIO'S NET ASSET VALUE PER SHARE WILL BE DETERMINED BY SUBTRACTING
ITS LIABILITIES FROM THE VALUE OF ITS ASSETS, AND DIVIDING THE REMAINDER BY
THE NUMBER OF OUTSTANDING SHARES. NET ASSET VALUE WILL BE CALCULATED
SEPARATELY FOR EACH CLASS. For valuation purposes, quotations of foreign
securities in a foreign currency will be converted to U.S. dollar equivalents.
THE BOARD 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 will be 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.
The Portfolio will compute its net asset value 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 net asset value. The New York Stock Exchange is closed
on the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
32
<PAGE>
INFORMATION ABOUT INTERNATIONAL STOCK FUND
FINANCIAL INFORMATION
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
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. The financial highlights presented below also are
representative of the combined Series because, at the time of the Conversion,
the combined Series will consist only of the assets of International Stock
Fund.
<TABLE>
<CAPTION>
SIX MONTHS NOVEMBER 15,
ENDED YEAR ENDED 1992(A)
MARCH 31, SEPTEMBER 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 OPERA-
TIONS:
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 opera-
tions....................... .73 .84 2.67 2.37
-------- -------- -------- -------
LESS DISTRIBUTIONS:
Dividends from net investment
income....................... (.19) (.10) (.03) (.02)
Distributions from net real-
ized gains................... -- (.33) (.15) --
-------- -------- -------- -------
Total distributions.......... (.19) (.43) (.18) (.02)
-------- -------- -------- -------
Net asset value, end of peri-
od........................... $ 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.
(d) Total returns are calculated assuming a purchase of shares on the first
day and a sale on the last day of each period reported and include
reinvestment of dividends and distributions. Total returns for periods of
less than a full year are not annualized. Total returns include the effect
of expense 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.
33
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of International Stock Fund's investment objective and
policies and of risk factors associated with an 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 International Stock
Fund's portfolio manager, see "Management of the Company" in the PIF
Prospectus.
PORTFOLIO TRANSACTIONS
For a discussion of International Stock Fund's policy with respect to
brokerage, see "Other Considerations--Portfolio Transactions" 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 SHARES
For a discussion of International Stock Fund 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 offering price of International Stock Fund
shares is determined, see "Other Considerations--Net Asset Value" 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
its shares, see "Other Considerations" in the PIF Prospectus.
34
<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 file 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
The validity of Class Z shares of the Portfolio to be issued pursuant to the
Plan 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, 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 report thereon which is included in International Stock
Fund's Annual Reports to Shareholders for the fiscal year ended September 30,
1995. 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 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 that they are entitled to vote for the proposed adjournment, 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 represents a broker "non-vote" (that is,
a Proxy from a broker or nominee indicating that such person has not
35
<PAGE>
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 11,162,668 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 12, 1996, the Trustees
and officers of PIF, as a group, owned less than 1% of the outstanding shares
of International Stock Fund and the Directors and officers of World Fund, as a
group, owned less than 1% of the outstanding shares of the Portfolio. As of
July 12, 1996, the following shareholders owned beneficially or of record 5%
or more of International Stock Fund's outstanding shares: PAMCO VCA OA
Account, 30 Scranton Office Park, Moosic, PA 18504-1789 owned 1,235,510 shares
(approximately 11% of the outstanding shares); Prudential Employee Savings
Plan, 71 Hanover Road, Florham Park, NJ 07932-1502 owned 4,659,994 shares
(approximately 42% of the outstanding shares); Rite Aid Employee Investment
Opportunity Plan, Rite Aid Corporation, 30 Hunter Lane, Camp Hill, PA 17011
owned 689,638 shares (approximately 6% of the outstanding shares); and
Deferred Compensation Plan for Employees of the Metropolitan Transportation
Authority, its Subsidiaries and Affiliates and Thrift Plan Employees of The
Metropolitan Transportation Authority, its Subsidiaries and Affiliates, 347
Madison Avenue, New York, NY 10017 owned 658,608 shares (approximately 6% of
the outstanding shares). Prudential intends to vote any shares for which it
has direct voting authority FOR the proposed Conversion.
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.
36
<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 nor hold special meetings of
shareholders unless required by the Investment Company Act or state law.
S. Jane Rose
Secretary
Dated: July 31, 1996
37
<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.
A-1
<PAGE>
1.4. At the Effective Time (or as soon thereafter as is reasonably
practicable), (a) the International Stock Series Share or Shares issued
pursuant to paragraph 4.7 shall be redeemed by International Stock Series at
net asset value 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.
A-2
<PAGE>
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;
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;
A-3
<PAGE>
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;
A-4
<PAGE>
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 4.7;
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;
A-5
<PAGE>
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; 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, counsel to PIF, 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 at the Effective Time a favorable
opinion from Kirkpatrick & Lockhart LLP, counsel to PIF, dated as of the
Effective Time, to the effect that:
4.4.1. PIF is a business trust 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 PIF's
Declaration of Trust as a separate series of PIF;
4.4.2. This Agreement has been duly authorized, executed, and delivered
by PIF and, assuming due authorization, execution, and delivery of this
Agreement by World Fund, is a valid and binding obligation of PIF
enforceable 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, and further subject to the qualifications
set forth in the next succeeding sentence. Such counsel may state that they
express no opinion as to the validity or enforceability of any provision
regarding choice of New York law to govern this Agreement;
4.4.3. The execution and delivery of this 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 30, 1992 between PIF and Prudential Mutual
Fund Management, Inc. (PMF); provided, however, that such counsel may state
that they express no opinion with respect to federal or state securities
laws, other antifraud laws, and fraudulent transfer laws; provided further
that insofar as performance by PIF of its obligations under this Agreement
is concerned, such counsel may state that 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 New York and Chapter 38 of the Delaware Code 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 International Stock Fund
that would be required to be disclosed in the Registration Statement and is
not so disclosed;
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; and
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 International Stock
Fund) or any of its properties or assets distributable or allocable to
International Stock 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.
A-9
<PAGE>
In rendering such opinion, such counsel may state that insofar as such
opinion involves factual matters, they have relied, to the extent they deem
proper, upon certificates of officers of PIF and certificates of public
officials. As to matters of Delaware law, such counsel may rely upon opinions
of Delaware counsel reasonably satisfactory to World Fund, in which case the
opinion shall state that both such counsel and World Fund are justified in so
relying. In rendering such opinion, such counsel also may (a) make assumptions
regarding the authenticity, genuineness, and/or conformity of documents and
copies thereof without independent verification thereof, (b) limit such
opinion to applicable federal and state law, and (c) define the word
"knowledge" and related terms to mean the knowledge of attorneys then with
such firm who have devoted substantive attention to matters directly related
to this Agreement and the Reorganization.
4.5. PIF shall have received at the Effective Time a favorable opinion from
Sullivan & Cromwell, counsel to World Fund, dated as of the Effective Time, to
the effect that:
4.5.1. World Fund is a corporation 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 duly established in accordance with the
terms of World Fund's 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, assuming due authorization, execution and delivery of this
Agreement by PIF, is a valid and binding obligation of World Fund
enforceable 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, and further subject to the qualifications
set forth in the next succeeding sentence. Such counsel may state that they
express no opinion as to the validity or enforceability of any provision
regarding choice of New York law to govern this Agreement;
4.5.3. The execution and delivery of this 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 (b) result in
a default or a breach of certain specified agreements to be entered into by
World Fund; provided, however, that such counsel may state that they
express no opinion with respect to federal or state securities laws, other
antifraud laws, and fraudulent transfer laws; provided further that insofar
as performance by World Fund of its obligations under this Agreement is
concerned, such counsel may state that 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 States of New York and 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 International Stock
Series that would be required to be disclosed in the Registration Statement
and is not so disclosed;
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; and
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
A-10
<PAGE>
is presently pending or threatened against World Fund (with respect to
International Stock Series) or any of its properties or assets
distributable or allocable to International Stock Series, and (b) World
Fund is not a party to or subject to the provision of any order, decree or
judgment of any court or government body that materially and adversely
affects its business, except as otherwise disclosed.
In rendering such opinion, such counsel may state that insofar as such
opinion involves factual matters, they have relied, to the extent they deem
proper, upon certificates of officers of World Fund and certificates of public
officials. As to matters of Maryland law, such counsel may rely upon opinions
of Maryland counsel reasonably satisfactory to PIF, in which case the opinion
shall state that both such counsel and PIF are justified in so relying. In
rendering such opinion, such counsel also may (a) make assumptions regarding
the authenticity, genuineness, and/or conformity of documents and copies
thereof without independent verification thereof, (b) limit such opinion to
applicable federal and state law, and (c) define the word "knowledge" and
related terms to mean the knowledge of attorneys then with such firm who have
devoted substantive attention to matters directly related to this Agreement
and the Reorganization.
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, a share or
shares of International Stock Series to PMF or an affiliate thereof for
consideration for the purpose of enabling PMF or such affiliate to vote on the
matters referred to in paragraphs 4.8 and 4.9;
4.8. World Fund (on behalf of International Stock Series) shall have entered
into an Investment Management Agreement with PMF, a Distribution Agreement
with Prudential Securities Incorporated, a Shareholder Administrative Services
Agreement with PMF, a Plan of Distribution, a Transfer Agency Agreement and
Service Agreement with 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 PMF or its affiliate
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 PMF or its affiliate 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.
A-11
<PAGE>
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 New York; provided that, in the case of any
conflict between such laws and the federal securities laws, the latter shall
govern.
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.
THE PRUDENTIAL INSTITUTIONAL FUND,
on behalf of its series,
International Stock Fund
/s/ Mark R. Fetting
By: _________________________________
Mark R. Fetting, President
PRUDENTIAL WORLD FUND, INC.,
on behalf of its series,
International Stock Series
/s/ Richard A. Redeker
By: _________________________________
Richard A. Redeker, President
A-12
<PAGE>
APPENDIX B
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
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 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 Funds
portfolio's 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,
/s/ Mark R. Fetting
Mark R. Fetting
President
B-1
<PAGE>
- --------------------------------------------------------------------------------
THE PRUDENTIAL GROWTH STOCK FUND
[LOGO] INSTITUTIONAL
FUND
- --------------------------------------------------------------------------------
OBJECTIVE: Seeks 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.
INVESTMENT APPROACH: The Adviser concentrates on large capitalization companies
with the potential for above average growth. Stocks are selected on a company-
by-company basis through the use of fundamental analysis.
The Adviser looks for companies that demonstrate superior sales growth, high
levels of unit growth, high return on assets and equity, and a strong balance
sheet, as well as being attractively valued in the judgement of the Adviser.
ADVISER: The Growth Stock Fund is managed by Jennison Associates Capital Corp.
Founded in 1969 and acquired by The Prudential in 1985, Jennison adheres to
clearly defined investment philosophies and is dedicated to achieving superior
investment results for institutional investors. Jennison manages over $28
billion in equity, balanced, and fixed income accounts at September 30, 1995.
ADVISER'S COMMENTS: For the year ended September 30, 1995, the Fund increased
35.1% versus the market overall, as measured by the S&P 500, which improved
29.7% in the same period. The Lipper Growth Fund Average increased 25.9% over
the same period. This positive performance can be attributed mostly to
particularly strong performance in three areas: financial services, capital
spending, and technology. The lower interest rate environment which began in
November 1994 helped boost interest rate sensitive stocks in the portfolio.
Strong capital spending both domestically and abroad helped bolster the current
and future earnings prospects of many capital goods producers. In technology,
there are a number of evolving long-term trends which have, and should continue
to have, both positive earnings and valuation consequences for companies in the
portfolio.
Throughout the past year we have had substantial net, positive earnings estimate
surprises. This has been a key to the out performance of the Fund and is the key
to our objective over time. Our goal is to own the best growth stocks we can
find at a reasonable valuation.
By and large we remain optimistic about growth stocks in a low economic growth
environment like we are currently experiencing, which is characterized by low
inflation and low interest rates. As always, growth stocks will be more volatile
than the market overall, but we believe that there are ample opportunities for
companies with growing revenue and earnings to provide significant positive
returns.
- -------------------------------------------------------
PERFORMANCE RESULTS:
Average Annual Returns Fund S&P 500
- ------------------------ ------- -------
One Year ended 9/30/95 +35.14% +29.74%
From Inception (11/5/92) +18.34% +15.40%
- -------------------------------------------------------
Returns 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. The Manager is currently limiting the
expenses of the Fund. Without this reduction of expenses, the total return would
have been lower.
B-2
<PAGE>
- --------------------------------------------------------------------------------
THE PRUDENTIAL GROWTH STOCK FUND
[LOGO] INSTITUTIONAL Comparison of Change in Value
FUND of A $10,000 Investment
- --------------------------------------------------------------------------------
[CHART]
Past performance is no guarantee of future results and an investor's shares may
be worth 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: Growth Stock Fund (the
"Fund") with a similar investment in the Standard & Poor's 500 Index (S&P 500)
by portraying the initial account value 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 S&P 500 is a capital-weighted index, representing the aggregate market value
of the common equity of 500 stocks primarily traded on the New York Stock
Exchange. The S&P 500 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 S&P 500 may differ substantially from the securities in the Fund's
portfolio. S&P 500 is not the only index that may be used to characterize
performance of growth funds and other indices may portray different comparative
performance.
B-3
<PAGE>
APPENDIX C
PRUDENTIAL WORLD FUND, INC.
NOMINATED SLATE OF DIRECTORS
(AS OF JULY 31, 1996)
The following is information about the nominated slate of Directors to be
presented to World Fund shareholders at an annual meeting anticipated to be
held in October 1996. For information on Prudential World Fund Inc.'s current
Directors, see the Prudential World Fund Inc. Statement of Additional
Information, which may be obtained by calling (800) 225-1852.
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- --------------------- --------------------------------------------
<S> <C>
Edward D. Beach (71).......... President and Director of BMC Fund, Inc. a
c/o Prudential Mutual Fund closed-end investment company; prior thereto
Management, Inc. Vice Chairman of Broyhill Furniture Industries,
One Seaport Plaza Inc.; Certified Public Accountant; Secretary and
New York NY Treasurer of Broyhill Family Foundation, Inc.;
Member of the Board of Trustees of Mars Hill
College; President, Treasurer and Director of
First Financial Fund, Inc. and The High Yield
Plus 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.; Munich Ameri-
One Seaport Plaza can Reinsurance Company and Munich Management
New York NY Corporation.
Delayne Derick Gold (58)...... Marketing and Management Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York NY
*Robert F. Gunia (49)......... Director (since January 1989) and Executive Vice
One Seaport Plaza President, Treasurer and Chief Financial Officer
New York, NY (since June 1987) of Prudential Mutual Fund Man-
agement, Inc. (PMF); Senior Vice President
(since March 1987) of Prudential Securities In-
corporated (PSI); Executive Vice President Trea-
surer, Comptroller, Director (since March 1991)
of Prudential Mutual Fund Distributors, Inc.
(PMFD); Director (since June 1987) of Prudential
Mutual Fund Services, Inc. (PMFS); Vice Presi-
dent and Director (since May 1989) of The Asia
Pacific Fund, Inc.
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 Fund, Inc.
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- --------------------- --------------------------------------------
<S> <C>
Robert E. LaBlanc (62)........ President of Robert E. LaBlanc Associates, Inc.
c/o Prudential Mutual Fund (telecommunications) since 1981; Director of
Management, Inc. Contell Cellular, Inc., M/A-Com, Inc., Storage
One Seaport Plaza Technology Corporation; TIE/communications, Inc.
New York NY and Tribune Company; Trustee of Manhattan Col-
lege.
*Mendel A. Melzer (35)........ Chief Financial Officer (since November 1995),
Money Management Group, The Prudential Insurance
Company of America; formerly Senior Vice Presi-
dent and Chief Financial Officer (April 1993-No-
vember 1995), Prudential Preferred Financial
Services; formerly Managing Director (April
1991-April 1993), Prudential Investment Advi-
sors.
*Richard A. Redeker (53)...... President, Chief Executive Officer and Director
One Seaport Plaza (since October 1993), PMF; Director and Member
New York, NY of the Operating Committee (since October 1993),
PSI; Director (since October 1993) of Prudential
Securities Group, Inc.; Executive Vice President
(since July 1994), The Prudential Investment
Corporation; Director (since January 1994) of
PMFD and PMFS; formerly Senior Executive Vice
President and Director (September 1978-September
1993) Kemper Financial Services, Inc.; Director
of The High Yield Income Fund, Inc.
Robin B. Smith (56)........... 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., Springs Indus-
New York, NY tries Inc., Texaco Inc., First Financial Fund,
Inc., The High Yield Income Fund, Inc. and The
High Yield Plus Fund, Inc.
Stephen Stoneburn (53)........ President, Argus Integrated Media, Inc. (since
c/o Prudential Mutual Fund June 1995); formerly Senior Vice President and
Management, Inc. Managing Director (January 1993-1995), Cowles
One Seaport Plaza Business Media; prior thereto, Senior Vice Pres-
New York, NY ident (January 1991-1992) and Publishing Vice
President (May 1989-December 1990) of Gralla
Publications, a division of United Newspapers,
U.K.; formerly Senior Vice President of Fair-
child Publications, Inc.
</TABLE>
C-2
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- --------------------- --------------------------------------------
<S> <C>
Nancy H. Teeters (66)........... Economist; formerly Vice President and Chief
c/o Prudential Mutual Fund Man- Economist (March 1986-June 1990) of Interna-
agement, Inc. tional Business Machines Corporation; Director
One Seaport Plaza of Inland Steel Corporation (since July 1991),
New York, NY and First Financial Fund, Inc.
</TABLE>
- --------
* "Interested" director, as defined in the Investment Company Act of 1940, by
reason of his affiliation with Prudential Securities or Prudential Mutual
Fund Management, Inc.
The above Nominees are also trustees, directors and officers of some or all
of the other investment companies distributed by Prudential Securities
Incorporated.
C-3
<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
Expense Ratios, Fee Waivers and Subsidy................................ 7
Purchases and Redemptions................................................ 8
Exchange Privileges...................................................... 9
Dividends and Other Distributions........................................ 9
Federal Income Tax Consequences of the Proposed Conversion............... 10
PRINCIPAL RISK FACTORS..................................................... 10
ANNUAL 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 World Fund and PIF................. 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...................................... 14
INFORMATION ABOUT THE PORTFOLIO............................................ 15
INFORMATION ABOUT INTERNATIONAL STOCK FUND................................. 33
MISCELLANEOUS.............................................................. 35
Additional Information................................................... 35
Legal Matters............................................................ 35
Experts.................................................................. 35
VOTING INFORMATION......................................................... 35
OTHER MATTERS.............................................................. 36
SHAREHOLDERS' PROPOSALS.................................................... 37
APPENDIX A--Agreement and Plan of Conversion and Liquidation............... A-1
APPENDIX B--Performance Information--International Stock Fund.............. B-1
APPENDIX C--Nominated Slate of Directors--World Fund....................... C-1
</TABLE>
<PAGE>
ThePrudential [LOGO] Mark R. Fetting
President
Prudential Defined Contribution Services
30 Scranton Office Park
Moosic, PA 18507-1789
August 5, 1996
Dear Plan Participant:
As announced in early June, one of the first significant actions
following the formation of the Prudential Money Management Group was the
approval by the Board of Trustees of The Prudential Institutional Fund (PIF) to
combine the seven institutional series of funds with the broader Prudential
Mutual Fund (PMF) family. Pending approval of the Board's action, as shown in
the chart below, the four largest PIF funds will continue with the same
investment objectives and portfolio managers. The three smaller funds will be
combined with similar, but not identical, PMF funds.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Current Fund New Fund Investment Portfolio Managers
Objective
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Stock Fund International Stock Series Same Peter Spano
Class Z (no change)
- --------------------------------------------------------------------------------------------------
Growth Stock Fund Prudential Jennison Fund Same David Poiesz
Class Z (no change)
- --------------------------------------------------------------------------------------------------
Stock Index Fund Stock Index Fund Same John Moschberger
Class Z (no change)
- --------------------------------------------------------------------------------------------------
Active Balanced Fund Active Balanced Fund Same Bradley Goldberg
Class Z (no change)
- --------------------------------------------------------------------------------------------------
Balanced Fund Prudential Allocation Fund Similar Gregory Goldberg
Balanced Portfolio Class Z
- --------------------------------------------------------------------------------------------------
Income Fund Prudential Government Income Fund Similar Barbara Kenworthy
Class Z
- --------------------------------------------------------------------------------------------------
Money Market Fund Prudential MoneyMart Assets Similar Joseph Tully
Class Z
- --------------------------------------------------------------------------------------------------
</TABLE>
As a shareholder, you are being asked to consider the action taken by
the Board. Enclosed is a combined proxy/prospectus statement discussing the
----------------------------------------------------------------
relevant fund consolidation in detail and the reasons why the Board believes the
- --------------------------------------------------------------------------------
consolidation is in the best interest of the shareholders. Also enclosed is the
- -------------------------------------------------------------------------------
ballot card for use in voting your shares. PLEASE INDICATE YOUR VOTE AND RETURN
- -------------------------------------------------------------------------------
IT IN THE ENVELOPE PROVIDED.
- ----------------------------
As noted on the front of the proxy, a Special Meeting of Shareholders
will be held on September 6, 1996 to approve the consolidation changes. If
approved, the changes for your particular funds will appear on your quarterly
statement following the Shareholder Meeting. No further action will be required
on your part. If you have questions regarding the consolidation, please contact
any member of your Prudential service team at 1-800-458-6333. Your Prudential
team remains committed to providing quality retirement services to help you
achieve financial security.
Sincerely,
/s/ Mark R. Fetting
Enclosures
<PAGE>
ThePrudential [LOGO] Mark R. Fetting
President
Prudential Defined Contribution Services
30 Scranton Office Park
Moosic, PA 18507-1789
August 5, 1996
Dear Pru-DC Client:
As announced in early June, one of the first significant actions
following the formation of the Prudential Money Management Group was the
approval by the Board of Trustees of The Prudential Institutional Fund (PIF) to
combine the seven institutional series of funds with the broader Prudential
Mutual Fund (PMF) family. Pending approval of the Board's action, as shown in
the chart below, the four largest PIF funds will continue with the same
investment objectives and portfolio managers. The three smaller funds will be
combined with similar, but not identical, PMF funds.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Current Fund New Fund Investment Portfolio Managers
Objective
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Stock Fund International Stock Series Same Peter Spano
Class Z (no change)
- --------------------------------------------------------------------------------------------------
Growth Stock Fund Prudential Jennison Fund Same David Poiesz
Class Z (no change)
- --------------------------------------------------------------------------------------------------
Stock Index Fund Stock Index Fund Same John Moschberger
Class Z (no change)
- --------------------------------------------------------------------------------------------------
Active Balanced Fund Active Balanced Fund Same Bradley Goldberg
Class Z (no change)
- --------------------------------------------------------------------------------------------------
Balanced Fund Prudential Allocation Fund Similar Gregory Goldberg
Balanced Portfolio Class Z
- --------------------------------------------------------------------------------------------------
Income Fund Prudential Government Income Fund Similar Barbara Kenworthy
Class Z
- --------------------------------------------------------------------------------------------------
Money Market Fund Prudential MoneyMart Assets Similar Joseph Tully
Class Z
- --------------------------------------------------------------------------------------------------
</TABLE>
As a shareholder, you are being asked to consider the action taken by
the Board. Enclosed is a combined proxy/prospectus statement discussing the
----------------------------------------------------------------
relevant fund consolidation in detail and the reasons why the Board believes the
- --------------------------------------------------------------------------------
consolidation is in the best interest of the shareholders. Also enclosed is the
- -------------------------------------------------------------------------------
ballot card for use in voting your shares. PLEASE INDICATE YOUR VOTE AND RETURN
- -------------------------------------------------------------------------------
IT IN THE ENVELOPE PROVIDED.
- ----------------------------
As noted on the front of the proxy, a Special Meeting of Shareholders
will be held on September 6, 1996 to approve the consolidation changes. If
approved, the changes for your particular funds will appear on your quarterly
statement following the Shareholder Meeting. No further action will be required
on your part. If you have questions regarding the consolidation, please contact
any member of your Prudential service team. We remain committed to providing
quality retirement services to help you achieve financial security.
Sincerely,
/s/ Mark R. Fetting
Enclosures
<PAGE>
ThePrudential [LOGO] Mark R. Fetting
President
Prudential Defined Contribution Services
30 Scranton Office Park
Moosic, PA 18507-1789
August 5, 1996
Dear Pru-DC Client:
As announced in early June, one of the first significant actions
following the formation of the Prudential Money Management Group was the
approval by the Board of Trustees of The Prudential Institutional Fund (PIF) to
combine the seven institutional series of funds with the broader Prudential
Mutual Fund (PMF) family. Pending approval of the Board's action, as shown in
the chart below, the four largest PIF funds will continue with the same
investment objectives and portfolio managers. The three smaller funds will be
combined with similar, but not identical, PMF funds.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Current Fund New Fund Investment Portfolio
Objective Managers
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Stock Fund International Stock Series Same Peter Spano
Class Z (no change)
- --------------------------------------------------------------------------------------------------
Growth Stock Fund Prudential Jennison Fund Same David Poiesz
Class Z (no change)
- --------------------------------------------------------------------------------------------------
Stock Index Fund Stock Index Fund Same John Moschberger
Class Z (no change)
- --------------------------------------------------------------------------------------------------
Active Balanced Fund Active Balanced Fund Same Bradley Goldberg
Class Z (no change)
- --------------------------------------------------------------------------------------------------
Balanced Fund Prudential Allocation Fund Similar Gregory Goldberg
Balanced Portfolio Class Z
- --------------------------------------------------------------------------------------------------
Income Fund Prudential Government Income Fund Similar Barbara Kenworthy
Class Z
- --------------------------------------------------------------------------------------------------
Money Market Fund Prudential MoneyMart Assets Similar Joseph Tully
Class Z
- --------------------------------------------------------------------------------------------------
</TABLE>
As a shareholder, you are being asked to consider the action taken by
the Board. Enclosed is a combined proxy/prospectus statement discussing the
----------------------------------------------------------------
relevant fund consolidation in detail and the reasons why the Board believes the
- --------------------------------------------------------------------------------
consolidation is in the best interest of the shareholders. Also enclosed is the
- -------------------------------------------------------------------------------
ballot card for use in voting your shares. PLEASE INDICATE YOUR VOTE AND RETURN
- -------------------------------------------------------------------------------
IT IN THE ENVELOPE PROVIDED.
- ----------------------------
As noted on the front of the proxy, a Special Meeting of Shareholders
will be held on September 6, 1996 to approve the consolidation changes. If
approved, the changes will appear on quarterly statements following the
Shareholder Meeting. No further action will be required on your part. If you
have questions regarding the consolidation, please contact any member of your
Prudential service team. We remain committed to providing quality retirement
services to help you and your participants achieve financial security.
Sincerely,
/s/ Mark R. Fetting
Enclosures
<PAGE>
ThePrudential [LOGO] Mark R. Fetting
President
Prudential Defined Contribution Services
30 Scranton Office Park
Moosic, PA 18507-1789
August 5, 1996
Dear Plan Participant:
As announced in early June, one of the first significant actions
following the formation of the Prudential Money Management Group was the
approval by the Board of Trustees of The Prudential Institutional Fund (PIF) to
combine the seven institutional series of funds with the broader Prudential
Mutual Fund (PMF) family. Pending approval of the Board's action, as shown in
the chart below, the four largest PIF funds will continue with the same
investment objectives and portfolio managers. The three smaller funds will be
combined with similar, but not identical, PMF funds.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Current Fund New Fund Investment Portfolio Managers
Objective
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Stock Fund International Stock Series Same Peter Spano
Class Z (no change)
- --------------------------------------------------------------------------------------------------
Growth Stock Fund Prudential Jennison Fund Same David Poiesz
Class Z (no change)
- --------------------------------------------------------------------------------------------------
Stock Index Fund Stock Index Fund Same John Moschberger
Class Z (no change)
- --------------------------------------------------------------------------------------------------
Active Balanced Fund Active Balanced Fund Same Bradley Goldberg
Class Z (no change)
- --------------------------------------------------------------------------------------------------
Balanced Fund Prudential Allocation Fund Similar Gregory Goldberg
Balanced Portfolio Class Z
- --------------------------------------------------------------------------------------------------
Income Fund Prudential Government Income Fund Similar Barbara Kenworthy
Class Z
- --------------------------------------------------------------------------------------------------
Money Market Fund Prudential MoneyMart Assets Similar Joseph Tully
Class Z
- --------------------------------------------------------------------------------------------------
</TABLE>
As a shareholder, you are being asked to consider the action taken by
the Board. Enclosed is a combined proxy/prospectus statement discussing the
----------------------------------------------------------------
relevant fund consolidation in detail and the reasons why the Board believes the
- --------------------------------------------------------------------------------
consolidation is in the best interest of the shareholders. Also enclosed is the
- -------------------------------------------------------------------------------
ballot card for use in voting your shares. PLEASE INDICATE YOUR VOTE AND RETURN
- -------------------------------------------------------------------------------
IT IN THE ENVELOPE PROVIDED.
- ----------------------------
As noted on the front of the proxy, a Special Meeting of Shareholders
will be held on September 6, 1996 to approve the consolidation changes. If
approved, the changes for your particular funds will appear on your quarterly
statement following the Shareholder Meeting. No further action will be required
on your part. If you have questions regarding the consolidation, please contact
any member of your Prudential service team at 1-800-562-8838. Your Prudential
team remains committed to providing quality retirement services to help you
achieve financial security.
Sincerely,
/s/ Mark R. Fetting
Enclosures
<PAGE>
ThePrudential [LOGO] Mark R. Fetting
President
Prudential Defined Contribution Services
30 Scranton Office Park
Moosic, PA 18507-1789
August 5, 1996
Dear Plan Participant:
As announced in early June, one of the first significant actions
following the formation of the Prudential Money Management Group was the
approval by the Board of Trustees of The Prudential Institutional Fund (PIF) to
combine each of the series of fund with the broader Prudential
Mutual Fund (PMF) family. Pending approval of the Board's action, as shown in
the chart below, the four largest PIF funds will continue with the same
investment objectives and portfolio managers. The remaining funds will be
combined with similar, but not identical, PMF funds.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Current Fund New Fund Investment Portfolio Managers
Objective
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
International Stock Fund International Stock Series Same Peter Spano
Class Z (no change)
- --------------------------------------------------------------------------------------------------
Growth Stock Fund Prudential Jennison Fund Same David Poiesz
Class Z (no change)
- --------------------------------------------------------------------------------------------------
Stock Index Fund Stock Index Fund Same John Moschberger
Class Z (no change)
- --------------------------------------------------------------------------------------------------
Active Balanced Fund Active Balanced Fund Same Bradley Goldberg
Class Z (no change)
- --------------------------------------------------------------------------------------------------
Balanced Fund Prudential Allocation Fund Similar Gregory Goldberg
Balanced Portfolio Class Z
- --------------------------------------------------------------------------------------------------
Income Fund Prudential Government Income Fund Similar Barbara Kenworthy
Class Z
- --------------------------------------------------------------------------------------------------
</TABLE>
As a shareholder, you are being asked to consider the action taken by
the Board. Enclosed is a combined proxy/prospectus statement discussing the
----------------------------------------------------------------
relevant fund consolidation in detail and the reasons why the Board believes the
- --------------------------------------------------------------------------------
consolidation is in the best interest of the shareholders. Also enclosed is the
- -------------------------------------------------------------------------------
ballot card for use in voting your shares. PLEASE INDICATE YOUR VOTE AND RETURN
- -------------------------------------------------------------------------------
IT IN THE ENVELOPE PROVIDED.
- ----------------------------
As noted on the front of the proxy, a Special Meeting of Shareholders
will be held on September 6, 1996 to approve the consolidation changes. If
approved, the changes for your particular funds will appear on your quarterly
statement following the Shareholder Meeting. No further action will be required
on your part. If you have questions regarding the consolidation, please contact
any member of your Prudential service team at 1-800-458-6333. Your Prudential
team remains committed to providing quality retirement services to help you
achieve financial security.
Sincerely,
/s/ Mark R. Fetting
Enclosures
<PAGE>
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 July 12, 1996, at the Special Meeting of
Shareholders to be held on September 6, 1996 or any adjournment thereof.
Please indicate your voting instructions on the reverse and sign and return this
proxy as indicated.
<PAGE>
2 International Stock Fund
Please indicate your vote by an "X" in the appropriate box below. The
Board of Trustees recommends a vote "FOR" the following proposal
1. Approval or disapproval of the Agreement and Plan of Conversion and
Liquidation.
FOR [_] AGAINST [_] ABSTAIN [_]
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.
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.
This proxy will not be voted unless it is dated and signed exactly as
instructed below.
------------------------------------
Signature
------------------------------------
Signature
Date: , 1996
------------------------
If shares are held jointly, each shareholder named should sign. If the shares
are held in trust, the Trustee should sign his or her name and indicate that he
or she is signing as Trustee. If the shareholder is a corporation, the President
or Vice President should sign in his or her own name, indicating title. If the
shareholder is a partnership, a partner should sign in his or her own name,
indicating that he or she is a "Partner."
<PAGE>
PRUDENTIAL WORLD FUND, INC.--INTERNATIONAL STOCK SERIES
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292-1025
(800) 225-1852
STATEMENT OF ADDITIONAL INFORMATION
DATED JULY 31, 1996
ACQUISITION OF ASSETS OF
THE PRUDENTIAL INSTITUTIONAL FUND--INTERNATIONAL STOCK FUND
PRUDENTIAL PLAZA
751 BROAD STREET
NEWARK, NEW JERSEY 07102-3777
(800) 225-1852
----------------
BY AND IN EXCHANGE FOR CLASS Z SHARES OF
THE INTERNATIONAL STOCK SERIES OF
PRUDENTIAL WORLD FUND, INC.
This Statement of Additional Information specifically relates to the
proposed transfer of all of the assets and the assumption of all of the
liabilities, if any, of International Stock Fund (International Stock Fund), a
portfolio of The Prudential Institutional Fund (PIF), by International Stock
Series (the Portfolio), a portfolio 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. Additional Information regarding Prudential World Fund, Inc.--Class
Z shares;
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
relating to International Stock Fund for the fiscal year ended
September 30, 1995; 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.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Prospectus and Proxy Statement dated July
31, 1996, relating to the above-referred matter. A copy of the Prospectus and
Proxy Statement may be obtained from World Fund without charge by writing or
calling World Fund at the address or phone number listed above.
1
<PAGE>
PRUDENTIAL WORLD FUND, INC.
(INTERNATIONAL STOCK SERIES)
Additional Information
The following is additional information regarding the International Stock
Series (the Series) of Prudential World Fund, Inc. (the Fund). SHARES OF THE
SERIES WILL NOT BE OFFERED TO THE GENERAL PUBLIC UNTIL ON OR ABOUT SEPTEMBER 20,
1996.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Investment Objective and Policies ............................................... B-2
Investment Restrictions ......................................................... B-13
Directors and Officers........................................................... B-14
Manager.......................................................................... B-17
Distributor...................................................................... B-19
Net Asset Value.................................................................. B-21
Portfolio Transactions and Brokerage ............................................ B-21
Purchase and Redemption of Series Shares......................................... B-23
Shareholder Investment Account................................................... B-25
Performance Information.......................................................... B-28
Taxes............................................................................ B-30
Custodian, Transfer and Dividend Disbursing Agent and Independent Accountants.... B-32
Appendix--General Investment Information......................................... App-1
Appendix--Historical Performance Data............................................ App-2
Appendix--Information Relating to The Prudential................................. App-6
Appendix--Description of S&P, Moody's and Duff & Phelps Ratings.................. App-9
</TABLE>
<PAGE>
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-grade domestic
and foreign money market instruments and short-term fixed income securities.
Although the Series will 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.
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 will receive 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 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.
B-2
<PAGE>
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 hereto
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 investment grade, 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 investment grade and lower-rated securities (or unrated
securities that are equivalent to investment grade 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 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
B-3
<PAGE>
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.
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,
B-4
<PAGE>
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), will not be 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, fixedasset 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.
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
B-5
<PAGE>
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 will pay 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 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
B-6
<PAGE>
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 ALLS 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
will bear the risk that the price of the securities held by the Series may not
increase as much as the index. In such 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
B-7
<PAGE>
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 oddlot
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, highgrade 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 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 roundtheclock 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 also will be 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 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 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 "whenissued" or
delay eddelivery 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 shortterm 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.
B-13
<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.
c/o Prudential Mutual Fund Hartford Foundation, Inc.
Management, Inc. (charitable foundation) (since May
One Seaport Plaza 1985); Director of Faircom, Inc.
New York, NY
Delayne Dedrick Gold (58) 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
c/o Prudential Mutual Fund Officer of Intertec, Inc.
Management, Inc. (investments) since 1980; Chairman
One Seaport Plaza and Chief Executive Officer of EHS,
New York, NY Inc. since 1993; Director of
Innovative Capital Management,
Inc., The Asia Pacific Fund and The
Greater China Fund.
</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. (75) Director Senior Director (since January
One Seaport Plaza 1986) of Prudential Securities
New York, NY Incorporated (Prudential
Securities); formerly Interim
Chairman and Chief Executive
Officer of Prudential Mutual Fund
Management Inc. (PMF);
(JuneSeptember 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
c/o Prudential Mutual Fund Company (investments) since 1981;
Management, Inc. Chairman of Insight Communications
One Seaport Plaza Company, L.P. and Microbiological
New York, NY Associates, Inc.; Director of
Cellular Communications, Inc.,
Cellular Communications
International, Inc., Cellular
Communications of Puerto Rico,
Inc., General American Investors
Company, Inc., IGENE
Biotechnology, Inc., International
CableTel Incorporated and a number
of private companies.
Robert E. LaBlanc (62) Director President of Robert E. LaBlanc
c/o Prudential Mutual Fund Associates, Inc.
Management, Inc. (telecommunications) since 1981;
One Seaport Plaza Director of Storage Technology
New York, NY Corporation, Titan Corp., Tribune
Company and Trustee of Manhattan
College.
Thomas A. Owens, Jr. (73) Director Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY
*Richard A. Redeker (53) President and President, Chief Executive Officer
One Seaport Plaza Director and Director (since October 1993),
New York, NY PMF; Executive Vice President;
Director and Member of the
Operating Committee (since October
1993); Prudential Securities
Incorporated (Prudential
Securities); Director (since
October 1993) of Prudential
Securities Group, Inc. (PSG); 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
1978September 1993); Director and
President of The Global Yield
Fund, Inc.
Clay T. Whitehead (57) Director President of National Exchange
c/o Prudential Mutual Fund Inc. (since May 1983).
Management, Inc.
One Seaport Plaza
New York, NY
David W. Drasnin (58) Vice President Vice President and Branch Manager
39 Public Square, of Prudential Securities.
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 OCCUPATIONS
NAME, ADDRESS AND AGE FUND DURING PAST FIVE YEARS
<S> <C> <C>
Robert F. Gunia (49) Vice President Chief Administrative Officer
One Seaport Plaza (since July 1990), Director (since
New York, NY January 1989) and Executive Vice
President, Treasurer and Chief
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
One Seaport Plaza Principal 1994) of PMF; First Vice President
New York, NY Financial and (since March 1994) of Prudential
Accounting Securities; Vice President of
Officer Bankers Trust (July 1989-March
1994).
Stephen M. Ungerman (43) Assistant First Vice President (since
One Seaport Plaza Treasurer February 1993) of PMF; Tax
New York, NY Director of the Money Management
Group and the Private Asset Group
of ThePrudential 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
One Seaport Plaza January 1991) and Senior Counsel
New York, NY (since June 1987) of PMF; Senior
Vice President and Senior Counsel
of Prudential Securities (since
July 1992); formerly Vice
President and Associate General
Counsel of Prudential Securities.
Ellyn C. Vogin (35) Assistant Vice President and Associate
One Seaport Plaza Secretary General Counsel of Prudential
New York, NY Securities and PMF (since March
1995); prior thereto, associated
with the law 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 outofpocket 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 will be 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." 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 CompanyInstitute, 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 proposed 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, will manage 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 will be obligated to keep certain books
and records of the Series. PMF also will administer the Series' corporate
affairs and, in connection therewith, will furnish 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'
proposed custodian, and PMFS, the Series' proposed transfer and dividend
disbursing agent. The management services of PMF for the Series will not be
exclusive under the terms of the Management Agreement and PMF will be free to,
and does, render management services to others.
For its services, PMF will receive, pursuant to the proposed Management
Agreement, a fee at an annual rate of 1% of the Series' average daily net
assets. The fee will be computed daily and payable monthly. The proposed
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.
B-17
<PAGE>
In connection with its management of the corporate affairs of the Series, PMF
will bear 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) 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 proposed Management Agreement, the Series will be
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 proposed 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 proposed 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 proposed
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.
PMF will enter 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 proposed Subadvisory Agreement
provides that Mercator will furnish investment advisory services in connection
with the management of the Series. In connection therewith, Mercator will be
obligated to keep certain books and records of the Fund. PMF will continue to
have responsibility for all investment advisory services pursuant to the
proposed Management Agreement and will supervise Mercator'sperformance of such
services.
Pursuant to a proposed subadvisory agreement with PMF, The Prudential
Investment Corporation (PIC) will provide 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 PICdetermined in a manner acceptable to PMF.
The proposed 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 proposed Management Agreement. The proposed Subadvisory
Agreement may be terminated by the Fund, PMF or Mercator upon not more than 60
days', nor less than 30 days', written notice. Theproposed Subadvisory Agreement
provides that it will continue in effect for a period of more than two years
from its execution only so long as such continuance is specifically approved at
least annually in accordance with the requirements of the Investment Company
Act.
The Manager and the 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
B-18
<PAGE>
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 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 complexwide 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'
tollfree 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), will act 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 proposed separate
distribution agreements (the Distribution Agreements), Prudential Securities
(the Distributor) will incur the expenses of distributing the Series' Class A,
Class B and Class C shares. Prudential Securities will serve as the Distributor
of the Class Z shares and will incur 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.
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 distributionrelated expenses with respect to the Class B
shares (assetbased sales charge). .
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.
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 proposed Distribution Agreement, the Series will agree 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.
B-20
<PAGE>
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) will be
valued at the last sales price on the day of valuation, or, if there was no sale
on such day, the mean between the last bid and asked prices on such day, as
provided by a pricing service. Corporate bonds (other than convertible debt
securities) and U.S. Government securities that are actively traded in the over-
the-counter market, including listed securities for which the primary market is
believed to be over-the-counter, will be 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, will be 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 will be valued
at the mean between the most recently quoted bid and asked prices on the
respective exchange and futures contracts and options thereon will be 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 will be converted
to U.S. dollar equivalents at the current rate obtained from a recognized bank
or dealer and forward currency exchange contracts will be 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 will be valued at their fair value as determined in good faith by the
Board of Directors. Short-term debt securities will be 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, will be 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 will be 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 will be 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 overthecounter 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.
B-21
<PAGE>
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.
In placing orders for portfolio securities of the Series, the Manager will be
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 will be 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 will be 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 will be 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 will be 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, will adopt 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) also will
be subject to such fiduciary standards as may be imposed upon Prudential
Securities (or such affiliate) by applicable law.
B-22
<PAGE>
PURCHASE AND REDEMPTION OF SERIES SHARES
SHARES OF THE SERIES WILL NOT BE OFFERED TO THE GENERAL PUBLIC UNTIL ON OR
ABOUT SEPTEMBER 20, 1996.
At that time, 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 will be offered to a limited group of investors at net
asset value without any sales charge.
Each class will represent an interest in the same assets of the Series and
will be identical in all respects except that (i) each class will be subject to
different sales charges and distribution and/or service expenses which may
affect performance, (ii) each class will have exclusive voting rights on any
matter submitted to shareholders that relates solely to its arrangement and will
have separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests ofany other class, (iii) each
class will have a different exchange privilege and (iv) only Class B shares will
have a conversion feature. See "Distributor." Each class also will have
separate exchange privileges. See "Shareholder Investment Account--Exchange
Privilege."
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.
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 also will be 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
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 will be calculated
using the maximum offering or price (net asset value plus maximum sales charge)
as of the previous business day. 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 will not be available to individual
participants in any retirement or group plans.
LETTERS OF INTENT. Reduced sales charges also will be 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).
B-23
<PAGE>
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 also will be 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 backdated 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 will not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter of
Intent will 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) will be
required to pay the difference between thesales charge otherwise applicable to
the purchases made during this period and sales charges actually paid. Such
paymentmay 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 will not be 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 will be waived under circumstances. In
connection with these waivers, the Transfer Agent will require you to submit the
supporting documentation set forth below.
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
<S> <C>
Death A copy of the shareholder's death certificate or,
in the case of a trust, a copy of the grantor's
death certificate, plus a copy of the trust
agreement identifying the grantor.
Disability--An individual A copy of the Social Security Administration award
will be considered letter or a letter from a physician on the
disabled if he or she is physician's letterhead stating that the
unable to engage in any shareholder (or, in the case of a trust, the
substantial gainful grantor) is permanently disabled. The letter must
activity by reason of any also indicate the date of disability.
medically determinable
physical or mental
impairment which can be
expected to result in
death or to be of
longcontinued and
indefinite duration.
Distribution from an IRA A copy of the distribution form from the custodial
or 403(b) Custodial firm indicating (i) the date of birth of the
Account shareholder and(ii) that the shareholder is over
age 59 1/2 and is taking a normal distribution--
signed by the shareholder.
Distribution from A letter signed by the plan administrator/trustee
Retirement Plan 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.
B-24
<PAGE>
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Series shares, a Shareholder Investment Account
will be 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 will be issued only for
full shares and may be redeposited in the Account at any time. There will be no
charge to the investor for issuance of a certificate. The Series will make
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 will be
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 will make 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 will
be 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 will be 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)
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
B-25
<PAGE>
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 will be 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 fouryear 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
See "Automatic Savings Accumulation Plan."
</TABLE>
/1/Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Average costs for private institutions include tuition, fees, room and
board for the 1993-1994 academic year.
/2/The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the 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 will
not be issued to ASAP participants.
Further information about this program and an application form can be obtained
from the Transfer Agent, PrudentialSecurities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan will be 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.
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 will 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 will constitute 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, selfdirected
individual retirement accounts and "tax sheltered accounts" under Section
403(b)(7) of the Internal Revenue Code will be available through the
Distributor. These plans will be for
B-27
<PAGE>
use by both self-employed individuals and corporate employers. These plans
permit either self-direction of accounts by participants or a pooled account
arrangement. Information regarding the establishment of these plans, the
administration, custodial fees and other details are available from Prudential
Securities or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult with
their own legal counsel or tax adviser with respect to the establishment and
maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
Individual Retirement Accounts. An individual retirement account (IRA) permits
the deferral of federal income tax on income earned in the account until the
earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, an 8% rate of return and a 39.6% federal income tax bracket
and shows how much more retirement income can accumulate within an IRA as
opposed to a taxable individual savings account.
TAXDEFERRED 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
taxdeferred 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 pro gram, 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 will be determined
separately for Class A, Class B, Class C and Class Z shares.
Average annual total return is computed according to the following formula:
P(1+T)/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 will be calculated separately for Class A, Class B, Class
C and Class Z shares. This yield will be computed by dividing the Series' net
investment
B-28
<PAGE>
income per share earned during this 30day period by the maximum offering price
per share on the last day of this period. Yield is calculated according to the
following formula:
6
a-b +1 -1
YIELD=2 [( ----- ) ]
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.
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)/
[CHART]
- ----------------------
/(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 marketweighted,
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 will elect 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 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, will be 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 also will be
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 shortterm 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 longterm 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
longterm 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
distributionrelated 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, will serve as Custodian for the Series' portfolio
securities and cash and in that capacity will maintain 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.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, will serve as the Transfer and Dividend Disbursing Agent of the
Series. Its mailing address is P.O. Box 15005, New Brunswick, New Jersey
089065005. PMFS is a whollyowned subsidiary of PMF. PMFS will provide 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 will receive 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
will be 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,
will serve as the Series' independent accountants, and in that capacity will
audit 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.
[CHART]
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 fixedincome 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
[Chart]
/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.
[Chart]
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.
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.
[Chart]
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.
App-4
<PAGE>
This chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.
[Chart]
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
onebond 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>
APPENDIX--INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance
Company of America (Prudential) and its subsidiaries as well as information
relating to the Prudential Mutual Funds. The data will be used in sales
materials relating to the Prudential Mutual Funds. Unless otherwise indicated,
the information is as of December 31, 1995 and is subject to change thereafter.
All information relies on data provided by The Prudential Investment Corporation
(PIC) or from other sources believed by the Manager to be reliable. Such
information has not been verified by the Fund.
Information about Prudential
The Manager and PIC/1/ 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, 1995. 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 more
than 92,000 persons worldwide, and maintains a sales force of approximately
13,000 agents and 5,600 financial advisors. 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 uses the rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.
Insurance. Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to more than 50 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of individual life insurance, the Prudential has 19 million life
insurance policies in force today with a face value of $1 trillion. Prudential
has the largest capital base ($11.4 billion) of any life insurance company in
the United States. The Prudential provides auto insurance for more than 1.7
million cars and insures more than 1.4 million homes.
Money Management. The Prudential is one of the largest pension fund
managers in the country, providing pension services to 1 in 3 Fortune 500 firms.
It manages $36 billion of individual retirement plan assets, such as 401(k)
plans. 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, 1995, Prudential
had more than $314 billion in assets under management. Prudential's Money
Management Group (of which Prudential Mutual Funds is a key part) manages over
$190 billion in assets of institutions and individuals.
Real Estate. 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./2/
Healthcare. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 5 million
Americans receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Bank, a wholly-owned subsidiary of
the Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.
Information about the Prudential Mutual Funds
Prudential Mutual Fund Management is one of the sixteenth largest
mutual fund companies in the country, with over 2.5 million shareholders
invested in more than 50 mutual fund portfolios and variable annuities with more
than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage
over $55 billion in mutual fund and variable annuity assets. Some of
Prudential's portfolio managers have over 20 years of experience managing
investment portfolios.
- -----------------
/1/ Prudential Mutual Fund Investment Management, a unit of PIC,
serves as the Subadviser to substantially all of the Prudential
Mutual Funds. Wellington Management Company serves as the
subadviser to Global Utility Fund, Inc., Nicholas-Applegate
Capital Management as subadviser to Nicholas-Applegate Fund,
Inc., Jennison Associates Capital Corp. as the subadviser to
Prudential Jennison Fund, Inc. and BlackRock Financial
Management Inc. as subadviser to the BlackRock Government Income
Trust. There are multiple subadvisers for The Target Portfolio
Trust
/2/ As of December 31, 1994
App-6
<PAGE>
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.
Equity Funds. Forbes magazine listed Prudential Equity Fund among
twenty mutual funds on its Honor Roll in its mutual fund issue of August 28,
1995. Honorees are chosen annually among mutual funds (excluding sector funds)
which are open to new investors and have had the same management for at least
five years. Forbes considers, among other criteria, the total return of a mutual
fund in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Fund, a growth-style equity
fund managed by Jenison Associates Capital Corp., a premier institutional equity
manager and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and
research intensive pursuit. A separate team of high yield bond analysts
monitor the 167 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase./3/ Non-Investment grade bonds,
also known as junk bonds or high yield bonds, are subject to a greater risk of
loss of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and
sophisticated research organization. Fourteen investment grade bond analysts
monitor the financial viability of approximately 1,750 different bond issuers in
the investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services
from almost 200 brokers and market service vendors. They also receive nearly
100 trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to
collect detailed information on which to trade. From natural gas prices in the
Rocky Mountains to the results of local municipal elections, a Prudential
portfolio manager or trader is able to monitor it if it's important to a
Prudential mutual fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and
foreign government securities a year. PIC seeks information from government
policy makers. In 1995, Prudential's portfolio managers met with several senior
U.S. and foreign government officials, on issues ranging from economic
conditions in foreign countries to the viability of index-linked securities in
the United States.
Prudential Mutual Funds' portfolio managers and analysts met with over
1,200 companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Funds global equity managers conducted many of their
visits overseas, often holding private meetings with a company in a foreign
language (our global equity managers speak 7 different languages, including
Mandarin Chinese).
Trading Data./4/ On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets. Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. 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./6/
- -------------
/3/ As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
/4/ Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts managed
by Prudential Mutual Investment Fund Management, a division of PIC, for the
year ended December 31, 1995.
/5/ Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General U.S. Government and Mortgage funds.
/6/ As of December 31, 1994.
App-7
<PAGE>
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Service, 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.
Information about Prudential Securities
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI./7/
Prudential Securities has a two-year Financial Advisor training program
plus advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment areas.
Prudential Securities is the only Wall Street firm to have its own in-house
Certified Financial Planner (CFP) program. In the December 1995 Issue of
Registered Rep, an industry publication, Prudential Securities' Financial
Advisor training programs received a grade of A-(compared to an industry average
of B+).
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey. Five
Prudential Securities' analysts were ranked as first-team finishers./8/
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architect/SM/, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser of Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- -----------------
/7/ As of December 31, 1994.
/8/ On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual analyst
and weighting them based on the size of the voting institution. In total,
the magazine sends its survey to approximately 2,000 institutions and a
group of European and Asian institutions.
App-8
<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 longterm
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 wellsafeguarded 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 midrange 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-9
<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 A1 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 A1+. Capacity for timely
payment on commercial paper rated A2 is strong, but the relative degree of
safety is not as high as for issues designated A1.
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-10
<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>
THE PRUDENTIAL
(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
