<PAGE>
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
Statement of Additional Information
dated March 4, 1997
Nicholas-Applegate Growth Equity Fund (the "Fund") is a series of Nicholas-
Applegate Fund, Inc. (the "Company"), an open-end, diversified management
investment company incorporated under the laws of Maryland. The Fund's
investment objective is long-term capital appreciation. The Fund seeks to
achieve its objective by investing principally in a diversified portfolio of
common stocks and securities convertible into or exercisable for common
stocks, the earnings and securities prices of which its Investment Adviser
expects to grow at a rate above the rate of the Standard & Poor's 500 Stock
Price Index (the "S&P 500"). The Fund intends to invest primarily in companies
having middle market capitalizations and above. Companies which have market
capitalizations of $500 million to approximately $5 billion are generally
referred to as "middle market" Capitalization companies. No assurance can be
given that the Fund's investment objective will be achieved. See "Investment
Objective and Policies".
The Fund's address is Gateway Center Three, Newark, New Jersey 07102, and
its telephone number is (800) 225-1852. The Statement of Additional
Information is not a prospectus and should be read in conjunction with the
Fund's Prospectus dated March 4, 1997, a copy of which may be obtained from
the Fund upon request.
TABLE OF CONTENTS
<TABLE>
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CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
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<S> <C> <C>
General Information...................................... B-2 17
Investment Objective and Policies........................ B-2 7
Investment Restrictions.................................. B-6 11
Directors and Principal Officers......................... B-8 11
Manager.................................................. B-11 11
Investment Adviser....................................... B-12 12
Distributor.............................................. B-14 12
Portfolio Transactions and Brokerage..................... B-17 14
Purchase and Redemption of Fund Shares................... B-19 18
Shareholder Investment Account........................... B-22 18
Net Asset Value.......................................... B-26 15
Dividends, Distributions and Taxes....................... B-27 16
Performance Information.................................. B-29 15
Custodian, Transfer and Dividend Disbursing Agent and In-
dependent Accountants................................... B-30 14
Financial Statements..................................... B-31 --
Report of Independent Accountants........................ B-41 --
Appendix I--Historical Performance Data.................. I-1 --
Appendix II--General Investment Information.............. II-1 --
Appendix III--Information Relating to The Prudential..... III-I --
</TABLE>
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MF151B
<PAGE>
GENERAL INFORMATION
The Company began business as a closed-end diversified management investment
company in April 1987 under the name "Nicholas-Applegate Growth Equity Fund,
Inc." Pursuant to its Charter, the Fund converted to an open-end investment
company (commonly referred to as a "mutual fund") on June 10, 1991, at which
time the name of the Company was changed to "Nicholas-Applegate Fund, Inc."
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is capital appreciation. It seeks to achieve
this objective by investing primarily in common stocks and in securities
convertible into or exercisable for common stocks (such as convertible
preferred stocks, convertible debentures and warrants), the earnings and
securities prices of which Nicholas-Applegate Capital Management, the Fund's
investment adviser ("Nicholas-Applegate" or the "Investment Adviser"), expects
to grow at a rate above that of the S&P 500. The Fund's investment objective
and certain other policies described under "Investment Restrictions" are
fundamental policies that may not be changed without the vote of a majority of
the outstanding shares of the Fund, as defined in the Investment Company Act
of 1940, as amended (the "Investment Company Act"). There can be no assurance
that the Fund's investment objective will be achieved. For a further
description of the Fund's investment objective, see "Description of the Fund--
Investment Objective" in the Prospectus.
INVESTMENT POLICIES AND PRACTICES
For a description of the Fund's investment policies and practices, and
certain of the risks associated therewith, see "How the Fund Invests--
Investment Policies and Practices" in the Prospectus.
CONVERTIBLE SECURITIES AND WARRANTS. The Fund may invest in securities which
may be exchanged for, converted into or exercised to acquire a predetermined
number of shares of the issuer's common stock at the option of the Fund during
a specified time period (such as convertible preferred stocks, convertible
debentures and warrants). A convertible security is a fixed-income security (a
bond or preferred stock) which may be converted at a stated price within a
specified period of time into a certain quantity of the common stock of the
same or a different issuer. Convertible securities are senior to common stocks
in a corporation's capital structure, but are usually subordinated to similar
nonconvertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from common stock but lower than
that afforded by a similar nonconvertible security), a convertible security
also affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation attendant upon a market price advance
in the convertible security's underlying common stock.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security)
or its "conversion value" (i.e., its value upon conversion into its underlying
common stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security
is also influenced by the market value of the security's underlying common
stock. The price of a convertible security tends to increase as the market
value of the underlying stock rises, whereas it tends to decrease as the
market value of the underlying stock declines. While no securities investment
is without some risk, investments in convertible securities generally entail
less risk than investments in the common stock of the same issuer.
Investments in warrants involve certain risks, including the possible lack
of a liquid market for resale of the warrants, potential price fluctuations as
a result of speculation or other factors, and failure of the price of the
underlying security to reach or have reasonable prospects of reaching a level
at which the warrant can be prudently exercised (in which event the warrant
may expire without being exercised, resulting in a loss of the Fund's entire
investment therein). The Fund does not contemplate investing more than 5% of
its total assets in fixed income convertible securities and warrants in the
coming year.
B-2
<PAGE>
SHORT-TERM INVESTMENTS. To the extent that the Fund is or becomes a
shareholder in a money market mutual fund, the Fund will bear its ratable
share of such fund's expenses, including management fees, and will remain
subject to payment of the management fee to the Manager with respect to the
Fund's assets so invested.
PUT AND CALL OPTIONS. The Fund is authorized to purchase listed covered
"put" and "call" options with respect to securities which are otherwise
eligible for purchase by the Fund and with respect to the S&P 500, subject to
certain restrictions. The Fund does not presently intend to purchase options
that are not traded on a national securities exchange. See "Description of the
Fund--Investment Policies and Practices--Put and Call Options" in the
Prospectus.
If the Fund purchases a listed put option, it acquires the right to sell the
underlying security at a specified price at any time during the term of the
option. Purchasing put options may be used as a portfolio investment strategy
when the Investment Adviser perceives significant short-term risk but
substantial long-term appreciation for the underlying security. The put option
acts as an insurance policy, as it protects against significant downward price
movement while it allows full participation in any upward movement. If the
Fund is holding a stock which it feels has strong fundamentals, but for some
reason may be weak in the near term, it may purchase a listed put on such
security, thereby giving itself the right to sell such security at a certain
strike price throughout the term of the option. Consequently, the Fund will
exercise the put only if the price of such security falls below the strike
price of the put. The difference between the put's strike price and the market
price of the underlying security on the date the Fund exercises the put, less
transaction costs, will be the amount by which the Fund will be able to hedge
against a decline in the underlying security. If during the period of the
option the market price for the underlying security remains at or above the
put's strike price, the put will expire worthless, representing a loss of the
price the Fund paid for the put, plus transaction costs. If the price of the
underlying security increases, the profit the Fund realizes on the sale of the
security will be reduced by the premium paid for the put option less any
amount for which the put may be sold.
If the Fund purchases a listed call option, it acquires the right to
purchase the underlying security at a specified price at any time during the
term of the option. The purchase of a call option can be either a speculative
practice to realize gains if the market price of the underlying security
increases above the strike price during the term of the option and the option
is sold at that time, or as a type of insurance policy to hedge against losses
that could occur if the Fund has a short position in the underlying security
and the security thereafter increases in price. The Fund will exercise a call
option only if the price of the underlying security is above the strike price
at the time of exercise. If during the option period the market price for the
underlying security remains at or below the strike price of the call option,
the option will expire worthless, representing a loss of the price paid for
the option, plus transaction costs. If the call option has been purchased to
hedge a short position of the Fund in the underlying security and the price of
the underlying security thereafter falls, the profit the Fund realizes on the
cover of the short position in the security will be reduced by the premium
paid for the call option less any amount for which such option may be sold.
The Fund may also purchase "put" and "call" options with respect to the S&P
500. Such options may be purchased as a speculative technique, as a hedge
against changes resulting from market conditions in the values of securities
which are held in the Fund's portfolio or which it intends to purchase or
sell, or when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Fund. The distinctive
characteristics of options on stock indices create certain risks that are not
present with stock options generally. Because the value of an index option
depends upon movements in the level of the index rather than the price of a
particular stock, whether the Fund will realize a gain or loss on the purchase
or sale of an option on an index depends upon movements in the level of stock
prices in the stock market generally rather than movements in the price of a
particular stock. Accordingly, successful use by the Fund of options on the
S&P 500 would be subject to the Investment Adviser's ability to predict
correctly movements in the direction of the stock market generally. This
requires different skills and techniques than predicting changes in the price
of individual stocks. The Investment Adviser currently uses such techniques in
conjunction with the management of other accounts.
B-3
<PAGE>
Index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading of index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number
of stocks included in the index. If this occurred, the Fund would not be able
to close out options which it had purchased, and if restrictions on exercise
were imposed, the Fund might be unable to exercise an option it holds, which
could result in substantial losses to the Fund. It is the Fund's policy to
purchase put or call options only with respect to the S&P 500, which index it
believes includes a sufficient number of stocks to minimize the likelihood of
a trading halt in the index.
The use of options as an investment technique of the Fund is restricted by
the Company's election to be subject to Subchapter M of the Internal Revenue
Code. See "Dividends, Distributions and Taxes".
SHORT SALES. The Investment Adviser's growth equity management approach is
aimed principally at identifying equity securities the earnings and prices of
which it expects to grow at a rate above that of the S&P 500. However, the
Investment Adviser believes that its approach also identifies securities the
prices of which can be expected to decline. Therefore, the Fund is authorized
to make short sales of securities it owns or has the right to acquire at no
added cost through conversion or exchange of other securities it owns
(referred to as short sales "against the box") and to make short sales of
securities which it does not own or have the right to acquire.
In a short sale that is not "against the box", the Fund sells a security
which it does not own, in anticipation of a decline in the market value of the
security. To complete the sale, the Fund must borrow the security (generally
from the broker through which the short sale is made) in order to make
delivery to the buyer. The Fund is then obligated to replace the security
borrowed by purchasing it at the market price at the time of replacement. The
Fund is said to have a "short position" in the securities sold until it
delivers them to the broker. The period during which the Fund has a short
position can range from one day to more than a year. Until the security is
replaced, the proceeds of the short sale are retained by the broker, and the
Fund is required to pay to the broker a negotiated portion of any dividends or
interest which accrue during the period of the loan. To meet current margin
requirements, the Fund is also required to deposit with the broker additional
cash or securities so that the total deposit with the broker is maintained
daily at 150% of the current market value of the securities sold short (100%
of the current market value if a security is held in the account that is
convertible or exchangeable into the security sold short within 90 days
without restriction other than the payment of money). Short sales by the Fund
that are not made "against the box" create opportunities to increase the
Fund's return but, at the same time, involve special risk considerations and
may be considered a speculative technique. Since the Fund in effect profits
from a decline in the price of the securities sold short without the need to
invest the full purchase price of the securities on the date of the short
sale, the Fund's asset value per share will tend to increase more when the
securities it has sold short decrease in value, and to decrease more when the
securities it has sold short increase in value, than would otherwise be the
case if it had not engaged in such short sales. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of any premium,
dividends or interest the Fund may be required to pay in connection with the
short sale. Furthermore, under adverse market conditions the Fund might have
difficulty purchasing securities to meet its short sale delivery obligations,
and might have to sell portfolio securities to raise the capital necessary to
meet its short sale obligations at a time when fundamental investment
considerations would not favor such sales.
If the Fund makes a short sale "against the box", the Fund would not
immediately deliver the securities sold and would not receive the proceeds
from the sale. The seller is said to have a short position in the securities
sold until it delivers the securities sold, at which time it receives the
proceeds of the sale. To secure its obligation to deliver securities sold
short, the Fund would deposit in escrow in a separate account with its
custodian an equal amount of the securities sold short or securities
convertible into or exchangeable for such securities. The Fund could close out
its short position by purchasing and delivering an equal amount of the
securities sold short, rather than by delivering securities already held by
the Fund, because the Fund might want to continue to receive interest and
dividend payments on securities in its portfolio that are convertible into the
securities sold short. The Fund's decision to make a short sale "against the
box" may be a technique to hedge against market risks when the Investment
Adviser believes that the price of a security may decline, causing a decline
in the value of a security owned by the Fund or a security
B-4
<PAGE>
convertible into or exchangeable for such security. In such case, any future
losses in the Fund's long position would be reduced by a gain in the short
position. The extent to which such gains or losses in the long position are
reduced will depend upon the amount of the securities sold short relative to
the amount of the securities the Fund owns, either directly or indirectly,
and, in the case where the Fund owns convertible securities, changes in the
investment values or conversion premiums of such securities. The Investment
Adviser has had experience in using short sales under similar circumstances
for its separate accounts since 1985.
ILLIQUID SECURITIES
The Fund may not invest more than 10% of its total assets in repurchase
agreements which have a maturity of longer than seven days or in other
illiquid securities, including securities that are illiquid by virtue of the
absence of a readily available market or legal or contractual restrictions on
resale. Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (Securities Act),
securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which have
not been registered under the Securities Act are referred to as private
placements or restricted securities and are purchased directly from the issuer
or in the secondary market. Mutual funds do not typically hold a significant
amount of these restricted or other illiquid securities because of the
potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes.
Institutional investors depend on an efficient institutional market in which
the unregistered security can be readily resold or on an issuer's ability to
honor a demand for repayment. The fact that there are contractual or legal
restrictions on resale to the general public or to certain institutions may
not be indicative of the liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to
the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the Securities Act for resales of certain
securities to qualified institutional buyers. The investment adviser
anticipates that the market for certain restricted securities such as
institutional commercial paper and foreign securities will expand further as a
result of this regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The Investment Adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Board of Directors. In reaching liquidity decisions, the Investment Adviser
will consider, among other things, the following factors: (1) the frequency of
trades and quotes for the security; (2) the number of dealers wishing to
purchase or sell the security and the number of other potential purchasers;
(3) dealer undertakings to make a market in the security; and (4) the nature
of the security and the nature of the marketplace trades (e.g., the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer). In addition, in order for commercial paper that is
issued in reliance on Section 4(2) of the Securities Act to be considered
liquid, (i) it must be rated in one of the two highest rating categories by at
least two nationally recognized statistical rating organizations (NRSRO), or
if only one NRSRO rates the securities, by that NRSRO, or, if unrated, be of
comparable quality in the view of the Investment Adviser; and (ii) it must not
be "traded flat" (i.e., without accrued interest) or in default as to
principal or interest. Repurchase agreements subject to demand are deemed to
have a maturity equal to the notice period.
B-5
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BORROWING POLICY. Although the Fund is authorized to borrow money from time
to time in amounts of up to 30% of the value of its total assets at the time
of such borrowings, the Board of Directors has adopted a policy that the Fund
may borrow an amount equal to no more than 30% of the value of its total
assets (calculated when the loan is made) only for temporary, extraordinary or
emergency purposes or for the clearance of transactions. See "Investment
Restrictions". This Board policy is not a fundamental policy of the Fund and
the Board of Directors may change its current policy in the future, without
shareholder approval, if it concludes that such a change would be in the best
interests of the Fund and its shareholders.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. A "majority of the
Fund's outstanding voting securities," when used in this Statement of
Additional Information, means the lesser of (i) 67% of the voting shares
represented at a meeting at which more than 50% of the outstanding voting
shares are present in person or represented by proxy or (ii) more than 50% of
the outstanding voting shares. All percentage limitations set forth below
apply immediately after a purchase or initial investment, and any subsequent
change in any applicable percentage resulting from market fluctuations will
not require elimination of any security from the Fund's portfolio.
1. The Fund may not invest in securities of any one issuer if more than 5%
of the market value of its total assets would be invested in the securities of
such issuer. However, up to 25% of the Fund's total assets may be invested
without regard to this limitation. In addition, this restriction does not
apply to investments in securities of the U.S. Government and its agencies.
2. The Fund may not purchase more than 10% of the outstanding voting
securities, or of any class of securities, of any one issuer, or purchase the
securities of any issuer for the purpose of exercising control.
3. The Fund may not invest 25% or more of the market value of its total
assets in the securities of issuers in any one particular industry. This
restriction does not apply to investments in securities of the U.S. Government
or its agencies.
4. The Fund may not purchase or sell real estate. However, the Fund may
invest in securities secured by, or issued by companies that invest in, real
estate or interests in real estate.
5. The Fund may not write put or call options or purchase any securities on
margin, except that the Fund may obtain short-term credit necessary for the
clearance of purchases and sales of portfolio securities.
6. The Fund may not make loans of money, except that the Fund may purchase
publicly distributed debt instruments and certificates of deposit and enter
into repurchase agreements. The Fund reserves the authority to make loans of
its portfolio securities in an aggregate amount not exceeding 25% of the value
of its total assets. Any such loans will be made only upon approval of, and
subject to any conditions imposed by, the Company's Board of Directors.
7. The Fund may borrow money on a secured or unsecured basis for any purpose
(including short-term credit referred to in restriction 5 above) in amounts
not exceeding 30% of the value of its total assets at the time of the
borrowing, provided that, pursuant to the Investment Company Act, borrowings
will only be made from banks and will be made only to the extent that the
value of the Fund's total assets, less its liabilities other than borrowings,
is equal to at least 300% of all borrowings (including the proposed
borrowing). If such asset coverage of 300% is not maintained, the Fund will
take prompt action to reduce its borrowings as required by applicable law.
8. The Fund may not pledge or in any way transfer as security for
indebtedness any securities owned or held by it, except to secure indebtedness
permitted by restriction 7 above.
B-6
<PAGE>
9. The Fund may not underwrite securities of other issuers, except insofar
as it may be deemed an underwriter under the Securities Act in selling
portfolio securities.
10. The Fund may not invest more than 10% of the value of its total assets
in securities that at the time of purchase have legal or contractual
restrictions on resale, or more than 20% of the value of its total assets in
securities of foreign issuers and American Depository Receipts.
11. The Fund may not purchase or sell commodities or commodity contracts,
including options contracts and options on futures contracts. For purposes of
this investment restriction, futures contracts are deemed to be commodity
contracts.
12. The Fund may not issue any securities senior to its Common Stock, except
that the Fund may borrow money as permitted by restriction 7 above.
As a matter of policy, the Board of Directors has determined that the Fund's
Investment Adviser will not be authorized to (i) make loans of its portfolio
securities in excess of 10% of the value of its total assets, (ii) make short
sales or maintain a short position if to do so would create liabilities or
require collateral deposits and segregation of assets arising in connection
with short sales aggregating more than 25% of the Fund's total assets, taken
at market value, (iii) invest in listed covered call options in excess of 5%
of the market value of the Fund's assets as of the date of investment, or
invest in listed covered put options in excess of 5% of the market value of
the Fund's assets as of the date of investment or (iv) borrow money for any
purpose. These are not fundamental policies of the Fund and the Company's
Board of Directors reserves the right to change any such determination in the
future, without shareholder approval, if it concludes that such a change would
be in the best interests of the Fund and its shareholders.
B-7
<PAGE>
DIRECTORS AND PRINCIPAL OFFICERS
The names and addresses of the Directors and principal officers of the
Company are set forth below, together with their positions and their principal
occupations during the past five years and, in the case of the Directors,
their positions with certain other organizations and companies.
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND AND OTHER AFFILIATIONS
---------------- ------------- ----------------------
<C> <C> <S>
Director and Managing Partner and Chief Investment
Chairman Officer, Nicholas-Applegate Capital
*Arthur E. Nicholas (50) Management (since August 1984),
600 West Broadway Trustee and Chairman of the Board of
29th Floor Trustees, Nicholas-Applegate
San Diego, California Investment Trust (since 1993).
Fred C. Applegate (51) Director President, Hightower Management Co.
885 La Jolla Corona Court (since January 1992); President,
La Jolla, California Nicholas-Applegate Capital
Management (August 1984-December
1991), Trustee and Chairman of the
Board of Trustees, Nicholas-
Applegate Mutual Funds (since 1993).
Dann V. Angeloff (61) Director President, The Angeloff Company
727 West Seventh Street (corporate financial advisers)
Los Angeles, California (since 1976); Trustee (1979-1987)
and University Counselor to the
President (since 1987), University
of Southern California; Director,
Public Storage, Inc. (since 1980)
(real estate investment trust); SEDA
Specialty Packaging, Inc. (since
1993); Trustee, Nicholas-Applegate
Investment Trust (since 1993).
Theodore J. Coburn (43) Director Partner, Brown, Coburn & Co.
17 Cotswold Road (investment banking firm) (since
Brookline, Massachusetts 1991); research associate at Harvard
Graduate School of Education (since
September 1996); formerly Managing
Director of Global Equity
Transactions Group and Member of
Board of Directors, Prudential
Securities (September 1986-June
1991); Trustee, Nicholas-Applegate
Investment Trust (since 1993).
Director, Emerging Germany Fund
(since 1995); Moovies, Inc. (since
1991).
*Robert F. Gunia (50) Director and Comptroller, Prudential Investments
One Seaport Plaza Vice President (since May 1996); Executive Vice
New York, New York President and Treasurer, Prudential
Mutual Fund Management LLC (PMF);
Senior Vice President (since March
1987) of Prudential Securities
Incorporated (Prudential
Securities); formerly Chief
Administrative Officer (July 1990-
September 1996), Director (January
1989-September 1996), Executive Vice
President, Treasurer and Chief
Financial Officer (June 1987-
September 1996) of Prudential Mutual
Fund Management, Inc.; Vice
President and Director of The Asia
Pacific Fund, Inc. (since May 1989);
Director of The High Yield Income
Fund, Inc. (since October 1996).
*+Arthur B. Laffer (56) Director Chairman, A.B. Laffer, V.A. Canto &
5405 Morehouse Drive Associates (economic consulting)
#340 (since 1979); Chairman, Laffer
San Diego, California Advisors Incorporated (economic
consulting) (since 1981); Director
U.S. Filter Corporation (since March
1991); Coinmach Laundry Corporation
(since September 1996); Cashyn Corp.
(since January 1997) and MasTec,
Inc. (construction) (since 1994);
Chairman, Calport Asset Management,
Inc. (since 1992); formerly
Distinguished University Professor
and Director, Pepperdine University
(September 1985-May 1988) and
Professor of Business Economics,
University of Southern California
(1978-1984); Trustee, Nicholas-
Applegate Mutual Funds (since 1993).
</TABLE>
B-8
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND AND OTHER AFFILIATIONS
---------------- ------------- ----------------------
<C> <C> <S>
Charles E. Young (65) Director Chancellor, UCLA (since
2147 Murphy Hall September 1968); Director of
Los Angeles, California Intel Corp. (since April
1974), Academy of Television
Arts and Sciences Foundation,
(since October 1988), Los
Angeles World Affairs Council
(since October 1977) and Town
Hall of California (since
1982); Trustee, Nicholas-
Applegate Mutual Funds (since
1993).
Jack C. Marshall (39) President Partner (since 1992), Portfolio
600 West Broadway Manager (since 1989),
29th Floor Nicholas-Applegate Capital
San Diego, California Management (since 1989).
Grace Torres (37) Treasurer and First Vice President (since
One Seaport Plaza Chief Accounting December 1996), Prudential
New York, New York Officer Mutual Fund Management, Inc.;
formerly First Vice President
of Prudential Securities
(March 1994-September 1996);
Vice President, Bankers Trust
Corporation (July 1989-March
1994).
Stephen M. Ungerman (43) Assistant Treasurer Tax Director of Prudential
Gateway Center Three Investments and the Private
Newark, NJ 07102 Asset Group of Prudential
(since March 1996); First Vice
President of Prudential Mutual
Fund Management, Inc.
(February 1993-September
1996); prior thereto, Senior
Tax Manager of Price
Waterhouse (1981-January
1993).
S. Jane Rose (51) Secretary Senior Vice President (since
One Seaport Plaza December 1996) of PMF; Senior
New York, New York Vice President (January 1991-
September 1996) and Senior
Counsel (June 1987-September
1996) of Prudential Mutual
Fund Management, Inc.; Senior
Vice President and Senior
Counsel (since July 1992) of
Prudential Securities;
formerly Vice President and
Associate General Counsel of
Prudential Securities.
Robert E. Carlson (66) Assistant Secretary Partner, Paul, Hastings,
555 South Flower Street Janofsky & Walker LLP (law
22nd Floor firm) since August 1988;
Los Angeles, California formerly Partner (through his
Professional Corporation),
Hufstedler, Miller, Carlson &
Beardsley (law firm) (1967-
1988).
Deborah A. Docs (39) Assistant Secretary Vice President and Associate
One Seaport Plaza General Counsel (since
New York, New York December 1996) of PMF; Vice
President and Associate
General Counsel (June 1991-
September 1996) of Prudential
Mutual Fund Management, Inc.;
Vice President and Associate
General Counsel of Prudential
Securities.
</TABLE>
- ----------
* An "interested" Director of the Company as defined in the Investment Company
Act.
+ A.B. Laffer, V.A. Canto & Associates (formerly A.B. Laffer Associates), of
which Mr. Laffer is the Chairman, received $100,000 in 1995 and $100,000 in
1996 from the Investment Adviser as compensation for consulting services
provided from time to time to the Investment Adviser. In addition, Mr.
Laffer's son is an employee of the Investment Adviser.
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 Incorporated.
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 $10,000 and $1,000 per Board meeting attended, in
addition to certain out-of-pocket expenses. The Chairman of the Audit
Committee receives an additional $1,500 and each member of the Audit Committee
receives an additional $1,000 per meeting attended.
B-9
<PAGE>
Directors may receive their Director's fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of such Director's 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 Director's
fees, together with interest thereon, is a general obligation of the Fund.
Pursuant to the terms of the Management Agreement with the Trust, the
Manager of Subadviser, as appropriate, 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 December 31, 1996 to the Directors who are not
affiliated with the Manager or Subadviser 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 LLC (Fund Complex) for the
calendar year ended December 31, 1996.
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>
Fred C. Applegate, $14,000 None N/A $14,000(1)*
Director
Dann V. Angeloff, 17,000 None N/A 17,000(1)*
Director
Theodore J. Coburn, 16,000 None N/A 14,000(1)*
Director
Arthur B. Laffer, 14,000 None N/A 16,000(1)*
Director
Charles E. Young, 16,000 None N/A 16,000(1)*
Director
</TABLE>
- ----------
* Indicates number of funds in Fund Complex (including the Fund) to which
aggregate compensation relates.
As of February 7, 1997 the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding common stock of the Fund.
As of February 7, 1997, the only beneficial owner, directly or indirectly,
of more than 5% of the outstanding shares of any class of common stock of the
Fund was Independent Trust Corp., Custodian Trust Funds 92-1, Attn: Gary
Bertacchi 15255 S. 94th Avenue, Orland Park, IL 60462-3800, which held 961,708
Class C shares of the Fund (9.3%).
As of February 7, 1997, Prudential Securities was the record holder for
other beneficial owners of 5,616,325 Class A shares (or 54% of the outstanding
Class A shares), 15,558,716 Class B shares (or 72% of the outstanding Class B
shares) and 372,308 Class C shares (or 76% of the outstanding Class C shares)
of the Fund. In the event of any meetings of shareholders Prudential
Securities will forward or cause the forwarding of, proxy materials to the
beneficial owners for which it is record holder.
B-10
<PAGE>
MANAGER
The Manager of the Fund is Prudential Mutual Fund Management LLC ("PMF" or
the "Manager"), Gateway Center Three, Newark, New Jersey 07102. PMF serves as
manager to all of the other investment companies that, together with the Fund,
comprise the "Prudential Mutual Funds." See "How the Fund is Managed--Manager"
in the Prospectus. As of January 31, 1997, PMF managed and/or administered
open-end and closed-end management investment companies with assets of
approximately $55.8 billion. According to the Investment Company Institute, as
of December 31, 1996 the Prudential Mutual Funds were the 15th largest family
of mutual funds in the United States.
Pursuant to the Management Agreement with the Company (the "Management
Agreement"), and subject to the supervision of the Company's Board of
Directors and in conformity with the stated policies of the Fund, PMF is
responsible for managing the investment operations of the Fund and the
composition of the Fund's portfolio, including the purchase, retention and
disposition of portfolio securities. In this regard, PMF provides supervision
of the Fund's investments, furnishes a continuous investment program for the
Fund's portfolio and places purchase and sale orders for portfolio securities
of the Fund and other investments. The Investment Adviser provides the
foregoing services to PMF pursuant to the terms of the Subadvisory Agreement
among PMF, the Investment Adviser and the Company (the "Subadvisory
Agreement"). Under the Management Agreement, PMF administers the Fund's
corporate affairs, subject to the supervision of the Company's Board of
Directors and, in connection therewith, furnishes the Fund with office
facilities and ordinary clerical and bookkeeping services which are not
furnished by the Fund's transfer and dividend disbursing agent and custodian.
The management services of PMF for the Fund are not exclusive under the terms
of the Management Agreement and PMF is free to, and does, render management
services to others.
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate equal to .95 of 1% of the average daily net assets of the
Fund. PMF pays the fees of the Investment Adviser (.75 of 1%) from this
management fee.
In connection with its management of the corporate affairs of the Fund, PMF
bears the following expenses: (a) the salaries and expenses of all of its and
the Company's personnel except the fees and expenses of Directors who are not
affiliated persons of PMF or the Fund's Investment Adviser; (b) all expenses
incurred by PMF or by the Fund in connection with managing the ordinary course
of the Fund's business, other than those assumed by the Fund, as described
below; and (c) the costs and expenses payable to the Investment Adviser
pursuant to its Subadvisory Agreement.
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees and expenses incurred by the
Fund in connection with the management of the investment and reinvestment of
the Fund's assets, (b) the fees and expenses of Directors who are not
affiliated with PMF or the Investment Adviser, (c) out-of-pocket travel
expenses for all Directors and other expenses of Directors' meetings, (d) the
fees and certain expenses of the Fund's custodian, (e) the fees and expenses
of the Fund's transfer and dividend disbursing agent that relate to the
maintenance of each shareholder account, (f) the charges and expenses of the
Fund's legal counsel and independent accountants, (g) brokerage commissions
and any issue or transfer taxes chargeable to the Fund in connection with its
securities transactions, (h) all taxes and corporate fees payable by the Fund
to federal, state and other governmental agencies, (i) the fees of any trade
association of which the Fund may be a member, (j) the cost of stock
certificates representing, and non-negotiable share deposit receipts
evidencing, shares of the Fund, (k) the cost of fidelity and liability
insurance, (l) the fees and expenses involved in registering and maintaining
registration of the Fund and of its shares with the Commission and registering
the Fund and qualifying its shares under state securities laws, including the
preparation and printing of the Fund's registration statement, prospectus and
statement of additional information for such purposes, (m) allocable
communication expenses with respect to investor services and all expenses of
shareholders' and Board of Directors' meetings and of preparing, printing and
mailing prospectuses and reports to shareholders, (n) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business and (o) expenses assumed by the Fund
pursuant to the Plans of Distribution adopted in conformity with Rule 12b-1
under the Investment Company Act.
B-11
<PAGE>
The Management Agreement provides that PMF will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the
matters to which the Management Agreement relates, except a loss resulting
from willful misfeasance, bad faith, gross negligence or reckless disregard of
its duties. The Management Agreement provides that it will terminate
automatically if assigned, and that it may be terminated without penalty by
either PMF or the Company (by the Board of Directors or vote of a majority of
the outstanding voting securities of the Fund, as defined in the Investment
Company Act) upon not more than 60 days' nor less than 30 days' written
notice. The Management Agreement will continue in effect for a period of more
than two years from the date of execution only so long as such continuance is
specifically approved at least annually in conformity with the Investment
Company Act. The Management Agreement was last approved by the Board of
Directors of the Company, including a majority of the Directors who are not
parties to the contract or interested persons of any such party as defined in
the Investment Company Act, on May 17, 1996 and by the shareholders of the
Fund on April 22, 1991 effective as of June 10, 1991.
For the fiscal years ended December 31, 1996, December 31, 1995 and December
31, 1994, PMF received net management and administrative fees of $892,788,
$754,705 and $708,486.
Prudential Mutual Fund Management, Inc., the Manager of the Fund, is a
subsidiary of Prudential Securities Incorporated (PSI) and The Prudential
Insurance Company of America (Prudential). Prudential Mutual Fund Services LLC
(PMFS or the Transfer Agent) serves as the transfer agent for the Prudential
Mutual Funds and, in addition, provides customer service, record keeping and
management and administration services to qualified plans.
INVESTMENT ADVISER
The Fund's Investment Adviser is Nicholas-Applegate Capital Management, a
California limited partnership, with offices at 600 West Broadway, San Diego,
California 92101. The Investment Adviser was organized in August 1984 to
manage discretionary accounts investing primarily in publicly traded equity
securities and securities convertible into or exercisable for publicly traded
equity securities, with the goal of capital appreciation. Its general partner
is Nicholas-Applegate Capital Management Holdings, L.P., a California limited
partnership of which the general partner is Nicholas-Applegate Capital
Management Holdings, Inc. (a California corporation owned by Mr. Nicholas).
The Investment Adviser currently has fifteen partners (including Mr.
Nicholas) who manage a staff of approximately 360 employees including 28
portfolio managers.
The Investment Adviser acted as investment adviser to the Fund pursuant to
an Investment Advisory Agreement with the Fund (the "Original Advisory
Agreement") from the commencement of the Fund's operations (as a closed-end
investment company) in April 1987 until its conversion to an open-end company
in June 1991. The Original Advisory Agreement was initially approved by Arthur
E. Nicholas and Fred C. Applegate as the Fund's original shareholders and was
approved by the Fund's public shareholders at the annual meetings of
shareholders held in May 1988, May 1989 and April 1990. The Original Advisory
Agreement was last approved by the Board of Directors of the Fund, including a
majority of the Directors who are not "interested persons" of the Investment
Adviser or the Fund, as defined in the Investment Company Act, in February
1991.
Pursuant to the conversion of the Fund to an open-end mutual fund, the
Original Advisory Agreement was terminated and the Management Agreement and
the Subadvisory Agreement were entered into effective June 10, 1991. The
Subadvisory Agreement was approved by the shareholders of the Fund on April
22, 1991, effective as of June 10, 1991. The Subadvisory Agreement was last
approved by the Board of Directors, including a majority of the Board of
Directors who are not parties to the contract or interested persons of any
such party as defined in the Investment Company Act, on May 17, 1996. Under
the Subadvisory Agreement, the Manager retains the Investment Adviser to
manage the Fund's investment portfolio, subject to the direction of the
B-12
<PAGE>
Company's Board of Directors and the Manager. The Investment Adviser is
authorized to determine which securities are to be bought or sold by the Fund
and in what amounts. In addition to providing management and investment
advisory services, the Investment Adviser compensates all Directors and
officers of the Fund who are "interested persons" of the Investment Adviser,
as such term is defined in the Investment Company Act.
The Subadvisory Agreement provides that the Investment Adviser will not be
liable for any error of judgment or for any loss suffered by the Fund or the
Manager in connection with the matters to which the Subadvisory Agreement
relates, except for liability resulting from willful misfeasance, bad faith or
gross negligence in the performance of its duties or by reason of its reckless
disregard of its duties and obligations or a breach of its fiduciary duty
under the Subadvisory Agreement. The Fund has agreed to indemnify the
Investment Adviser against liabilities, costs and expenses that the Investment
Adviser may incur in connection with any action, suit, investigation or other
proceeding arising out of or otherwise based on any action actually or
allegedly taken or omitted to be taken by the Investment Adviser in connection
with the performance of its duties or obligations under the Subadvisory
Agreement or otherwise as an investment adviser of the Fund. The Investment
Adviser is not entitled to indemnification with respect to any liability to
the Fund or its shareholders by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties, or of its reckless
disregard of its duties and obligations or of a breach of its fiduciary duty
under the Subadvisory Agreement.
The Subadvisory Agreement further provides that the Fund may use "Nicholas-
Applegate" as part of its name so long as the Subadvisory Agreement is in
effect. Because the name "Nicholas-Applegate" is a property right of the
Investment Adviser, the Investment Adviser, as well as Mr. Nicholas and Mr.
Applegate, may, upon the termination of the Subadvisory Agreement, require the
Fund to refrain from using the name "Nicholas-Applegate" in any form.
The Manager pays to the Investment Adviser, as compensation for the services
provided by the Investment Adviser under the Subadvisory Agreement, a fee at
an annual rate equal to .75 of 1% of the average daily net assets of the Fund.
Under the Original Advisory Agreement, the Investment Adviser's fee for its
services as investment adviser to the Fund was a fee comprised of a basic fee
(the "Basic Fee") and an adjustment to the Basic Fee based on the investment
performance per share of the Fund in relation to the investment record of the
S&P 500 for certain performance periods. The Basic Fee was a monthly fee equal
to 1/12 of .75% (.75% on an annualized basis) of the average of the daily net
assets of the Fund at the end of each month included in the applicable
performance period. The Basic Fee for each such month was subject to increase
or decrease depending on the extent, if any, by which the investment
performance per share of the Fund exceeded or was exceeded by the percentage
change in the investment record of the S&P 500 for such performance period.
The Basic Fee was increased by 1/12 of .25% (to a total of 1/12 of 1.00%) if
the investment performance per share of the Fund exceeded the percentage
change in the S&P 500 for such performance period by nine or more percentage
points, and was decreased by 1/12 of .25% (to a total of 1/12 of .50%) if the
investment performance per share of the Fund was exceeded by the percentage
change in the S&P 500 for such performance period by nine or more percentage
points. If the investment performance per share of the Fund did not exceed, or
was not exceeded by, the percentage change in the S&P 500 for a performance
period by nine or more percentage points, the maximum percentage increase or
decrease in the Basic Fee ( 1/12 of either +.25% or -.25%, respectively) was
prorated for such performance period in the same proportion as the excess of
the investment performance per share of the Fund over the percentage change in
the investment record of the S&P 500, or as the excess of the percentage
change in the investment record of the S&P 500 over the investment performance
per share of the Fund, as the case may be, for such performance period bore to
nine percentage points.
During the years ended December 31, 1994, 1995 and 1996, the Fund and the
Manager paid the Investment Adviser aggregate advisory fees of $2,665,258,
$2,839,126 and $3,358,584, respectively, pursuant to the terms of the
Subadvisory Agreement.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Company (by
B-13
<PAGE>
the Board of Directors or vote of a majority of the outstanding voting
securities of the Fund, as defined in the Investment Company Act), PMF or the
Investment Adviser upon not more than 60 days' nor less than 30 days' written
notice, without payment of any penalty. The Subadvisory Agreement provides that
it will continue in effect for a period of more than two years from its
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act.
The Investment Adviser and its affiliated companies have adopted a personal
investment policy consistent with Investment Company Institute guidelines. This
policy includes, among other things, a ban on acquisitions of securities in an
initial public offering; restrictions on acquisitions of securities in private
placements; investment pre-clearance and reporting requirements; review of
duplicate confirmation statements; annual recertification of compliance with a
code of ethics; disclosure of personal holdings by certain personnel; blackout
periods on personal investing for certain personnel; prohibition of short-term
trading profits for investment personnel; limitations on service as a director
of publicly traded companies; and disclosure of personal securities
transactions.
DISTRIBUTOR
Prudential Securities Incorporated, One Seaport Plaza, New York, New York
10292 ("Prudential Securities"), acts as the distributor of the shares of the
Fund. Prior to January 2, 1996, Prudential Mutual Fund Distributors, Inc.
(PMFD), One Seaport Plaza, New York, New York 10292, acted as Distributor of
the Class A shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively the "Plans") adopted pursuant
to Rule 12b-1 under the Investment Company Act and a distribution agreement
(the "Distribution Agreement"), PMFD and Prudential Securities (collectively
the "Distributor") incur the expenses of distributing the Fund's Class A, Class
B and Class C shares. Prudential Securities also incurs the expenses of
distributing the Fund's Class Z shares under the Distribution Agreement, none
of which are reimbursed by or paid for by the Fund. See "How the Fund is
Managed--Distributor" in the Prospectus. The Class A and Class B Distribution
Plans were adopted by the Board of Directors, including a majority of the
Directors who have no direct or indirect financial interest in the operation of
the Plans or in any agreement related to either Plan (the "Rule 12b-1
Directors"), on February 1, 1991, effective as of June 10, 1991. The holders of
a majority of the Fund's outstanding Class A shares approved the Class A Plan
on April 22, 1991. PMF, the sole shareholder of the Fund's Class B shares,
approved the Class B Plan on June 10, 1991. The Class B Plan was approved by
Class B shareholders of the Fund on May 18, 1992. On May 17, 1993, the
Directors, including a majority of the Rule 12b-1 Directors, at a meeting
called for the purpose of voting on each Plan, approved the continuance of the
Plans and Distribution Agreements and approved modifications of the Fund's
Class A and Class B Plans and Distribution Agreements to conform them with
recent amendments to the National Association of Securities Dealers, Inc.
(NASD) maximum sales charge rule described below. As so modified, the Class A
Plan provides that (i) up to .25 of 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and/or the maintenance
of shareholder accounts (service fee) and (ii) total distribution fees
(including the service fee of .25 of 1%) may not exceed .30 of 1%. As so
modified, the Class B Plan provides that (i) up to .25 of 1% of the average
daily net assets of the Class B shares may be paid as a service fee and (ii) up
to .75 of 1% (not including the service fee) may be used as reimbursement for
distribution-related expenses with respect to the Class B shares (asset-based
sales charge). On May 17, 1993, the Board of Directors, including a majority of
the Rule 12b-1 Directors, at a meeting called for the purpose of voting on each
Plan, adopted a plan of distribution for the Class C shares of the Fund and
approved further amendments to the plans of distribution for the Fund's Class A
and Class B shares changing them from reimbursement type plans to compensation
type plans. The Plans were last approved by the Board of Directors, including a
majority of the Rule 12b-1 Directors, on May 17, 1996. The Class A Plan, as
amended, was approved by Class A and Class B shareholders, and the Class B
Plan, as amended, was approved by Class B shareholders on July 19, 1994. The
Class C Plan was approved by the sole shareholder of Class C shares on August
1, 1994.
CLASS A PLAN. For the year ended December 31, 1996, PSI received payments of
$246,258, under the Class A Plan. This amount was primarily expended for
payments of account servicing fees to financial advisers and other persons who
sell Class A shares. In addition, for the year ended December 31, 1996, PSI
received approximately $268,000 in initial sales charges.
B-14
<PAGE>
CLASS B PLAN. For the year ended December 31, 1996, Prudential Securities
received $3,048,413 from the Fund under the Class B Plan and spent
approximately $1,943,300 in distributing the Fund's Class B shares. It is
estimated that of the latter amount, approximately 1.0% ($14,300) was spent on
printing and mailing of prospectuses and sales material to other than current
shareholders; 28.7% ($558,000) was spent on compensation to Pruco Securities
Corporation, an affiliated broker-dealer, for commissions to its
representatives and other expenses, including an allocation on account of
overhead and other branch office distribution related expenses, incurred by it
for distribution of Class B shares; and 70.3% ($1,366,000) was spent on the
aggregate of (i) commission credits to Prudential Securities branch offices for
payments of commissions and account servicing fees to financial adviser [36.6%
($711,000)] and (ii) an allocation on account of overhead and other branch
office distribution-related expenses [33.7% ($655,000)]. The term "overhead and
other branch office distribution-related expenses" represents (a) the expenses
of operating the branch offices of Prudential Securities and Prusec in
connection with the sale of Fund shares, including lease costs, the salaries
and employee benefits of operations and sales support personnel, utility costs,
communications costs and the costs of stationery and supplies, (b) the costs of
client sales seminars, (c) travel expenses of mutual fund sales coordinators to
promote the sale of Fund shares and (d) other incidental expenses relating to
branch promotion of Fund sales.
Prudential Securities also receives the proceeds of contingent deferred sales
charges paid by investors upon certain redemptions of Class B shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges"
in the Prospectus. For the fiscal year ended December 31, 1996 Prudential
Securities received approximately $719,200 in contingent deferred sales charges
attributable to Class B shares.
CLASS C PLAN. Prudential Securities receives the proceeds of contingent
deferred sales charges paid by investors upon certain redemptions of Class C
shares. See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred
Sales Charges" in the Prospectus.
For the year ended December 31, 1996, Prudential Securities received $58,615
from the Fund under the Class C Plan and spent approximately $59,000 in
distributing the Fund's Class C Shares. It is estimated that of the latter
amount, approximately 3.4% ($2,000) was spent on printing and mailing of
prospectuses to other than current shareholders; 10.2% ($6,000) on compensation
to Prusec for commissions to its representatives and other expenses, including
an allocation of overhead and other branch office distribution-related
expenses, incurred by it for distribution of Fund shares; and 86.4% ($51,000)
on the aggregate of (i) payments of commissions and account servicing fees to
financial advisers (62.7% or $37,000) and (ii) an allocation of overhead and
other branch office distribution-related expenses for payments of related
expenses (23.7% or $14,000). Prudential Securities also receives the proceeds
of contingent deferred sales charges paid by investors upon certain redemptions
of Class C shares. See "Shareholder Guide--How to Sell Your Shares--Contingent
Deferred Sales Charges" in the Prospectus. For the fiscal year ended December
31, 1996, Prudential Securities received approximately $2,000 in contingent
deferred sales charges attributable to Class C 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 Class A, Class B and Class C Plans may each be terminated at
any time, without penalty, by the vote of a majority of the Rule 12b-1
Directors or by the vote of the holders of a majority of the outstanding shares
of the applicable class on not more than 30 days' written notice to any other
party to the Plans. The Plans may not be amended to increase materially the
amounts to be spent for the services described therein without approval by the
shareholders of the applicable class (by both Class A and Class B shareholders,
voting separately, in the case of material amendments to the Class A Plan), and
all material amendments are required to be approved by the Board of Directors
in the manner described above. Each Plan will automatically terminate in the
event of its assignment. The Fund will not be contractually obligated to pay
expenses incurred under the Class A Plan, Class B Plan or Class C Plan if such
Plan is terminated or not continued.
B-15
<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 the Class
A, Class B and Class C shares of the Fund by the Distributor. The report will
include an itemization of the distribution expenses and the purposes of such
expenditures. In addition, as long as the Plans remain in effect, the selection
and nomination of Directors who are not interested persons of the Company will
be committed to the Directors who are not interested persons of the Company.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify PMFD
and Prudential Securities to the extent permitted by applicable law against
certain liabilities under the Securities Act of 1993, as amended. The Restated
Distribution Agreement was last approved by the Directors, including a majority
of the Rule 12b-1 Directors, on May 17, 1996.
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.
B-16
<PAGE>
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD Inc., the
Distributor is required to limit aggregate initial sales charges, deferred
sales charges and asset-based sales charges to 6.25% of total gross sales of
each class of shares. Interest charges on unreimbursed distribution expenses
equal to the prime rate plus one percent per annum may be added to the 6.25%
limitation. Sales from the reinvestment of dividends and distributions are not
included in the calculation of the 6.25% limitation. The annual asset-based
sales charge on shares of the Fund may not exceed .75 of 1% per class. The
6.25% limitation applies to the Fund rather than on a per shareholder basis. If
aggregate sales charges were to exceed 6.25% of total gross sales of any class,
all sales charges on shares of all classes would be suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Company's Board of Directors and the
oversight and review of the Manager, the Investment Adviser is primarily
responsible for the execution of the Fund's portfolio transactions and the
allocation of its brokerage business. In executing such transactions, the
Investment Adviser will seek to obtain the best price and execution for the
Fund, taking into account such factors as price, size of order, difficulty and
risk of execution and operational facilities of the firm involved. Securities
in which the Fund invests may be traded in the over-the-counter markets, and
the Fund deals directly with the dealers who make markets in such securities
except in those circumstances where better prices and execution are available
elsewhere. Commission rates are established pursuant to negotiation with
brokers or dealers based on the quality or quantity of services provided in
light of generally prevailing rates, and while the Investment Adviser generally
seeks reasonably competitive commission rates, the Fund does not necessarily
pay the lowest commissions available. The allocation of orders among brokers
and the commission rates paid are reviewed quarterly by the Board of Directors
of the Company.
The Fund has no obligation to deal with any broker or group of brokers in
executing transactions in portfolio securities. Subject to obtaining the best
price and execution, brokers who sell shares of the Fund or provide
supplemental research, market and statistical information and other research
services and products to the Investment Adviser may receive orders for
transactions by the Fund. Such information, services and products are those
which brokerage houses customarily provide to institutional investors, and
include items such as statistical and economic data, research reports on
particular companies and industries, and computer software used for research
with respect to investment decisions. Information, services and products so
received are in addition to and not in lieu of the services required to be
performed by the Investment Adviser under the Subadvisory Agreement and the
expenses of the Investment Adviser are not necessarily reduced as a result of
the receipt of such supplemental information, services and products. Such
information, services and products may be useful to the Investment Adviser in
providing services to clients other than the Fund, and not all such
information, services and products are used by the Investment Adviser in
connection with the Fund. Similarly, such information, services and products
provided to the Investment Adviser by brokers and dealers through whom other
clients of the Investment Adviser effect securities transactions may be useful
to the Investment Adviser in providing services to the Fund. The Investment
Adviser is authorized to pay higher commissions on brokerage transactions for
the Fund to brokers in order to secure information, services and products
described above, subject to review by the Company's Board of Directors from
time to time as to the extent and continuation of this practice. During the
fiscal year ended December 31, 1993, substantially all of the Fund's brokerage
commissions were paid to firms which provided research services to the Fund's
Investment Adviser.
Although investment decisions for the Fund are made independently from those
of the other accounts managed by the Investment Adviser, investments of the
kind made by the Fund may often also be made by such other accounts. When a
purchase or sale of the same security is made at substantially the same time on
behalf of the Fund and one or more other accounts managed by the Investment
Adviser, available investments are allocated in the discretion of the
Investment Adviser by such means as, in its judgment, result in fair treatment.
The Investment Adviser aggregates orders for purchases and sales of securities
of the same issuer on the same day among the Fund and its other managed
accounts, and the price paid to or received by the Fund and those accounts is
the average obtained in those orders. In some cases, such aggregation and
allocation procedures may affect adversely the price paid or received by the
Fund or the size of the position purchased or sold by the Fund.
B-17
<PAGE>
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to
the dealer. In underwritten offerings, securities are purchased at a fixed
price which includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. On occasion, certain
money market instruments and agency securities may be purchased directly from
the issuer, in which case no commissions or discounts are paid. The Fund will
not deal with Prudential Securities in any transaction in which Prudential
Securities acts as principal. Thus, it will not deal in over-the-counter
securities with Prudential Securities acting as market marker, and it will not
execute a negotiated trade with Prudential Securities if execution involves
Prudential Securities acting as principal with respect to any part of the
Fund's order.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities (or any affiliate), during the
existence of the syndicate, is a principal underwriter (as defined in the
Investment Company Act), except in accordance with rules of the Commission.
This limitation, in the opinion of the Fund, will not significantly affect the
Fund's ability to pursue its present investment objective. However, in the
future in other circumstances, the Fund may be at a disadvantage because of
this limitation in comparison to other funds with similar objectives but not
subject to such limitation.
Subject to the above considerations, Prudential Securities may act as a
broker or dealer for the Fund. In order for Prudential Securities to effect
any portfolio transactions for the Fund, the commissions, fees or other
remuneration received by Prudential Securities must be reasonable and fair
compared to the commissions, fees or other remuneration paid to other such
brokers or dealers in connection with comparable transactions involving
similar securities sold on an exchange during a comparable period of time.
This standard would allow Prudential Securities to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker
or dealer in a commensurate arms-length transaction. Furthermore, the Board of
Directors of the Fund, including a majority of the Directors who are not
"interested" directors, has adopted procedures which are reasonably designed
to provide that any commissions, fees or other remuneration paid to Prudential
Securities are consistent with the foregoing standard. In accordance with
Section 11(a) under the Securities Exchange Act of 1934, Prudential Securities
may not retain compensation for effecting transactions on a national
securities exchange for the Fund unless the Fund has expressly authorized the
retention of such compensation in a written contract executed by the Fund and
Prudential Securities. Section 11(a) provides that Prudential Securities must
furnish to the Fund at least annually a statement setting forth the total
amount of all compensation retained by Prudential Securities for transactions
effected by the Fund during the applicable period. Brokerage transactions with
Prudential Securities are also subject to such fiduciary standards as may be
imposed by applicable law.
The table presented below shows certain information regarding the payment of
commissions by the Fund, including the amount of such commissions paid to
Prudential Securities, for the three-year period ended December 31, 1996.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
-------- -------- ----------
<S> <C> <C> <C> <C>
Total brokerage commissions paid by the
Fund................................... $914,031 $884,934 $1,113,173
Total brokerage commissions paid to Pru-
dential Securities..................... $ 0 $ 0 $ 0
Percentage of total brokerage commis-
sions paid to Prudential Securities.... 0% 0% 0%
</TABLE>
Of the total brokerage commissions paid during the year ended December 31,
1996 $757,069 or (82.8%) were paid to firms which provided research,
statistical or other services to the Manager. PMF has not separately
identified a portion of such brokerage commissions as applicable to the
provision of such research, statistical or other services.
B-18
<PAGE>
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of the purchase (Class A
shares) or on a deferred basis (Class B or Class C shares). Class Z shares of
the Fund are offered to a limited group of investors at net asset value
without any sales charges. See "Shareholder Guide--How to Buy Shares of the
Fund" in the Prospectus.
Each class represents an interest in the same assets of the Fund and is
identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service fees (except for Class Z shares,
which are not subject to any sales charges and distribution and/or service
fees), which may affect performance, (ii) each class has exclusive voting
rights with respect to any matter submitted to shareholders that relates
solely to its arrangement and has separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of any other class, (iii) each class has a different exchange
privilege, (iv) only Class B shares have a conversion feature and (v) Class Z
shares are offered exclusively for sale to a limited group of investors. See
"Distributor" and "Shareholder Investment Account--Exchange Privilege."
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 5.00% and
Class B, Class C* and Class Z shares are sold at net asset value. Using the
Fund's net asset value at December 31, 1996, the maximum offering price of the
Fund's shares is as follows:
<TABLE>
<S> <C>
CLASS A
Net asset value.................................................. $15.41
Maximum sales charge (5.00% of offering price)................... .81
------
Offering price to public......................................... $16.22
======
CLASS B
Net asset value, offering price and redemption price per Class B
share*.......................................................... $14.48
======
CLASS C
Net asset value, offering price and redemption price per Class C
share*.......................................................... $14.48
======
CLASS Z
Net asset value, offering price and redemption price per Class Z
share........................................................... $15.41
======
</TABLE>
----------
*Class B and Class C shares are subject to a contingent
deferred sales charge on certain redemptions. See "Shareholder
Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges" in the Prospectus.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the
purchases may be combined to take advantage of the reduced sales charges
applicable to larger purchases. See the table of breakpoints under
"Shareholder Guide--Alternative Purchase Plan" in the Prospectus.
B-19
<PAGE>
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and 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.
Also, an eligible group of related Fund investors may include an employer
(or group of related employers) and one or more qualified retirement plans of
such employer or employers (an employer controlling, controlled by or under
common control with another employer is deemed related to that employer).
In addition, an eligible group of related Fund Investors may include (i) a
client of a Prudential Securities financial adviser who gives such financial
adviser discretion to purchase the Prudential Mutual Funds for his or her
account only in connection with participation in a market timing program and
for which program Prudential Securities receives a separate advisory fee or
(ii) a client of an unaffiliated registered investment adviser which is a
client of a Prudential Securities financial adviser, if such unaffiliated
adviser has discretion to purchase the Prudential Mutual Funds for the
accounts of his or her customers but only if the client of such unaffiliated
adviser participates in a market timing program conducted by such unaffiliated
adviser; provided such accounts in the aggregate have assets of at least $15
million invested in the Prudential Mutual Funds.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charges will be
granted subject to confirmation of the investor's holdings. The Combined
Purchase and Cumulative Purchase Privilege does not apply to individual
participants in any retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of
related investors, as described above under "Combined Purchase and Cumulative
Purchase Privilege," may aggregate the value of their existing holdings of
shares of the Fund and shares of other Prudential Mutual Funds (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 he
held either directly with the Transfer Agent or through Prudential Securities.
The value of existing holdings for purposes of determining the reduced sales
charge is calculated using the maximum offering price (net asset value plus
maximum sales charge) as of the previous business day. See "How the Fund
Values Its Shares" in the Prospectus. The Distributor must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charges will be granted subject to confirmation of the
investor's holdings. Rights of accumulation are not available to individual
participants in any retirement or group plans.
LETTERS OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors), including retirement and group 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 a
Letter of Intent whereby they agree to enroll, within a thirteen-month period,
a specified number of eligible employees or participants (Participant Letter
of Intent).
B-20
<PAGE>
For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction; however, the value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the Transfer
Agent or through Prudential Securities.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant 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 shares totaling 5%
of the dollar amount of the Letter of Intent will be held by the Transfer Agent
in the name of the purchaser, except in the case of retirement and group plans
where the employer or plan sponsor will be responsible for paying any
applicable sales charge. The effective date of an Investment Letter of Intent
except in the case of retirement and group plans may be back-dated up to 90
days, in order that any investments made during this 90-day period, valued at
the purchaser's cost, can be applied to the fulfillment of the Letter of Intent
goal.
The Investment Letter of Intent does not obligate the investor to purchase,
or the Fund to sell, the indicated amount. Similarly, the Participant Letter of
Intent does not obligate the retirement or group plan to enroll the indicated
number of eligible employees or participants. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser (or the
employer or plan sponsor in the case of any retirement or group plan) is
required to pay the difference between the sales charge otherwise applicable to
the purchases made during this period and sales charges actually paid. Such
payment may be made directly to the Distributor or, if not paid, the
Distributor will liquidate sufficient escrowed shares to obtain such
difference. If the goal is exceeded in an amount which qualifies for a lower
sales charge, a price adjustment is made by refunding to the purchaser the
amount of excess sales charge, if any, paid during the thirteen-month period.
Investors electing to purchase 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 charge 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 group or plan. Letters of Intent are not available to individual
participants in retirement or group plans.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES.
The Contingent Deferred Sales Charge is waived under circumstances described
in the Prospectus. See "Shareholder Guide--How to Sell Your Shares--Waiver of
Contingent Deferred Sales Charges--Class B Shares" in the Prospectus. In
connection with these waivers, the Transfer Agent will require you to submit
the supporting documentation set forth below.
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
<S> <C>
Death A copy of the shareholder's death
certificate or, in the case of a trust, a
copy of the grantor's death certificate,
plus a copy of the trust agreement
identifying the grantor.
Disability - An individual will be
considered disabled if he or she is unable A copy of the Social Security
to engage in any substantial gainful Administration award letter or a letter
activity by reason of any medically from a physician on the physician's
determinable physical or mental impairment letterhead stating that the shareholder
which can be expected to result in death or (or, in the case of a trust, the grantor)
to be of long-continued and indefinite is permanently disabled. The letter must
duration. also indicate the date of disability.
</TABLE>
B-21
<PAGE>
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
<S> <C>
Distribution from an IRA or 403(b) A Copy of the distribution form from the
Custodial Account custodial firm indicating (i) the date of
birth of the shareholder and (ii) that
the shareholder is over age 59 1/2 and is
taking a normal distribution--signed by
the shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the
reason for the distribution.
Excess Contributions A letter from the shareholder (for an
IRA) or the plan administrator/trustee on
company letterhead indicating the amount
of the excess and whether or not taxes
have been paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents as
it may deem appropriate.
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchase an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares
of the Fund following the second purchase was $550,000, the quantity discount
would be available for the second purchase of $450,000 but not for the first
purchase of $100,000. The quantity discount will be imposed at the following
rates depending on whether the aggregate value exceeded $500,000 or $1 million:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS INVESTED
OR REDEMPTION PROCEEDS
--------------------------------------
YEAR SINCE PURCHASE
PAYMENT MADE $500,001 TO $1 MILLION OVER $1 MILLION
------------------- ---------------------- ---------------
<S> <C> <C>
First.......................... 3.0% 2.0%
Second......................... 2.0% 1.0%
Third.......................... 1.0% 0%
Fourth and thereafter.......... 0% 0%
</TABLE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account is
established for each investor under which the shares are held for the investor
by the Transfer Agent. If a stock certificate is desired, it must be requested
in writing for each transaction. Certificates are issued only for full shares
and may be redeposited in the Account at any time. There is no charge to the
investor for issuance of a certificate. The Fund makes available to the
shareholders the following privileges and plans:
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at net asset
value per share. 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
B-22
<PAGE>
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 (without a sales
charge) 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.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
Mutual Funds may also be exchanged for shares of the Fund. All exchanges are
made on the basis of relative net asset value next determined after receipt of
an order in proper form. An exchange will be treated as a redemption and
purchase for tax purposes. Shares may be exchanged for shares of another fund
only if shares of such fund may legally be sold under applicable state laws.
For retirement and group plans having a limited menu of Prudential Mutual
Funds, the Exchange Privilege is available for those funds eligible for
investment in the particular program.
It is contemplated that the Exchange Privilege may be applicable to new
mutual funds (including new series of the Company) the shares of which may be
distributed by the Distributor.
CLASS A. Shareholders of the Fund may exchange their Class A shares for Class
A shares of certain Prudential Mutual Funds, shares of Prudential Government
Securities Trust (Short-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 and U.S.
Treasury Money Market Series); Prudential Municipal Series Fund (Connecticut
Money Market Series, Massachusetts Money Market Series, New York Money Market
Series and New Jersey Money Market Series); Prudential MoneyMart Assets; and
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential Mutual Funds and shares of Prudential Special Money Market Fund, a
money market fund. No CDSC will be payable upon such exchange, but a CDSC may
be payable upon the redemption of the Class B and Class C shares acquired as a
result of an exchange. The applicable sales charge will be that imposed by the
fund in which shares were initially purchased and the purchase date will be
deemed to be the first day of the month after the initial purchase, rather than
the date of the exchange.
Class B and Class C shares of the Fund may also be exchanged for Class B and
Class C shares, respectively, of an eligible money market fund without
imposition of any CDSC at the time of exchange. Upon subsequent redemption from
such money market fund or after re-exchange into the Fund, such shares will be
subject to the CDSC calculated by excluding the time such shares were held in
the money market fund. In order to minimize the period of time in which shares
are subject to a CDSC, shares exchanged out of the money market fund will be
exchanged on the basis of their remaining holding periods, with the longest
remaining holding periods being transferred first. In measuring the time period
shares are held in a money market fund and "tolled" for purposes of calculating
the CDSC holding period, exchanges are deemed to have been made on the last day
of the month. Thus, if shares are exchanged into the Fund from a money market
fund during the month (and are held in the Fund at the end of the month), the
entire month will be included in the CDSC holding period. Conversely, if shares
are exchanged into a money market
B-23
<PAGE>
fund prior to the last day of the month (and are held in the money market fund
on the last day of the month), the entire month will be excluded from the CDSC
holding period. For purposes of calculating the seven year holding period
applicable to the Class B conversion feature, the time period during which
Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class
B or Class C exchange privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of the Fund without subjecting such shares to any CDSC. Shares of any fund
participating in the Class B or Class C exchange privilege that were acquired
through reinvestment of dividends or distributions may be exchanged for Class B
or Class C shares of other funds 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 FUND'S TRANSFER AGENT,
PRUDENTIAL SECURITIES OR PRUSEC. THE EXCHANGE PRIVILEGE MAY BE MODIFIED,
TERMINATED OR SUSPENDED ON SIXTY DAYS' NOTICE, AND ANY FUND, INCLUDING THE
FUND, OR THE DISTRIBUTOR HAS THE RIGHT TO REJECT ANY EXCHANGE APPLICATION
RELATING TO SUCH FUND'S SHARES.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a fixed
amount of dollars in shares at set intervals. A 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 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 home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class beginning in 2011, the cost of four years at
a private college could reach $210,000 and over $90,000 at a public
university./1/
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals./2/
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- -------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 years.................................... $ 110 $ 165 $ 220 $ 275
20 years.................................... 176 264 352 440
15 years.................................... 296 444 592 740
10 years.................................... 555 833 1,110 1,388
5 years..................................... 1,371 2,057 2,742 3,428
</TABLE>
See "Automatic Savings Accumulation Plan."
- ----------
/1/Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Information about the costs of private colleges is from the Digest of
Education Statistics, 1992; The National Center for Educational Statistics; and
the U.S. Department of Education. Average costs for private institutions
include tuition, fees and 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 Fund. The
investment return and principal value of investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
B-24
<PAGE>
AUTOMATIC SAVINGS ACCUMULATION PLAN ("ASAP")
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account
or Prudential Securities account (including a Command Account) to be debited
to invest specified dollar amounts in shares of the Fund. The investor's bank
must be a member of the Automatic Clearing House System. Stock certificates
are not issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through Prudential
Securities or the Transfer Agent. Such withdrawal plan provides for monthly or
quarterly checks in any amount, except as provided below, up to the value of
the shares in the shareholder's account. Withdrawals of Class B or Class C
shares may be subject to a CDSC. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and
(iii) the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment Account--
Automatic Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may
be terminated at any time, and the Distributor reserves the right to initiate
a fee of up to $5 per withdrawal, upon 30 days' written notice to the
shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares
are inadvisable because of the sales charges 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 plan, particularly if used in connection with a retirement
plan.
TAX-DEFERRED RETIREMENT PLANS
Various tax deferred retirement plans, including a 401(k) Plan, self-
directed individual retirement accounts and "tax-sheltered accounts" under
Section 403(b)(7) of the Internal Revenue Code are available through the
Distributor. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants or a pooled account arrangement. Information regarding the
establishment of these plans, their 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 such plan.
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
B-25
<PAGE>
savings account with those in an IRA, assuming a $2,000 annual contribution,
and 8% rate of return and a 39.6% federal income tax bracket and shows how
much more retirement income can accumulate within an IRA as opposed to a
taxable individual savings account.
TAX-DEFERRED COMPOUNDING/1/
<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
------------- -------- ---
<S> <C> <C>
10 years $ 26,165 $ 31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
</TABLE>
- ----------
/1/The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings
in the IRA account will be subject to tax when withdrawn from the account.
MUTUAL FUND PROGRAMS
From time to time, the Fund 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 marketed 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 Fund
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 part of
a program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, individuals should consult their Prudential
Securities Financial Advisor or Prudential/Pruco Securities Representative
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
The net asset value of a share of the Fund is calculated by dividing (i) the
value of the securities held by the Fund, plus any cash or other assets, minus
all liabilities (including accrued estimated expenses on an annual basis), by
(ii) the total number of shares outstanding. Net asset value is calculated
separately for each class. The value of the investments and assets of the Fund
is determined each business day. Portfolio securities that are traded on a
stock exchange or on the NASDAQ National Market System are valued at the last
sale price as of the close of business on the New York Stock Exchange
(currently 4:00 p.m. New York time) on the day the securities are being
valued, or lacking any sales, at the mean between the closing bid and asked
prices. Other over-the-counter securities are valued at the mean between the
closing bid and asked prices. Debt securities with maturities of 60 days or
less are valued at amortized cost if their term to maturity from date of
purchase is less than 60 days, or by amortizing, from the sixty-first day
prior to maturity, their value on the sixty-first day prior to maturity if
their term to maturity from date of purchase by the Fund is more than 60 days,
unless this is determined by the Board of Directors not to represent fair
value. Repurchase agreements are valued at cost plus accrued interest.
Securities and other assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Company's Board of Directors.
B-26
<PAGE>
In the event that the New York Stock Exchange or the national securities
exchange on which stock or stock options are traded adopt different trading
hours on either a permanent or temporary basis, the Board of Directors of the
Company will reconsider the time at which net asset value is computed. In
addition, the asset value of the Fund may be computed as of any time permitted
pursuant to any exemption, order or statement of the Commission or its staff.
The net asset value of Class B and Class C shares will generally be lower
than the net asset value of Class A and Class Z shares as a result of the
larger distribution-related fee to which Class B and Class C shares are
subject. It is expected, however, that the 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.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDEND AND DISTRIBUTION POLICY. The Fund's present policy, which may be
changed by the Company's Board of Directors, is to make distributions of any
net investment income and capital gains, if any, to shareholders annually.
REGULATED INVESTMENT COMPANY. The Fund has elected to qualify and intends to
remain qualified as a regulated investment company under Subchapter M of the
Internal Revenue Code. As a regulated investment company, the Fund will not be
liable for federal income tax on its income and gains provided it distributes
all of its income and gains currently. Qualification as a regulated investment
company under the Internal Revenue Code requires, among other things, that the
Fund (a) derive at least 90% of its gross income from dividends, interest,
payments with respect to securities loans, 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 held less than three months; and (c) diversify its
holdings so that, at the end of each fiscal quarter, (i) at least 50% of the
market value of the Fund's assets is represented by cash, U.S. Government
securities and securities of other regulated investment companies, and other
securities (for purposes of this calculation generally limited, in respect of
any one issuer, to an amount not greater than 5% of the market value of the
Fund's assets and 10% of the outstanding voting securities of such issuer) and
(ii) not more than 25% of the value of its assets is invested in the
securities of any one issuer (other than U.S. Government securities or the
securities of other regulated investment companies), or two or more issuers
which the Company controls and which are determined to be engaged in the same
or similar trades or businesses. The Fund generally will be subject to a
nondeductible excise tax of 4% to the extent that it does not meet certain
minimum distribution requirements as of the end of each calendar year. The
Fund intends to make timely distributions of its income in compliance with
these requirements and anticipates that it will not be subject to the excise
tax.
Dividends paid by the Fund from ordinary income, and distributions of the
Fund's net realized short-term capital gains, are taxable to its shareholders
as ordinary income. Distributions to corporate shareholders will be eligible
for the 70% dividends received deduction to the extent that the income of the
Fund is derived from dividends on common or preferred stock. Dividend income
earned by the Fund will be eligible for the dividends received deduction only
if the Fund has satisfied a 46-day holding period requirement with respect to
the underlying portfolio security (91 days in the case of dividends derived
from preferred stock). In addition, a corporate shareholder must have held its
shares in the Fund for not less than 46 days (91 days in the case of dividends
derived from preferred stock) in order to claim the dividend received
deduction. Not later than 60 days after the end of its taxable year, the Fund
will send to its shareholders a written notice designating the amount of any
distributions made during such year which may be taken into account by its
shareholders for purposes of such deduction provisions of the Internal Revenue
Code. Net capital gain distributions are not eligible for the dividends
received deduction.
Under the Internal Revenue Code, any distributions designated as being made
from the Fund's net capital gains are taxable to its shareholders as long-term
capital gains, regardless of the holding period of such shareholders. Such
distributions of net capital
B-27
<PAGE>
gains will be designated by the Fund as a capital gains distribution in a
written notice to its shareholders which accompanies the distribution payment.
Any loss on the sale of shares held for less than six months will be treated
as a long-term capital loss for federal tax purposes to the extent a
shareholder receives net capital gain distributions on such shares. The
maximum federal income tax rate applicable to long-term capital gains is
currently 28% for individual and corporate shareholders. Dividends and
distributions are taxable as described whether received in cash or reinvested
in additional shares of the Fund.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes
of calculating gain or loss realized upon a sale or exchange of shares of the
Fund.
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A and Class Z shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share distributions of net capital gains, if any, will be paid in the same
amount for Class A, Class B, Class C and Class Z shares. See "Net Asset
Value."
OTHER TAX INFORMATION. The Company may also be subject to state or local
taxes in certain other states where it is deemed to be doing business.
Further, in those states which have income tax laws, the tax treatment of the
Company and of shareholders of the Fund with respect to distributions by the
Fund may differ from federal tax treatment. Distributions to shareholders may
be subject to additional state and local taxes. Shareholders should consult
their own tax advisers regarding specific questions as to federal, state or
local taxes.
B-28
<PAGE>
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Company may from time to time advertise the
Fund's average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z Shares. See "How the Fund
Calculates Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P(1+T)n = ERV
Where:P= a hypothetical initial payment of $1000.
T= average annual total return.
n= number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5, or 10 year periods at the end of the
period (or fractional portion thereof).
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal
or state income taxes that may be payable upon redemption.
The average annual total return for Class A shares for the one, five and
nine-and two-thirds year periods ended on December 31, 1996 was 11.45%, 11.46%
and 12.16%, respectively. The average annual total return for Class B shares
for the one, five and five-and-one-half year periods ended December 31, 1996
was 10.54%, 11.52% and 15.14%, respectively. The average annual total return
for Class C shares for the one and two-and-one half year periods ended
December 31, 1996 was 14.54% and 18.12%, respectively.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares. See "How the Fund Calculates Performance" in the
Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
<TABLE>
<S> <C>
ERV -
P
-----
T =
P
</TABLE>
Where:P= a hypothetical initial payment of $1000.
T = aggregate total return.
ERV = ending redeemable value of a hypothetical $1000 payment made at the
beginning of the 1, 5 or 10 year periods at the end of the 1, 5 or
10 year periods (or fractional portion thereof).
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The aggregate total return for Class A shares for the one, five and eight-
and-two-third year periods ended on December 31, 1996 was 16.45%, 81.12% and
221.61%, respectively. The aggregate total return for Class B shares for the
one, five and five-and-one-half year periods ended on December 31, 1996 was
15.54%, 73.51% and 120.03%, respectively. The aggregate total return for Class
C shares for the one and two-and-one half year periods ended December 31, 1996
was 15.54% and 49.55%, respectively.
B-29
<PAGE>
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of
inflation./1/
(ART)
/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 & Poor's 500 Stock Index, a market-weighted,
unmanaged index of 500 common stocks in a variety of industry sectors. It is a
commonly used indicator of broad stock price movements. This chart is for
illustrative purposes only, and is not intended to represent the performance
of any particular investment or fund. Investors cannot invest directly in an
index. Past performance is not a guarantee of future results.
CUSTODIAN, TRANSFER AND DIVIDENDDISBURSING AGENT AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities
and cash and in that capacity maintains certain financial and accounting books
and records pursuant to an agreement with the Fund. Subcustodians provide
custodial services for the Fund's foreign assets held outside the United
States. See "How the Fund is Managed--Custodian and Transfer and Dividend
Disbursing Agent" in the Prospectus.
Prudential Mutual Fund Services LLC ("PMFS"), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the
Fund. PMFS is a wholly-owned subsidiary of PMF. PMFS provides customary
transfer agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions, and
related functions. For these services, PMFS receives an annual fee per
shareholder account, a new account set-up fee for each manually established
account and a monthly inactive zero balance account fee of $.20 per
shareholder account. PMFS is also reimbursed for its out-of-pocket expenses,
including but not limited to postage, stationery, printing, allocable
communications expenses and other costs. For the year ended December 31, 1996,
the Fund incurred fees of approximately $590,000 for the services of PMFS.
Ernst & Young LLP serves as the Company's independent accountants and in
that capacity audits the Company's annual financial statements with respect to
the Fund.
B-30
<PAGE>
NICHOLAS-APPLEGATE FUND, INC. Portfolio of Investments
NICHOLAS-APPLEGATE GROWTH EQUITY FUND December 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Shares Description Value
(Note 1)
- -------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS--93.8%
CAPITAL GOODS--27.4%
Computers-Services--6.0%
80,900 Compaq Computer Corp.*......... $ 6,006,825
169,600 Dell Computer Corp.*........... 9,010,000
170,000 EMC Corporation*............... 5,631,250
137,700 Gateway 2000 Inc.*............. 7,375,556
--------------
28,023,631
--------------
Electronic Components--7.1%
198,500 CompUSA Inc.*.................. 4,094,063
150,500 FORE Systems, Inc.*............ 4,947,687
78,000 Intel Corp. ................... 10,213,125
260,000 Tech Data Corp.*............... 7,117,500
150,000 Vitesse Semiconductor Corp.*... 6,825,000
--------------
33,197,375
--------------
Retail Specialty Chain--3.5%
165,100 Borders Group, Inc.*........... 5,922,962
162,500 Consolidated Stores Corp.*..... 5,220,313
178,800 Toys R Us, Inc.*............... 5,364,000
--------------
16,507,275
--------------
Telecommunication--10.8%
220,000 ADC Telecommunications, Inc.*.. 6,847,500
110,000 Andrew Corp.*.................. 5,836,875
91,900 Ascend Communications, Inc.*... 5,709,287
196,900 Ericsson (L.M.)
Telephone Co., Inc. (ADR)... 5,943,919
92,000 LCI International, Inc.*....... 1,978,000
265,000 NEXTEL Communications, Inc.*... 3,461,563
151,900 Nokia Corp. (ADR).............. 8,753,237
190,400 Teleport Communications
Group Inc.*................. 5,807,200
170,000 Tellabs, Inc.*................. 6,396,250
--------------
50,733,831
--------------
CONSUMER NON-DURABLES--17.3%
Airlines--1.4%
105,700 UAL Corporation*............... 6,606,250
--------------
Drugs & Healthcare--10.2%
195,600 Biogen, Inc.*.................. 7,579,500
120,800 Boston Scientific Corp.*....... 7,248,000
129,650 Cardinal Health, Inc. ......... 7,552,112
167,100 Dura Pharmaceuticals, Inc.*.... 7,979,025
156,300 HEALTHSOUTH Corp.*............. 6,037,088
110,000 Oxford Health Plans, Inc.*..... 6,441,875
121,300 Vertex Pharmaceuticals, Inc.*.. 4,882,325
--------------
47,719,925
--------------
Hotels & Restaurants--0.6%
180,900 Host Marriott Corp.*........... 2,894,400
--------------
Leisure And Recreation--3.6%
160,000 Harley-Davidson Inc. .......... 7,520,000
350,000 International Game Tech., Inc.. 6,387,500
164,300 WMS Industries, Inc.*.......... 3,286,000
--------------
17,193,500
--------------
Retail-Services--1.5%
225,900 CUC International Inc.*........ 5,365,125
39,700 Kohl's Corp.*.................. 1,558,225
--------------
6,923,350
--------------
ENERGY--13.3%
Oil & Gas-Production/Pipeline--9.9%
155,000 BJ Services Co.*............... 7,905,000
138,900 Burlington Resources, Inc. .... 6,997,087
119,500 Diamond Offshore
Drilling, Inc.*............. 6,811,500
153,100 Pogo Producing Co. ............ 7,233,975
175,000 Smith International, Inc.*..... 7,853,125
50,200 United Meridian Corp.*......... 2,597,850
192,750 Williams Cos., Inc. ........... 7,228,125
--------------
46,626,662
--------------
Oil Services--3.4%
180,000 ENSCO International Inc.*...... 8,730,000
103,500 Western Atlas, Inc.*........... 7,335,563
--------------
16,065,563
--------------
</TABLE>
See Notes to Financial Statements
31
<PAGE>
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Shares Description Value
(Note 1)
- -------------------------------------------------------------
<C> <S> <C>
ENVIRONMENTAL SECTOR--3.3%
Pollution Control
Equipment & Service--3.3%
239,700 Republic Industries, Inc.*..... $ 7,475,644
245,680 USA Waste Services, Inc.*...... 7,831,050
--------------
15,306,694
--------------
FINANCIAL SERVICES--11.3%
Financial/Business Services--11.3%
160,000 APAC Teleservices Inc.*........ 6,140,000
166,100 Associates First Capital Corp.. 7,329,163
139,400 Danka Business
Systems PLC (ADR)........... 4,931,275
210,000 Equifax, Inc. ................. 6,431,250
162,000 Green Tree Financial Corp. .... 6,257,250
86,800 MGIC Investment Corp. ......... 6,596,800
233,800 Money Store, Inc. (The)........ 6,458,725
196,600 SunAmerica, Inc. .............. 8,724,125
--------------
52,868,588
--------------
GENERAL BUSINESS--8.2%
Apparel & Textiles--8.2%
104,000 Gucci Group NV (ADR)........... 6,643,000
257,000 Jones Apparel Group, Inc.*..... 9,605,375
232,200 Mohawk Industries, Inc.*....... 5,108,400
216,900 Nautica Enterprises, Inc.*..... 5,476,725
78,700 NIKE, Inc. .................... 4,702,325
149,300 Tommy Hilfiger Corp.*.......... 7,166,400
--------------
38,702,225
--------------
TECHNOLOGY SECTOR--13.0%
Computer Hardware--1.1%
205,800 Sun Microsystems, Inc.*........ 5,286,488
--------------
Computer-Software--11.9%
174,000 BMC Software Inc.*............. 7,199,250
202,400 Cambridge Technology
Partners, Inc.*............. 6,793,050
89,400 Computer Associates
International, Inc. ........ 4,447,650
124,300 McAfee Associates, Inc.*....... 5,469,200
44,200 Microsoft Corp.*............... 3,652,025
112,000 Netscape
Communications Corp.*....... 6,370,000
181,400 Parametric Technology Corp.*... 9,319,425
166,200 Rational Software Corp.*....... 6,575,287
130,000 Synopsys, Inc.*................ 6,012,500
--------------
55,838,387
--------------
Total common stocks
(cost $347,551,519).......... 440,494,144
--------------
<CAPTION>
Principal
Amount
(000)
- ---------
<C> <S> <C>
SHORT-TERM INVESTMENTS--6.7%
Commercial Paper--6.7%
American Electric Power Co., Inc.
$ 8,032 6.55%, 1/2/97............... 8,030,539
Merrill Lynch & Co., Inc.
23,128 6.50%, 1/2/97............... 23,123,824
--------------
31,154,363
--------------
Other
115 Seven Seas Money Market Fund... 115,004
--------------
Total short-term investments
(cost $31,269,367).......... 31,269,367
--------------
Total Investments--100.5%
(cost $378,820,886; Note 4). 471,763,511
Liabilities in excess of other
assets--(0.5%).............. (2,140,504)
--------------
Net Assets--100%............... $469,623,007
==============
</TABLE>
- --------------
* Non-income producing security.
ADR--American Depository Receipt
See Notes to Financial Statements
32
<PAGE>
- --------------------------------------------------------------------------
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
Statement of Assets and Liabilities
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets December 31, 1996
-----------------
<S> <C>
Investments, at value (cost $378,820,886)................ $ 471,763,511
Cash..................................................... 43,789
Receivable for Fund shares sold.......................... 2,281,118
Receivable for investments sold.......................... 2,192,400
Dividends and interest receivable........................ 45,558
Deferred expenses and other assets....................... 9,533
-------------
Total assets........................................ 476,335,909
-------------
Liabilities
Payable for investments purchased........................ 4,529,796
Payable for Fund shares reacquired....................... 1,134,247
Management fee payable................................... 380,075
Accrued expenses......................................... 357,364
Distribution fee payable................................. 299,377
Directors' fees payable.................................. 12,043
-------------
Total liabilities................................... 6,712,902
-------------
Net Assets............................................... $ 469,623,007
=============
Net assets were comprised of:
Common stock, at par................................... $ 318,347
Paid-in capital in excess of par....................... 355,155,899
-------------
355,474,246
Accumulated net realized gain on investments........... 21,206,136
Net unrealized appreciation on investments............. 92,942,625
-------------
Net assets, December 31, 1996............................ $ 469,623,007
=============
Class A:
Net asset value and redemption price per share
($145,120,322 / 9,417,367 shares of common stock
issued and outstanding).............................. $15.41
Maximum sales charge (5% of offering price)............ 81
------
Maximum offering price to public....................... $16.22
======
Class B:
Net asset value, offering price and redemption price
per share ($317,767,563 / 21,952,085 shares of common
stock issued and outstanding)........................ $14.48
======
Class C:
Net asset value, offering price and redemption price
per share ($6,735,122 / 465,271 shares of common
stock issued and outstanding)........................ $14.48
======
</TABLE>
See Notes to Financial Statements
33
<PAGE>
- --------------------------------------------------------------------------------
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
Statement of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
December 31, 1996
-------------------
<S> <C>
Net Investment Loss
Income
Dividends (net of foreign withholding taxes of
$12,568)..................................... $ 927,752
Interest......................................... 1,210,222
------------
Total income............................... 2,137,974
------------
Expenses
Management fees............................ 4,251,372
Distribution fee -- Class A................ 246,258
Distribution fee -- Class B................ 3,048,413
Distribution fee -- Class C................ 58,615
Transfer agent's fees and expenses......... 616,000
Reports to shareholders.................... 144,000
Custodian's fees and expenses.............. 140,000
Registration fees.......................... 79,000
Insurance expense.......................... 77,600
Directors' fees............................ 77,000
Legal fees and expenses.................... 50,000
Audit fees and expenses.................... 32,000
Miscellaneous.............................. 34,360
------------
Total expenses.......................... 8,854,618
------------
Net investment loss.............................. (6,716,644)
------------
Realized and Unrealized Gain
on Investments
Net realized gain on investment transactions..... 72,328,335
Net change in unrealized appreciation/
depreciation on investments................... (173,258)
------------
Net gain on investments.......................... 72,155,077
------------
Net Increase in Net Assets
Resulting from Operations........................ $65,438,433
============
</TABLE>
See Notes to Financial Statements
- --------------------------------------------------------------------------------
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1996 1995
------------- -------------
Increase (Decrease)
in Net Assets
<S> <C> <C>
Operations
Net investment loss................. $ (6,716,644) $ (5,354,509)
Net realized gain on
investment transactions............ 72,328,335 37,652,628
Net change in unrealized
appreciation/depreciation
on investments..................... (173,258) 68,899,944
-------------- -------------
Net increase in
net assets resulting
from operations..................... 65,438,433 101,198,063
-------------- -------------
Net equalization debits............... -- (25,587)
-------------- -------------
Distributions to shareholders
from net realized gains on
investments
Class A.......................... (18,962,078) (3,870,372)
Class B.......................... (44,527,983) (9,969,062)
Class C.......................... (917,000) (145,786)
-------------- -------------
(64,407,061) (13,985,220)
-------------- -------------
Fund share transactions (Note 5)
(net of share conversions)
Net proceeds from shares
subscribed.......................... 899,616,382 497,447,785
Net asset value of shares
issued to shareholders in
reinvestment of
distributions....................... 58,287,125 12,582,750
Cost of shares reacquired............ (909,300,156) (523,457,280)
-------------- -------------
Net increase (decrease) in
net assets from Fund
share transactions.................. 48,603,351 (13,426,745)
-------------- -------------
Total increase......................... 49,634,723 73,760,511
Net Assets
Beginning of year...................... 419,988,284 346,227,773
-------------- -------------
End of year............................ $ 469,623,007 $ 419,988,284
============== =============
</TABLE>
See Notes to Financial Statements
34
<PAGE>
- --------------------------------------------------------------------------------
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
Notes to Financial Statements
- --------------------------------------------------------------------------------
Nicholas-Applegate Growth Equity Fund (the "Fund") is currently the only
series of Nicholas-Applegate Fund, Inc. The Fund commenced operations as a
closed-end, diversified management investment company on April 9, 1987. On June
7, 1991, the Fund ceased operations as a closed-end investment company.
Effective June 10, 1991, trading in the Fund's shares was discontinued on the
New York Stock Exchange and the Fund commenced operations as an open-end,
diversified management investment company.
The Fund's investment objective is capital appreciation. It seeks to achieve
this objective by investing primarily in common stocks and in securities
convertible into or excercisable for common stocks (such as convertible
preferred stocks, convertible debentures and warrants), the earnings and
securities prices of which the investment adviser expects to grow at a rate
above that of the S&P 500.
Note 1. Accounting The following is a summary
Policies of significant accounting
policies followed by the
Fund in the preparation of
its financial statements.
Security Valuation: Investments are stated at value. Investments for which
market quotations are readily available are valued at the last reported sales
price. If there are no sales on the date of valuation, then investments are
valued at the mean between the most recently quoted bid and asked prices
provided by principal market makers. Securities for which market quotations
are not readily available are valued at fair value as determined in good faith
by or under the direction of the Fund's Board of Directors. Short-term
securities are valued at amortized cost.
In connection with transactions in repurchase agreements, it is the Fund'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. 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 Fund may be
delayed or limited.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized and unrealized gains and losses from
security transactions are calculated on the identified cost basis. Dividend
income is recorded on the ex-dividend date and interest income is recorded on
an accrual basis. Expenses are recorded on the accrual basis which may require
the use of certain estimates by management.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based
upon the relative proportion of net assets of each class at the beginning of
the day.
Equalization: Effective January 1, 1996, the Fund discontinued the accounting
practice of equalization. Equalization is a practice whereby a portion of
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 balance of $25,587 undistributed net investment
income at December 31, 1996, resulting from equalization was transferred
to paid-in capital in excess of par. Such reclassification has no effect
on net assets, results of operations, or net asset value per share.
Dividends and Distributions: Dividends from net investment income and
distributions of net capital gains in excess of capital loss carryforwards,
if any, are declared and paid annually. Dividends and distributions are
recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles.
Federal Income Taxes: It is the Fund's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to shareholders.
Therefore, no tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance
with the Fund's understanding of the applicable country's tax rules and rates.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountant's 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 December
35
<PAGE>
31, 1996 the Fund decreased accumulated net investment loss by $6,716,644, and
decreased paid-in capital by $6,716,644 due to the Fund experiencing a net
investment loss during the year. Net realized gains and net assets were not
affected by this change.
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management,
LLC ("PMF"). Pursuant to the management agreement, PMF has responsibility for
all investment advisory services and supervises the subadviser's performance of
such services. PMF has entered into a subadvisory agreement with Nicholas-
Applegate Capital Management ("NACM"); NACM furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the
services of the subadviser, the compensation of officers of the Fund who are
employees of PMF, occupancy and certain clerical and bookkeeping costs of the
Fund. The Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly at an
annual rate of .95% of the average daily net assets of the Fund. PMF pays
NACM, as compensation for its services pursuant to the subadvisory agreement,
a fee at the rate of .75% of the average daily net assets of the Fund. During
the year ended December 31, 1996 PMF earned $4,251,372 in management fees of
which it paid $3,358,584 to NACM under the foregoing agreements.
The Fund has a distribution agreement with Prudential Securities
Incorporated ("PSI"), which acts as the distributor of the Class A, Class B
and Class C shares of the Fund. The Fund compensates PSI for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the "Class A, B and C Plans") regardless of expenses actually
incurred by them. The distribution fees for Class A, B and C shares are
accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and
1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Class A, B and C Plans were .18 of 1% of
average daily net assets of Class A shares and 1% of the average daily net
assets of both the Class B and Class C shares, respectively, for the year
ended December 31, 1996.
PSI has advised the Fund that it has received approximately $268,300 in
front-end sales charges resulting from sales of Class A shares during the year
ended December 31, 1996. From these fees, PSI paid such sales charges to
PRUCO Securities Corporation, an affiliated broker-dealer, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI advised the Fund that for the year ended December 31, 1996, it
received approximately $721,400 in contingent deferred sales charges imposed
upon certain redemptions by Class B and C shareholders.
PSI, PMF and ("Prusec") are (indirect) wholly-owned subsidiaries of The
Prudential Insurance Company of America. ("Prudential")
The Fund, along with other affiliated registered investment companies
(the "Funds"), entered into a credit agreement (the "Agreement") on December
31, 1996 with an unaffiliated lender. The maximum commitment under the
Agreement is $200,000,000. The Agreement expires on December 30, 1997.
Interest on any such borrowings outstanding will be at market rates. The
purposes of the Agreement is to serve as an alternative source of funding for
capital share redemptions. The Fund has not borrowed any amounts pursuant to
the Agreement as of December 31, 1996. The Funds pay a commitment fee at an
annual rate of .055 of 1% on the unused portion of the credit facility. The
commitment fee is accrued and paid quarterly on a pro-rata basis by the Funds.
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, LLC ("PMFS"), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year ended December 31,
1996, the Fund incurred fees of approximately $590,000 for the services of PMFS,
of which approximately $52,700 was owed as of December 31, 1996. Transfer agent
fees and expenses in the Statement of Operations also include certain out of
pocket expenses paid to non-affiliates.
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term
investments, for the year ended December 31, 1996 aggregated $487,250,242 and
$524,967,988, respectively.
The cost basis of investments for federal income tax purposes at December
31, 1996 was $378,829,945 and, accordingly, net unrealized appreciation of
investments for federal income tax purposes was $92,933,566 (gross unrealized
appreciation--$100,985,442; gross unrealized depreciation--$8,051,876).
Note 5. Capital
The Fund offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending upon
the period of time the shares are held. Class C shares are sold with a
contingent deferred sales charge of 1% during
36
<PAGE>
the first year. Class B shares will automatically convert to Class A shares on
a quarterly basis approximately seven years after purchase. A special exchange
privilege is also available for shareholders who qualified to purchase Class A
shares at net asset value.
The Fund has authorized 100 million shares of common stock at $.01 par
value per share equally divided into three classes, designated Class A, Class
B and Class C shares.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------- ----------- ---------------
<S> <C> <C>
Year ended December 31, 1996:
Shares sold....................... 45,256,796 $ 735,771,997
Shares issued in reinvestment
of dividends and distributions.. 983,300 15,498,673
Shares reacquired................. (45,642,294) (743,356,355)
------------ --------------
Net increase in shares
outstanding before conversion... 597,802 7,914,315
Shares issued upon conversion
from Class B.................... 628,501 10,055,961
------------ --------------
Net increase in shares
outstanding.................... 1,226,303 $ 17,970,276
------------ --------------
Year ended December 31, 1995:
Shares sold....................... 24,651,915 $ 348,256,276
Shares issued in reinvestment of
dividends and distributions... 215,625 3,115,781
Shares reacquired................. (25,323,931) (359,037,322)
============ ==============
Net decrease in shares
outstanding before conversion.. (456,391) (7,665,265)
Shares issued upon conversion
from Class B................... 1,302,983 16,471,726
------------ --------------
Net increase in shares
outstanding..................... 846,592 $ 8,806,461
============ ==============
<CAPTION>
Class B
- --------
<S> <C> <C>
Year ended December 31, 1996:
Shares sold....................... 10,219,707 $ 155,199,983
Shares issued in reinvestment of
distributions................... 2,823,157 41,917,160
Shares reacquired................. (10,486,306) (158,450,669)
------------ --------------
Net increase in shares
outstanding before conversion... 2,556,558 38,666,474
Shares reacquired upon
conversion into Class A......... (664,025) (10,055,961)
------------ --------------
Net increase in shares
outstanding.................... 1,892,533 $ 28,610,513
============ ==============
<CAPTION>
Class B Shares Amount
- --------- -------- --------
<S> <C> <C>
Year ended December 31, 1995:
Shares sold....................... 10,704,150 $ 145,320,817
Shares issued in reinvestment of
distributions................... 675,282 9,325,642
Shares reacquired................. (12,198,113) (163,546,779)
----------- --------------
Net decrease in shares
outstanding before conversion... (818,681) (8,900,320)
Shares reacquired upon
conversion into Class A......... (1,354,574) (16,471,726)
----------- --------------
Net decrease in shares
outstanding.................... (2,173,255) $ (25,372,046)
============ ==============
<CAPTION>
Class C
- ---------
<S> <C> <C>
Year ended December 31, 1996:
Shares sold....................... 564,965 $ 8,644,402
Shares issued in reinvestment of
distributions.................. 58,630 871,292
Shares reacquired................. (496,192) (7,493,132)
------------ --------------
Net increase in shares
outstanding.................... 127,403 $ 2,022,562
============ ==============
Year ended December 31, 1995:
Shares sold....................... 297,211 $ 3,870,692
Shares issued in reinvestment of
distributions................... 10,241 141,327
Shares reacquired................. (64,764) (873,179)
------------ --------------
Net increase in shares
outstanding.................... 242,688 $ 3,138,840
============ ==============
</TABLE>
Note 6. Distributions On February 7, 1997, the
Board of Directors of the
Fund declared a long-term capital distribution of $0.509 per share for Class
A, B and C shares respectively, payable on February 28, 1997 to shareholders
of record on February 14, 1997.
37
<PAGE>
- --------------------------------------------------------------------------------
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------------
1996 1995(a) 1994(a) 1993(a) 1992(a)
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.......... $ 15.18 $ 11.99 $ 13.56 $ 12.77 $ 11.73
----------- ---------- ---------- ---------- ----------
Income from investment operations:
- ---------------------------------
Net investment loss......................... (0.14) (0.11) (0.07) (0.07) (0.07)
Net realized and unrealized gain (loss) on
investment transactions............... 2.64 3.82 (1.19) 2.63 1.11
----------- ---------- --------- --------- ---------
Total from investment operations...... 2.50 3.71 (1.26) 2.56 1.04
----------- ---------- --------- --------- ---------
Less distributions:
- ------------------
Distributions from net realized gains from
investment transactions............... (2.27) (0.52) (0.31) (1.77) --
---------- ---------- --------- ---------- ----------
Total distributions................... (2.27) (0.52) (0.31) (1.77) --
---------- ---------- --------- ---------- ----------
Net asset value, end of year................ $ 15.41 $ 15.18 $ 11.99 $ 13.56 $ 12.77
========== ========== ========= ========== ==========
TOTAL RETURN(b):............................ 16.45% 31.20% (9.53)% 20.26% 8.87%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............... $145,120 $124,340 $ 88,069 $ 97,596 $ 84,169
Average net assets (000).................... $136,482 $109,740 $ 93,620 $ 90,332 $ 74,005
Ratios to average net assets:
Expenses, including distribution fee.. 1.41% 1.44% 1.49%(d) 1.42%(d) 1.54%(d)
Expenses, excluding distribution fee.. 1.23% 1.27% 1.32%(d) 1.30%(d) 1.44%(d)
Net investment loss................... (0.93)% (0.83)% (0.59)% (0.53)% (0.63)%
For Class A, B and C shares:
Portfolio turnover rate(c).................. 113% 106% 110% 112% 107%
Average commission rate paid per share...... $.0588 $.0592 N/A N/A N/A
</TABLE>
- ---------------------
(a) Calculated based upon weighted average shares outstanding during the
periods due to effects of open-ending, Fund share sales and the resulting
share issuance from the stock rights offering.
(b) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of dividends
and distributions.
(c) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(d) Current year amounts have been restated from prior periods presentation.
N/A -- Not available
See Notes to Financial Statements
38
<PAGE>
- --------------------------------------------------------------------------------
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
--------------------------------------------------------------------------
Year Ended December 31,
--------------------------------------------------------------------------
1996 1995(a) 1994(a) 1993(a) 1992(a)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE
OPERATING PERFORMANCE:
Net asset value, beginning of year............ $14.49 $ 11.56 $ 13.18 $ 12.56 $ 11.65
--------- --------- --------- --------- ---------
Income from investment operations:
- ---------------------------------
Net investment loss........................... (.24) (0.22) (0.17) (0.18) (0.16)
Net realized and unrealized gain (loss) on
investment transactions................... 2.50 3.67 (1.14) 2.57 1.07
--------- --------- --------- --------- ---------
Total from investment operations.......... 2.26 3.45 (1.31) 2.39 0.91
--------- --------- --------- --------- ---------
Less distributions:
- ------------------
Distributions from net realized gains from
investment transactions................... (2.27) (0.52) (0.31) (1.77) --
--------- --------- --------- --------- ---------
Total distributions....................... (2.27) (0.52) (0.31) (1.77) --
--------- --------- --------- --------- ---------
Net asset value, end of year.................. $14.48 $ 14.49 $ 11.56 $ 13.18 $ 12.56
========= ========= ========= ========= =========
TOTAL RETURN(b):.............................. 15.54% 30.11% (10.20)% 19.21% 7.81%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $317,768 $290,751 $257,059 $252,911 $123,306
Average net assets (000)...................... $304,841 $265,597 $261,285 $179,456 $ 80,531
Ratios to average net assets:
Expenses, including distribution fee...... 2.23% 2.27% 2.32%(c) 2.30%(c) 2.44%(c)
Expenses, excluding distribution fee...... 1.23% 1.27% 1.32%(c) 1.30%(c) 1.44%(c)
Net investment loss....................... (1.75)% (1.66)% (1.39)% (1.40)% (1.56)%
</TABLE>
- ----------------------
(a) Calculated based upon weighted average shares outstanding during the
periods due to effects of open-ending, Fund share sales and the resulting
share issuance from the stock rights offering.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions.
(c) Current year amounts have been restated from prior periods presentation.
See Notes to Financial Statements
39
<PAGE>
- --------------------------------------------------------------------------------
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
--------------------------------------------------
August 1,
1994(c)
Year Ended December 31, Through
-------------------------- December 31,
1996 1995(a) 1994(a)
---------- ---------- ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $ 14.49 $ 11.56 $ 11.62
Income from investment operations:
- ---------------------------------
Net investment loss.......................... (0.22) (0.22) (0.05)
Net realized and unrealized gain (loss) on
investment transactions.................... 2.48 3.67 (0.01)
---------- ---------- -----------
Total from investment operations....... 2.26 3.45 (0.06)
---------- ---------- -----------
Less distributions:
- ------------------
Distributions from net realized gains from
investment transactions.................... (2.27) (0.52) --
---------- ---------- -----------
Total distributions........................ (2.27) (0.52) --
---------- ---------- -----------
Net asset value, end of period............... $ 14.48 $ 14.49 $ 11.56
========== ========== ===========
TOTAL RETURN(b):............................. 15.54% 30.11% (0.52)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............. $ 6,735 $ 4,897 $ 1,100
Average net assets (000)..................... $ 5,862 $ 2,961 $ 225
Ratios to average net assets:
Expenses, including distribution fee....... 2.23% 2.27% 6.23%(d)(e)
Expenses, excluding distribution fee....... 1.23% 1.27% 5.23%(d)(e)
Net investment loss..................... (1.75)% (1.63)% (3.36)%(d)
</TABLE>
- --------------
(a) Calculated based upon weighted average shares outstanding during the
periods due to effects of open-ending, Fund share sales and the resulting
share issuance from the stock rights offering.
(b) Total return does not consider the effects of sales loads. Total return
is calculated assuming purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods less than a full year are not
annualized.
(c) Commencement of offering Class C shares.
(d) Annualized.
(e) Current year amounts have been restated from prior periods presentation.
See Notes to Financial Statements
40
<PAGE>
- --------------------------------------------------------------------------------
R E P O R T O F I N D E P E N D E N T A U D I T O R S
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
Nicholas-Applegate Fund, Inc.
We have audited the accompanying statement of assets and liabilities of
Nicholas-Applegate Growth Equity Fund, the only series of Nicholas-Applegate
Fund, Inc., including the portfolio of investments, as of December 31, 1996,
and the related statement of operations for the year then ended, and the
statements of changes in net assets and the financial highlights for each of
the two years in the period then ended. 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. The financial highlights of
Nicholas-Applegate Growth Equity Fund for each of the three years in the
period ended December 31, 1994 for Class A and Class B shares, and for the
period from August 1, 1994 (commencement of investment operations) to
December 31, 1994 for Class C Shares, were audited by other auditors whose
report dated February 8, 1995 expressed an unqualified opinion on those
financial highlights.
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
securities owned as of December 31, 1996 by correspondence with the custodian
and brokers. 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Nicholas-Applegate Growth Equity Fund as of December 31, 1996, the results of
its operations for the year then ended, and the changes in its net assets and
the financial highlights for each of the two years in the period then ended, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
February 3, 1997
41
<PAGE>
APPENDIX I--HISTORICAL PERFORMANCE DATA
GROWTH POTENTIAL OF MID-SIZED STOCKS
Ending value of a $1,000 investment in mid- and large-sized stocks from
1/1/26 through 6/30/96.
[ART]
- ----------
Source: Ibbotson Associates' EnCorr Software, Chicago, IL as of 6/30/96. Used
with permission. All rights reserved. The S&P mid-cap and 500 indices are
unmanaged. Investor's cannot invest directly in stock indices. This Chart
is for illustrative purposes only and is not indicative of the past,
present or future performance of any specific investment.
I-1
<PAGE>
APPENDIX II--GENERAL INVESTMENT INFORMATION
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.
II-1
<PAGE>
APPENDIX III--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. See "Management of the Fund--Manager" in the
Prospectus. 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 Investments, a business group of Prudential (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.
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/1/ Prudential Investments, a business group 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 Series Fund, Inc. and Prudential Active Balanced Fund, a portfolio
of Prudential Dryden Fund, Mercator Asset Management LP as the Subadviser
to International Stock Series, a portfolio of Prudential World 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.
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INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
Prudential Mutual Fund Management is one of the sixteen 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.
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 Jennison 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.
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/3/ As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
IV-2
<PAGE>
Prudential Mutual Fund 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./5/ 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/
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services LLC, 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 Architects 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 or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
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/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 Fund Investment 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.
/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.
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