<PAGE>
As filed with the Securities and Exchange Commission on March 7, 1997
Registration No. 33-38461
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
[X]
POST-EFFECTIVE AMENDMENT NO. 10
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
[X]
AMENDMENT NO. 12
(Check appropriate box or boxes)
-----------
NICHOLAS-APPLEGATE FUND, INC.
(Formerly Nicholas-Applegate Growth Equity Fund, Inc.)
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
NEWARK, NEW JERSEY 07102
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 367-7530
S. JANE ROSE, ESQ.
GATEWAY CENTER THREE
NEWARK, NEW JERSEY 07102
(NAME AND ADDRESS OF AGENT FOR SERVICE OF PROCESS)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)
[_] on (date) pursuant to paragraph (a) of Rule 485.
[_] 75 days after filing pursuant to paragraph (a)(ii).
[_] on (date) pursuant to paragraph (a)(ii) of Rule 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[_] this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940, REGISTRANT
HAS PREVIOUSLY REGISTERED AN INDEFINITE NUMBER OF SHARES OF COMMON STOCK, PAR
VALUE $.01 PER SHARE. THE REGISTRANT FILED A NOTICE UNDER SUCH RULE FOR ITS
FISCAL YEAR ENDED DECEMBER 31, 1996 ON FEBRUARY 27, 1997.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
------------- --------
<C> <S> <C>
PART A
Item 1. Cover Page........................... Cover Page
Item 2. Synopsis............................. Fund Expenses; Fund Highlights
Item 3. Condensed Financial Information...... Fund Expenses; Financial
Highlights; How the Fund
Calculates Performance
Item 4. General Description of Registrant.... Cover Page; Fund Highlights;
General Information
Item 5. Management of Fund................... Financial Highlights; How the
Fund is Managed; General
Information
Item 6. Capital Stock and Other Securities... Taxes, Dividends and
Distributions; General
Information
Item 7. Purchase of Securities Being Offered. Shareholder Guide: How the
Fund Values its Shares
Item 8. Redemption or Repurchase............. Shareholder Guide: How the
Fund Values its Shares;
General Information
Item 9. Pending Legal Proceedings............ Not Applicable
PART B
Item 10. Cover Page........................... Cover Page
Item 11. Table of Contents.................... Table of Contents
Item 12. General Information and History...... General Information
Item 13. Investment Objectives and Policies... Investment Objective and
Policies; Investment
Restrictions
Item 14. Management of the Fund............... Directors and Officers;
Manager; Distributor
Item 15. Control Persons and Principal Holders
of Securities........................ Principal Holders of
Securities
Item 16. Investment Advisory and Other
Services............................. Manager; Distributor;
Custodian, Transfer and
Dividend Disbursing Agent and
Independent Accountants
Item 17. Brokerage Allocation and Other
Practices............................ Portfolio Transactions and
Brokerage
Item 18. Capital Stock and Other Securities... Not Applicable
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered............. Purchase and Redemption of
Fund Shares; Shareholder
Investment Account; Net Asset
Value
Item 20. Tax Status........................... Dividends, Distributions and
Taxes
Item 21. Underwriters......................... Distributor
Item 22. Calculation of Performance Data...... Performance Information
Item 23. Financial Statements................. Financial Statements
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Post-Effective Amendment
to the Registration Statement.
</TABLE>
<PAGE>
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
- -------------------------------------------------------------------------------
PROSPECTUS 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 whose objective is capital appreciation. The Fund intends
to invest 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 (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. THE FUND MAY ENGAGE IN SHORT-SELLING
AND SHORT-TERM TRADING. THESE TECHNIQUES MAY BE CONSIDERED SPECULATIVE AND MAY
RESULT IN HIGHER RISKS AND COSTS TO THE FUND. SEE "HOW THE FUND INVESTS--
INVESTMENT OBJECTIVE" AND "--INVESTMENT POLICIES AND PRACTICES."
The Fund's Manager is Prudential Mutual Fund Management LLC. The Fund's
Investment Adviser is Nicholas-Applegate Capital Management. See "How the Fund
is Managed." The Fund's address is Gateway Center Three, Newark, New Jersey
07102, and its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information
about the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated March 4, 1997, which information is
incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Company at the
address or telephone number noted above.
- -------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
The following summary is intended to highlight certain information contained
in this prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS NICHOLAS-APPLEGATE GROWTH EQUITY FUND?
Nicholas-Applegate Growth Equity Fund is a mutual fund. A mutual fund pools
the resources of investors by selling its shares to the public and investing
the proceeds of such sales in a portfolio of securities designed to achieve
its investment objective. Technically, the Fund is an open-end, diversified
management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is capital appreciation. It seeks to
achieve this objective by investing primarily in common stocks and
securities convertible into or exercisable for common stocks (such as
convertible preferred stocks and convertible debentures) the earnings and
securities prices of which the Investment Adviser expects to grow at a rate
above that of the S&P 500. There can be no assurance that the Fund's
objective will be achieved. See "How the Fund Invests--Investment Objective
and Policies" at page 7.
WHAT ARE THE FUND'S RISK FACTORS AND SPECIAL CHARACTERISTICS?
In seeking to achieve its investment objective, the Fund has generally
invested in companies having middle market capitalizations, and above.
Companies which have capitalizations of $500 million to approximately $5
billion are generally referred to as "middle market capitalization"
companies. The Fund's net asset value may be subject to above average
fluctuations, and its portfolio turnover may be substantially greater than
that of many other funds. The Fund may also invest in securities of foreign
issuers, engage in short sales and borrow from banks for certain purposes,
all of which involve special risk considerations. See "How the Fund
Invests--Investment Objective and Policies" at page 7. As with an investment
in any mutual fund, an investment in this Fund can decrease in value and you
can lose money.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management LLC (PMF or the Manager) is the Manager
of the Fund and is compensated for its services at an annual rate of .95 of
1% of the Fund's average daily net assets. As of January 31, 1997, PMF
served as manager or administrator to 62 investment companies, including 40
mutual funds, with aggregate assets of approximately $55.8 billion.
Nicholas-Applegate Capital Management (NACM or the Investment Adviser)
furnishes investment advisory services in connection with the management of
the Fund under a Subadvisory Agreement with PMF. See "How the Fund is
Managed--Manager" at page 11 and "How the Fund is Managed--Investment
Adviser" at page 12.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's Class A, Class B and Class C and Class Z shares
and is paid a distribution and service fee with respect to Class A shares
which is currently being charged at the annual rate of .25 of 1% of the
average daily net assets of the Class A shares and a distribution and
service fee with respect to Class B and Class C shares at an annual rate of
1% of the average daily net assets of each of the Class B and Class C
shares. Prudential Securities incurs the expense of distributing the Fund's
Class Z shares under a Distribution Agreement with the Fund, none of which
is reimbursed or paid for by the Fund. See "How the Fund is Managed--
Distributor" at page 12.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares except that the minimum initial investment
for Class C shares may be waived from time to time. The minimum subsequent
investment is $100 for Class A, Class B and Class C shares. Class Z shares are
not subject to any minimum investment requirements. There is no minimum
investment requirement for certain retirement and employee savings plans or
custodial accounts for the benefit of minors. For purchases made through the
Automatic Savings Accumulation Plan the minimum initial and subsequent
investment is $50. See "Shareholder Guide--How to Buy Shares of the Fund" at
page 18 and "Shareholder Guide--Shareholder Services" at page 28.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco-
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent) at
the net asset value per share (NAV) next determined after receipt of your
purchase order by the Transfer Agent or Prudential Securities plus a sales
charge which may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). Class Z shares are
offered to a limited group of investors at net asset value without any sales
charge. See "How the Fund Values its Shares" at page 15 and "Shareholder
Guide--How to Buy Shares of the Fund" at page 18.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four classes of shares:
. Class A Shares: Sold with an initial sales charge of up to 5% of the
offering price.
. Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from
5% to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain
redemptions made within six years of purchase. Although
Class B shares are subject to higher ongoing distribution-
related expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are
subject to lower ongoing distribution-related expenses)
approximately seven years after purchase.
. Class C Shares: Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to higher
ongoing distribution-related expenses than Class A shares
but do not convert to another class.
. Class Z Shares: Sold without either an initial or contingent deferred
sales charge to a limited group of investors. Class Z
shares are not subject to any ongoing service or
distribution expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 19.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 23.
DIVIDENDS AND DISTRIBUTIONS
The Fund expects to pay dividends of net investment income annually, if any,
and make distributions of any net capital gains at least annually. Dividends
and distributions will be automatically reinvested in additional shares of the
Fund at NAV without a sales charge unless you request that they be paid to you
in cash. See "Taxes, Dividends and Distributions" at page 16.
3
<PAGE>
- --------------------------------------------------------------------------------
FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
EXPENSES+ -------------- ------------------------------------- ---------------------------- ----------------
<S> <C> <C> <C> <C>
Maximum Sales Load
Imposed on Purchases
(as a percentage of
offering price)..... 5.00% None None None
Maximum Sales Load
Imposed on
Reinvested
Dividends........... None None None None
Maximum Deferred
Sales Load (as a
percentage of
original purchase
price or redemption 5% during the first year, decreasing
proceeds, whichever by 1% annually to 1% in the fifth and 1% on redemptions made
is lower)........... None sixth years and 0% the seventh year* within one year of purchase. None
Redemption Fees...... None None None None
Exchange Fees........ None None None None
<CAPTION>
ANNUAL FUND OPERATING CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES**
EXPENSES -------------- ------------------------------------- ---------------------------- ----------------
<S> <C> <C> <C> <C>
(as a percentage of
average net assets)
Management Fees...... .95% .95% .95% .95%
12b-1 Fees........... .25++ 1.00 1.00 None
Other Expenses....... .28% .28% .28% .28%
---- ------------------------------------- ---------------------------- ----
Total Fund Operating
Expenses............ 1.48% 2.23% 2.23% 1.23%
==== ===================================== ============================ ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming
(1) 5% annual return and (2) redemption at
the end of each time period:
Class A..................................... $64 $ 94 $127 $218
Class B..................................... $73 $100 $129 $226
Class C..................................... $33 $ 70 $119 $256
Class Z..................................... $13 $ 39 $ 68 $149
You would pay the following expenses on the
same investment, assuming no redemption:
Class A..................................... $64 $ 94 $127 $218
Class B..................................... $23 $ 70 $119 $226
Class C..................................... $23 $ 70 $119 $256
Class Z..................................... $13 $ 39 $ 68 $149
</TABLE>
The above example is based on restated data for the Fund's fiscal year
ended December 31, 1996. The example should not be considered a
representation of past or future expenses. Actual expenses may be greater
or less than those shown.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. For more complete descriptions of the various
costs and expenses, see "How the Fund is Managed". "Other Expenses"
includes operating expenses of the Fund, such as directors' and
professional fees, registration fees, reports to shareholders, transfer
agency and custodian fees and franchise taxes.
----------
* Class B shares will automatically convert to Class A shares
approximately seven years after purchase. See "Shareholder Guide--
Conversion Feature--Class B Shares."
** Estimated based on expenses expected to have been incurred if Class Z
Shares were in existence throughout the fiscal year ended December 31,
1997.
+ Pursuant to rules of the National Association of Securities Dealers,
Inc., the aggregate initial sales charges, deferred sales charges and
asset-based sales charges on shares of the Fund may not exceed 6.25% of
total gross sales, subject to certain exclusions. This 6.25% limitation
is imposed on the Fund rather than on a per shareholder basis.
Therefore, long-term shareholders of the Fund may pay more in total
sales charges than the economic equivalent of 6.25% of such
shareholders' investment in such shares. See "How the Fund is Managed--
Distributor."
++ Although the Class A Distribution and Service Plan provides that the
Fund may pay a distribution fee of up to .30 of 1% per annum of the
average daily net assets of the Class A shares, the Distributor has
agreed to limit its distribution fees with respect to Class A shares of
the Fund to no more than .25 of 1% of the average daily net assets of
the Class A shares for the fiscal year ending December 31, 1997. Total
operating expenses without such limitation would be 1.53%. See "How the
Fund is Managed--Distributor."
4
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
The information presented in this section includes information for fiscal
periods ended prior to the Fund's conversion from a closed-end investment
company to an open-end investment company.
- --------------------------------------------------------------------------------
The following financial highlights have been audited by Ernst & Young LLP
with respect to the fiscal years ended December 31, 1995 and December 31,
1996, and by Coopers & Lybrand LLP, with respect to the fiscal years of the
Fund ended December 31, 1990, December 31, 1991, December 31, 1992 December
31, 1993 and December 31, 1994, each of whom is an independent accountant,
and whose respective reports thereon were unqualified. This information
should be read in conjunction with the financial statements and the notes
thereto, which appear in the Statement of Additional Information. Further
performance information is contained in the annual report, which may be
obtained without charge. See "Shareholder Guide--Shareholder Services--
Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A(B)
------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1996 1995(D) 1994(D) 1993(D) 1992(D) 1991(D)
-------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period....................... $ 15.18 $ 11.99 $ 13.56 $ 12.77 $ 11.73 $ 10.19
-------- -------- ------- ------- ------- --------
INCOME FROM INVESTMENT
- ----------------------
OPERATIONS:
-----------
Net investment income (loss)..... (0.14) (.011) (.07) (0.07) (0.07) (0.10)
Net realized and unrealized gain
(loss) on investment
transactions.................... 2.64 3.82 (1.19) 2.63 1.11 5.50
-------- -------- ------- ------- ------- --------
Total from investment operations. 2.50 3.71 (1.26) 2.56 1.04 5.40
-------- -------- ------- ------- ------- --------
LESS DIVIDENDS AND DISTRIBUTIONS:
- ---------------------------------
Dividends from net investment
income.......................... -- -- -- -- -- --
Distributions from net realized
gains from investment
transactions.................... (2.27) (0.52) (0.31) (1.77) -- (3.86)
-------- -------- ------- ------- ------- --------
Total dividends and
distributions................... (2.27) (0.52) (0.31) (1.77) -- (3.86)
-------- -------- ------- ------- ------- --------
Increase (decrease) resulting
from Fund share transactions.... -- -- -- -- -- --
-------- -------- ------- ------- ------- --------
Net asset value, end of period... $ 15.41 $ 15.18 $ 11.99 $ 13.56 $ 12.77 $ 11.73
======== ======== ======= ======= ======= ========
TOTAL RETURN(G): ................ 16.45% 31.20% (9.53)% 20.26% 8.87% 55.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).. $145,120 $124,340 $86,069 $97,596 $84,169 $ 63,028
Average net assets (000)......... $136,482 $109,740 $93,620 $90,332 $74,005 $104,819
Ratios to average net assets:
Expenses, including distribution
fee............................ 1.41% 1.44% 1.49%(j) 1.42%(j) 1.54%(j) 1.94%(i)(j)
Expenses, excluding distribution
fee............................ 1.23% 1.27% 1.32%(j) 1.30%(j) 1.44%(j) 1.90%(j)
Net investment income (loss).... (0.93)% (0.83)% (0.59)% (0.53)% (0.63)% (0.83)%
Portfolio turnover rate(e)....... 113% 106% 110% 112% 107% 115%
Asset coverage of borrowing...... -- -- -- -- -- --
Total debt outstanding (000
omitted)........................ -- -- -- -- -- --
Average commission rate paid per
share........................... $ .0588 $ .0592 N/A N/A N/A N/A
<CAPTION>
CLASS A(B)
--------------------------------------------------------------
APRIL 9,
1987(H)
YEAR ENDED DECEMBER 31, TO
------------------------------------------- DECEMBER 31,
1990(D) 1989(C)(D) 1988(C)(D) 1987(C)(D)
-------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period....................... $ 11.42 $ 8.55 $ 7.40 $ 9.21(f)
-------- -------- ------- -------
INCOME FROM INVESTMENT
- ----------------------
OPERATIONS:
-----------
Net investment income (loss)..... 0.02 (0.25) (0.14) (0.04)
Net realized and unrealized gain
(loss) on investment
transactions.................... (0.66) 3.39 1.21 (1.77)
-------- -------- ------- -------
Total from investment operations. (0.64) 3.14 1.07 (1.81)
-------- -------- ------- -------
LESS DIVIDENDS AND DISTRIBUTIONS:
- ---------------------------------
Dividends from net investment
income.......................... (0.02) -- -- --
Distributions from net realized
gains from investment
transactions.................... (0.06) (0.28) -- --
-------- -------- ------- -------
Total dividends and
distributions................... (0.08) (0.28) -- --
-------- -------- ------- -------
Increase (decrease) resulting
from Fund share transactions.... (0.51) 0.01 0.08 --
-------- -------- ------- -------
Net asset value, end of period... $ 10.19 $ 11.42 $ 8.55 $ 7.40
======== ======== ======= =======
TOTAL RETURN(G): ................ (10.03)% 36.83% 15.54% (20.43)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).. $120,987 $108,415 $81,559 $74,121
Average net assets (000)......... $116,094 $ 98,874 $79,103 $90,251
Ratios to average net assets:
Expenses, including distribution
fee............................ 1.63%(i)(j) 4.55%(i)(j) 4.60%(i)(j) 3.61%(a)(i)(j)
Expenses, excluding distribution
fee............................ 1.63%(j) 4.55%(j) 4.60%(j) 3.61%(a)(j)
Net investment income (loss).... 0.24% (2.36)% (1.64)% (0.52)%(a)
Portfolio turnover rate(e)....... 149% 120% 183% 299%
Asset coverage of borrowing...... -- 371% 372% 385%
Total debt outstanding (000
omitted)........................ -- $ 40,000 $30,000 $26,000
Average commission rate paid per
share........................... N/A N/A N/A N/A
</TABLE>
---------
<TABLE>
<C> <S>
(a) Annualized.
(b) Prior to June 10, 1991, the Fund was organized as a closed-end
investment company. On June 10, 1991, the Fund was re-organized as an
open-end investment company and commenced offering of Class A shares.
(c) Not audited by Ernst & Young LLP or Coopers & Lybrand LLP.
(d) Calculated based upon weighted average shares outstanding during the
periods due to effects of open-ending, Fund share sales and the
resulting share issuance from a stock rights offering.
(e) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(f) Net of underwriting discount ($.70) and offering costs ($.09).
(g) Total return is calculated assuming a purchase of shares on the first
day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total return does not
consider the effects of sales loads. Total return for periods of less
than one full year are not annualized.
(h) Commencement of investment operations of Class A shares.
(i) Ratios of expenses, before loan interest, commitment fees and
nonrecurruing expenses were 1.71% in 1991, 1.16% in 1990, 1.14% in
1989, 1.29% in 1988 and 1.25% in 1987 for Class A Shares, respectively.
(j) Current year amounts have been restated from prior periods
presentation.
N/A -- Not available
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
The information presented in this section includes information for fiscal
periods ended prior to the Fund's conversion from a closed-end investment
company to an open-end investment company.
The following financial highlights have been audited by Ernst & Young LLP
with respect to the fiscal years ended December 31, 1995 and December 31,
1996, and by Coopers & Lybrand LLP, with respect to the fiscal years of the
Fund ended December 31, 1990, December 31, 1991, December 31, 1992, December
31, 1993 and December 31, 1994, each of whom is an independent accountant,
and whose respective reports thereon were unqualified. This information
should be read in conjunction with the financial statements and the notes
thereto, which appear in the Statement of Additional Information. Further
performance information is contained in the annual report which may be
obtained without charge. See "Shareholder Guide--Shareholder Services--
Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS B(B)
------------------------------------------------------------------------
JUNE 10,
YEAR ENDED 1991
DECEMBER 31, THROUGH
------------------------------------------------------- DECEMBER 31,
1996 1995(C) 1994(C) 1993(C) 1992(C) 1991(C)
-------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period. $ 14.49 $ 11.56 $ 13.18 $ 12.56 $ 11.65 $ 12.43
-------- -------- -------- -------- -------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income
(loss).................. (0.24) (0.22) (0.17) (0.18) (0.16) (0.08)
Net realized and
unrealized gain (loss)
on investment transac-
tions................... 2.50 3.67 (1.14) 2.57 1.07 3.16
-------- -------- -------- -------- -------- -------
Total from investment op-
erations................ 2.26 3.45 (1.31) 2.39 0.91 3.08
-------- -------- -------- -------- -------- -------
LESS DIVIDENDS AND DISTRIBUTIONS:
Dividends from net in-
vestment income......... -- -- -- -- -- --
Distributions from net
realized gains from
investment transactions. (2.27) (0.52) (0.31) (1.77) -- (3.86)
-------- -------- -------- -------- -------- -------
Total dividends and dis-
tributions.............. (2.27) (0.52) (0.31) (1.77) -- (3.86)
-------- -------- -------- -------- -------- -------
Increase (decrease)
resulting from Fund
share transactions...... -- -- -- -- -- --
-------- -------- -------- -------- -------- -------
Net asset value, end of
period.................. $ 14.48 $ 14.49 $ 11.56 $ 13.18 $ 12.56 $ 11.65
======== ======== ======== ======== ======== =======
TOTAL RETURN(e): ........ 15.54% 30.11% (10.20)% 19.21% 7.81% 26.82%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $317,768 $290,751 $257,059 $252,911 $123,306 $12,877
Average net assets (000). $304,841 $265,597 $261,285 $179,456 $ 80,531 $ 1,922
Ratios to average net assets:
Expenses, including dis-
tribution fee.......... 2.23% 2.27% 2.32%(h) 2.30%(h) 2.44%(h) 3.77%(a)(g)(h)
Expenses, excluding dis-
tribution fee.......... 1.23% 1.27% 1.32%(h) 1.30%(h) 1.44%(h) 2.77%(a)(h)
Net investment income
(loss)................. (1.75)% (1.66)% (1.39)% (1.40)% (1.56)% (3.17)%(a)
Portfolio turnover rat-
e(d).................... 113% 106% 110% 112% 107% 115%
Average commission rate
paid per share.......... $ .0588 $ .0592 N/A N/A N/A N/A
<CAPTION>
CLASS C
--------------------------------------
AUGUST 1,
1994(F)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1996 1995(C) 1994(C)
-------- ------------ ------------
<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 income
(loss).................. (0.22) (0.22) (0.05)
Net realized and
unrealized gain (loss)
on investment transac-
tions................... 2.48 3.67 (0.01)
------ ------ ------
Total from investment op-
erations................ 2.26 3.45 (0.06)
------ ------ ------
LESS DIVIDENDS AND DISTRIBUTIONS:
Dividends from net in-
vestment income......... -- -- --
Distributions from net
realized gains from
investment transactions. (2.27) (0.52) --
------ ------ ------
Total dividends and dis-
tributions.............. (2.27) (0.52) --
------ ------ ------
Increase (decrease)
resulting from Fund
share transactions...... -- -- --
------ ------ ------
Net asset value, end of
period.................. $14.48 $14.49 $11.56
====== ====== ======
TOTAL RETURN(e): ........ 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 $ 226
Ratios to average net assets:
Expenses, including dis-
tribution fee.......... 2.33% 2.27% 6.23%(a)(h)
Expenses, excluding dis-
tribution fee.......... 1.23% 1.27% 5.23%(a)(h)
Net investment income
(loss)................. (1.75)% (1.63)% (3.36)%(a)
Portfolio turnover rat-
e(d).................... 113% 106% 110%
Average commission rate
paid per share.......... $.0588 $.0592 N/A
</TABLE>
---------
<TABLE>
<C> <S>
(a) Annualized.
(b) Prior to June 10, 1991, the Fund was organized as a closed-end
investment company. On June 10, 1991, the Fund was re-organized as an
open-end investment company and commenced offering of Class B shares.
(c) 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 a stock rights offering.
(d) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(e) Total return is calculated assuming a purchase of shares on the first
day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total return does not
consider the effects of sales loads. Total return for periods of less
than one full year are not annualized.
(f) Commencement of offering of Class C shares.
(g) Ratio of expenses, before loan interest, commitment fees and
nonrecurring expenses was 3.76% for Class B shares.
(h) Current year amounts have been restated from prior period presentation.
N/A -- Not applicable
</TABLE>
6
<PAGE>
- --------------------------------------------------------------------------------
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS CAPITAL APPRECIATION. THE FUND SEEKS TO
ACHIEVE ITS OBJECTIVE BY INVESTING PRIMARILY IN COMMON STOCKS AND SECURITIES
CONVERTIBLE INTO OR EXERCISABLE FOR COMMON STOCKS (SUCH AS CONVERTIBLE
PREFERRED STOCKS AND CONVERTIBLE DEBENTURES), THE EARNINGS AND SECURITIES
PRICES OF WHICH THE INVESTMENT ADVISER EXPECTS TO GROW AT A RATE ABOVE THAT OF
THE S&P 500. THERE CAN BE NO ASSURANCE THAT SUCH OBJECTIVE WILL BE ACHIEVED.
See "Investment Objective and Policies" in the Statement of Additional
Information.
AS WITH AN INVESTMENT IN ANY MUTUAL FUND, AN INVESTMENT IN THE FUND CAN
DECREASE IN VALUE AND YOU CAN LOSE MONEY.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND THEREFORE MAY NOT
BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE FUND'S
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). FUND POLICIES THAT ARE NOT FUNDAMENTAL
MAY BE MODIFIED BY THE BOARD OF DIRECTORS.
Pursuant to the Investment Adviser's growth equity management approach, under
normal market conditions the Fund intends to invest at least 90% of its total
assets in a diversified portfolio of equity securities such as common stocks,
preferred stocks and convertible preferred stocks, which the Investment Adviser
believes have above-average earnings growth prospects based on a company-by-
company analysis (rather than on broader analyses of specific industries or
sectors of the economy).
THE INVESTMENT ADVISER SEEKS TO IDENTIFY STOCKS OF COMPANIES WHICH IT EXPECTS
TO ENTER INTO AN ACCELERATING EARNINGS PERIOD, TO ATTRACT INCREASING
INSTITUTIONAL SPONSORSHIP OR TO DEMONSTRATE STRONG PRICE APPRECIATION RELATIVE
TO THEIR INDUSTRIES AND TO BROAD MARKET AVERAGES. The companies in which the
Fund invests do not necessarily have records of past high growth. Examples of
possible investments include companies with cyclical earnings, companies with
new and innovative products or services, companies facing a changed economic,
competitive or regulatory environment, companies with a new or different
management approach and initial public offerings of companies which the
Investment Adviser believes offer above-average growth potential.
THE FUND INTENDS TO INVEST PRIMARILY IN COMPANIES HAVING MIDDLE MARKET
CAPITALIZATIONS AND ABOVE. Stock market capitalization is calculated by
multiplying the total number of a company's issued and outstanding common
shares by the per share market price of such shares. The Investment Adviser
believes that the over $500 million capitalization sector will continue for the
foreseeable future to offer a sufficient number of stocks having growth
characteristics which meet the Fund's investment criteria, so that it is
unlikely the Fund will need to consider investing in the under $500 million
capitalization sector. The Fund would only consider investments in the under
$500 million sector if sufficient attractive growth stocks were not available
in the over $500 million sector and if ample opportunity were believed to exist
in the under $500 million sector sufficient to satisfy the requirements of all
accounts the Investment Adviser manages which are primarily invested in the
under $500 million sector. Companies which have market capitalizations of $500
million to approximately $5 billion are generally referred to as "middle market
capitalization" companies. The Investment Adviser anticipates that the Fund's
investments will continue to be primarily in companies with smaller and medium
market capitalizations compared to those of the S&P 500 as a whole.
The Investment Adviser uses an extensive network of more than 75 brokerage
firms throughout the United States to identify equity investment opportunities.
The Investment Adviser's staff then applies its own computer-assisted
fundamental analysis to such individual potential investments, building
portfolios of equity securities which the Investment Adviser believes have
above-average earnings growth prospects. Investments are closely monitored with
a view to the sale of portfolio securities when the reasons for the initial
purchases are no longer valid.
7
<PAGE>
THE FUND RETAINS CASH AND EQUIVALENTS IN AMOUNTS DEEMED ADEQUATE FOR CURRENT
NEEDS, AND MAY MAKE SHORT-TERM INVESTMENTS DURING PERIODS WHEN, IN THE OPINION
OF THE INVESTMENT ADVISER, ATTRACTIVE EQUITY INVESTMENTS ARE NOT AVAILABLE.
See "Other Investments and Policies--Short-Term Investments".
The Fund's net asset value may be subject to above-average fluctuations
compared to the net asset values of other investment companies, because
greater than average risk will be assumed in investing in companies for the
purpose of seeking to achieve higher than average capital growth. The Fund's
investment policies may result in portfolio turnover substantially greater
than the turnover of many other investment companies. See "Other Investments
and Policies--Portfolio Turnover".
OTHER INVESTMENTS AND POLICIES
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). See
"Investment Objective and Policies--Investment Policies and Practices--
Convertible Securities and Warrants" in the Statement of Additional
Information.
FOREIGN SECURITIES
The Fund may invest up to 20% of its total assets in securities of foreign
issuers and in American Depository Receipts, which are receipts issued by an
American bank or trust company evidencing ownership of underlying securities
issued by a foreign issuer. Investments in foreign securities involve certain
inherent risks, such as exchange rate fluctuations, political, social or
economic instability of the country of issue, diplomatic developments which
could affect the assets of the Fund held in foreign countries, and the
possible imposition of exchange controls, withholding taxes on dividends or
interest payments, confiscatory taxes or expropriation. There may be less
government supervision and regulation of foreign securities exchanges, brokers
and listed companies than exists in the United States, foreign brokerage
commissions and custody fees are generally higher than those in the United
States, and foreign security settlements will in some instances be subject to
delays and related administrative uncertainties. The Fund will probably have
greater difficulty in obtaining or enforcing a court judgment abroad than it
would have doing so within the United States. Less information may be publicly
available about a foreign company than about a domestic company, and foreign
companies may not be subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies. In
addition, foreign securities markets have substantially less volume than the
New York Stock Exchange and securities of some foreign companies are less
liquid and more volatile than securities of comparable U.S. companies.
SHORT-TERM INVESTMENTS
The Fund may invest in short-term investments during periods when, in the
opinion of the Investment Adviser, attractive equity investments are
temporarily unavailable or other circumstances or market conditions warrant
such investments. Under normal circumstances no more than 10% of the Fund's
total assets will be retained in cash and equivalents. Such investments may
include U.S. Treasury Bills or other U.S. Government or Government agency
obligations; certificates of deposit of the 50 largest commercial banks in the
United States, measured by total assets as shown by their most recent annual
financial statements; commercial paper rated A-1 or A-2 by Standard & Poor's
Corporation or P-1 or P-2 by Moody's Investors Service or, if not rated,
issued by companies having an outstanding debt issue rated AA or better by
Standard & Poor's or Aa or better by Moody's; shares of money market mutual
funds; or repurchase agreements with respect to such securities.
REPURCHASE AGREEMENTS
The Fund may on occasion enter into repurchase agreements, whereby the seller
of a security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few
8
<PAGE>
days, although it may extend over a number of months. The resale price is in
excess of the purchase price, reflecting an agreed-upon rate of return
effective for the period of time the Fund's money is invested in the security.
The Fund's repurchase agreements will at all times be fully collateralized in
an amount at least equal to the resale price. The instruments held as
collateral are valued daily and, if the value of the instruments declines, the
Fund will require additional collateral. If the seller defaults and the value
of the collateral securing the repurchase agreement declines, the Fund may
incur a loss.
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 the following restrictions:
the aggregate premiums on call options purchased by the Fund may not exceed 5%
of the market value of the total assets of the Fund as of the date the call
options are purchased, and the aggregate premiums on the put options may not
exceed 5% of the market value of the total assets of the Fund as of the date
such options are purchased. A "put" gives a holder the right to require the
writer of the put to purchase from the holder a security at a specified price,
and a "call" gives a holder the right to require the writer of the call to sell
a security to the holder at a specified price. See "Investment Objective and
Policies--Investment Policies and Practices--Put and Call Options" in the
Statement of Additional Information.
SHORT SALES
The Investment Adviser believes that its growth equity management approach, in
addition to identifying equity securities the earnings and prices of which it
expects to grow at a rate above that of the S&P 500, 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. 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. 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. 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 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 Investment Adviser has
had experience in using short sales for its separate accounts since 1985. See
"Investment Objective and Policies--Investment Policies and Practices--Short
Sales" in the Statement of Additional Information.
In the view of the Securities and Exchange Commission (the "Commission"), a
short sale by the Fund involves the creation of a "senior security" as such
term is defined in the Investment Company Act, unless the sale is "against the
box" and the securities sold short are placed in a segregated account (not with
the broker), or the Fund"s obligation to deliver the securities sold short is
"covered" by placing in a segregated account (not with the broker) cash or U.S.
Government securities in an amount equal to the difference between the market
value of the securities sold short at the time of the short sale and any cash
or U.S. Government securities required to be deposited as collateral with a
broker in connection with the sale (not including the proceeds from the short
9
<PAGE>
sale), which difference is adjusted daily for changes in the value of the
securities sold short. The total value of the cash and U.S. Government
securities deposited with the broker and otherwise segregated may not at any
time be less than the market value of the securities sold short at the time of
the short sale. As a matter of policy, the Company's Board of Directors has
determined that the Fund will not make short sales of securities or maintain a
short position if to do so would create liabilities or require collateral
deposits and segregation of assets aggregating more than 25% of the Fund's
total assets, taken at market value. See "Investment Restrictions" in the
Statement of Additional Information.
In order to qualify as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"),
the Fund must derive less than 30% of its gross income from the sale of
securities it has held for less than three months (the "three month gain
rule"). The three month gain rule may limit the Fund's ability to sell a
portfolio security short, or to terminate its short position, at a time when
the Investment Adviser believes it would be advantageous to do so. The Fund
would not enter into a short sale or purchase and deliver new securities to
terminate its short position if such action would cause the Fund to violate the
three month gain rule. A violation of such rule might result in the failure by
the Fund to satisfy the requirements of Subchapter M of the Internal Revenue
Code and in the taxation of Fund income at the Fund level.
SECURITIES LENDING
To increase its income, the Fund may lend its portfolio securities to
financial institutions such as banks and brokers if the loan is collateralized
in accordance with applicable regulatory requirements. The Company's Board of
Directors has adopted an operating policy that limits the amount of such loans
to not more than 10% of the value of the total assets of the Fund. See
"Investment Restrictions" in the Statement of Additional Information. During
the time portfolio securities are on loan, the borrower pays the Fund an amount
equivalent to any dividends or interest paid on such securities, and the Fund
may invest the cash collateral and earn additional income, or it may receive an
agreed-upon amount of interest income from the borrower who has delivered
equivalent collateral or secured a letter of credit. Such loans involve risks
of delay in receiving additional collateral or in recovering the securities
loaned or even loss of rights in the collateral should the borrower of the
securities fail financially. However, such securities lending will be made only
when, in the Investment Adviser's judgment, the income to be earned from the
loans justifies the attendant risks. Loans are subject to termination at the
option of the Fund or the borrower. The Fund may pay reasonable administrative
and custodial fees in connection with a loan and may pay a negotiated portion
of the interest earned on the cash or equivalent collateral to the borrower or
placing broker. The Fund does not have the right to vote securities on loan,
but would terminate the loan and regain the right to vote if that were
considered important with respect to the investment.
PORTFOLIO TURNOVER
The Investment Adviser's growth equity management approach results in
substantial portfolio turnover, as the Investment Adviser sells portfolio
securities when it believes the reasons for their initial purchase are no
longer valid. The Fund's portfolio turnover rates for the fiscal years ended
December 31, 1996 and December 31, 1995 were 113% and 106%, respectively.
Although it is not possible to predict future portfolio turnover rates
accurately, and such rates may vary greatly from year to year, the Fund
anticipates that its annual portfolio turnover rate will not exceed 200%.
Portfolio turnover rate is calculated by dividing the lesser of the Fund's
annual sales or purchases of portfolio securities by the monthly average value
of securities in the portfolio during the year, excluding portfolio securities
the maturities of which at the time of acquisition were one year or less. See
"Portfolio Transactions and Brokerage" in the Statement of Additional
Information.
The Fund's ability to enter into certain short-term transactions will be
limited by the requirement that certain gains on securities may not exceed 30%
of its annual gross income for federal income tax purposes. However, portfolio
turnover will not otherwise be a limiting factor in making investment
decisions, and the Fund's investment policies may result in portfolio turnover
substantially greater than that of other investment companies. A high rate of
portfolio turnover involves correspondingly greater brokerage commission
expense than a lower rate, which expense must be borne by the Fund and its
shareholders. High portfolio turnover may also result in the realization of
substantial net short-term capital gains, and any distributions resulting from
such gains will be
10
<PAGE>
ordinary income for federal income tax purposes. See "'Dividends, Distributions
and Taxes" in the Statement of Additional Information.
BORROWING
The Fund is permitted to borrow money from banks in amounts of up to 30% of
its total assets (calculated when the loan is made) only for temporary,
extraordinary or emergency purposes or for the clearance of transactions. The
Board of Directors reserves the right to change this 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.
The use of borrowing by the Fund is a speculative technique that creates an
opportunity for greater total return but, at the same time, involves special
risk considerations that may not be associated with other funds having similar
objectives and policies. Since substantially all the Fund's assets fluctuate in
value, whereas the interest obligation resulting from a borrowing will be fixed
by the terms of the Fund's agreement with its lender, the asset value per share
of the Fund will tend to increase more when its portfolio securities increase
in value and to decrease more when its portfolio assets decrease in value than
would otherwise be the case if the Fund did not borrow funds. In addition,
interest costs on borrowings may fluctuate with changing market rates of
interest and may partially offset or exceed the return earned on borrowed funds
(or on the assets that were retained rather than sold to meet the needs for
which funds were borrowed). Under adverse market conditions, the Fund might
have to sell portfolio securities to meet interest or principal payments at a
time when fundamental investment considerations would not favor such sales. See
"Borrowing Policy" in the Statement of Additional Information.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
- --------------------------------------------------------------------------------
HOW THE FUND IS MANAGED
- --------------------------------------------------------------------------------
THE COMPANY HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUND'S MANAGER, INVESTMENT ADVISER AND DISTRIBUTOR, AS SET FORTH
BELOW, DECIDES UPON MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND
SUPERVISES THE DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S INVESTMENT
ADVISER FURNISHES DAILY INVESTMENT ADVISORY SERVICES.
For the year ended December 31, 1996, the Fund's total expenses as a
percentage of average net assets for Class A, Class B and Class C shares were
1.41%, 2.23% and 2.23%, respectively. See "Financial Highlights".
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT LLC (PMF OR THE MANAGER), GATEWAY CENTER
THREE, NEWARK, NEW JERSEY 07102, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE EQUAL TO .95 OF 1% OF THE AVERAGE DAILY NET
ASSETS OF THE FUND. PMF is organized in New York as a limited liability
Company. It is the successor to Prudential Mutual Fund Management, Inc., which
transferred its assets to PMF in September 1996. For the fiscal year ended
December 31, 1996, the Fund paid management fees to PMF of .95% of the Fund's
average net assets. See "Manager" in the Statement of Additional Information.
As of January 31, 1997 PMF served as the manager to 40 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies, with aggregate assets of
approximately $55.8 billion.
11
<PAGE>
UNDER THE MANAGEMENT AGREEMENT WITH THE COMPANY, PMF SUPERVISES THE INVESTMENT
OPERATIONS OF THE COMPANY AND ADMINISTERS THE COMPANY'S CORPORATE AFFAIRS. See
"Manager" in the Statement of Additional Information.
INVESTMENT ADVISER
NICHOLAS-APPLEGATE CAPITAL MANAGEMENT, 600 WEST BROADWAY, 29TH FLOOR, SAN
DIEGO, CALIFORNIA 92101, HAS SERVED AS THE INVESTMENT ADVISER TO THE FUND SINCE
ITS INCEPTION. THE INVESTMENT ADVISER MANAGES THE INVESTMENT OPERATIONS OF THE
FUND AND THE COMPOSITION OF THE FUND'S PORTFOLIO, INCLUDING THE PURCHASE,
RETENTION AND DISPOSITION THEREOF. It is compensated for its services by PMF,
not the Fund, at a rate of .75 of 1% of the average daily net assets of the
Fund. PMF continues to have responsibility for all investment advisory services
in accordance with the Management Agreement and supervises NACM's performance
of such services. For the fiscal year ended December 31, 1996, PMF paid
subadvisory fees to NACM of .75% of the Fund's average net assets.
The Investment Adviser currently manages a total of approximately $31 billion
of assets for a variety of clients, including employee benefit plans of
corporations, public retirement systems and unions, university endowments,
foundations and other institutional investors and individuals. The Investment
Adviser was organized in 1984 as a California limited partnership. Its general
partner is Nicholas-Applegate Capital Management Holdings, L.P., a California
limited partnership controlled by Arthur E. Nicholas. He and fourteen other
partners manage a staff of approximately 360 employees.
The Fund is managed under the general supervision of Arthur E. Nicholas, who
has been the chief investment officer of the Investment Adviser since its
organization. In addition, since December 1995, John D. Wylie, as Chief
Investment Officer--Retail, is also responsible for general oversight of the
Fund's portfolio. Jack C. Marshall, a partner of the Investment Adviser, is
primarily responsible for the day-to-day management of the Fund's portfolio.
Mr. Marshall has managed the Fund's portfolio since 1989 and has been employed
by Nicholas-Applegate Capital Management since March 1989.
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF
THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE SHARES OF THE FUND.
IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA (PRUDENTIAL).
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY THE PLANS) ADOPTED BY THE COMPANY UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A SEPARATE DISTRIBUTION
AGREEMENT (THE DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES ( THE
DISTRIBUTOR) INCURS 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 is reimbursed by or paid for by the Fund. These expenses include
commissions and account servicing fees paid to, or on account of, financial
advisers of Prudential Securities and representatives of Pruco Securities
Corporation (Prusec), an affiliated broker-dealer, commissions and account
servicing fees paid to, or on account of, other broker-dealers or financial
institutions (other than national banks) which have entered into agreements
with the Distributor, advertising expenses, the cost of printing and mailing
prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service fees
to the Distributor as compensation for its distribution and service activities,
not as reimbursement for specific expenses incurred. If the Distributor's
expenses exceed its distribution and service fees, the Fund will not be
obligated to pay any additional expenses. If the Distributor's expenses are
less than such distribution and service fees, it will retain its full fees and
realize a profit.
12
<PAGE>
UNDER THE CLASS A PLAN, THE FUND MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL
RATE OF UP TO .30% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The
Class A Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class A shares may be used to pay for personal service and/or
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of up to .25 of 1%) may not exceed .30 of 1% of
the average daily net assets of the Class A shares. Prudential Securities has
agreed to limit its distribution-related fees under the Class A Plan to .25 of
1% of the average daily net assets of the Class A shares for the fiscal year
ending December 31, 1997.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS PRUDENTIAL SECURITIES FOR
ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C SHARES
AT AN ANNUAL RATE OF UP TO 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF THE
CLASS B AND CLASS C SHARES. The Class B and Class C Plans provide for the
payment to Prudential Securities of (i) an asset-based sales charge of .75 of
1% of the average daily net assets of each of the Class B and Class C shares,
and (ii) a service fee of .25 of 1% of the average daily net assets of each of
the Class B and Class C shares. The service fee is used to pay for personal
service and/or the maintenance of shareholder accounts. Prudential Securities
also receives contingent deferred sales charges from certain redeeming
shareholders. See "Shareholder Guide--How to Sell Your Shares--Contingent
Deferred Sales Charges."
For the fiscal year ended December 31, 1996, the Fund paid distribution
expenses of .25%, 1.00% and 1.00% of the average net assets of the Class A,
Class B and Class C shares, respectively. The Fund records all payments made
under the Plans as expenses in the calculation of net investment income. See
"Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B or Class C
shares of the Fund will be allocated to each class based upon the ratio of
sales of each class to the sales of all shares of the Fund other than expenses
allocable to a particular class. The distribution fee and sales charge of one
class will not be used to subsidize the sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Board of Directors of the Company, including a majority
of the Directors who are not "interested persons" of the Company (as defined in
the Investment Company Act) and who have no direct or indirect financial
interest in the operation of the Plan or any agreement related to the Plan (the
"Rule 12b-1 Directors"), vote annually to continue the Plan. Each Plan may be
terminated at any time by vote of a majority of the Rule 12b-1 Directors or of
a majority of the outstanding shares of the applicable class of the Fund. The
Fund will not be obligated to pay distribution and service fees incurred under
any plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Fund under the Class
A, Class B and Class C Plans, the Manager (or one of its affiliates) may make
payments out of its own resources to dealers (including Prudential Securities)
and other persons which distribute shares of the Fund (including Class Z
shares). Such payments may be calculated by reference to the net asset value of
shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the
allegations asserted against it, PSI consented to the entry of an SEC
Administrative Order which stated that PSI's conduct violated the federal
securities laws, directed PSI to cease and desist from violating the federal
securities laws, pay civil penalties, and adopt certain remedial measures to
address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of
a $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
13
<PAGE>
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms
of the agreement, no prosecution will be instituted by the United States for
the offenses charged in the complaint. If on the other hand, during the course
of the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may
be obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein, and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker for the Fund provided that the
commissions, fees or other remuneration it receives are fair and reasonable.
Subject to obtaining the best price and execution, brokers' sales of the Fund's
shares may be considered in selecting brokers, and brokers who 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. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
FEE WAIVERS AND SUBSIDY
PMF may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. Fee waivers
and expense subsidize will increase the Fund's total return. See "Performance
Information" in the Statement of Additional Information and "Fund Expenses".
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting
books and records pursuant to an agreement with the Company. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC, Raritan Plaza One, Edison, New Jersey
08837, serves as the Fund's Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
14
<PAGE>
- --------------------------------------------------------------------------------
HOW THE FUND VALUES ITS SHARES
- --------------------------------------------------------------------------------
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
BOARD OF DIRECTORS HAS FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF
THE FUND'S NET ASSET VALUE TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued according to market quotations or, if such
quotations are not readily available, at fair value as determined in good faith
under procedures established by the Company's Board of Directors. See "Net
Asset Value" in the Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase,
sell or redeem shares have been received by the Fund or days on which changes
in the value of the Fund's portfolio securities do not materially affect the
NAV. The New York Stock Exchange is closed on the following holidays: New
Year's Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different NAVs and
dividends. The NAV of Class B and Class C shares will generally be lower than
the NAV of Class A shares as a result of the larger distribution-related fee to
which Class B and Class C shares are subject. The NAV of Class Z shares will
generally be higher than the NAV of the other three classes because Class Z
shares are not subject to any distribution and/or service fees. It is expected,
however, that the NAV of the four classes will tend to converge immediately
after the recording of dividends, if any, which will differ by approximately
the amount of the distribution and/or service fee expense accrual differential
among the classes.
- --------------------------------------------------------------------------------
HOW THE FUND CALCULATES PERFORMANCE
- --------------------------------------------------------------------------------
FROM TIME TO TIME THE COMPANY MAY ADVERTISE THE FUND'S "TOTAL RETURN"
(INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) IN
ADVERTISEMENTS AND SALES LITERATURE. TOTAL RETURN IS CALCULATED SEPARATELY FOR
CLASS A, CLASS B, CLASS C AND CLASS Z SHARES. These figures are based on
historical earnings and are not intended to indicate future performance. The
"total return" shows how much an investment in the Fund would have increased
(decreased) over a specified period of time (i.e., one, five or ten years or
since inception of the Fund) assuming that all distributions and dividends by
the Fund were reinvested on the reinvestment dates during the period. The
"aggregate" total return reflects actual performance over a stated period of
time. "Average annual" total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. "Average annual" total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither "average
annual" total return nor "aggregate" total return takes into account any
federal or state income taxes which may be payable upon redemption. The Fund
also may include comparative performance information in advertising or
marketing the Fund's shares. Such performance information may include data from
Lipper Analytical Services, Inc., Morningstar Publications, Inc., other
industry publications, business periodicals and market indices. See
"Performance Information" in the Statement of Additional Information. Further
performance information is contained in the Fund's annual and semi-annual
reports to Shareholders, which may be obtained without charge. See "Shareholder
Counsel--Shareholder Services--Reports to Shareholders."
15
<PAGE>
- --------------------------------------------------------------------------------
TAXES, DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A REGULATED
INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE FUND WILL
NOT BE SUBJECT TO FEDERAL INCOME TAX ON ITS NET INVESTMENT INCOME AND CAPITAL
GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. See "Dividends,
Distributions and Taxes" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
Any dividends out of net taxable investment income, together with any
distributions of short-term gains (i.e., the excess of net short-term capital
gains over net long-term capital losses) distributed to shareholders, will be
taxable as ordinary income to the shareholders whether or not reinvested. Any
net capital gains (i.e., the excess of net long-term capital gains over net
short-term capital losses) distributed to shareholders will be taxable as long-
term capital gains to the shareholders, whether or not reinvested and
regardless of the length of time a shareholder has owned his or her shares. The
maximum long-term capital gains rate for individuals is 28%. The maximum long-
term capital gains rate for corporate shareholders is currently the same as the
maximum tax rate for ordinary income.
The Fund has obtained opinions of counsel to the effect that neither the
conversion of Class B shares into Class A shares nor the exchange of any class
of the Fund's shares for any other class of its shares constitutes a taxable
event for federal income tax purposes. However, such opinions are not binding
on the Internal Revenue Service.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Company is required to withhold and remit
to the U.S. Treasury 31% of dividends, capital gain income and redemption
proceeds payable to individuals and certain noncorporate shareholders who fail
to furnish correct tax identification numbers on IRS Form W-9 (or IRS Form W-8
in the case of certain foreign shareholders). For shareholders who are
otherwise subject to backup withholding under federal income tax law, only
dividends and capital gains distributions are subject to withholding. Dividends
of net investment income and short-term capital gains paid to a foreign
shareholder will generally be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate).
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO PAY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY, ANNUALLY
AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY NET CAPITAL GAINS. Dividends
paid by the Fund with respect to each class of shares, to the extent any
dividends are paid, will be calculated in the same manner, at the same time, on
the same day and will be in the same amount except that each class (other than
Class Z) will bear its own distribution expenses, generally resulting in lower
dividends for Class B and Class C shares in relation to Class A and Class Z
shares and lower dividends for Class A shares in relation to Class Z shares.
Distributions of net capital gains, if any, will be paid in the same amount for
each class of shares. See "How The Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES BASED ON
THE NAV OF EACH CLASS ON THE RECORD DATE, OR SUCH OTHER DATE AS THE BOARD OF
DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN
FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS IN CASH. Shareholders who acquired shares prior to the conversion
of the Company from a closed-end company to an open-end company, and who did
not elect to participate in the Fund's dividend reinvestment plan, will
continue to receive dividends and distributions in cash unless further
elections are made to the Fund. Such election should be submitted to Prudential
Mutual Fund Services, Inc., Attention: Account Maintenance, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. The Fund will notify each shareholder after
the close of the Fund's taxable year of both the dollar amount and the taxable
status of that year's dividends and distributions on a per share
16
<PAGE>
basis. If you hold shares through Prudential Securities, you should contact
your financial adviser to elect to receive dividends and distributions in cash.
WHEN THE FUND GOES "EX-DIVIDEND", ITS NAV FOR EACH CLASS IS REDUCED BY THE
AMOUNT OF THE DIVIDEND OR DISTRIBUTION ALLOCABLE TO EACH CLASS. IF YOU BUY
SHARES JUST PRIOR TO THE EX-DIVIDEND DATE, THE PRICE YOU PAY WILL INCLUDE THE
DIVIDEND OR DISTRIBUTION AND A PORTION OF YOUR INVESTMENT MAY BE RETURNED TO
YOU AS A TAXABLE DISTRIBUTION. YOU SHOULD, THEREFORE, CONSIDER THE TIMING OF
DIVIDENDS AND DISTRIBUTIONS WHEN MAKING YOUR PURCHASES.
Dividends paid by the Fund will be eligible for the 70% dividends received
deduction for corporate shareholders, to the extent that the Fund's income is
derived from certain dividends received from domestic corporations. Capital
gains distributions are not eligible for the 70% dividends received deduction.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
DESCRIPTION OF COMMON STOCK
THE COMPANY WAS INCORPORATED IN MARYLAND ON JANUARY 30, 1987 UNDER THE NAME
"NICHOLAS-APPLEGATE GROWTH EQUITY FUND, INC." AS A CLOSED-END, DIVERSIFIED
MANAGEMENT INVESTMENT COMPANY. THE FUND OPERATED AS A CLOSED-END FUND UNTIL
JUNE 10, 1991. AS A CLOSED-END INVESTMENT COMPANY DURING THE 1990 CALENDAR
YEAR, THE FUND'S SHARES TRADED AT AN AVERAGE DISCOUNT FROM NET ASSET VALUE OF
7.52%. BECAUSE OF THIS DISCOUNTED VALUATION OF ITS SHARES, THE COMPANY
CONVERTED TO AN OPEN-END INVESTMENT COMPANY IN ACCORDANCE WITH ITS CHARTER AND
CHANGED ITS NAME TO "NICHOLAS-APPLEGATE FUND, INC." ON JUNE 10, 1991. ALL
OUTSTANDING SHARES OF THE COMPANY AT THE TIME OF THE CONVERSION TO AN OPEN-END
INVESTMENT COMPANY WERE CONVERTED INTO CLASS A SHARES OF THE FUND. THE COMPANY
IS AUTHORIZED TO ISSUE 50 MILLION SHARES OF CLASS A COMMON STOCK, 50 MILLION
SHARES OF CLASS B COMMON STOCK, 50 MILLION SHARES OF CLASS C COMMON STOCK AND
50 MILLION SHARES OF CLASS Z COMMON STOCK OF THE NICHOLAS-APPLEGATE GROWTH
EQUITY FUND SERIES, $.01 PAR VALUE PER SHARE. 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 on any matter submitted to
shareholders that relates solely to its distribution and/or service fee
arrangements and has separate voting rights on any other matter submitted to
shareholders in which the interests of one class differ from the interests of
another 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 sales to a limited group of investors. See "How the Fund is
Managed--Distributor." In accordance with the Company's Charter, the Board of
Directors may authorize the creation of additional series of common stock, and
classes within series, with such preferences, privileges, limitations and
voting and dividend rights as the Board may determine.
The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares of the Fund are also redeemable at the option of the
Company under certain circumstances as described under "Shareholder Guide--How
to Sell Your Shares." Each share of each class of Common Stock is equal as to
earnings, assets and voting privileges, except as noted above, and each class
bears the expenses related to the distribution of its shares with the exception
of Class Z shares which are not subject to any distribution or service fees.
Except for the conversion feature applicable to Class B shares, there are no
conversion, preemptive or other subscription rights. In the event of
liquidation, each share of Common Stock of the Fund is entitled to its portion
of all of the Fund's assets after all debt and expenses of the Fund have been
paid. Since Class B and Class C shares generally bear higher distribution
expenses than Class A shares, the liquidation proceeds to shareholders of those
classes are likely to be lower than to Class A shareholders and to Class Z
shareholders, whose shares are not subject to any distribution and/or service
fees. The Fund's shares do not have cumulative voting rights for the election
of Directors.
17
<PAGE>
THE COMPANY DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS OF THE
FUND UNLESS OTHERWISE REQUIRED BY LAW. THE COMPANY WILL NOT BE REQUIRED TO HOLD
MEETINGS OF SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF DIRECTORS IS
REQUIRED TO BE ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT.
SHAREHOLDERS HAVE CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A
VOTE OF 10% OF THE FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE
REMOVAL OF ONE OR MORE DIRECTORS OR TO TRANSACT ANY OTHER BUSINESS.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
- --------------------------------------------------------------------------------
SHAREHOLDER GUIDE
- --------------------------------------------------------------------------------
HOW TO BUY SHARES OF THE FUND
The purchase price is the NAV next determined following receipt of an order by
the Transfer Agent or Prudential Securities plus a sales charge which, at your
option, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis (Class B or Class C shares). Class Z shares are to be
offered commencing on or about March 17, 1997 to a limited group of investors
without a sales charge. Participants in programs sponsored by Prudential
Retirement Services should contact their client representative for more
information about Class Z shares. See "Alternative Purchase Plan" below. See
also "How the Fund Values its Shares."
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT) ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020.
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares, except that the minimum initial investment
for Class C shares may be waived from time to time. There is no minimum
investment requirement for Class Z shares. The minimum subsequent investment is
$100 for all classes, except for Class Z shares for which there is no such
minimum. All minimum investment requirements are waived for certain retirement
and employee savings plans or custodial accounts for the benefit of minors. For
purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50.
Application forms can be obtained from PMFS, Prudential Securities, Prusec or
certain selected dealers (Class A only). If a stock certificate is desired, it
must be requested in writing for each transaction. Certificates are issued only
for full shares. Shareholders who hold their shares through Prudential
Securities will not receive stock certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to the Fund's Custodian, State Street Bank and
Trust Company, Boston, Massachusetts, Custody
18
<PAGE>
and Shareholder Services Division, Attention: Nicholas-Applegate Growth Equity
Fund, Inc. specifying on the wire the account number assigned by PMFS and your
name and identifying the sales charge alternative (Class A, Class B, Class C
shares or Class Z shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Nicholas-Applegate Growth
Equity Fund, Class A, Class B, Class C or Class Z shares and your name and
individual account number. It is not necessary to call PMFS to make subsequent
purchase orders utilizing Federal Funds. The minimum amount which may be
invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS Z
SHARES), WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
---------------------------- ------------------------ ------------------------
<S> <C> <C> <C>
Class A Maximum initial sales charge .30 of 1% Initial sales charge
of 5% of the public offering (Currently being waived or reduced for
price charged at a rate certain purchases
of 0.25 of 1%)
Class B Maximum contingent deferred 1% Shares convert to Class
sales charge or CDSC of 5% A shares approximately
of the lesser of the amount seven years after
invested or the redemption purchase
proceeds; declines to zero
after six years
Class C Maximum CDSC of 1% of the 1% Shares do not convert to
lesser of the amount another class
invested or the redemption
proceeds on redemptions made
within one year of purchase
Class Z None None Sold to a limited group
of investors
</TABLE>
The four classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
(with the exception of Class Z shares, which are not subject to any
distribution and/or service fees) bears the separate expenses of its Rule 12b-1
distribution and service plan, (ii) each class has exclusive voting rights on
any matter submitted to shareholders that relates solely for its arrangement
and has separate voting rights on any matter submitted to shareholders in which
the interests of one class differ from the interests of any other class and
(iii) only Class B shares have a conversion feature. The four classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee (if any) of
each class. Class B and Class C shares bear the expenses of a higher
distribution fee which will generally cause them to have higher expense ratios
and to pay lower dividends than the Class A and Class Z shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B, Class C and Class
Z shares and will generally receive more compensation initially for selling
Class A and Class B shares than for selling Class C or Class Z shares.
19
<PAGE>
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of
any applicable sales charge (whether imposed at the time of purchase or
redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the difference classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares automatically
convert to Class A shares approximately seven years after purchase (see
"Conversion Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund.
If you intend to hold your investment in the Fund for less than 7 years and do
not qualify for a reduced sales charge on Class A shares, since Class A shares
are subject to a maximum initial sales charge of 5% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6 year period, you should
consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 7 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money
invested initially because the sales charge on Class A shares is deducted at
the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B or Class C shares for the higher
cumulative annual distribution-related fee on those shares to exceed the
initial sales charge plus cumulative annual distribution-related fee on Class A
shares. This does not take into account the time value of money, which further
reduces the impact of the higher Class B or Class C distribution-related fee on
the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions when the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE EITHER AS PART OF A SINGLE INVESTMENT,
EXCEPT IN THE CASE OF CERTAIN RETIREMENT PLANS, OR UNDER RIGHTS OF ACCUMULATION
OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES UNLESS THE PURCHASER IS
ELIGIBLE TO PURCHASE CLASS Z SHARES. See "Reduction and Waiver of Initial Sales
Charges" and "Class Z shares" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
AMOUNT OF PURCHASE --------------- --------------- -----------------
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50 4.71 4.25
$50,000 to $99,999 4.00 4.17 3.75
$100,000 to $249,999 3.25 3.36 3.00
$250,000 to $499,999 2.50 2.56 2.40
$500,000 to $999,999 2.00 2.04 1.90
$1,000,000 and above None None None
</TABLE>
The Distributor may reallow the entire initial charge to dealers. Selling
dealers may be deemed to be underwriters, as that term is defined in the
Securities Act.
20
<PAGE>
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares
a finders' fee based on a percentage of the net asset value of shares sold by
such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be
aggregated to determine the applicable reduction. See "Purchase and Redemption
of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A shares"
in the Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the
Internal Revenue Code (collectively, Benefit Plans), provided that the Benefit
Plan has existing assets of at least $1 million invested in shares of
Prudential Mutual Funds (excluding money market funds other than those
acquired pursuant to the exchange privilege) or 250 eligible employees or
participants. In the case of Benefit Plans whose accounts are held directly
with the Transfer Agent or Prudential Securities and for which the Transfer
Agent or Prudential Securities does individual account record keeping (Direct
Account Benefit Plans) and Benefit Plans sponsored by PSI or its subsidiaries
(PSI or Subsidiary Prototype Benefit Plans), Class A shares may be purchased
at NAV by participants who are repaying loans made from such plans to the
participant.
PruArray or Smartpath Plans. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or non-
qualified under the Internal Revenue Code of 1986, as amended, (the Code),
including pension, profit-sharing, stock-bonus or other employee benefit plans
under Section 401 of the Code and deferred compensation and annuity plans
under Sections 457 and 403(b)(7) of the Code that participate in the Transfer
Agent's PruArray or Smartpath Program (benefit plan record keeping services)
(hereafter referred to as a PruArray or Smartpath Plan); provided (i) that the
plan has at least $1 million in existing assets or 250 eligible employees or
participants. The term "existing assets" for this purpose includes stock
issued by a PruArray or Smartpath Plan sponsor and shares of non-money market
Prudential Mutual Funds and shares of certain unaffiliated non-money market
mutual funds that participate in the PruArray or Smartpath Program
(Participating Funds). "Existing assets" also include shares of money market
funds acquired by exchange from a Participating Fund, monies invested in The
Guaranteed Interest Account (GIA), a group annuity product issued by
Prudential, and units of The Stable Value Fund (SVF), an unaffiliated bank
collective fund. Class A shares also may be purchased at NAV by plans that
have monies invested in GIA and SVF, provided (i) the purchase is made with
the proceeds of a redemption from either GIA or SVF and (ii) Class A shares
are an investment option of the plan.
PruArray Association Benefit Plans. Class A shares are also offered at net
asset value to Benefit Plans or non-qualified plans sponsored by employers
which are members of a common trade, professional or membership association
(Association) that participate in the PruArray Program provided that the
Association enters into a written agreement with Prudential. Such Benefit
Plans or non-qualified plans may purchase Class A shares at net asset value
without regard to the assets or number of participants in the individual
employer's qualified Plan(s) or non-qualified plans so long as the employers
in the Association (i) have retirement plan assets in the aggregate of at
least $1 million or 250 participants in the aggregate and (ii) maintain their
accounts with the Fund's transfer agent.
PruArray Savings Program. Class A shares are also offered at net asset value
to employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for
purchase at net asset value by Individual Retirement Accounts and Savings
Accumulation Plans of the company's employees. The Program is available only
to (i) employees who open an IRA or Savings Accumulation Plan account with the
Fund's transfer agent and (ii) spouses of employees who open an IRA account
with the Fund's transfer agent. The program is offered to companies that have
at least 250 eligible employees.
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<PAGE>
Special Rules Applicable to Retirement Plans. After a Benefit Plan or PruArray
Plan qualifies to purchase Class A shares at NAV, all subsequent purchases will
be made at NAV.
Other Waivers. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers and current and former Directors/Trustees of the Prudential Mutual
Funds (including the Fund), (b) employees of Prudential Securities and PMF and
their subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees of subadvisers of the Prudential Mutual Funds provided that purchases
at NAV are permitted by such person's employer, (d) Prudential employees and
special agents of Prudential and its subsidiaries and all persons who have
retired directly from active service with Prudential or one of its
subsidiaries, (e) registered representatives and employees of dealers who have
entered into a selected dealer agreement with Prudential Securities provided
that purchases at NAV are permitted by such person's employer and (f) investors
who have a business relationship with a financial adviser who joined Prudential
Securities from another investment firm, provided that (i) the purchase is made
within 180 days of the commencement of the financial adviser's employment at
Prudential Securities, or within one year in the case of benefit plans, (ii)
the purchase is made with proceeds of a redemption of shares of any open-end,
non-money market fund sponsored by the financial adviser's previous employer
(other than a fund which imposes a distribution or service fee of .25 of 1% or
less) and (iii) the financial adviser served as the client's broker on the
previous purchases.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation
of your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--
Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES.
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class
B and Class C shares may be subject to a CDSC. See "How to Sell Your Shares--
Contingent Deferred Sales Charges." The Distributor will pay sales commissions
of up to 4% of the purchase price of Class B shares to dealers, financial
advisers and other persons who sell Class B shares at the time of sale from its
own resources. This facilitates the ability of the Fund to sell the Class B
shares without an initial sales charge being deducted at the time of purchase.
The Distributor anticipates that it will recoup its advancement of sales
commissions from the combination of the CDSC and the distribution fee. See "How
the Fund is Managed--Distributor." In connection with the sale of Class C
shares, the Distributor will pay dealers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 1% of the purchase
price at the time of the sale.
CLASS Z SHARES
Class Z shares of the Fund are available for purchase by the following
categories of investors:
(i) pension, profit-sharing or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code, deferred compensation and annuity
plans under Sections 457 and 403(b)(7) of the Internal Revenue Code and non-
qualified plans for which the Fund is an available option (collectively,
Benefit Plans), provided such Benefit Plans (in combination with other plans
sponsored by the same employer or group of related employers) have at least $50
million in defined contribution assets; (ii) participants in any fee-based
program sponsored by Prudential Securities or its affiliates which includes
mutual funds as investment options and for which the Fund is an available
option; and (iii) investors who are, or have executed a letter of intent to
become, shareholders of any series of Prudential Dryden Fund (formerly The
Prudential Institutional Fund (Dryden Fund)) on or before one or more series of
Dryden Fund reorganized or who on that date had investments in certain products
for which Dryden Fund provided exchangeability. After a Benefit Plan qualifies
to purchase Class Z shares, all subsequent purchases will be for Class Z
shares.
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<PAGE>
In connection with the sale of Class Z shares, the Manager, the Distributor or
one of their affiliates may pay dealers, financial advisers and other persons
which distribute shares a finders' fee based on a percentage of the net asset
value of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES AT ANY TIME FOR CASH AT THE NAV NEXT DETERMINED
AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE TRANSFER AGENT
OR PRUDENTIAL SECURITIES. See "How the Fund Values Its Shares." In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST REDEEM
YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO
BE PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST
OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT
MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services LLC, Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08900-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the
redemption request and on the certificates, if any, or stock power, must be
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office manager
of most Prudential Insurance and Financial Services or Prudential Preferred
Financial Services offices. In the case of redemptions from a PruArray or
Smartpath Plan, if the proceeds of the redemption are invested in another
investment option of the plan, in the name of the record holder and at the same
address as reflected in the Transfer Agent's records, a signature guarantee is
not required.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO
YOUR PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment
may be postponed or the right of redemption suspended at times (a) when the New
York Stock Exchange is closed for other than customary weekends and holidays,
(b) when trading on such Exchange is restricted, (c) when an emergency exists
as a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; applicable rules and regulations of the SEC will
govern as to whether the conditions prescribed in (b), (c) or (d) exist.
Shareholders who hold their shares through Prudential Securities or through a
dealer which has entered into a selected dealer agreement with the Distributor
must redeem their shares by contacting their financial adviser.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE
OR BY CERTIFIED OR OFFICIAL BANK CHECKS.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the
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<PAGE>
SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares". If
your shares are redeemed in kind, you would incur transaction costs in
converting the assets into cash. The Fund, however has elected to be governed
by Rule 18f-1 under the Investment Company Act, under which the Fund is
obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of
the net asset value of the Fund during any 90-day period for any one
shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board of
Directors may redeem all of the shares of any shareholder, other than an IRA or
other tax-deferred retirement plan, whose account has a net asset value of less
than $500 due to a redemption. The Fund will give such shareholders 60 days'
prior written notice in which to purchase sufficient additional shares to avoid
such redemption. No contingent deferred sales charge will be imposed on any
such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares, and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the cash proceeds of such redemption in shares of the Fund at the NAV
next determined after the order is received, which must be within 90 days after
the date of the redemption. No sales charge will apply to such repurchases. You
will receive pro rata credit for any contingent deferred sales charge paid in
connection with the redemption of Class B or Class C shares. You must notify
the Fund's Transfer Agent, either directly or through Prudential Securities or
Prusec, at the time the repurchase privilege is exercised that you are entitled
to credit for the contingent deferred sales charge previously paid. Exercise of
the repurchase privilege will generally not affect federal income tax treatment
of any gain realized upon redemption. If the redemption resulted in a loss,
some or all of the loss, depending on the amount reinvested, will not be
allowed for federal income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC
will be deducted from the redemption proceeds and reduce the amount paid to
you. The CDSC will be imposed on any redemption by you which reduces the
current value of your Class B or Class C shares to an amount which is lower
than the amount of all payments by you for shares during the preceding six
years, in the case of Class B shares, and one year, in the case of Class C
shares. A CDSC will be applied on the lesser of the original purchase price or
the current value of the shares being redeemed. Increases in the value of your
shares or shares acquired through reinvestment of dividends or distributions
are not subject to a CDSC. The amount of any contingent deferred sales charge
will be paid to and retained by the Distributor. See "How the Fund is Managed--
Distributor" and "Waiver of the Contingent Deferred Sales Charges--Class B
Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month. The CDSC will be calculated from the first day of the month after
the initial purchase, excluding the time shares were held in a money market
fund. See "How to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------- -------------------------
<S> <C>
First....................................... 5.0%
Second...................................... 4.0%
Third....................................... 3.0%
Fourth...................................... 2.0%
Fifth....................................... 1.0%
Sixth....................................... 1.0%
Seventh and thereafter...................... None
</TABLE>
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<PAGE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Fund shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC
period; then of amounts representing the cost of shares acquired prior to July
1, 1985; and finally, of amounts representing the cost of shares held for the
longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase, you decided
to redeem $500 of your investment. Assuming at the time of the redemption the
net asset value had appreciated to $12 per share, the value of your Class B
shares would be $1,260 (105 shares at $12 per share). The CDSC would not be
applied to the value of the reinvested dividend shares and the amount which
represents appreciation ($260). Therefore, $240 of the $500 redemption
proceeds ($500 minus $260) would be charged at a rate of 4% (the applicable
rate in the second year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC
will be waived in the case of a redemption following the death or disability
of a shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint
tenancy (with rights of survivorship), or a trust, at the time of death or
initial determination of disability provided that the shares were purchased
prior to death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a tax-
deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of
an excess contribution or plan distributions following the death or disability
of the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (i.e.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC
was not previously deducted will thereafter be subject to a CDSC without
regard to the time such amounts were previously invested. In the case of a
401(k) plan, the CDSC will also be waived upon the redemption of shares
purchased with amounts used to repay loans made from the account to the
participant and from which a CDSC was previously deducted.
The contingent deferred sales charge (CDSC) will be waived (or reduced) on
certain redemptions from a Systematic Withdrawal Plan. On an annual basis, up
to 12% of the total dollar amount subject to the CDSC may be redeemed without
charge.
In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Company.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec, at the time of redemption, that you are entitled to
waiver of the CDSC and provide the Transfer Agent with such supporting
documentation as it may deem appropriate. The waiver will be granted subject
to confirmation of your entitlement. See "Purchase and Redemption of Fund
Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in the
Statement of Additional Information.
25
<PAGE>
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES
PruArray or SmartPath Plans. The CDSC will be waived on redemptions from
certain qualified and non-qualified retirement and deferred compensation plans
that participate in the Transfer Agent's PruArray and SmartPath Programs,
provided that the investment options of the Plan include shares of Prudential
Mutual Funds and shares of non-affiliated mutual funds.
CONVERSION FEATURE--CLASS B SHARES
Class B shares automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase. It is currently anticipated that
conversions will occur during the months of February, May, August and November.
Conversions will be effected at relative net asset value without the imposition
of any additional sales charge. The first conversion of Class B shares occurred
in February 1995, when the conversion feature was first implemented.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each conversion date in accordance with the following formula:
(i) the ratio of (a) the amounts paid for Class B shares purchased at least
seven years prior to the conversion date to (b) the total amount paid for all
Class B shares purchased and then held in your account (ii) multiplied by the
total number of Class B shares then in your account. Each time any Eligible
Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares purchased and then held in your account that were
acquired through the automatic reinvestment of dividends and other
distributions will convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as described above will generally be either more or less than
the number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to
shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher
than that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or
a series of exchanges, on the last day of the month in which the original
payment or purchase of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year will not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase
of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (ii) that the conversion of shares does not constitute a taxable
event.
26
<PAGE>
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended,
Class B shares of the Fund will continue to be subject, possibly indefinitely,
to their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN OTHER
PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE PRIVILEGE) AND ANY SERIES OF THE COMPANY
THAT MAY BE ESTABLISHED FROM TIME TO TIME, AND ONE OR MORE SPECIFIC MONEY
MARKET FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS.
CLASS A, CLASS B, CLASS C AND CLASS Z SHARES MAY BE EXCHANGED FOR CLASS A,
CLASS B, CLASS C AND CLASS Z SHARES, RESPECTIVELY, OF ANOTHER FUND ON THE BASIS
OF THE RELATIVE NAV. No sales charge will be imposed at the time of the
exchange. Any applicable CDSC payable upon the redemption of shares exchanged
will be calculated from the first day of the month after the initial purchase,
excluding the time shares were held in a money market fund. Class B and Class C
shares may not be exchanged into money market funds other than Prudential
Special Money Market Fund. For purposes of calculating the holding period
applicable to the Class B conversion feature, the time period during which
Class B shares were held in a money market fund will be excluded. See
"Conversion Feature--Class B Shares" above. An exchange will be treated as a
redemption and purchase for tax purposes. See "Shareholder Investment Account--
Exchange Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the
Fund at (800) 225-1852 to execute a telephone exchange of shares, on weekdays,
except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time.
For your protection and to prevent fraudulent exchanges, your telephone call
will be recorded and you will be asked to provide your personal identification
number. A written confirmation of the exchange transaction will be sent to you.
NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST
WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE
UNDER THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order. The Exchange Privilege will be available only in states where the
exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED BELOW.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above). Under this exchange privilege, amounts representing any Class B and
Class C shares held in such a shareholder's account and which are not subject
to a CDSC will be automatically exchanged for Class A shares for shareholders
who qualify to purchase Class A shares at NAV on a quarterly basis, unless the
shareholder elects otherwise. Similarly, shareholders who qualify to purchase
Class Z shares will have their Class B and Class C shares which are not subject
to a CDSC and their Class A shares exchanged for Class Z shares on a quarterly
basis. It is currently anticipated that this exchange will occur quarterly in
February, May, August and November. Eligibility for this exchange privilege
will be calculated on the business day prior to the date of the exchange.
Amounts representing Class B or Class C shares which are not subject to a CDSC
include the following: (1) amounts representing Class B or Class C shares
acquired pursuant to the automatic reinvestment of dividends and distributions,
(2) amounts representing the
27
<PAGE>
increase in the net asset value above the total amount of payments for the
purchase of Class B or Class C shares and (3) amounts representing Class B or
Class C shares held beyond the applicable CDSC period. Class B and Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities or Prusec that they are eligible for this special
exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares
when they elect to have those assets become a part of the fee-based program.
Upon leaving the program (whether voluntarily or not), such Class Z shares
(and, to the extent provided for in the program, Class Z shares acquired
through participation in the program) will be exchanged for Class A shares at
net asset value. Similarly, participants in PSI's 401(k) Plan for which the
Fund's Class Z shares is an available option and who wish to transfer their
Class Z shares out of the PSI 401(k) Plan following separation from service
(i.e., voluntary or involuntary termination of employment or retirement) will
have their Class Z shares exchanged for Class A shares at NAV.
The Fund reserves the right to reject any exchange order, including exchanges
(and market timing transactions) engaged in by one or more accounts acting in
concert or otherwise, which are of size and/or frequency that have or may have
an adverse effect on the ability of the Subadviser to manage the portfolio. The
determination that such exchanges or activity may have an adverse effect and
the determination to reject any exchange order shall be in the discretion of
the Manager and the Subadviser.
The Exchange Privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you can
take advantage of the following additional services and privileges:
. AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. Shareholders who acquired
shares prior to the conversion of the Company from a closed-end company to an
open-end company and who did not elect to participate in the Fund's dividend
reinvestment plan will continue to receive dividends and distributions in cash
unless further election is made to the Fund. If you hold shares through
Prudential Securities, you should contact your financial adviser.
. AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP, you may make regular
purchases of the Fund's shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
. TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and "tax-
sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code are
available through the Distributor. These plans are for use by both self-
employed individuals and corporate employers. These plans permit either self-
direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or the
Transfer Agent. If you are considering adopting such a plan, you should consult
with your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.
. SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
. REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will
28
<PAGE>
provide one annual and semi-annual shareholder report and annual prospectus per
household. You may request additional copies of such reports by calling (800)
225-1852 or by writing to the Fund at Gateway Center Three, Newark, New Jersey
07102. In addition, monthly unaudited financial data are available upon request
from the Fund.
. SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Company at
Gateway Center Three, Newark, New Jersey 07102, or by telephone, at (800) 225-
1852 (toll free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
29
<PAGE>
- --------------------------------------------------------------------------------
THE PRUDENTIAL MUTUAL FUND FAMILY
- --------------------------------------------------------------------------------
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the
investment options available through our family of funds. For more information
on the Prudential Mutual Funds, including charges and expenses, contact your
Prudential Securities financial adviser or Prusec representative or telephone
the Funds at (800) 225-1852 for a free prospectus. Read the prospectus
carefully before you invest or send money.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-------------------------- --------------------
TAXABLE BOND FUNDS EQUITY FUNDS
-------------------------- --------------------
<S> <C>
Prudential Diversified Bond Fund, Inc. Prudential Allocation Fund
Prudential Government Income Fund, Inc. Balanced Portfolio
Prudential Government Securities Trust Strategy Portfolio
Short-Intermediate Term Series Prudential Distressed Securities
Prudential High Yield Fund, Inc. Fund, Inc.
Prudential Mortgage Income Fund, Inc. Prudential Dryden Fund
Prudential Structured Maturity Fund, Inc. Prudential Active Balanced Fund
Income Portfolio Prudential Emerging Growth Fund,
The BlackRock Government Income Trust Inc.
------------------------------ Prudential Equity Fund, Inc.
TAX-EXEMPT BOND FUNDS Prudential Equity Income Fund
------------------------------ Prudential Jennison Series Fund,
Prudential California Municipal Fund Inc.
California Series Prudential Jennison Growth Fund
California Income Series Prudential Jennison Growth &
Prudential Municipal Bond Fund Income Fund
High Yield Series Prudential Multi-Sector Fund, Inc.
Insured Series Prudential Small Companies Fund,
Intermediate Series Inc.
Prudential Municipal Series Fund Prudential Utility Fund, Inc.
Florida Series Nicholas-Applegate Fund, Inc.
Hawaii Income Series Nicholas-Applegate Growth Equity
Maryland Series Fund
Massachusetts Series --------------------------
Michigan Series MONEY MARKET FUNDS
New Jersey Series --------------------------
New York Series . Taxable Money Market Funds
North Carolina Series Prudential Government Securities
Ohio Series Trust
Pennsylvania Series Money Market Series
Prudential National Municipals Fund, Inc. U.S. Treasury Money Market
--------------------- Series
GLOBAL FUNDS Prudential Special Money Market
--------------------- Fund, Inc.
Prudential Europe Growth Fund, Inc. Money Market Series
Prudential Global Genesis Fund, Inc. Prudential MoneyMart Assets, Inc.
Prudential Global Limited Maturity Fund, . Tax-Free Money Market Funds
Inc. Limited Maturity Portfolio Prudential Tax-Free Money Fund,
Prudential Intermediate Global Income Inc.
Fund, Inc. Prudential California Municipal
Prudential Natural Resources Fund, Inc. Fund
Prudential Pacific Growth Fund, Inc. California Money Market Series
Prudential World Fund, Inc. Prudential Municipal Series Fund
Global Series Connecticut Money Market Series
International Stock Series Massachusetts Money Market
The Global Government Plus Fund, Inc. Series
The Global Total Return Fund, Inc. New Jersey Money Market Series
Global Utility Fund, Inc. New York Money Market Series
. Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
. Institutional Money Market Funds
Prudential Institutional Liquidity
Portfolio, Inc.
Institutional Money Market
Series
</TABLE>
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS............................................................ 2
What are the Fund's Risk Factors and Special
Characteristics?......................................................... 2
FUND EXPENSES.............................................................. 4
FINANCIAL HIGHLIGHTS....................................................... 5
HOW THE FUND INVESTS....................................................... 7
Investment Objective and Policies......................................... 7
Other Investments and Policies............................................ 8
Investment Restrictions................................................... 11
HOW THE FUND IS MANAGED.................................................... 11
Manager................................................................... 11
Investment Adviser........................................................ 12
Distributor............................................................... 12
Portfolio Transactions.................................................... 14
Fee Waivers and Subsidy................................................... 14
Custodian and Transfer and Dividend Disbursing Agent...................... 14
HOW THE FUND VALUES ITS SHARES............................................. 15
HOW THE FUND CALCULATES PERFORMANCE........................................ 15
TAXES, DIVIDENDS AND DISTRIBUTIONS......................................... 16
GENERAL INFORMATION........................................................ 17
Description of Common Stock............................................... 17
Additional Information.................................................... 18
SHAREHOLDER GUIDE.......................................................... 18
How to Buy Shares of the Fund............................................. 18
Alternative Purchase Plan................................................. 19
How to Sell Your Shares................................................... 23
Conversion Feature--Class B Shares........................................ 26
How to Exchange Your Shares............................................... 27
Shareholder Services...................................................... 28
</TABLE>
- --------------------------------------------------------------------------------
MF 151A 444369Q
CUSIP Nos.:
Class A: 653698-20-9
Class B: 653698-30-8
Class C: 653698-40-7
Class Z: 653698-50-6
NICHOLAS APPLEGATE GROWTH
EQUITY FUND
----------------------------------------------------------------------------
PROSPECTUS
MARCH 4, 1997
[LOGO OF PRUDENTIAL INVESTMENTS APPEARS HERE]
<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>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
----- ---------------
<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-1 --
</TABLE>
- -------------------------------------------------------------------------------
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
<PAGE>
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 March, 1994), Prudential
New York, New York Officer Mutual Fund Management, Inc.;
First Vice President of
Prudential Securities (since
March, 1994); Prior thereto,
Vice President, Bankers Trust
Corporation.
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). PMF has three wholly-owned
subsidiaries: Prudential Mutual Fund Distributors, Inc., Prudential Mutual
Fund Services LLC (PMFS or the Transfer Agent) and Prudential Mutual
Investment Management, Inc. PMFS 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.
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 , 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.
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
B-14
<PAGE>
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.
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.
B-15
<PAGE>
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.
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
B-16
<PAGE>
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.
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
B-17
<PAGE>
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.
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.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that
employer).
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charges will be
granted subject to confirmation of the investor's holdings. 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.
LETTER 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).
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.
B-20
<PAGE>
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.
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.
</TABLE>
B-21
<PAGE>
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
<S> <C>
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>
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 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.
B-22
<PAGE>
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 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
B-23
<PAGE>
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.
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 60 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.
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.
- --------
/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.
III-1
<PAGE>
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.
- --------
/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.
- --------
/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.
IV-3
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
(1) Financial Statements included in the Prospectus constituting Part A
of this Registration Statement:
Selected Per Share Data and Ratios.
(2) (a) Financial statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
Statement of Assets and Liabilities as of December 31, 1996
Statement of Operations for the Year Ended December 31, 1996
Statement of Changes in Net Assets for the Years Ended December 31,
1996 and 1995
Notes to Financial Statements
Financial Highlights
Auditors Report of (of Ernst & Young LLP) dated February 3, 1997 with
respect to the fiscal year ended December 31, 1996
(B) EXHIBITS:
1. (a) Articles of Amendment and Restatement of Charter of Registrant.
(Incorporated by reference to Exhibit 1.1 to Registration Statement
on Form N-2, File No. 33-11709 filed on February 3, 1987.)
(b) Articles of Amendment of Charter of Registrant. (Incorporated by
reference to Exhibit 1.2 to Registration Statement on Form N-2, File
No. 33-11709, filed on April 29, 1988.)
(c) Certificate of Correction. (Incorporated by reference to Exhibit
1.3 to Registration Statement on Form N-2, No. 33-11709, filed on
April 29, 1988.)
(d) Articles of Amendment of Charter (Incorporated by reference to
Exhibit 1.4 to Amendment No. 1, Registration Statement on Form N-2,
File No. 33-11709, filed on April 12, 1990.)
(e) Articles of Amendment of Charter of the Registrant. (Incorporated
by reference to Exhibit 1(e) to Post-Effective Amendment No. 1, to
the Registration Statement on Form N-1A, File No. 33-38461, filed on
December 11, 1991.)
(f) Articles of Amendment of Charter of the Registrant. (Incorporated
by reference to Exhibit 1(f) to Post-Effective Amendment No. 8 to
Registration Statement on Form N-1A, File No. 33-38461, filed on
March 6, 1995.)
(g) Articles Supplementary.*
2. (a) Amended and Restated By-Laws of the Registrant. (Incorporated by
reference to Exhibit 2.1 to Registration Statement on Form N-2, File
No. 33-11709, filed on February 3, 1987.)
(b) Amended By-Laws of Registrant. (Incorporated by reference to
Exhibit 2(b) of Pre-effective Amendment No. 1 to Registration
Statement on Form N-1A, File No. 33-38461, filed on May 6, 1991.)
3. Not Applicable.
4. (a) Specimen stock certificates for Class A shares. (Incorporated by
reference to Exhibit 4(a) of Pre-effective Amendment No. 1 to
Registration Statement on Form N-1A, File No. 33-38461, filed on May
6, 1991.)
(b) Specimen stock certificates for Class B shares. (Incorporated by
reference to Exhibit 4(b) of Pre-effective Amendment No. 1 to
Registration Statement on Form N-1A, File No. 33-38461, filed on May
6, 1991.)
5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc. (Incorporated by reference to Exhibit
5(a) to Post-Effective Amendment No. 1, to Registration Statement on
Form N-1A, File No. 33-38461, filed on December 11, 1991.)
C-1
<PAGE>
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation. (Incorporated by
reference to Exhibit 5(b) to Post-Effective Amendment No. 1, to
Registration Statement on Form N-1A, File No. 33-38461, filed on
December 11, 1991.)
6. (a) Distribution Agreement for Class A Shares between the Registrant
and Prudential Mutual Fund Distributors, Inc. (Incorporated by
reference to Exhibit 6(e) to Post-Effective Amendment No. 8 to
Registration Statement on Form N-1A, File No. 33-38461, filed on
March 6, 1995.)
(b) Distribution Agreement for Class B Shares between the Registrant
and Prudential Securities Incorporated. (Incorporated by reference to
Exhibit 6(f) to Post-Effective Amendment No. 8 to Registration
Statement on Form N-1A, File No. 33-38461, filed on March 6, 1995.)
(c) Distribution Agreement for Class C Shares between the Registrant
and Prudential Securities Incorporated. (Incorporated by reference to
Exhibit 6(g) to Post-Effective Amendment No. 8 to Registration
Statement on Form N-1A, File No. 33-38461, filed on March 6, 1995.)
(d) Amendment to Distribution Agreements.*
(e) Restated Distribution Agreements.*
7. Not Applicable.
8. (a) Custodian Contract between the Registrant and State Street Bank
and Trust Company. (Incorporated by reference to Exhibit 9.1 to
Registration Statement on Form N-2, File No. 33-11709, filed on
February 3, 1987.)
(b) Addendum to Custodian Contract between the Registrant and State
Street Bank and Trust Company. (Incorporated by reference to Exhibit
8(b) to Registration Statement on Form N-1A, File No. 33-38461, filed
on May 6, 1991.)
9. (a) Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. (Incorporated by reference to
Exhibit 9(a) to Post-Effective Amendment No. 1, to Registration
Statement on Form N-1A, File No. 33-38461, filed on December 11,
1991.)
10. Opinion and consent of Piper & Marbury, Maryland counsel to the
Registrant. (Incorporated by reference to Exhibit 10 to Pre-
effective Amendment No. 1 to Registration Statement on Form N-1A,
File No. 33-38461, filed on May 6, 1991.)
11. Consent of Ernst & Young LLP.*
12. Not Applicable.
13. Subscription Agreement between the Registrant and Arthur E. Nicholas
and Fred C. Applegate (Incorporated by reference to Exhibit 4 to
Pre-effective Amendment No. 4 on Form N-2, File No. 33-11709, filed
on April 13, 1987.)
14. Not Applicable.
15. (a) Distribution and Service Plan for Class A Shares. (Incorporated
by reference to Exhibit 15(e) to Post-Effective Amendment No. 8 to
Registration Statement on Form N-1A, File No. 33-38461, filed on
March 6, 1995.)
(b) Distribution and Service Plan for Class B Shares. (Incorporated
by reference to Exhibit 15(f) to Post-Effective Amendment No. 8 to
Registration Statement on Form N-1A, File No. 33-38461, filed on
March 6, 1995.)
(c) Distribution and Service Plan for Class C Shares. (Incorporated
by reference to Exhibit 15(g) to Post-Effective Amendment No. 8 to
Registration Statement on Form N-1A, File No. 33-38461, filed on
March 6, 1995.)
16. (a) Schedule of Computation of Performance Quotations. (Incorporated
by reference to Exhibit 16(a) to Post-Effective Amendment No. 4 to
Registration Statement on Form N-1A, File No. 33-38461, filed on
March 3, 1993).
(b) Schedule of Calculation of Aggregate Total Return for Class A and
Class B shares. (Incorporated by reference to Exhibit 16(b) to Post-
Effective Amendment No. 4 to Registration Statement on Form N-1A,
File No. 33-38461, filed on March 3, 1993).
C-2
<PAGE>
17. Financial Data Schedules.*
18. Rule 18f-3 Plan.*
- ----------
*Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Fred C. Applegate, Arthur B. Laffer and Charles E. Young, members of the
Board of Directors of Registrant, also comprise all of the members of the
Board of Trustees of Nicholas-Applegate Mutual Funds, a registered investment
company. Accordingly, Registrant and Nicholas-Applegate Mutual Funds may be
deemed to be under common control.
Arthur E. Nicholas, Dann V. Angeloff, and Theodore J. Coburn, members of the
Board of Directors of Registrant, are also members of the Board of Trustees of
Nicholas-Applegate Investment Trust, a registered investment company. As they
constitute 50% of the members of such Board of Trustees, and all of the assets
of Nicholas-Applegate Mutual Funds are invested in Nicholas-Applegate
Investment Trust, Registrant and Nicholas-Applegate Investment Trust may be
deemed to be under common control.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of February 7, 1997 there were 10,348,342, 21,644,067 and 491,146 record
holders of Class A, Class B and Class C common stock, $.01 par value per
share, of the Registrant, respectively.
ITEM 27. INDEMNIFICATION.
Section 9 of the Management Agreement filed herewith as Exhibit 5A generally
provides that the Manager will not be liable for any error of judgment or for
any loss suffered by the Registrant in connection with the matters to which
the Management Agreement relates, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or for
willfull misfeasance, bad faith, gross negligence or reckless disregard of
duty. See "Manager" in the Statement of Additional Information.
Under Section 5 of the Subadvisory Agreement filed herewith as Exhibit 5B
the Investment Adviser is provided with indemnification by the Registrant
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 Registrant; provided, however, that no
indemnification shall be provided by the Registrant with respect to any
liability of the Investment Adviser to the Registrant or its shareholders by
reason of the willful misfeasance, bad faith or gross negligence in the
performance of the Investment Adviser's duties, by reason of its reckless
disregard of its duties and obligations or by reason of its breach of
fiduciary duty under the Subadvisory Agreement. See "Investment Adviser" in
the Statement of Additional Information.
Indemnification of PMFD and Prudential Securities (the "Distributors"), the
Distributors of the Class A and Class B Common Stock, respectively, of the
Fund, is provided in Section 10 of the Distribution Agreements filed herewith
as Exhibits 6A and 6B, respectively, which provision provides that the Fund
will indemnify the named Distributor and its officers, directors, and control
persons for any and all claims, demands, liabilities and expenses which any of
them may incur for untrue statements of fact, or omissions to state a material
fact, in the Registrant's Registration Statement or Prospectus. such
indemnification is only afforded such Distributor or its officers, directors
and control persons if a determination is made that the person to be
indemnified was not liable by reason of willful misfeasance, bad faith or
gross negligence in the performance of such person's duties or by reason of
its reckless disregard of such person's obligations under the Distributor's
Distribution Agreement with the Fund.
Liability of the Registrant's custodian, State Street Bank and Trust
Company, is limited under Section 3.10 of the Custodian Agreement filed
herewith as Exhibit 8A.
Indemnification of the Registrant's transfer agent, Prudential Mutual Fund
Services, Inc. ("PMFS"), is provided in Article 5 of the Transfer Agent
Agreement filed herewith as Exhibit 9. In Section 5.01 of Article 5 of the
Transfer Agent Agreement, the Fund has agreed to indemnify PMFS for, and hold
it harmless from, any losses, damages, costs, expenses and liability arising
out of or attributable to: (i) the actions of PMFS or its agents and
subcontractors taken pursuant to the Transfer Agent Agreement (provided
C-3
<PAGE>
that such actions are taken in good faith and without negligence or willful
misconduct); (ii) the Fund's failure to perform its obligations under the
Transfer Agent Agreement; (iii) the reliance by PMFS or its agents on
information, records or documents received by PMFS from or on behalf of the
Fund; (iv) the reliance by PMFS on any instructions or requests of the Fund;
or (v) the offer or sale of shares of the Fund in violation of any
registration requirements imposed under Federal or applicable state securities
laws.
The Registrant, its officers and directors, and the Investment Adviser are
insured under an errors and omissions liability insurance policy which,
generally, covers claims by the Registrant's shareholders based on negligent
acts by the insureds, negligent failure to discover dishonest acts and the
costs and expenses of defending those claims. Such insurance does not protect
nor purport to protect the insured parties from liability to the Registrant or
its shareholders to which such person would otherwise be subject by reason of
such person's commission of fraud, dishonesty or malicious acts or omissions
or any willful breach of duty, neglect, misstatement, misleading statement or
other act done or wrongfully attempted in the performance of such person's
duties.
Section 2-418 of the General Corporation Law of the State of Maryland
provides that a corporation may indemnify any director who is made a party to
any proceeding by reason of his or her service as a director, except in
circumstances where the director acted in bad faith or with active and
deliberate dishonesty, or the director received an improper personal benefit,
or in the case of any criminal proceeding, the director had reasonable cause
to believe that the act or omission was unlawful. The indemnification afforded
a director may be made with respect to judgments, penalties, fines,
settlements and reasonable expenses actually incurred by the director in
connection with the proceeding. However, if the proceeding was won by or in
the right of the corporation, indemnification may not be made in respect to
any proceeding in which the director shall have been adjudicated to be liable
to the corporation. The indemnification and advancement of expenses provided
or authorized by Section 2-418 of the Maryland General Corporation Law are not
exclusive of any other rights, by indemnification or otherwise, to which a
director may be entitled under the charter, bylaws, a resolution of
shareholders or directors, an agreement or otherwise, both as to action in an
official capacity and as to action in another capacity while holding such
office. A corporation, in addition, may indemnify and advance expenses to an
officer, employee or agent who is not a director to the same extent that it
may indemnify directors under Section 2-418 of the Maryland General
Corporation Law. Section 10 of Article Eighth of the Registrant's Charter
filed herewith as Exhibit 1A provides the Directors and officers of the
Registrant with affirmative indemnification rights to the fullest extent
provided by Maryland law or of any other applicable jurisdiction consistent
with applicable law.
In addition, Section 2-405.2 of the Maryland General Corporation Law
provides that the charter of a corporation may include any provision expanding
or limiting the liability of the corporation's directors and officers to the
corporation or its shareholders for money damages except (i) to the extent
that it is proved that the person actually received an improper benefit or
profit in money, property or services, for the amount of the benefit or profit
in money, property or services actually received or (ii) to the extent that a
judgment or other financial adjudication adverse to the person is entered in a
proceeding based on a finding in the proceeding that the person's action, or
failure to act, was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. Section 12 of
Article Eighth of the Registrant's Charter filed herewith as Exhibit 1A limits
the personal liability of the Directors and officers of the Registrant for
money damages to the fullest extent permitted by Maryland law, but does not
protect any director or officer against any liability which such person would
otherwise be subject by reason of such person's willful misfeasance, bad
faith, gross negligence or reckless disregard of such person's duties.
Notwithstanding the provisions of the Registrant's Charter which provide or
purport to provide affirmative indemnification rights to the officers and
directors of the Registrant, consistent with the applicability of Section
17(h) of the Investment Company Act of 1940, as amended, to the Registrant and
its activities, such Charter provisions will not be construed to protect the
officers and directors of the Registrant against any liability that any such
person may otherwise be subject to by reason of such person's willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such person's office.
Pursuant to Rule 484 under the Securities Act of 1933, as amended, the
Registrant furnishes the following undertaking:
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
C-4
<PAGE>
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit of
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER (A)
PRUDENTIAL MUTUAL FUND MANAGEMENT, LLC
See "How the Fund Is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PMF are listed in
Schedules A and D of Form ADV of PMF as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
The business and other connections of PMF's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, Newark, NJ 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PMF PRINCIPAL OCCUPATIONS
---------------- ----------------- ---------------------
<C> <C> <S>
Brian Storms Officer-In-Charge, Officer-In-Charge, President, Chief Executive
President, Officer and Chief Operating Officer, PMF
Chief Executive Officer and
Chief Operating Officer
Robert F. Gunia Executive Vice President Comptroller, Prudential Investments;
and Treasurer Executive Vice President and Treasurer, PMF;
Senior Vice President of Prudential
Securities Incorporated (Prudential
Securities)
Thomas A. Early Executive Vice President, Executive Vice President, Secretary and
Secretary and General Counsel General Counsel, PMF; Vice President and
General Counsel, Prudential Retirement
Services
Susan C. Cote Executive Vice President, Executive Vice President, Chief Financial
Chief Financial Officer Officer, PMF.
Neil A. McGuinness Executive Vice President Executive Vice President, PMF.
Robert J. Sullivan Executive Vice President Executive Vice President, PMF.
</TABLE>
Nicholas-Applegate Capital Management, the Investment Adviser of the
Registrant, is a registered investment adviser primarily engaged in the
investment advisory business. Its general partner is Nicholas-Applegate
Capital Management Holdings, L.P., a California limited partnership, which is
engaged only in the business of acting as such general partner and as general
partner of certain investment limited partnerships.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Prudential Securities Incorporated
Prudential Securities is distributor for The BlackRock Government Income
Trust, Command Government Fund, Command Money Fund, Command Tax-Free Fund, The
Global Government Plus Fund, Inc., The Global Total Return Fund, Inc., Global
Utility
C-5
<PAGE>
Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity
Fund), Prudential Allocation Fund, Prudential California Municipal Fund,
Prudential Distressed Securities Fund, Inc., Prudential Diversified Bond Fund,
Inc., Prudential Dryden Fund, Prudential Emerging Growth Fund, Inc., Prudential
Equity Fund, Inc., Prudential Equity Income Fund, Prudential Europe Growth
Fund, Inc., Prudential Global Genesis Fund, Inc., Prudential Global Limited
Maturity Fund, Inc., Prudential Government Income Fund, Inc., Prudential
Government Securities Trust, Prudential High Yield Fund, Inc., Prudential
Intermediate Global Income Fund, Inc., Prudential Institutional Liquidity
Portfolio, Inc., Prudential Jennison Series Fund, Inc., Prudential MoneyMart
Assets, Inc., Prudential Mortgage Income Fund, Inc., Prudential Multi-Sector
Fund, Inc., Prudential Municipal Bond Fund, Prudential Municipal Series Fund,
Prudential National Municipals Fund, Inc., Prudential Natural Resources Fund,
Inc., Prudential Pacific Growth Fund, Inc., Prudential Small Companies Fund,
Inc., Prudential Special Money Market Fund, Inc., Prudential Structured
Maturity Fund, Inc., Prudential Tax-Free Money Fund, Inc., Prudential Utility
Fund, Inc., Prudential World Fund, Inc. and The Target Portfolio Trust.
Prudential Securities is also a depositor for the following unit investment
trusts:
Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
(b) Prudential Securities Incorporated
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(/1/) UNDERWRITER REGISTRANT
- --------- ------------- ----------------
<S> <C> <C>
Robert C. Golden........ Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Alan D. Hogan........... Executive Vice President, Chief Administrative None
Officer and Director
George A. Murray........ Executive Vice President and Director None
Leland B. Paton......... Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Martin Pfinsgraff....... Executive Vice President, Chief Financial None
Officer and Director
Vincent T. Pica, II..... Director, Member of Operating Committee and None
One New York Plaza Executive Vice President
New York, NY 10292
Hardwick Simmons........ Chief Executive Officer, President and Director None
Lee B. Spencer Jr. ..... General Counsel, Executive Vice President and None
Director
</TABLE>
- ----------
(/1/)The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
C-6
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices
of State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, 02171 The Prudential Investment Corporation, Prudential Plaza,
745 Broad Street, Newark, New Jersey 07102, the Registrant, One Seaport Plaza,
New York, New York 10292, and Prudential Mutual Fund Services LLC, Raritan
Plaza One, Edison, New Jersey 08837. Documents required by Rules 31a-1(b)(5),
(6), (7), (9), (10) and (11) and 31a-1(f) will be kept at Three Gateway
Center, documents required by Rules 31a-1(b)(4) and (11) and 31a-1(d) at One
Seaport Plaza and the remaining accounts, books and other documents required
by such other pertinent provisions of Section 31(a) and the Rules promulgated
thereunder will be kept by State Street Bank and Trust Company and Prudential
Mutual Fund Services LLC.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund is Managed--
Manager" and "How the Fund is Managed-Distributor" in the Prospectus and the
captions "Manager" and "Distributor" in the Statement of Additional
Information, constituting Parts A and B, respectively, of this Registration
Statement, Registrant is not a party to any management-related service
contract.
ITEM 32. UNDERTAKINGS
The Registrant hereby undertakes to furnish each person to whom a Prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of
1933 and has duly caused this Post-Effective Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Newark, and State of New Jersey, on the 27th day of
February, 1997.
NICHOLAS-APPLEGATE FUND, INC.
By: /s/ Jack C. Marshall
------------------------------------
JACK C. MARSHALL, PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ Arthur E. Nicholas Chairman and Director February 27, 1997
--------------------------------------
ARTHUR E. NICHOLAS
/s/ Dann V. Angeloff Director February 27, 1997
--------------------------------------
DANN V. ANGELOFF
/s/ Fred C. Applegate Director February 27, 1997
--------------------------------------
FRED C. APPLEGATE
/s/ Theodore J. Coburn Director February 27, 1997
--------------------------------------
THEODORE J. COBURN
/s/ Robert F. Gunia Director February 27, 1997
--------------------------------------
ROBERT F. GUNIA
/s/ Arthur B. Laffer Director February 27, 1997
--------------------------------------
ARTHUR B. LAFFER
/s/ Charles S. Young Director February 27, 1997
--------------------------------------
CHARLES S. YOUNG
Treasurer and Principal Financial
/s/ Grace Torres and Accounting Officer February 27, 1997
--------------------------------------
Grace Torres
</TABLE>
C-8
<PAGE>
NICHOLAS-APPLEGATE FUND, INC.
POST-EFFECTIVE AMENDMENT NO. 10
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<C> <S> <C>
1(a) Articles of Amendment and Restatement of Charter of
Registrant. (Incorporated by reference to Exhibit 1.1 to
Registration Statement on Form N-2, File No. 33-11709 filed
on February 3, 1987.)
(b) Articles of Amendment of Charter of Registrant. (Incorporated
by reference to Exhibit 1.2 to Registration Statement on
Form N-2, File No. 33-11709, filed on April 29, 1988.)
(c) Certificate of Correction. (Incorporated by reference to
Exhibit 1.3 to Registration Statement on Form N-2,
No. 33-11709, filed on April 29, 1988.)
(d) Articles of Amendment of Charter (Incorporated by reference
to Exhibit 1.4 to Amendment No. 1, Registration Statement on
Form N-2, File No. 33-11709, filed on April 12, 1990.)
(e) Articles of Amendment of Charter of the Registrant.
(Incorporated by reference to Exhibit 1(e) to Post-Effective
Amendment No. 1, to the Registration Statement on Form N-1A,
File No. 33-38461, filed on December 11, 1991.)
(f) Articles of Amendment of Charter of the Registrant.
(Incorporated by reference to Exhibit 1(f) to Post-Effective
Amendment No. 8 to Registration Statement on Form N-1A, File
No. 33-38461, filed on March 6, 1995.)
(g) Articles Supplementary.*
2(a) Amended and Restated By-Laws of the Registrant. (Incorporated
by reference to Exhibit 2.1 to Registration Statement on
Form N-2, File No. 33-11709, filed on February 3, 1987.)
(b) Amended By-Laws of Registrant. (Incorporated by reference to
Exhibit 2(b) of Pre-effective Amendment No. 1 to
Registration Statement on Form N-1A, File No. 33-38461,
filed on May 6, 1991.)
3 Not Applicable.
4(a) Specimen stock certificates for Class A shares. (Incorporated
by reference to Exhibit 4(a) of Pre-effective Amendment No.
1 to Registration Statement on Form N-1A, File No. 33-38461,
filed on May 6, 1991.)
(b) Specimen stock certificates for Class B shares. (Incorporated
by reference to Exhibit 4(b) of Pre-effective Amendment No.
1 to Registration Statement on Form N-1A, File No. 33-38461,
filed on May 6, 1991.)
5(a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc. (Incorporated by reference to
Exhibit 5(a) to Post-Effective Amendment No. 1, to
Registration Statement on Form N-1A, File No. 33-38461,
filed on December 11, 1991.)
(b) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and The Prudential Investment Corporation.
(Incorporated by reference to Exhibit 5(b) to Post-Effective
Amendment No. 1, to Registration Statement on Form N-1A,
File No. 33-38461, filed on December 11, 1991.)
6(a) Distribution Agreement for Class A Shares between the
Registrant and Prudential Mutual Fund Distributors, Inc.
(Incorporated by reference to Exhibit 6(e) to Post-Effective
Amendment No. 8 to Registration Statement on Form N-1A, File
No. 33-38461, filed on March 6, 1995.)
(b) Distribution Agreement for Class B Shares between the
Registrant and Prudential Securities Incorporated.
(Incorporated by reference to Exhibit 6(f) to Post-Effective
Amendment No. 8 to Registration Statement on Form N-1A, File
No. 33-38461, filed on March 6, 1995.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<C> <S> <C>
(c) Distribution Agreement for Class C Shares between the
Registrant and Prudential Securities Incorporated.
(Incorporated by reference to Exhibit 6(g) to Post-
Effective Amendment No. 8 to Registration Statement on Form
N-1A, File No. 33-38461, filed on March 6, 1995.)
(d) Amendment to Distribution Agreements.*
(e) Restated Distribution Agreements.*
7 Not Applicable.
8(a) Custodian Contract between the Registrant and State Street
Bank and Trust Company. (Incorporated by reference to
Exhibit 9.1 to Registration Statement on Form N-2, File No.
33-11709, filed on February 3, 1987.)
(b) Addendum to Custodian Contract between the Registrant and
State Street Bank and Trust Company. (Incorporated by
reference to Exhibit 8(b) to Registration Statement on Form
N-1A, File No. 33-38461, filed on May 6, 1991.)
9(a) Transfer Agency and Service Agreement between the Registrant
and Prudential Mutual Fund Services, Inc. (Incorporated by
reference to Exhibit 9(a) to Post-Effective Amendment No. 1,
to Registration Statement on Form N-1A, File No. 33-38461,
filed on December 11, 1991.)
10 Opinion and consent of Piper & Marbury, Maryland counsel to
the Registrant. (Incorporated by reference to Exhibit 10 to
Pre-effective Amendment No. 1 to Registration Statement on
Form N-1A, File No. 33-38461, filed on May 6, 1991.)
11 Consent of Ernst & Young LLP.*
12 Not Applicable.
13 Subscription Agreement between the Registrant and Arthur E.
Nicholas and Fred C. Applegate (Incorporated by reference to
Exhibit 4 to Pre-effective Amendment No. 4 on Form N-2, File
No. 33-11709, filed on April 13, 1987.)
14 Not Applicable.
15(a) Distribution and Service Plan for Class A Shares.
(Incorporated by reference to Exhibit 15(e) to
Post-Effective Amendment No. 8 to Registration Statement on
Form N-1A, File No. 33-38461, filed on March 6, 1995.)
(b) Distribution and Service Plan for Class B Shares.
(Incorporated by reference to Exhibit 15(f) to
Post-Effective Amendment No. 8 to Registration Statement on
Form N-1A, File No. 33-38461, filed on March 6, 1995.)
(c) Distribution and Service Plan for Class C Shares.
(Incorporated by reference to Exhibit 15(g) to
Post-Effective Amendment No. 8 to Registration Statement on
Form N-1A, File No. 33-38461, filed on March 6, 1995.)
16(a) Schedule of Computation of Performance Quotations.
(Incorporated by reference to Exhibit 16(a) to
Post-Effective Amendment No. 4 to Registration Statement on
Form N-1A, File No. 33-38461, filed on March 3, 1993).
(b) Schedule of Calculation of Aggregate Total Return for Class
A and Class B shares. (Incorporated by reference to Exhibit
16(b) to Post-Effective Amendment No. 4 to Registration
Statement on Form N-1A, File No. 33-38461, filed on March 3,
1993).
17 Financial Data Schedules.*
18 Rule 18f-3 Plan.*
</TABLE>
- ----------
* Filed herewith.
<PAGE>
EXHIBIT 99.1(g)
FORM OF ARTICLES SUPPLEMENTARY
OF
NICHOLAS APPLEGATE FUND, INC.
* * * * * * *
Pursuant to Section 2-208.1
of the Maryland General Corporation Law
* * * * * * *
Nicholas Applegate Fund, Inc., a Maryland corporation having its principal
offices in Baltimore, Maryland and Newark, New Jersey (the "Corporation"),
hereby certifies to the State Department of Assessments and Taxation of
Maryland, that:
FIRST: The Corporation is registered as an open-end company under the
Investment Company Act of 1940.
SECOND: The total number of shares of all classes of stock which the
Corporation has authority to issue is 750,000,000 shares of common stock, par
value of $.01 each, having an aggregate par value of $7,500,000.
THIRD: Heretofore, the number of authorized shares of which the
Corporation has authority to issue was divided into three classes of shares,
consisting of 250,000,000 Class A shares, 250,000,000 Class B shares and
250,000,000 Class C shares.
FOURTH: In accordance with Section 2-105(c) of the Maryland General
Corporation Law and pursuant to a resolution duly adopted by the Board of
Directors of the Corporation at a meeting held on July 24, 1995, the number of
authorized shares of which the Corporation has authority to issue is hereby
increased to 1,000,000,000 shares, par value of $.01 per share having an
aggregate par value of $10,000,000 to be divided into four classes of shares,
consisting of 250 million Class A shares, 250 million Class B shares, 250
million Class C shares and 250 million Class Z shares.
FIFTH: The Class Z shares shall represent the same interest in the
Corporation and have identical voting, dividend, liquidation and other rights as
the Class A, Class B and Class C shares except that (i) Expenses related to the
distribution of each class of shares shall be borne solely by such class; (ii)
The bearing of such expenses solely by shares of each class shall be
appropriately reflected (in the manner determined by the Board of Directors) in
the net asset value, dividends, distribution and liquidation rights of the
shares of such class; (iii) The Class A Common Stock shall be subject to a
front-end sales load and a Rule 12b-1 distribution fee as determined by the
Board of Directors from time to time; (iv) The Class B Common Stock shall be
subject to a contingent deferred sales charge and a Rule 12b-1 distribution fee
as determined by the
<PAGE>
Board of Directors from time to time; (v) The Class C Common Stock shall be
subject to a contingent deferred sales charge and a Rule 12b-1 distribution fee
as determined by the Board of Directors from time to time and (vi) The Class Z
Common Stock shall not be subject to a front-end sales load, a contingent
deferred sales charge nor a Rule 12b-1 distribution fee. All shares of each
particular class shall represent an equal proportionate interest in that class,
and each share of any particular class shall be equal to each other share of
that class.
IN WITNESS WHEREOF, NICHOLAS APPLEGATE FUND, INC., has caused these
presents to be signed in its name and on its behalf by its Vice President and
attested by its Assistant Secretary on , 1997.
---------------
NICHOLAS APPLEGATE FUND, INC.
By
---------------------
Robert F. Gunia
Vice President
Attest:
-------------------
Deborah A. Docs
Assistant Secretary
THE UNDERSIGNED, Vice President of Nicholas Applegate Fund, Inc., who
executed on behalf of the Corporation the foregoing Articles Supplementary of
which this certificate is made a part, hereby acknowledges in the name and on
behalf of said Corporation the foregoing Articles Supplementary to be the
corporate act of said Corporation and hereby certifies that to the best of his
knowledge, information and belief the matters and facts set forth therein with
respect to the authorization and approval thereof are true in all material
respects under the penalties of perjury.
------------------------------
Robert F. Gunia
Vice President
<PAGE>
EXHIBIT 99.6(d)
Amendment to Distribution Agreements
------------------------------------
The Distribution Agreements between Prudential Mutual Fund Distributors,
Inc. and each of the Funds listed below are hereby transferred to Prudential
Securities Incorporated effective January 1, 1996.
Name of Fund Date of Agreement
- ------------ -----------------
The BlackRock Government Income Trust August 30, 1991 and amended
(Class A) and restated on April 12,
1995
Command Government Fund September 15, 1988 and amended and
restated on April 12, 1995
Command Money Fund September 15, 1988 and amended and
restated on April 12, 1995
Command Tax-Free Money Fund September 15, 1988 and amended and
restated on April 12, 1995
Global Utility Fund, Inc. February 4, 1991 and (Class A) amended
and restated on July 1, 1993, August 1,
1994 and May 4, 1995
Nicholas-Applegate Fund, Inc. August 1, 1994 and amended (Class A)
and restated on May 12, 1995
Nicholas-Applegate Growth Equity Fund
Prudential Allocation Fund January 22, 1990 and(Class A) amended
and restated on August 1, 1994 and
Strategy Portfolio May 3, 1995
Balanced Portfolio
<PAGE>
Prudential California Municipal Fund August 1, 1994 and amended (Class A)
and restated on May 5, 1995
California Income Series
California Series
Prudential California Municipal Fund February 10, 1989 and
amended and restated on
California Money Market Series July 1, 1993 and May 5, 1995
Prudential Diversified Bond Fund, Inc. January 3, 1995 and amended (Class A)
and restated on June 13, 1995
Prudential Equity Fund, Inc. August 1, 1994 and amended (Class A)
and restated on May 5, 1995
Prudential Equity Income Fund August 1, 1994 and amended (Class A)
and restated on May 3, 1995
Prudential Europe Growth Fund, Inc. July 11, 1994 and amended (Class A) and
restated on June 13, 1995
Prudential Global Fund, Inc. August 1, 1994 and amended (Class A)
and restated on June 5, 1995
Prudential Global Genesis Fund, Inc. August 1, 1994 and amended (Class A)
and restated on May 3, 1995
Prudential Global Natural Resources
Fund, Inc. August 1, 1994 and amended (Class A)
and restated on May 3, 1995
Prudential Government Income Fund, Inc. January 22, 1990 and (Class A) amended
and restated on April 13, 1995
Prudential Government Securities Trust November 20, 1990 and Money Market
Series amended and restated on
U.S. Treasury Money Market Series July 1, 1993, May 2, 1995
and August 1, 1995
2
<PAGE>
Prudential Growth Opportunity
Fund, Inc. January 22, 1990 and (Class A)
amended and restated on
July 1, 1993, August 1, 1994
and May 2, 1995
Prudential High Yield Fund, Inc. January 22, 1990 and (Class A)
amended and restated on
July 1, 1993, August 1, 1994
and May 2, 1995
Prudential Institutional Liquidity
Portfolio, Inc. November 20, 1987 and amended and
restated on
Prudential Institutional Money
Market Series July 1, 1993 and
April 11, 1995
Prudential Intermediate Global
Income Fund, Inc. August 1, 1994 and amended (Class A)
and restated on May 10, 1995
Prudential MoneyMart Assets, Inc. May 1, 1988 and amended and restated on
July 1, 1993 and May 10, 1995
Prudential Mortgage Income Fund, Inc. August 1, 1994 and amended (Class A)
and restated on May 5, 1995
Prudential Multi-Sector Fund, Inc. August 1, 1994 and amended (Class A)
and restated on May 3, 1995
Prudential Municipal Bond Fund August 1, 1994 and amended
(Class A) and restated on May 3, 1995
Insured Series
High Yield Series
Intermediate Series
Prudential Municipal Series Fund August 1, 1994 and amended (Class A)
and restated on May 5, 1995
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
3
<PAGE>
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
4
<PAGE>
Prudential Municipal Series Fund
Connecticut Money Market Series February 10, 1989 and
Massachusetts Money Market Series amended and restated on
New Jersey Money Market Series July 1, 1993 and May 5, 1995
New York Money Market Series
Prudential National Municipals
Fund, Inc. January 22, 1990 and (Class A)
amended and restated on
July 1, 1993, August 1, 1994
and May 2, 1995
Prudential Pacific Growth Fund, Inc. August 1, 1994 and amended (Class A)
and restated on June 5, 1995
Prudential Global Limited Maturity
Fund, Inc. August 1, 1994 and amended
(formerly Prudential Short-Term (Class A) and restated on June 5,
Global Income 1995 Fund Inc.)
Global Assets Portfolio
Limited Maturity Portfolio
Prudential Special Money Market Fund January 12, 1990 and
Money Market Series amended and restated on April 12, 1995
Prudential Structured Maturity
Fund, Inc. August 1, 1994 and amended (Class A)
and restated on June 14, 1995
Income Portfolio
Prudential Tax-Free Money Fund, Inc. May 2, 1988 and amended and restated on
July 1, 1993, May 2, 1995 and
August 1, 1995
Prudential U. S. Government Fund August 1, 1994 and amended (Class A)
and restated on June 5, 1995
Prudential Utility Fund, Inc. August 1, 1994 and amended (Class A)
and restated on June 14, 1995
5
<PAGE>
EACH OF THE FUNDS LISTED ABOVE
By
/s/ Robert F. Gunia
----------------------------------------
Robert F. Gunia
Vice President
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC.
By
/s/ Stephen P. Fisher
----------------------------------------
Stephen P. Fisher
Vice President
AGREED TO AND ACCEPTED BY:
PRUDENTIAL SECURITIES INCORPORATED
By
/s/ Brendan Boyle
----------------------------------
Brendan Boyle
Senior Vice President
6
<PAGE>
EXHIBIT 99.6(e)
NICHOLAS APPLEGATE FUND, INC.
Distribution Agreement
----------------------
Agreement made as of May 17, 1996 between Nicholas Applegate Fund,
Inc., a Maryland corporation (the Fund), and Prudential Securities Incorporated,
a Delaware corporation (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
shares for sale continuously;
WHEREAS, the shares of the Fund may be divided into classes and/or
series (all such shares being referred to herein as Shares) and the Fund
currently is authorized to offer Class A, Class B, Class C and Class Z Shares;
WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other, with respect to the continuous offering of the Fund's Shares
from and after the date hereof in order to promote the growth of the Fund and
facilitate the distribution of its Shares; and
WHEREAS, upon approval by the holders of the respective classes and/or
series of Shares of the Fund it is contemplated that the Fund will adopt a plan
(or plans) of distribution pursuant to Rule 12b-1 under the Investment Company
Act with respect to certain of its classes and/or series of Shares (the Plans)
authorizing payments by the Fund to the Distributor with respect to the
distribution of such classes and/or series of Shares and the maintenance of
related shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
------------------------------
The Fund hereby appoints the Distributor as the principal underwriter
and distributor of the Shares of the Fund to sell Shares to the public on behalf
of the Fund and the Distributor hereby accepts such appointment and agrees to
act hereunder. The
<PAGE>
Fund hereby agrees during the term of this Agreement to sell
Shares of the Fund through the Distributor on the terms and conditions set forth
below.
Section 2. Exclusive Nature of Duties
--------------------------
The Distributor shall be the exclusive representative of the Fund to
act as principal underwriter and distributor of the Fund's Shares, except that:
2.1 The exclusive rights granted to the Distributor to sell Shares of
the Fund shall not apply to Shares of the Fund issued in connection with the
merger or consolidation of any other investment company or personal holding
company with the Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding shares of any such company by
the Fund.
2.2 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to reinvestment of dividends or capital gains distributions or
through the exercise of any conversion feature or exchange privilege.
2.3 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to the reinstatement privilege afforded redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases made through
the Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean
the Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. Purchase of Shares from the Fund
--------------------------------
3.1 The Distributor shall have the right to buy from the Fund on
behalf of investors the Shares needed, but not more than the Shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Shares placed with the Distributor by investors or registered and qualified
securities dealers and other financial institutions (selected dealers).
3.2 The Shares shall be sold by the Distributor on behalf of the Fund
and delivered by the Distributor or selected
2
<PAGE>
dealers, as described in Section 6.4 hereof, to investors at the offering price
as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of any or all
classes and/or series of its Shares at times when redemption is suspended
pursuant to the conditions in Section 4.3 hereof or at such other times as may
be determined by the Board of Directors. The Fund shall also have the right to
suspend the sale of any or all classes and/or series of its Shares if a banking
moratorium shall have been declared by federal or New York authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Shares received by
the Distributor. Any order may be rejected by the Fund; provided, however, that
the Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Shares. The Fund (or its agent) will confirm
orders upon their receipt, will make appropriate book entries and upon receipt
by the Fund (or its agent) of payment therefor, will deliver deposit receipts
for such Shares pursuant to the instructions of the Distributor. Payment shall
be made to the Fund in New York Clearing House funds or federal funds. The
Distributor agrees to cause such payment and such instructions to be delivered
promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Shares by the Fund
----------------------------------------------
4.1 Any of the outstanding Shares may be tendered for redemption at
any time, and the Fund agrees to repurchase or redeem the Shares so tendered in
accordance with its Articles of Incorporation as amended from time to time, and
in accordance with the applicable provisions of the Prospectus. The price to be
paid to redeem or repurchase the Shares shall be equal to the net asset value
determined as set forth in the Prospectus. All payments by the Fund hereunder
shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
on or before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Shares shall be
paid by the Fund as follows: (i) in the case of Shares subject to a contingent
deferred sales charge, any applicable contingent deferred sales charge shall be
paid to the Distributor, and the balance shall be paid to or for the account of
the redeeming shareholder, in each case in accordance with applicable provisions
of the Prospectus; and (ii) in the case of all other Shares, proceeds shall be
paid to or for the account of the redeeming shareholder, in each case in
accordance with applicable provisions of the Prospectus.
3
<PAGE>
4.3 Redemption of any class and/or series of Shares or payment may be
suspended at times when the New York Stock Exchange is closed for other than
customary weekends and holidays, when trading on said Exchange is restricted,
when an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or during any
other period when the Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Fund
------------------
5.1 Subject to the possible suspension of the sale of Shares as
provided herein, the Fund agrees to sell its Shares so long as it has Shares of
the respective class and/or series available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Shares, and this shall
include one certified copy, upon request by the Distributor, of all financial
statements prepared for the Fund by independent public accountants. The Fund
shall make available to the Distributor such number of copies of its Prospectus
and annual and interim reports as the Distributor shall reasonably request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Board of Directors and the shareholders, all necessary
action to fix the number of authorized Shares and such steps as may be necessary
to register the same under the Securities Act, to the end that there will be
available for sale such number of Shares as the Distributor reasonably may
expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Shares for sales under the
securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Articles of
Incorporation or By-Laws to comply with the laws of any state, to maintain an
office in any state, to change the terms of the offering of its Shares in any
state from the terms set forth in its Registration Statement, to qualify as a
foreign corporation in any state or to consent to service of process in any
state other than with respect to claims arising out of the offering of its
Shares. Any such qualification
4
<PAGE>
may be withheld, terminated or withdrawn by the Fund at any time in its
discretion. As provided in Section 9 hereof, the expense of qualification and
maintenance of qualification shall be borne by the Fund. The Distributor shall
furnish such information and other material relating to its affairs and
activities as may be required by the Fund in connection with such
qualifications.
Section 6. Duties of the Distributor
-------------------------
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Shares, but shall not be obligated to sell any specific number of
Shares. Sales of the Shares shall be on the terms described in the Prospectus.
The Distributor may enter into like arrangements with other investment
companies. The Distributor shall compensate the selected dealers as set forth
in the Prospectus.
6.2 In selling the Shares, the Distributor shall use its best efforts
in all respects duly to conform with the requirements of all federal and state
laws relating to the sale of such securities. Neither the Distributor nor any
selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of the National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected
dealer agreements with registered and qualified securities dealers and other
financial institutions of its choice for the sale of Shares, provided that the
Fund shall approve the forms of such agreements. Within the United States, the
Distributor shall offer and sell Shares only to such selected dealers as are
members in good standing of the NASD. Shares sold to selected dealers shall be
for resale by such dealers only at the offering price determined as set forth in
the Prospectus.
Section 7. Payments to the Distributor
---------------------------
7.1 With respect to classes and/or series of Shares which impose a
front-end sales charge, the Distributor shall receive and may retain any portion
of any front-end sales charge which is imposed on such sales and not reallocated
to selected dealers as set forth in the Prospectus, subject to the limitations
of Article III, Section 26 of the NASD Rules of Fair Practice.
5
<PAGE>
Payment of these amounts to the Distributor is not contingent upon the adoption
or continuation of any applicable Plans.
7.2 With respect to classes and/or series of Shares which impose a
contingent deferred sales charge, the Distributor shall receive and may retain
any contingent deferred sales charge which is imposed on such sales as set forth
in the Prospectus, subject to the limitations of Article III, Section 26 of the
NASD Rules of Fair Practice. Payment of these amounts to the Distributor is not
contingent upon the adoption or continuation of any Plan.
Section 8. Payment of the Distributor under the Plan
-----------------------------------------
8.1 The Fund shall pay to the Distributor as compensation for
services under any Plans adopted by the Fund and this Agreement a distribution
and service fee with respect to the Fund's classes and/or series of Shares as
described in each of the Fund's respective Plans and this Agreement.
8.2 So long as a Plan or any amendment thereto is in effect, the
Distributor shall inform the Board of Directors of the commissions and account
servicing fees with respect to the relevant class and/or series of Shares to be
paid by the Distributor to account executives of the Distributor and to broker-
dealers and financial institutions which have dealer agreements with the
Distributor. So long as a Plan (or any amendment thereto) is in effect, at the
request of the Board of Directors or any agent or representative of the Fund,
the Distributor shall provide such additional information as may reasonably be
requested concerning the activities of the Distributor hereunder and the costs
incurred in performing such activities with respect to the relevant class and/or
series of Shares.
Section 9. Allocation of Expenses
----------------------
The Fund shall bear all costs and expenses of the continuous offering
of its Shares (except for those costs and expenses borne by the Distributor
pursuant to a Plan and subject to the requirements of Rule 12b-1 under the
Investment Company Act), including fees and disbursements of its counsel and
auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and all amendments and supplements thereto, and preparing
and mailing annual and periodic reports and proxy materials to shareholders
(including but not limited to the expense of setting in type any such
Registration Statements, Prospectuses, annual or periodic reports or proxy
materials). The Fund shall also bear the cost of expenses of qualification of
the Shares for sale, and, if necessary or advisable in connection therewith, of
qualifying the Fund as a broker or dealer, in such states of the United States
or other
6
<PAGE>
jurisdictions as shall be selected by the Fund and the Distributor pursuant to
Section 5.4 hereof and the cost and expense payable to each such state for
continuing qualification therein until the Fund decides to discontinue such
qualification pursuant to Section 5.4 hereof. As set forth in Section 8 above,
the Fund shall also bear the expenses it assumes pursuant to any Plan, so long
as such Plan is in effect.
Section 10. Indemnification
---------------
10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and directors and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
reasonable counsel fees incurred in connection therewith) which the Distributor,
its officers, directors or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, except insofar as such claims,
demands, liabilities or expenses arise out of or are based upon any such untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with information furnished in writing by the Distributor
to the Fund for use in the Registration Statement or Prospectus; provided,
however, that this indemnity agreement shall not inure to the benefit of any
such officer, director, trustee or controlling person unless a court of
competent jurisdiction shall determine in a final decision on the merits, that
the person to be indemnified was not liable by reason of willful misfeasance,
bad faith or gross negligence in the performance of its duties, or by reason of
its reckless disregard of its obligations under this Agreement (disabling
conduct), or, in the absence of such a decision, a reasonable determination,
based upon a review of the facts, that the indemnified person was not liable by
reason of disabling conduct, by (a) a vote of a majority of a quorum of
directors or trustees who are neither "interested persons" of the Fund as
defined in Section 2(a)(19) of the Investment Company Act nor parties to the
proceeding, or (b) an independent legal counsel in a written opinion. The Fund's
agreement to indemnify the Distributor, its officers and directors or trustees
and any such controlling person as aforesaid is expressly conditioned upon the
Fund's being promptly notified of any action brought against the Distributor,
its officers or directors or trustees, or any such controlling person, such
notification to be given by letter or telegram addressed to the Fund at its
principal business office. The Fund agrees promptly to notify the Distributor of
the commencement of any litigation or proceedings against it or any of
7
<PAGE>
its officers or directors in connection with the issue and sale of any Shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Directors and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any reasonable counsel fees incurred in connection therewith) which the
Fund, its officers and Directors or any such controlling person may incur under
the Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its Directors or officers or
such controlling person resulting from such claims or demands shall arise out of
or be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon any
alleged omission to state a material fact in connection with such information
required to be stated in the Registration Statement or Prospectus or necessary
to make such information not misleading. The Distributor's agreement to
indemnify the Fund, its officers and Directors and any such controlling person
as aforesaid, is expressly conditioned upon the Distributor's being promptly
notified of any action brought against the Fund, its officers and Directors or
any such controlling person, such notification being given to the Distributor at
its principal business office.
Section 11. Duration and Termination of this Agreement
------------------------------------------
11.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Board of Directors of the Fund, or by the vote of a
majority of the outstanding voting securities of the applicable class and/or
series of the Fund, and (b) by the vote of a majority of those Directors who are
not parties to this Agreement or interested persons of any such parties and who
have no direct or indirect financial interest in this Agreement or in the
operation of any of the Fund's Plans or in any agreement related thereto
(Independent Directors), cast in person at a meeting called for the purpose of
voting upon such approval.
11.2 This Agreement may be terminated at any time, without the payment
of any penalty, by a majority of the Independent Directors or by vote of a
majority of the outstanding voting securities of the applicable class and/or
series of the Fund, or by the Distributor, on sixty (60) days' written notice to
the other party. This Agreement shall automatically terminate in the event of
its assignment.
8
<PAGE>
11.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding
voting securities", when used in this Agreement, shall have the respective
meanings specified in the Investment Company Act.
Section 12. Amendments to this Agreement
----------------------------
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Board of Directors of the Fund, or by the vote
of a majority of the outstanding voting securities of the applicable class
and/or series of the Fund, and (b) by the vote of a majority of the Independent
Directors cast in person at a meeting called for the purpose of voting on such
amendment.
Section 13. Separate Agreement as to Classes and/or Series
----------------------------------------------
The amendment or termination of this Agreement with respect to any
class and/or series shall not result in the amendment or termination of this
Agreement with respect to any other class and/or series unless explicitly so
provided.
Section 14. Governing Law
-------------
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Securities Incorporated
By: /s/ Robert F. Gunia
-------------------
Robert F. Gunia
Senior Vice President
Nicholas Applegate Fund, Inc.
By: /s/ Jack C. Marshall
--------------------
Jack C. Marshall
President
9
<PAGE>
EXHIBIT 99.11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants" and the use of our report dated February 3, 1997, in
Post-Effective Amendment No. 10 to the Registration Statement under the
Securities Act of 1933, Amendment No. 12 to the Registration Statement under the
Investment Company Act of 1940 and related Statement of Additional Information
of Nicholas-Applegate Fund, Inc.
/s/ Ernst & Young LLP
Los Angeles, California
February 26, 1997
<PAGE>
EXHIBIT 99.18
NICHOLAS APPLEGATE FUND,INC.
(the Fund)
PLAN PURSUANT TO RULE 18F-3
The Fund hereby adopts this plan pursuant to Rule 18f-3 under the
Investment Company Act of 1940 (the 1940 Act), setting forth the separate
arrangement and expense allocation of each class of shares. Any material
amendment to this plan is subject to prior approval of the Board of Directors,
including a majority of the independent Directors.
CLASS CHARACTERISTICS
CLASS A SHARES: Class A shares are subject to a high initial sales charge
- --------------
and a distribution and/or service fee pursuant to Rule 12b-1
under the 1940 Act (Rule 12b-1 fee) not to exceed .30 of 1%
per annum of the average daily net assets of the class. The
initial sales charge is waived or reduced for certain
eligible investors.
CLASS B SHARES: Class B shares are not subject to an initial sales charge
- --------------
but are subject to a high contingent deferred sales charge
(declining by 1% each year) which will be imposed on certain
redemptions and a Rule 12b-1 fee of not to exceed [.75 of
1%/1%] per annum of the average daily net assets of the
class. The contingent deferred sales charge is waived for
certain eligible investors. Class B shares automatically
convert to Class A shares approximately [seven] years after
purchase.
CLASS C SHARES: Class C shares are not subject to an initial sales charge
- --------------
but are subject to a low contingent deferred sales charge
(declining by 1% each year) which will be imposed on certain
redemptions and a Rule 12b-1 fee not to exceed 1% per annum
of the average daily net assets of the class.
Class Z SHARES: Class Z shares are not subject to either an initial or
- --------------
contingent deferred sales charge nor are they subject to any
Rule 12b-1 fee.
INCOME AND EXPENSE ALLOCATIONS
Income, any realized and unrealized capital gains and losses, and expenses
not allocated to a particular class,
<PAGE>
will be allocated to each class on the basis of the net asset value of that
class in relation to the net asset value of the Fund.
DIVIDENDS AND DISTRIBUTIONS
Dividends and other distributions paid by the Fund to each class of shares,
to the extent paid, will be paid on the same day and at the same time, and
will be determined in the same manner and will be in the same amount,
except that the amount of the dividends and other distributions declared
and paid by a particular class may be different from that paid by another
class because of Rule 12b-1 fees and other expenses borne exclusively by
that class.
EXCHANGE PRIVILEGE
Each class of shares is generally exchangeable for the same class of shares
(or the class of shares with similar characteristics), if any, of the other
Prudential Mutual Funds (subject to certain minimum investment
requirements) at relative net asset value without the imposition of any
sales charge.
Class B and Class C shares (which are not subject to a contingent deferred
sales charge) of shareholders who qualify to purchase Class A shares at net
asset value will be automatically exchanged for Class A shares on a
quarterly basis, unless the shareholder elects otherwise.
CONVERSION FEATURES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be
effected at relative net asset value without the imposition of any
additional sales charge.
GENERAL
A. Each class of shares shall have exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and shall
have separate voting rights on any matter submitted to shareholders in
which the interests of one class differ from the interests of any other
class.
B. On an ongoing basis, the Directors, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Fund
for the existence of any material conflicts among the interests of its
several classes. The Directors, including a majority of the independent
<PAGE>
Directors, shall take such action as is reasonably necessary to eliminate
any such conflicts that may develop. Prudential Mutual Fund Management,
Inc., the Fund's Manager, will be responsible for reporting any potential
or existing conflicts to the Directors.
C. For purposes of expressing an opinion on the financial statements of the
Fund, the methodology and procedures for calculating the net asset value
and dividends/distributions of the Fund's several classes and the proper
allocation of income and expenses among such classes will be examined
annually by the Fund's independent auditors who, in performing such
examination, shall consider the factors set forth in the relevant auditing
standards adopted, from time to time, by the American Institute of
Certified Public Accountants.
Dated: March 1, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000810212
<NAME> NICHOLAS APPLEGATEFUND, INC.
<SERIES>
<NUMBER> 001
<NAME> NICHOLAS APPLEGATEFUND, INC. (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 378,820,886
<INVESTMENTS-AT-VALUE> 471,763,511
<RECEIVABLES> 4,473,518
<ASSETS-OTHER> 98,880
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 476,335,909
<PAYABLE-FOR-SECURITIES> 4,529,796
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,183,106
<TOTAL-LIABILITIES> 6,712,902
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 355,474,246
<SHARES-COMMON-STOCK> 31,834,723
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 21,206,136
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 92,942,625
<NET-ASSETS> 469,623,007
<DIVIDEND-INCOME> 927,752
<INTEREST-INCOME> 1,210,222
<OTHER-INCOME> 0
<EXPENSES-NET> 8,854,618
<NET-INVESTMENT-INCOME> (6,716,644)
<REALIZED-GAINS-CURRENT> 72,328,335
<APPREC-INCREASE-CURRENT> (173,258)
<NET-CHANGE-FROM-OPS> 65,438,433
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (64,407,061)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 899,616,382
<NUMBER-OF-SHARES-REDEEMED> (909,300,156)
<SHARES-REINVESTED> 58,287,125
<NET-CHANGE-IN-ASSETS> 49,634,723
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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