<PAGE>
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
- -------------------------------------------------------------------------------
PROSPECTUS DATED MARCH 4, 1998
- -------------------------------------------------------------------------------
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 Investments 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, 100 Mulberry Street,
Newark, New Jersey 07102-4077, 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 and is available at the Web
site of The Prudential Insurance Company of America
(http://www.prudential.com). Additional information about the Fund has been
filed with the Securities and Exchange Commission (the Commission) in a
Statement of Additional Information, dated March 4, 1998, 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. The Commission maintains a Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information regarding the Fund.
- -------------------------------------------------------------------------------
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 8.
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 8. 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 Investments Fund Management LLC (PIFM 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, 1998,
PIFM served as manager or administrator to 64 investment companies,
including 42 mutual funds, with aggregate assets of approximately $63
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 PIFM. See "How the
Fund is Managed--Manager" at page 12 and "How the Fund is Managed--
Investment Adviser" at page 12.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Securities Incorporated (Prudential Securities or the
Distributor), 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 13.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 per class for Class A and Class B
shares 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 29.
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 LLC (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 NAV 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 sales charge or CDSC 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 20.
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 24. Participants
in programs sponsored by Prudential Retirement Services should contact their
client representative for more information about selling their Class Z shares.
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 av-
erage net assets)
Management Fees....... .95% .95% .95% .95%
12b-1 Fees............ .25++ 1.00 1.00 None
Other Expenses........ .24% .24% .24% .24%
---- ------------------------------------- ---------------------------- ----
Total Fund Operating
Expenses............. 1.44% 2.19% 2.19% 1.19%
==== ===================================== ============================ ====
</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 $93 $125 $214
Class B..................................... $72 $98 $127 $224
Class C..................................... $32 $68 $117 $252
Class Z..................................... $12 $38 $ 65 $144
You would pay the following expenses on the
same investment, assuming no redemption:
Class A..................................... $64 $93 $125 $214
Class B..................................... $22 $68 $117 $224
Class C..................................... $22 $68 $117 $252
Class Z..................................... $12 $38 $ 65 $144
</TABLE>
The above example is based on restated data for the Fund's fiscal year
ended December 31, 1997. 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."
+ 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, 1998. Total
operating expenses without such limitation would be 1.49%. 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, December 31, 1996
and December 31, 1997 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 auditor, 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(A)
------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1997 1996 1995(C) 1994(C) 1993(C) 1992(C) 1991(C)
-------- -------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPER-
ATING
PERFORMANCE:
Net asset value, beginning
of year........ $ 15.41 $ 15.18 $ 11.99 $ 13.56 $ 12.77 $ 11.73 $ 10.19
-------- -------- -------- ------- ------- ------- --------
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income (loss).. (.12) (0.14) (.011) (.07) (0.07) (0.07) (0.10)
Net realized and
unrealized gain
(loss) on
investment
transactions... 2.60 2.64 3.82 (1.19) 2.63 1.11 5.50
-------- -------- -------- ------- ------- ------- --------
Total from
investment
operations..... 2.48 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... (3.42) (2.27) (0.52) (0.31) (1.77) -- (3.86)
-------- -------- -------- ------- ------- ------- --------
Total dividends
and
distributions.. (3.42) (2.27) (0.52) (0.31) (1.77) -- (3.86)
-------- -------- -------- ------- ------- ------- --------
Increase
(decrease)
resulting from
Fund share
transactions... -- -- -- -- -- -- --
-------- -------- -------- ------- ------- ------- --------
Net asset value,
end of year.... $ 14.47 $ 15.41 $ 15.18 $ 11.99 $ 13.56 $ 12.77 $ 11.73
======== ======== ======== ======= ======= ======= ========
TOTAL
RETURN(E): .... 17.33% 16.45% 31.20% (9.53)% 20.26% 8.87% 55.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end
of year (000).. $133,973 $145,120 $124,340 $86,069 $97,596 $84,169 $ 63,028
Average net
assets (000)... $139,933 $136,482 $109,740 $93,620 $90,332 $74,005 $104,819
Ratios to average net assets:
Expenses,
including
distribution
fee........... 1.37% 1.41% 1.44% 1.49%(g) 1.42%(g) 1.54%(g) 1.94%(f)(g)
Expenses,
excluding
distribution
fee........... 1.19% 1.23% 1.27% 1.32%(g) 1.30%(g) 1.44%(g) 1.90%(g)
Net investment
income (loss). (.82)% (0.93)% (0.83)% (0.59)% (0.53)% (0.63)% (0.83)%
Portfolio
turnover
rate(d)........ 182% 113% 106% 110% 112% 107% 115%
Asset coverage
of borrowing... -- -- -- -- -- -- --
Total debt
outstanding
(000 omitted).. -- -- -- -- -- -- --
Average
commission rate
paid per share. $ .0590 $ .0588 $ .0592 N/A N/A N/A N/A
<CAPTION>
1990(C) 1989(B)(C) 1988(B)(C)
--------------- ---------------- ----------------
<S> <C> <C> <C>
PER SHARE OPER-
ATING
PERFORMANCE:
Net asset value, beginning
of year........ $ 11.42 $ 8.55 $ 7.40
--------------- ---------------- ----------------
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income (loss).. 0.02 (0.25) (0.14)
Net realized and
unrealized gain
(loss) on
investment
transactions... (0.66) 3.39 1.21
--------------- ---------------- ----------------
Total from
investment
operations..... (0.64) 3.14 1.07
--------------- ---------------- ----------------
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 year.... $ 10.19 $ 11.42 $ 8.55
=============== ================ ================
TOTAL
RETURN(E): .... (10.03)% 36.83% 15.54%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end
of year (000).. $120,987 $108,415 $81,559
Average net
assets (000)... $116,094 $ 98,874 $79,103
Ratios to average net assets:
Expenses,
including
distribution
fee........... 1.63%(f)(g) 4.55%(f)(g) 4.60%(f)(g)
Expenses,
excluding
distribution
fee........... 1.63%(g) 4.55%(g) 4.60%(g)
Net investment
income (loss). 0.24% (2.36)% (1.64)%
Portfolio
turnover
rate(d)........ 149% 120% 183%
Asset coverage
of borrowing... -- 371% 372%
Total debt
outstanding
(000 omitted).. -- $ 40,000 $30,000
Average
commission rate
paid per share. N/A N/A N/A
</TABLE>
---------
<TABLE>
<C> <S>
(a) 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.
(b) Not audited by Ernst & Young LLP or Coopers & Lybrand LLP.
(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) 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.
(g) Current year amounts have been restated from prior periods
presentation.
N/A -- Not applicable.
</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, December 31, 1996,
and December 31, 1997 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 auditor, 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)
------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
------------------------------------------------------------------
1997 1996 1995(C) 1994(C) 1993(C) 1992(C)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPER-
ATING
PERFORMANCE:
Net asset value, beginning
of period..... $14.48 $ 14.49 $ 11.56 $ 13.18 $ 12.56 $ 11.65
-------- -------- -------- -------- -------- --------
INCOME FROM IN-
VESTMENT
OPERATIONS:
Net investment
loss........... (0.23) (0.24) (0.22) (0.17) (0.18) (0.16)
Net realized and
unrealized gain
(loss) on
investment
transactions... 2.43 2.50 3.67 (1.14) 2.57 1.07
-------- -------- -------- -------- -------- --------
Total from in-
vestment opera-
tions.......... 2.20 2.26 3.45 (1.31) 2.39 0.91
-------- -------- -------- -------- -------- --------
LESS DIVIDENDS AND DISTRIBUTIONS:
Distributions
from net
realized gains
from investment
transactions... (3.42) (2.27) (0.52) (0.31) (1.77) --
-------- -------- -------- -------- -------- --------
Net asset value,
end of period.. $13.26 $ 14.48 $ 14.49 $ 11.56 $ 13.18 $ 12.56
======== ======== ======== ======== ======== ========
TOTAL
RETURN(E): .... 16.48% 15.54% 30.11% (10.20)% 19.21% 7.81%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end
of period
(000).......... $284,191 $317,768 $290,751 $257,059 $252,911 $123,306
Average net as-
sets (000)..... $300,520 $304,841 $265,597 $261,285 $179,456 $ 80,531
Ratios to average net assets:
Expenses, in-
cluding dis-
tribution fee. 2.19% 2.23% 2.27% 2.32%(h) 2.30%(h) 2.44%(h)
Expenses, ex-
cluding dis-
tribution fee. 1.19% 1.23% 1.27% 1.32%(h) 1.30%(h) 1.44%(h)
Net investment
income (loss). (1.64)% (1.75)% (1.66)% (1.39)% (1.40)% (1.56)%
Portfolio turn-
over rate(d)... 182% 113% 106% 110% 112% 107%
Average
commission rate
paid per share. $ .0590 $ .0588 $ .0592 N/A N/A N/A
<CAPTION>
CLASS C
-----------------------------------------------------------------
JUNE 10, AUGUST 1,
1991 YEAR ENDED 1994(F)
THROUGH DECEMBER 31, THROUGH
DECEMBER 31, --------------------------- DECEMBER 31,
1991(C) 1997 1996 1995(C) 1994(C)
-------------------- -------- -------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPER-
ATING
PERFORMANCE:
Net asset value, beginning
of period..... $ 12.43 $14.48 $14.49 $11.56 $11.62
-------------------- -------- -------- --------- ----------------
INCOME FROM IN-
VESTMENT
OPERATIONS:
Net investment
loss........... (0.08) (0.22) (0.22) (0.22) (0.05)
Net realized and
unrealized gain
(loss) on
investment
transactions... 3.16 2.42 2.48 3.67 (0.01)
-------------------- -------- -------- --------- ----------------
Total from in-
vestment opera-
tions.......... 3.08 2.20 2.26 3.45 (0.06)
-------------------- -------- -------- --------- ----------------
LESS DIVIDENDS AND DISTRIBUTIONS:
Distributions
from net
realized gains
from investment
transactions... (3.86) (3.42) (2.27) (0.52) --
-------------------- -------- -------- --------- ----------------
Net asset value,
end of period.. $ 11.65 $13.26 $14.48 $14.49 $11.56
==================== ======== ======== ========= ================
TOTAL
RETURN(E): .... 26.82% 16.48% 15.54% 30.11% (0.52)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end
of period
(000).......... $12,877 $6,750 $6,735 $4,897 $1,100
Average net as-
sets (000)..... $ 1,922 $6,796 $5,862 $2,961 $ 226
Ratios to average net assets:
Expenses, in-
cluding dis-
tribution fee. 3.77%(a)(g)(h) 2.19% 2.33% 2.27% 6.23%(a)(h)
Expenses, ex-
cluding dis-
tribution fee. 2.77%(a)(h) 1.19% 1.23% 1.27% 5.23%(a)(h)
Net investment
income (loss). (3.17)%(a) (1.64)% (1.75)% (1.63)% (3.36)%(a)
Portfolio turn-
over rate(d)... 115% 182% 113% 106% 110%
Average
commission rate
paid per share. N/A $.0590 $.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>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS Z SHARES)
The following financial highlights have been audited by Ernst & Young LLP,
independent auditors, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and the notes
thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a share of Class Z common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. The information is based on data contained in
the financial statements. 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 Z
------------
MARCH 18,
1997(A)
THROUGH
DECEMBER 31,
1997
------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning period............................... $14.48
------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss............................................. (0.22)
Net realized and unrealized gains on investment and foreign cur-
rency transactions............................................. 3.18
------
Total from investment operations................................ 2.96
------
LESS DISTRIBUTIONS
Distributions from net realized gains from investment transac-
tions.......................................................... (2.91)
------
Net asset value, end of period.................................. $14.53
======
TOTAL RETURN(C)................................................. 21.90%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................................. $ 633
Average net assets (000)........................................ $ 121
Ratios to average net assets:
Expenses, including distribution fees......................... 1.19%(b)
Expenses, excluding distribution fees......................... 1.19%(b)
Net investment income......................................... (.85)%(b)
Portfolio turnover rate......................................... 182%
Average commission rate paid per share.......................... $.0590
</TABLE>
- ----------
(a) Commencement of offering of Class Z shares.
(b) Annualized.
(c) 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 the period reported and includes reinvestment of dividends
and distributions. Total returns for periods of less than a full year are
not annualized.
7
<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.
8
<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
9
<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
10
<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.
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, 1997 and December 31, 1996 were 182% and 113%, 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.
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 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.
11
<PAGE>
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, 1997, the Fund's total expenses as a
percentage of average net assets for Class A, Class B, Class C and Class Z
shares were 1.37%, 2.19%, 2.19% and 1.19%, respectively. See "Financial
Highlights".
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, 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. PIFM is
organized in New York as a limited liability Company. For the fiscal year
ended December 31, 1997, the Fund paid management fees to PIFM of .95% of the
Fund's average net assets. See "Manager" in the Statement of Additional
Information.
As of January 31, 1998 PIFM served as the manager to 42 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 $63 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE COMPANY, PIFM 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 PIFM, not the Fund, at a rate of .75 of 1% of the
12
<PAGE>
average daily net assets of the Fund. PIFM 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, 1997, PIFM paid subadvisory fees to NACM of .75% of
the Fund's average net assets.
The Investment Adviser currently manages a total of approximately $30 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 twenty other
partners manage a staff of approximately 475 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) and Catherine Somhegyi, the Investment Adviser's Chief
Investment Officer-Global Equity, who has been employed by the Investment
Adviser since 1987. A team management approach is utilized in connection with
the day-to-day management of the Fund's portfolio. The members of the team are
Andrew B. Gallagher, Maren Lindstrom and Thomas J. Sullivan. Mr. Gallagher has
been employed by Nicholas-Applegate Capital Management since 1992. Ms.
Lindstrom has been employed by Nicholas-Applegate Capital Management since
1994; prior thereto, she was employed by Societe Generale, Banque D'Orsay and
Prudential Asset Management. Mr. Sullivan has been employed by Nicholas-
Applegate Capital Management since 1994; prior thereto he was employed by
Donaldson, Lufkin & Jenrette Securities Corporation.
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE
DISTRIBUTOR OF THE CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF THE 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), THE DISTRIBUTOR INCURS THE EXPENSES OF
DISTRIBUTING THE FUND'S CLASS A, CLASS B AND CLASS C SHARES. The Distributor
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.
UNDER THE CLASS A PLAN, THE FUND MAY PAY THE DISTRIBUTOR 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. The Distributor 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, 1998.
13
<PAGE>
UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS THE DISTRIBUTOR 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 the Distributor 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. The Distributor 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, 1997, 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.
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
PIFM 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.
14
<PAGE>
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 PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
YEAR 2000
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of their outside service
providers. Many computer software systems in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. Such event could have a negative impact on handling securities
trades, payments of interest and dividends, pricing and account services.
Although, at this time, there can be no assurance that their will be no
adverse impact on the Fund, the Manager, the Distributor, the Transfer Agent
and the Custodian have advised the Fund that they have been actively working
on necessary changes to their computer systems to prepare for the year 2000
and expect that their systems, and those of their outside service providers,
will be adapted in time for that event.
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.
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 AVERAGE ANNUAL TOTAL
RETURN, AND AGGREGATE TOTAL RETURN AND YIELD, 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
15
<PAGE>
the same aggregate total return if performance had been constant over the
entire period. Average annual total return smooths out variations in
performance and takes into account any applicable initial or contingent
deferred sales charges. Neither average annual total return nor aggregate
total return takes into account any federal or state income taxes which may be
payable upon redemption. The yield refers to the income generated by an
investment in the Fund over a one-month or 30-day period. This income is then
annualized; that is, the amount of income generated by the investment during
that 30-day period is assumed to be generated each 30-day period for twelve
periods and is shown as a percentage of the investment. The income earned on
the investment is also assumed to be reinvested at the end of the sixth 30-day
period. The Fund 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."
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 individual shareholders for
securities held between 12 and 18 months currently is 28% and for securities
held more than 18 months is 20%. The maximum tax rate for ordinary income is
39.6%. The maximum long-term capital gains rate for corporate shareholders
currently is 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 certain individuals and certain non-corporate
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
16
<PAGE>
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
per share 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 basis. If you hold shares through Prudential Securities, you should
contact your financial adviser to elect to receive dividends and distributions
in cash.
IF YOU BUY SHARES ON OR IMMEDIATELY BEFORE THE RECORD DATE (THE DATE THAT
DETERMINED WHO RECEIVES THE DIVIDEND), YOU WILL RECEIVE A PORTION OF THE MONEY
YOU INVESTED AS A TAXABLE DIVIDEND. THEREFORE, YOU SHOULD CONSIDER THE TIMING
OF DIVIDENDS WHEN BUYING SHARES OF THE FUND.
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
17
<PAGE>
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.
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 Commission
under the Securities Act of 1933. Copies of the Registration Statement may be
obtained at a reasonable charge from the Commission or may be examined,
without charge, at the office of the Commission in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH THE DISTRIBUTOR 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 purchase price is the NAV next determined following receipt of an order
by the Transfer Agent or the Distributor plus a sales charge which, at your
option, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis (Class B or Class C shares). Class Z shares are
offered to a limited group of investors without a sales charge. Participants
in programs sponsored by Prudential Retirement Services should contact their
client representative for more information about Class Z shares. Payments may
be made by cash, wire, check or through your brokerage account. See
"Alternative Purchase Plan" below. See also "How the Fund Values its Shares."
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
18
<PAGE>
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 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
class in which you are eligible to invest (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.
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<PAGE>
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 CDSC of 5% of the 1% Shares convert to Class
lesser of the amount A shares approximately
invested or the redemption seven years after
proceeds; declines to zero purchase
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.
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.
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<PAGE>
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 NAV, 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.
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 from its own resources based on a percentage of the NAV 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.
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<PAGE>
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 Prudential Securities or
its subsidiaries (Prudential Securities or Subsidiary Prototype Benefit
Plans), Class A shares may be purchased at NAV by participants who are
repaying loans made from such plans to the participant.
Prudential Retirement Programs. 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 for which Prudential serves as the
plan administrator or recordkeeper, provided that (i) the plan has at least $1
million in existing assets or 250 eligible employees and (ii) the Fund is an
available investment option. These plans include pension, profit-sharing,
stock-bonus or other employee benefit plans 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 plans that participate in the
Transfer Agent's PruArray and SmartPath Program (benefit plan recordkeeping
services) (hereafter referred to as a PruArray or SmartPath Plan). All plans
of a company for which Prudential serves as plan administrator or recordkeeper
are aggregated in meeting the $1 million threshold. The term "existing assets"
as used herein includes stock issued by a plan sponsor, shares of Prudential
Mutual Funds and shares of certain unaffiliated mutual funds that participate
in the PruArray or SmartPath Program (Participating Funds). "Existing assets"
also include monies invested in The Guaranteed Interest Account (GIA), a group
annuity insurance 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 NAV 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 NAV 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 Transfer Agent.
PruArray Savings Program. Class A shares are also offered at NAV 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 NAV 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 Transfer Agent and (ii) spouses of
employees who open an IRA account with the Transfer Agent. The program is
offered to companies that have at least 250 eligible employees.
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 of the Prudential Mutual Funds (including the Fund), (b) employees of
Prudential Securities and PIFM 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
22
<PAGE>
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, (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, and (g) investors in Individual
Retirement Accounts, provided the purchase is made with the proceeds of a tax-
free rollover of assets from a Benefit Plan for which Prudential Investments
serves as the recordkeeper or administrator.
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, from its own
resources, 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. 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, from its own resources, 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 currently 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 or trust program sponsored by Prudential Securities, The Prudential
Savings Bank, F.S.B. or any affiliate which includes mutual funds as
investment options and for which the Fund is an available option; (iii)
certain participants in the MEDLEY Program (group variable annuity contracts)
sponsored by Prudential for whom Class Z shares of the Prudential Mutual Funds
are an available option; (iv) Benefit Plans for which Prudential Retirement
Services serves as recordkeeper and as of September 20, 1996, (a) were Class Z
shareholders of the Prudential Mutual Funds or (b) executed a letter of intent
to purchase Class Z shares of the Prudential Mutual Funds; (v) current and
former Directors/Trustees of the Prudential Mutual Funds (including the Fund);
and (vi) employees of Prudential and/or Prudential Securities who participate
in a Prudential-sponsored employee savings plan.
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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 from its own resources 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 THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT 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 FACT 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 Commission, by order, so permits;
applicable rules and regulations of the Commission 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 CASHIERS CHECKS.
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<PAGE>
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 Commission. 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 NAV 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 CDSC 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.
However, if the redemption was made within a 30 day period of the repurchase
and if the redemption resulted in a loss, some or all of the loss, depending
on the amount reinvested, 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."
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<PAGE>
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>
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 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.
26
<PAGE>
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. The Transfer Agent will calculate the total amount available for this
waiver annually on the anniversary date of your purchase or, for shares
purchased prior to March 1, 1997, on March 1 of the current year. The CDSC
will be waived (or reduced) on redemptions until this threshold 12% is
reached.
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.
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.
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.
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."
27
<PAGE>
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. 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, Inc. 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.
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<PAGE>
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 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
NAV. 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 exchange privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, the Fund reserves the right to refuse purchase orders and
exchanges by any person, group or commonly controlled account, if, in the
Manager's sole judgement, such person, group or accounts were following a
market timing strategy or were otherwise engaging in excessive trading (Market
Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading.
The Fund may notify the Market Timer of rejection of an exchange or purchase
order subsequent to the day on which the order was placed.
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
29
<PAGE>
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 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, 100 Mulberry Street, Newark, New Jersey 07102-4077. 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.
30
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential 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.
TAXABLE BOND FUNDS EQUITY FUNDS
Prudential Diversified Bond Fund, Inc. Prudential Balanced Fund
Prudential Government Income Fund, Inc. Prudential Distressed Securities
Prudential Government Securities Trust Fund, Inc.
Short-Intermediate Term Series Prudential Index Series Fund
Prudential High Yield Fund, Inc. Prudential Active Balanced Fund
Prudential Mortgage Income Fund, Inc. Prudential Stock Index Fund
Prudential Structured Maturity Fund, Inc. Prudential Bond Market Index
Income Portfolio Fund
Prudential Europe Index Fund
TAX-EXEMPT BOND FUNDS Prudential Pacific Index Fund
Prudential Small-Cap Index Fund
Prudential California Municipal Fund Prudential Emerging Growth Fund,
California Series Inc.
California Income Series Prudential Equity Fund, Inc.
Prudential Municipal Bond Fund Prudential Equity Income Fund
High Yield Series Prudential Jennison Series Fund,
Insured Series Inc.
Intermediate Series Prudential Jennison Active
Prudential Municipal Series Fund Balanced Fund
Florida Series Prudential Jennison Growth Fund
Maryland Series Prudential Jennison Growth &
Massachusetts Series Income Fund
Michigan Series Prudential Multi-Sector Fund, Inc.
New Jersey Series Prudential Small-Cap Quantum Fund,
New York Series Inc.
North Carolina Series Prudential Small Company Value
Ohio Series Fund, Inc.
Pennsylvania Series Prudential Utility Fund, Inc.
Prudential National Municipals Fund, Inc. Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity
GLOBAL FUNDS Fund
Prudential Europe Growth Fund, Inc. MONEY MARKET FUNDS
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity . Taxable Money Market Funds
Fund, Inc. Cash Accumulation Trust
Limited Maturity Portfolio Liquid Assets Fund
Prudential Intermediate Global Income National Money Market Fund
Fund, Inc. Prudential Government Securities
Prudential International Bond Fund, Inc. Trust
Prudential Natural Resources Fund, Inc. Money Market Series
Prudential Pacific Growth Fund, Inc. U.S. Treasury Money Market
Prudential World Fund, Inc. Series
Global Series Prudential Special Money Market
International Stock Series Fund, Inc.
The Global Total Return Fund, Inc. Money Market Series
Global Utility Fund, Inc. Prudential MoneyMart Assets, Inc.
. Tax-Free Money Market Funds
Prudential Tax-Free Money Fund,
Inc.
Prudential California Municipal
Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market
Series
New Jersey Money Market Series
New York Money Market Series
. 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
<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....................................................... 8
Investment Objective and Policies......................................... 8
Other Investments and Policies............................................ 9
Investment Restrictions................................................... 12
HOW THE FUND IS MANAGED.................................................... 12
Manager................................................................... 12
Investment Adviser........................................................ 12
Distributor............................................................... 13
Portfolio Transactions.................................................... 14
Fee Waivers and Subsidy................................................... 14
Custodian and Transfer and Dividend Disbursing Agent...................... 14
Year 2000................................................................. 15
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................................................. 20
How to Sell Your Shares................................................... 24
Conversion Feature--Class B Shares........................................ 27
How to Exchange Your Shares............................................... 28
Shareholder Services...................................................... 29
The Prudential Mutual Fund Family......................................... A-1
</TABLE>
- --------------------------------------------------------------------------------
MF151A
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, 1998
www.prudential.com
[LOGO] PRUDENTIAL
INVESTMENTS
<PAGE>
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
Statement of Additional Information
dated March 4, 1998
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, 100 Mulberry Street, Newark, New
Jersey 07102-4077, 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, 1998, 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 8
Investment Restrictions.................................. B-6 12
Directors and Principal Officers......................... B-8 12
Manager.................................................. B-11 12
Investment Adviser....................................... B-12 12
Distributor.............................................. B-14 13
Portfolio Transactions and Brokerage..................... B-16 14
Purchase and Redemption of Fund Shares................... B-18 18
Shareholder Investment Account........................... B-22 30
Net Asset Value.......................................... B-25 15
Dividends, Distributions and Taxes....................... B-26 16
Performance Information.................................. B-29 15
Custodian, Transfer and Dividend Disbursing Agent and In-
dependent Auditors...................................... B-30 14
Financial Statements..................................... B-31 --
Report of Independent Auditors........................... B-41 --
Appendix I--General Investment Information............... I-1 --
Appendix II--Historical Performance Data................. II-1 --
Appendix III--Information Relating to The Prudential..... III-I --
</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
B-2
<PAGE>
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.
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
B-3
<PAGE>
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.
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.
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
B-4
<PAGE>
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 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>
*Arthur E. Nicholas (51) Director, Managing Partner and Chief
600 West Broadway Chairman and Investment Officer, Nicholas-
29th Floor President Applegate Capital Management
San Diego, California (since August 1984), Trustee and
Chairman of the Board of
Trustees, Nicholas-Applegate
Investment Trust (since 1993);
Chairman of Nicholas-Applegate
Securities.
Fred C. Applegate (52) Director President, Hightower Management
885 La Jolla Corona Court Co. (from January 1992 to
La Jolla, California present); President, 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 (62) 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);
Trustee, Nicholas-Applegate
Investment Trust (since 1993).
Theodore J. Coburn (44) 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 (51) Director and Vice President, Prudential
Gateway Center Three Vice President Investments (since September
100 Mulberry Street 1997); Executive Vice President
Newark, New Jersey 07102-4077 and Treasurer, Prudential
Investment Fund Management LLC
(PIFM); 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 (57) Director Chairman, Laffer Associates
5405 Morehouse Drive (formerly A.B. Laffer, V.A.
#340 Canto & Associates) (economic
San Diego, California consulting) (since 1979);
Chairman, Laffer Advisors
Incorporated (economic
consulting) (since 1981);
Director U.S. Filter Corporation
(since March 1991); Coinmach
Laundry Corporation (since
September 1996); and MasTec,
Inc. (construction) (since
1994); Chairman, Calport Asset
Management,
</TABLE>
B-8
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND AND OTHER AFFILIATIONS
---------------- ------------- ----------------------
<C> <C> <S>
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).
Charles E. Young (66) Director Chancellor Emeritus (July
10920 Wilshire Blvd. 1987-present);
Ste. 1835 Chancellor, UCLA (from
Los Angeles, California 90024 September 1968 to July
1997); Director of 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).
Grace Torres (38) Treasurer and First Vice President
Gateway Center Three Chief Accounting (since December 1996),
100 Mulberry Street Officer PIFM; formerly First Vice
Newark, New Jersey 07102-4077 President of Prudential
Securities (March 1994-
September 1996); Vice
President, Bankers Trust
Corporation (July 1989-
March 1994).
Stephen M. Ungerman (44) Assistant Treasurer Tax Director of Prudential
Gateway Center Three Investments and the
100 Mulberry Street Private Asset Group of
Newark, New Jersey 07102-4077 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 (52) Secretary Senior Vice President
Gateway Center Three (since December 1996) of
100 Mulberry Street PIFM; Senior Vice
Newark, New Jersey 07102-4077 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 (67) Assistant Secretary Partner, Paul, Hastings,
555 South Flower Street Janofsky & Walker LLP
22nd Floor (law firm) since August
Los Angeles, California 1988; formerly Partner
(through his Professional
Corporation), Hufstedler,
Miller, Carlson &
Beardsley (law firm)
(1967-1988).
Deborah A. Docs (40) Assistant Secretary Vice President and
Gateway Center Three Associate General Counsel
100 Mulberry Street (since December 1996) of
Newark, New Jersey 07102-4077 PIFM; 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.
+ Mr. Laffer is considered to be an "interested person" of the Trust because
Laffer Associates (formerly A.B. Laffer, V.A. Canto & Associates), or its
affiliates received material compensation from the Investment Adviser for
consulting services provided from time to time to the Investment Adviser,
and because during the last two fiscal years his son was 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.
B-9
<PAGE>
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 PIFM
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.
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 or 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, 1997 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 Investments Fund Management LLC (Fund Complex) for the
calendar year ended December 31, 1997.
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, $11,500 None N/A $11,500(1)*
Director
Dann V. Angeloff, $17,000 None N/A $17,000(1)*
Director
Theodore J. Coburn, $13,500 None N/A $13,500(1)*
Director
Arthur B. Laffer, $14,000 None N/A $14,000(1)*
Director
Charles E. Young, $12,500 None N/A $12,500(1)*
Director
</TABLE>
- ----------
* Indicates number of funds in Fund Complex (including the Fund) to which
aggregate compensation relates.
As of February 6, 1998 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 6, 1998, the only beneficial owner, directly or indirectly,
of more than 5% of the outstanding shares of any class of common stock of the
Fund were Mr. Robert Daniels and Ms. Dorothy M. Poore JT TEN, 6055 E. Lake
Meade Blvd., #202A, Las Vegas, NV which held 3,303 Class Z shares of the Fund
(6%) and Peggy J. Steffen and Bridget A. Roznai JT TEN, 748 Nectarine Ct.,
Henderson, NV which held 2,952 Class Z shares of the Fund (5%).
As of February 6, 1998, Prudential Securities was the record holder for
other beneficial owners of 4,219,913 Class A shares (or 47% of the outstanding
Class A shares), 13,648,995 Class B shares (or 66% of the outstanding Class B
shares), 362,821 Class C shares (or 71% of the outstanding Class C shares) and
58,145 Class Z shares (or 100% of the outstanding Class Z 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 Investments Fund Management LLC
("PIFM" or the "Manager"), Gateway Center Three, 100 Mulberry Street, Newark,
New Jersey 07102-4077. PIFM 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, 1998, PIFM managed and/or administered open-end and closed-end
management investment companies with assets of approximately $63 billion.
According to the Investment Company Institute, as of October 31, 1997 the
Prudential Mutual Funds were the 17th 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, PIFM 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, PIFM 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 PIFM pursuant to the terms of the Subadvisory Agreement
among PIFM, the Investment Adviser and the Company (the "Subadvisory
Agreement"). Under the Management Agreement, PIFM 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 PIFM for the Fund are not exclusive under the terms
of the Management Agreement and PIFM is free to, and does, render management
services to others.
For its services, PIFM 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. PIFM 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, PIFM
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 PIFM or the Fund's Investment Adviser; (b) all expenses
incurred by PIFM 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 PIFM 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 including the
preparation and printing of the Fund's registration statement, prospectus and
statement of additional information for such purposes, and paying the fees and
expenses of notice filings made in accordance with state securities laws, (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 PIFM 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 PIFM 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 16, 1997 and by the shareholders of the
Fund on April 22, 1991 effective as of June 10, 1991.
For the fiscal years ended December 31, 1997, 1996, and December 31, 1995,
PIFM received net management and administrative fees of $892,503, $892,788 and
$754,705.
Prudential Investments Fund Management LLC, the Manager of the Fund, is a
subsidiary of Prudential Securities Incorporated (PSI) and The Prudential
Insurance Company of America (Prudential). Prudential Mutual Fund Services LLC
(PMFS or the Transfer Agent) serves as the transfer agent for the Prudential
Mutual Funds and, in addition, provides customer service, record keeping and
management and administration services to qualified plans.
INVESTMENT ADVISER
The Fund's Investment Adviser is Nicholas-Applegate Capital Management, a
California limited partnership, with offices at 600 West Broadway, San Diego,
California 92101. The Investment Adviser was organized in August 1984 to
manage discretionary accounts investing primarily in publicly traded equity
securities and securities convertible into or exercisable for publicly traded
equity securities, with the goal of capital appreciation. Its general partner
is Nicholas-Applegate Capital Management Holdings, L.P., a California limited
partnership of which the general partner is Nicholas-Applegate Capital
Management Holdings, Inc. (a California corporation owned by Mr. Nicholas).
The Investment Adviser currently has twenty-one partners (including Mr.
Nicholas) who manage a staff of approximately 475 employees including 46
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 16, 1997. Under
the Subadvisory Agreement, the Manager retains the Investment Adviser to
manage the Fund's investment portfolio, subject to the direction of the
Company's Board of Directors and the Manager. The Investment Adviser is
authorized to determine which securities
B-12
<PAGE>
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, 1995, 1996 and 1997 the Fund and the
Manager paid the Investment Adviser aggregate advisory fees of $2,839,126,
$3,358,584 and $3,357,513, 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 the Board of Directors or vote of a majority of
the outstanding voting securities of the Fund, as defined in the
B-13
<PAGE>
Investment Company Act), PIFM or the Investment Adviser upon not more than 60
days' nor less than 30 days' written notice, without payment of any penalty.
The Subadvisory Agreement provides that it will continue in effect for a
period of more than two years from its execution only so long as such
continuance is specifically approved at least annually in conformity with the
Investment Company Act.
The Investment Adviser and its affiliated companies have adopted a personal
investment policy consistent with Investment Company Institute guidelines.
This policy includes, among other things, a ban on acquisitions of securities
in an initial public offering; restrictions on acquisitions of securities in
private placements; investment pre-clearance and reporting requirements;
review of duplicate confirmation statements; annual recertification of
compliance with a code of ethics; disclosure of personal holdings by certain
personnel; blackout periods on personal investing for certain personnel;
prohibition of short-term trading profits for investment personnel;
limitations on service as a director of publicly traded companies; and
disclosure of personal securities transactions.
DISTRIBUTOR
Prudential Securities Incorporated, One Seaport Plaza, New York, New York
10292 (Prudential Securities or the Distributor), acts as the distributor of
the 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"), the Distributor incurs the expenses of
distributing the Fund's Class A, Class B and Class C shares. The Distributor
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 16, 1997. 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, 1997, the Distributor received
payments of $251,879, 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, 1997, PSI received approximately $139,800 in initial sales
charges.
B-14
<PAGE>
CLASS B PLAN. For the year ended December 31, 1997, the Distributor received
$3,005,201 from the Fund under the Class B Plan and spent approximately
$1,305,300 in distributing the Fund's Class B shares. It is estimated that of
the latter amount, approximately 1.2% ($15,100) was spent on printing and
mailing of prospectuses and sales material to other than current shareholders;
29.3% ($382,300) was spent on compensation to Pruco Securities Corporation, an
affiliated broker-dealer, for commissions to its representatives and other
expenses, including an allocation on account of overhead and other branch
office distribution related expenses, incurred by it for distribution of Class
B shares; and 69.5% ($907,900) 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 [44.1% ($576,100)] and (ii) an
allocation on account of overhead and other branch office distribution-related
expenses [25.4% ($331,800)]. 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.
The Distributor 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, 1997 the
Distributor received approximately $538,800 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, 1997, the Distributor received $67,962 from
the Fund under the Class C Plan and spent approximately $63,200 in
distributing the Fund's Class C Shares. It is estimated that of the latter
amount, approximately 0.9% ($500) was spent on printing and mailing of
prospectuses to other than current shareholders; 6.1% ($3,900) 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 93.0% ($58,800)
on the aggregate of (i) payments of commissions and account servicing fees to
financial advisers (83.7% or $52,900) and (ii) an allocation of overhead and
other branch office distribution-related expenses for payments of related
expenses (9.3% or $5,900). The Distributor 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, 1997, the Distributor received approximately $4,800 in contingent deferred
sales charges attributable to Class C shares.
The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Board of Directors, including a majority vote of the Rule 12b-1 Directors,
cast in person at a meeting called for the purpose of voting on such
continuance. The Class A, Class B and Class C Plans may each be terminated at
any time, without penalty, by the vote of a majority of the Rule 12b-1
Directors or by the vote of the holders of a majority of the outstanding
shares of the applicable class on not more than 30 days' written notice to any
other party to the Plans. The Plans may not be amended to increase materially
the amounts to be spent for the services described therein without approval by
the shareholders of the applicable class (by both Class A and Class B
shareholders, voting separately, in the case of material amendments to the
Class A Plan), and all material amendments are required to be approved by the
Board of Directors in the manner described above. Each Plan will automatically
terminate in the event of its assignment. The Fund will not be contractually
obligated to pay expenses incurred under the Class A Plan, Class B Plan or
Class C Plan if such Plan is terminated or not continued.
B-15
<PAGE>
Pursuant to each Plan, the Board of Directors will review at least quarterly
a written report of the distribution expenses incurred on behalf of the Class
A, Class B and Class C shares of the Fund by the Distributor. The report will
include an itemization of the distribution expenses and the purposes of such
expenditures. In addition, as long as the Plans remain in effect, the
selection and nomination of Directors who are not interested persons of the
Company will be committed to the Directors who are not interested persons of
the Company.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify the
Distributor 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 16, 1997.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD Inc., the
Distributor is required to limit aggregate initial sales charges, deferred
sales charges and asset-based sales charges to 6.25% of total gross sales of
each class of shares. Interest charges on unreimbursed distribution expenses
equal to the prime rate plus one percent per annum may be added to the 6.25%
limitation. Sales from the reinvestment of dividends and distributions are not
included in the calculation of the 6.25% limitation. The annual asset-based
sales charge on shares of the Fund may not exceed .75 of 1% per class. The
6.25% limitation applies to the Fund rather than on a per shareholder basis.
If aggregate sales charges were to exceed 6.25% of total gross sales of any
class, all sales charges on shares of all classes would be suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Company's Board of Directors and the
oversight and review of the Manager, the Investment Adviser is primarily
responsible for the execution of the Fund's portfolio transactions and the
allocation of its brokerage business. In executing such transactions, the
Investment Adviser will seek to obtain the best price and execution for the
Fund, taking into account such factors as price, size of order, difficulty and
risk of execution and operational facilities of the firm involved. Securities
in which the Fund invests may be traded in the over-the-counter markets, and
the Fund deals directly with the dealers who make markets in such securities
except in those circumstances where better prices and execution are available
elsewhere. Commission rates are established pursuant to negotiation with
brokers or dealers based on the quality or quantity of services provided in
light of generally prevailing rates, and while the Investment Adviser
generally seeks reasonably competitive commission rates, the Fund does not
necessarily pay the lowest commissions available. The allocation of orders
among brokers and the commission rates paid are reviewed quarterly by the
Board of Directors of the Company.
The Fund has no obligation to deal with any broker or group of brokers in
executing transactions in portfolio securities. Subject to obtaining the best
price and execution, brokers who sell shares of the Fund or provide
supplemental research, market and statistical information and other research
services and products to the Investment Adviser may receive orders for
transactions by the Fund. Such information, services and products are those
which brokerage houses customarily provide to institutional investors, and
include items such as statistical and economic data, research reports on
particular companies and industries, and computer software used for research
with respect to investment decisions. Information, services and products so
received are in addition to and not in lieu of the services required to be
performed by the Investment Adviser under the Subadvisory Agreement and the
expenses of the Investment Adviser are not necessarily reduced as a result of
the receipt of such supplemental information, services and products. Such
information, services and products may be useful to the Investment Adviser in
providing services to clients other than the Fund, and not all such
information, services and products are used by the Investment Adviser in
connection with the Fund. Similarly, such information, services and products
provided to the Investment Adviser by brokers and dealers through whom other
clients of the Investment Adviser effect securities transactions may be useful
to the Investment Adviser in providing services to the Fund. The Investment
Adviser is authorized to pay higher commissions on brokerage transactions for
the Fund to brokers in order to secure information, services and products
described above, subject to review by the Company's Board of Directors from
time to time as to the extent and continuation of this practice. During the
fiscal year ended December 31, 1997, substantially all of the Fund's brokerage
commissions were paid to firms which provided research services to the Fund's
Investment Adviser.
B-16
<PAGE>
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 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, 1997.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
------------- -------- --------
<S> <C> <C> <C> <C>
Total brokerage commissions paid by the
Fund................................... $3,677,411.02 $914,031 $884,934
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>
B-17
<PAGE>
Of the total brokerage commissions paid during the year ended December 31,
1997 $1,044,840 or (28.4%) were paid to firms which provided research,
statistical or other services to the Manager. PIFM has not separately
identified a portion of such brokerage commissions as applicable to the
provision of such research, statistical or other services.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value (NAV) 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 NAV without any sales
charges. See "Shareholder Guide--How to Buy Shares of the Fund" in the
Prospectus.
Each class of shares represents an interest in the same assets of the Fund
and is identical in all respects except that (i) each class is subject to
different sales charges and distribution and/or service fees (except for Class
Z shares, which are not subject to any sales charges and distribution and/or
service fees), which may affect performance, (ii) each class has exclusive
voting rights with respect to any matter submitted to shareholders that
relates solely to its arrangement and has separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of any other class, (iii) each class has a different exchange
privilege, (iv) only Class B shares have a conversion feature and (v) Class Z
shares are offered exclusively for sale to a limited group of investors. See
"Distributor" and "Shareholder Investment Account--Exchange Privilege."
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 5.00% and
Class B, Class C* and Class Z shares are sold at NAV. Using the Fund's NAV at
December 31, 1997, the maximum offering price of the Fund's shares is as
follows:
<TABLE>
<S> <C>
CLASS A
Net asset value.................................................. $14.47
Maximum sales charge (5.00% of offering price)................... .76
------
Offering price to public......................................... $15.23
======
CLASS B
Net asset value, offering price and redemption price per Class B
share*.......................................................... $13.26
======
CLASS C
Net asset value, offering price and redemption price per Class C
share*.......................................................... $13.26
======
CLASS Z
Net asset value, offering price and redemption price per Class Z
share........................................................... $14.53
======
</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
B-18
<PAGE>
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.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a company will be
deemed to control the company, and a partnership will be deemed to be
controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
Also, an eligible group of related Fund investors may include an employer
(or group of related employers) and one or more qualified retirement plans of
such employer or employers (an employer controlling, controlled by or under
common control with another employer is deemed related to that employer).
In addition, an eligible group of related Fund Investors may include (i) a
client of a Prudential Securities financial adviser who gives such financial
adviser discretion to purchase the Prudential Mutual Funds for his or her
account only in connection with participation in a market timing program and
for which program Prudential Securities receives a separate advisory fee or
(ii) a client of an unaffiliated registered investment adviser which is a
client of a Prudential Securities financial adviser, if such unaffiliated
adviser has discretion to purchase the Prudential Mutual Funds for the
accounts of his or her customers but only if the client of such unaffiliated
adviser participates in a market timing program conducted by such unaffiliated
adviser; provided such accounts in the aggregate have assets of at least $15
million invested in the Prudential Mutual Funds.
THE DISTRIBUTOR MUST BE NOTIFIED AT THE TIME OF PURCHASE THAT THE INVESTOR
IS ENTITLED TO A REDUCED SALES CHARGE. THE REDUCED SALES CHARGES WILL BE
GRANTED SUBJECT TO CONFIRMATION OF THE INVESTOR'S HOLDINGS. THE COMBINED
PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE DOES NOT APPLY TO INDIVIDUAL
PARTICIPANTS IN ANY RETIREMENT OR GROUP PLANS.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of
related investors, as described above under "Combined Purchase and Cumulative
Purchase Privilege," may aggregate the value of their existing holdings of
shares of the Fund and shares of other Prudential Mutual Funds (excluding
money market funds other than those acquired pursuant to the exchange
privilege) to determine the reduced sales charge. However, the value of shares
held directly with the Transfer Agent and through Prudential Securities will
not be aggregated to determine the reduced sales charge. All shares must he
held either directly with the Transfer Agent or through Prudential Securities.
The value of existing holdings for purposes of determining the reduced sales
charge is calculated using the maximum offering price (NAV 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.
B-19
<PAGE>
LETTERS OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors), including retirement and group plans,
who enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds (Investment Letter of Intent). Retirement and group plans may
also qualify to purchase Class A shares at net asset value by entering into a
Letter of Intent whereby they agree to enroll, within a thirteen-month period,
a specified number of eligible employees or participants (Participant Letter
of Intent).
For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction; however, the value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the
Transfer Agent or through Prudential Securities.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number
of investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant
enrollment goal over a thirteen-month period. Each investment made during the
period, in the case of an Investment Letter of Intent, will receive the
reduced sales charge applicable to the amount represented by the goal, as if
it were a single investment. In the case of a Participant Letter of Intent,
each investment made during the period will be made at net asset value.
Escrowed 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.
</TABLE>
B-20
<PAGE>
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
<S> <C>
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.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the
reason for the distribution.
Excess Contributions A letter from the shareholder (for an
IRA) or the plan administrator/trustee on
company letterhead indicating the amount
of the excess and whether or not taxes
have been paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchase an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares
of the Fund following the second purchase was $550,000, the quantity discount
would be available for the second purchase of $450,000 but not for the first
purchase of $100,000. The quantity discount will be imposed at the following
rates depending on whether the aggregate value exceeded $500,000 or $1
million:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS INVESTED
OR REDEMPTION PROCEEDS
--------------------------------------
YEAR SINCE PURCHASE
PAYMENT MADE $500,001 TO $1 MILLION OVER $1 MILLION
------------------- ---------------------- ---------------
<S> <C> <C>
First.......................... 3.0% 2.0%
Second......................... 2.0% 1.0%
Third.......................... 1.0% 0%
Fourth and thereafter.......... 0% 0%
</TABLE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
B-21
<PAGE>
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 NAV (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. Such shareholder will receive credit for any CDSC paid
in connection with the amount of the proceeds being reinvested.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to
the minimum investment requirements of such funds. Shares of such other
Prudential Mutual Funds may also be exchanged for shares of the Fund. All
exchanges are made on the basis of the relative NAV 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) (Class A shares); 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 (Class A shares); 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.
B-22
<PAGE>
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 acquired
through reinvestment of dividends or distributions may be exchanged for Class
B or Class C shares of other funds without being subject to any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the 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."
B-23
<PAGE>
- ----------
/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.
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 NAV 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
B-24
<PAGE>
both self-employed individuals and corporate employers. These plans permit
either self-direction of accounts by participants or a pooled account
arrangement. Information regarding the establishment of these plans, 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 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 a traditional IRA account will be subject to tax when withdrawn from the
account. Distributions from a Roth IRA which meets the conditions required
under the Internal Revenue Code will not be subject to tax upon withdrawal
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
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of
investments listed on a securities exchange and NASDAQ National Market System
securities (other than options on stock and stock indices) are valued at
B-25
<PAGE>
the last sale price on the day of valuation or, if there was no sale on such
day, the mean between the last bid and asked prices on such day, as provided
by a pricing service or principal market maker. Corporate bonds (other than
convertible debt securities) and U.S. Government securities that are actively
traded in the over-the-counter market, including listed securities for which
the primary market is believed to be over-the-counter, are valued on the basis
of valuations provided by a pricing service which uses information with
respect to transactions in bonds, quotations from bond dealers, agency
ratings, market transactions in comparable securities and various
relationships between securities in determining value. Convertible debt
securities that are actively traded in the over-the-counter market, including
listed securities for which the primary market is believed to be over-the-
counter, are valued at the mean between the last reported bid and asked prices
provided by principal market makers. Options on stock and stock indices traded
on an exchange are valued at the mean between the most recently quoted bid and
asked prices on the respective exchange and futures contracts and options
thereon are valued at their last sale prices as of the close of trading on the
applicable commodities exchange or board of trade. Quotations of foreign
securities in a foreign currency are converted to U.S. dollar equivalents at
the current rate obtained from a recognized bank or dealer and forward
currency exchange contracts are valued at the current cost of covering or
offsetting such contracts. Should an extraordinary event, which is likely to
affect the value of the security, occur after the close of an exchange on
which a portfolio security is traded, such security will be valued at fair
value considering factors determined in good faith by the investment adviser
under procedures established by and under the general supervision of the
Fund's Board of Directors.
Securities or other assets for which reliable market quotations are not
readily available or for which the pricing agent or principal market maker
does not provide a valuation or methodology or provides a valuation or
methodology that, in the judgment of the Manager or Subadviser (or Valuation
Committee or Board of Directors) does not represent fair value, are valued by
the Valuation Committee or Board of Directors in consultation with the Manager
or Subadviser. Short-term debt securities are valued at cost, with interest
accrued or discount amortized to the date of maturity, if their original
maturity was 60 days or less, unless this is determined by the Board of
Directors not to represent fair value. Short-term securities with remaining
maturities of more than 60 days, for which market quotations are readily
available, are valued at their current market quotations as supplied by an
independent pricing agent or principal market maker. The Fund will compute its
NAV at 4:15 P.M., New York time, on each day the New York Stock Exchange is
open for trading except on days on which no orders to purchase, sell or redeem
Fund shares have been received or days on which changes in the value of the
Fund's portfolio securities do not affect NAV. In the event the New York Stock
Exchange closes early on any business day, the NAV of the Fund's shares shall
be determined at the time between such closing and 4:15 P.M., New York time.
The New York Stock Exchange is closed on the following holidays: New Year's
Day, Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
NAV is calculated separately for each class. 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
Class A, Class B or Class C shares as a result of the fact that the Class Z
shares are not subject to any distribution or service fee. It is expected,
however, that the 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.
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.
B-26
<PAGE>
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 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
B-27
<PAGE>
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) to the power of 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 year, five
year and, ten year periods ended on December 31, 1997 was 11.46%, 13.13% and
16.13%, respectively. The average annual total return for Class B shares for
the one year, five year and since inception periods ended December 31, 1997
was 11.48%, 13.27% and 15.43%, respectively. The average annual total return
for Class C shares for the one year and since inception periods ended December
31, 1997 was 15.48% and 17.64%, respectively. The average annual total return
for Class Z shares for the since inception (March 18, 1997) period ended
December 31, 1997 was 21.28%.
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:
ERV - P
T = -------
P
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 year, five year
and, ten year periods ended on December 31, 1997 was 17.33%, 95.03% and
369.63%, respectively. The aggregate total return for Class B shares for the
one year, five year and since inception periods ended on December 31, 1997 was
16.48%, 87.45% and 156.29%, respectively. The aggregate total return for Class
C shares for the one year and since inception periods ended December 31, 1997
was 16.48% and 74.20%, respectively. The aggregate total return for Class Z
shares for the since inception (March 18, 1997) period ended December 31, 1997
was 21.28%.
The Fund's 30-day yields for the period ended December 31, 1997 were (.74)%,
(1.58)%, (1.57)% and (0.58)% for Class A, Class B, Class C and Class Z shares,
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/
A Look at Performance Over the Long-Term
Average Annual Returns
1/1/26-12/31/97
Common Stocks Long-Term Gov't. Bonds Inflation
11.0% 5.2% 3.1%
/1/Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1997
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 AUDITORS
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 PIFM. 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, 1997,
the Fund incurred fees of approximately $624,000 for the services of PMFS.
Ernst & Young LLP serves as the Company's auditors 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, 1997
Value
Shares Description (Note 1)
COMMON STOCKS--98.8%
CAPITAL GOODS--25.9%
Construction--1.5%
101,400 Centex Corp................ $ 6,381,863
------------
Drugs & Healthcare--1.6%
145,000 Sybron International
Corp.*................... 6,805,937
------------
Retail/Wholesale Specialty
Chain--18.5%
330,200 Borders Group, Inc.*....... 10,339,388
95,675 Consolidated Stores
Corp.*................... 4,203,720
211,000 Costco Companies, Inc.*.... 9,415,875
204,950 Dollar Tree Stores Inc.*... 8,479,806
191,500 General Nutrition Cos.*.... 6,511,000
121,200 Kohl's Corp.*.............. 8,256,750
258,600 Meyer, (Fred), Inc.*....... 9,406,575
157,400 NBTY, Inc.*................ 5,253,225
173,200 TJX Companies, Inc......... 5,953,750
292,200 U.S. Office Products
Co.*..................... 5,734,425
97,800 Whole Foods Market,
Inc.*.................... 5,000,025
------------
78,554,539
------------
Telecommunication--4.3%
245,100 LCI International, Inc.*... 7,536,825
97,700 Pacific Gateway Exchange,
Inc.*.................... 5,257,481
103,100 Teleport Communications
Group Inc.*.............. 5,657,613
------------
18,451,919
------------
CONSUMER NON-DURABLES--21.1%
Airlines--1.1%
183,000 Southwest Airlines Co...... 4,506,375
------------
Business Services--1.4%
150,000 Robert Half International
Inc.*.................... 6,000,000
------------
Drugs & Healthcare--12.0%
110,300 Centocor, Inc.*............ 3,667,475
161,900 Concentra Managed Care,
Inc.*.................... 5,464,125
200,000 Elan Corp. PLC (ADR)*...... $ 10,237,500
450,000 Health Management Assoc.,
Inc.*.................... 11,362,500
191,500 HEALTHSOUTH Corp.*......... 5,323,030
58,150 McKesson Corporation....... 6,291,103
150,000 Millenium Pharmaceuticals,
Inc.*.................... 2,850,000
186,400 Watson Pharmaceuticals,
Inc.*.................... 6,046,350
------------
51,242,083
------------
Hotels & Restaurants--4.0%
190,000 CKE Restaurants, Inc....... 8,003,750
463,100 Host Marriott Corp.*....... 9,088,337
------------
17,092,087
------------
Leisure And Recreation--2.6%
200,000 Carnival Corp.............. 11,075,000
------------
ENERGY--8.8%
Electrical Utilities--1.4%
126,000 AES Corp.*................. 5,874,750
------------
Oil & Gas-Production/Pipeline--4.4%
147,500 Devon Energy Corp.......... 5,678,750
206,900 Precision Drilling
Corp.*................... 5,043,187
450,000 Santa Fe Energy Resources,
Inc.*.................... 5,062,500
98,100 Valero Energy Corp......... 3,084,019
------------
18,868,456
------------
Oil Services--3.0%
46,200 Camco International,
Inc...................... 2,942,363
297,800 Global Industries, Ltd.*... 5,062,600
73,200 Smith International,
Inc.*.................... 4,492,650
------------
12,497,613
------------
ENVIRONMENTAL--2.2%
Pollution Control Equipment &
Service--2.2%
407,500 Allied Waste Industries,
Inc.*.................... 9,499,844
------------
See Notes to Financial Statements.
B-31
<PAGE>
NICHOLAS-APPLEGATE FUND, INC. Portfolio of Investments
NICHOLAS-APPLEGATE GROWTH EQUITY FUND December 31, 1997
Value
Shares Description (Note 1)
FINANCIAL SERVICES--6.2%
Financial/Business Services--4.7%
213,000 CIT Group*................. $ 6,869,250
85,000 FINOVA Group, Inc.......... 4,223,438
135,200 MGIC Investment Corp....... 8,990,800
------------
20,083,488
------------
Insurance--1.5%
160,000 Provident Cos., Inc........ 6,180,000
------------
GENERAL BUSINESS--11.9%
Advertising--1.8%
200,000 Outdoor Systems, Inc.*..... 7,675,000
------------
Apparel & Textiles--0.5%
49,700 Jones Apparel Group,
Inc.*.................... 2,137,100
------------
Beverages--1.7%
130,000 Canandaigua Brands,
Inc.*.................... 7,198,750
------------
Media--5.3%
142,600 Chancellor Media Corp.*.... 10,641,525
149,400 Clear Channel
Communications, Inc.*.... 11,867,962
------------
22,509,487
------------
Office Furnishings--0.8%
110,000 Knoll, Inc.*............... 3,533,750
------------
Printing & Publishing--1.8%
210,000 Valassis Communications,
Inc.*.................... 7,770,000
------------
TECHNOLOGY--22.7%
Computer-Networks--1.5%
180,000 Network Appliance, Inc.*... 6,390,000
------------
Computers-Services--2.0%
208,300 Saville Systems Ireland PLC
(ADR)*................... 8,644,450
------------
Computer Software--11.3%
230,200 Bay Networks, Inc.*........ 5,884,487
88,100 BMC Software Inc.*......... 5,781,563
302,000 Compuware Corp.*........... 9,664,000
267,800 Industri-Matematik Int'l.
Corp.*................... 7,900,100
125,800 Peoplesoft Inc.*........... 4,906,200
252,800 Platinum Technology,
Inc.*.................... $ 7,141,600
128,900 VERITAS Software Corp.*.... 6,573,900
------------
47,851,850
------------
Electronic Components--4.3%
141,000 Level One Communications,
Inc.*.................... 3,983,250
108,500 Sanmina Corp.*............. 7,350,875
168,000 Uniphase Corp.*............ 6,951,000
------------
18,285,125
------------
Telecommunications Equipment--3.6%
142,500 Advanced Fibre
Communications*.......... 4,150,313
116,900 CIENA Corp.*............... 7,145,512
204,600 PairGain Technologies,
Inc.*.................... 3,964,125
------------
15,259,950
------------
Total common stocks
(cost $345,948,203)...... 420,369,416
------------
Principal
Amount
(000)
- ----------
SHORT-TERM INVESTMENTS--4.2%
Commercial Paper--4.2%
$ 17,725 American Express Co.
6.65%, 1/2/98............ 17,721,726
------------
Other
11 Seven Seas Money Market
Fund..................... 11,173
------------
Total short-term
investments
(cost $17,732,899)....... 17,732,899
------------
Total Investments--103.0%
(cost $363,681,102; Note
4)....................... 438,102,315
------------
Liabilities in excess of
other assets--(3.0)%..... (12,554,981)
------------
Net Assets--100%........... $425,547,334
------------
------------
- ---------------
* Non-income producing.
ADR--American Depository Receipt.
See Notes to Financial Statements.
B-32
<PAGE>
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets December 31, 1997
-----------------
<S> <C>
Investments, at value (cost $363,681,102)............................................. $ 438,102,315
Cash.................................................................................. 25,341
Receivable for investments sold....................................................... 1,226,691
Receivable for Fund shares sold....................................................... 235,560
Dividends and interest receivable..................................................... 43,089
Other assets.......................................................................... 8,414
-----------------
Total assets...................................................................... 439,641,410
-----------------
Liabilities
Payable for investments purchased..................................................... 11,420,023
Payable for Fund shares reacquired.................................................... 1,852,808
Management fee payable................................................................ 330,884
Distribution fee payable.............................................................. 259,354
Accrued expenses...................................................................... 223,335
Directors' fees payable............................................................... 7,672
-----------------
Total liabilities................................................................. 14,094,076
-----------------
Net Assets............................................................................ $ 425,547,334
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................ $ 312,478
Paid-in capital in excess of par.................................................... 327,085,175
-----------------
327,397,653
Accumulated net realized gain on investments........................................ 23,728,468
Net unrealized appreciation on investments.......................................... 74,421,213
-----------------
Net assets, December 31, 1997......................................................... $ 425,547,334
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($133,973,481 / 9,256,311 shares of common stock issued and outstanding).......... $14.47
Maximum sales charge (5% of offering price)......................................... .76
-----------------
Maximum offering price to public.................................................... $15.23
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($284,190,969 / 21,438,752 shares of common stock issued and outstanding)......... $13.26
-----------------
-----------------
Class C:
Net asset value, offering price and redemption price per share
($6,749,676 / 509,191 shares of common stock issued and outstanding).............. $13.26
-----------------
-----------------
Class Z:
Net asset value, offering price and redemption price per share
($633,208 / 43,584 shares of common stock issued and outstanding)................. $14.53
-----------------
-----------------
</TABLE>
See Notes to Financial Statements.
B-33
<PAGE>
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
Statement of Operations
Year Ended
December 31,
Net Investment Loss 1997
-------------
Income
Dividends (net of foreign
withholding taxes
of $12,889)...................... $ 1,300,064
Interest........................... 1,148,848
-------------
Total income..................... 2,448,912
-------------
Expenses
Management fees.................... 4,250,016
Distribution fee--Class A.......... 251,879
Distribution fee--Class B.......... 3,005,201
Distribution fee--Class C.......... 67,962
Transfer agent's fees and
expenses........................... 643,000
Custodian's fees and expenses...... 110,000
Reports to shareholders............ 100,000
Directors' fees.................... 77,000
Registration fees.................. 50,000
Audit fees and expense............. 33,000
Insurance expense.................. 28,000
Legal fees and expenses............ 25,000
Miscellaneous...................... 2,284
-------------
Total expenses................... 8,643,342
-------------
Net investment loss.................. (6,194,430)
-------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain on investment
transactions....................... 94,942,716
Net change in unrealized appreciation
of
investments........................ (18,521,412)
-------------
Net gain on investments.............. 76,421,304
-------------
Net Increase in Net Assets
Resulting from Operations............ $ 70,226,874
=============
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
Statement of Changes in Net Assets
Year Ended Year Ended
Increase (Decrease) December 31, December 31,
in Net Assets 1997 1996
------------------ -------------
Operations
Net investment loss... $ (6,194,430) $ (6,716,644)
Net realized gain on
investment
transactions........ 94,942,716 72,328,335
Net change in
unrealized
appreciation on
investments......... (18,521,412) (173,258)
------------------ -------------
Net increase in net
assets resulting
from operations..... 70,226,874 65,438,433
------------------ -------------
Distributions to
shareholders from net
realized gains on
investments
Class A............. (27,098,267) (18,962,078)
Class B............. (63,813,523) (44,527,983)
Class C............. (1,442,170) (917,000)
Class Z............. (66,424) --
------------------ -------------
(92,420,384) (64,407,061)
------------------ -------------
Fund share transactions
(Note 5)
(net of share
conversions)
Net proceeds from
shares subscribed... 543,622,835 899,616,382
Net asset value of
shares issued to
shareholders in
reinvestment of
distributions....... 84,714,423 58,287,125
Cost of shares
reacquired.......... (650,219,421) (909,300,156)
------------------ -------------
Net increase
(decrease) in net
assets from Fund
share
transactions........ (21,882,163) 48,603,351
------------------ -------------
Total increase
(decrease)............ (44,075,673) 49,634,723
Net Assets
Beginning of year....... 469,623,007 419,988,284
------------------ -------------
End of year............. $ 425,547,334 $ 469,623,007
================== =============
See Notes to Financial Statements.
B-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 poli-
cies 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. Real-
ized 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.
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 31, 1997 the Fund decreased accumulated net investment loss by
$6,194,430 and decreased paid-in capital by $6,194,430 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 Investments Fund
Management LLC ('PIFM'). Pursuant to the management agreement, PIFM has
responsibility for all
B-35
<PAGE>
investment advisory services and supervises the subadviser's performance of such
services. PIFM 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. PIFM pays for the services of the
subadviser, the compensation of officers of the Fund who are employees of PIFM,
occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears
all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an
annual rate of .95% of the average daily net assets of the Fund. PIFM 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, 1997, PIFM earned $4,250,016 in management fees of which it
paid $3,357,513 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, Class C and
Class Z 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. No distribution or service fees are paid to PSI as
distributor for the Class Z shares of the Fund.
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 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, 1997.
PSI has advised the Fund that it has received approximately $139,800 in
front-end sales charges resulting from sales of Class A shares during the year
ended December 31, 1997. From these fees, PSI paid such sales charges to PRUCO
Securities Corporation ('PRUSEC'), 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, 1997, it received
approximately $543,600 in contingent deferred sales charges imposed upon certain
redemptions by Class B and C shareholders.
PSI, PIFM 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'), had a credit agreement (the 'Agreement') with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. 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 during the year
ended December 31, 1997. 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. The Agreement
expired on December 30, 1997 and has been extended through December 29, 1998
under the same terms.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices LLC ('PMFS'), a
with Affiliates wholly owned subsidiary of
PIFM, serves as the Fund's transfer agent. During
the year ended December 31, 1997, the Fund incurred fees of approximately
$624,000 for the services of PMFS. As of December 31, 1997, approximately
$49,500 of such fees were due to PMFS. Transfer agent fees and expenses in the
Statement of Operations also include certain out of pocket expenses paid to
nonaffiliates.
Note 4. Portfolio Purchases and sales of invest-
Securities ment securities, other than
short-term investments, for the year ended
December 31, 1997 aggregated $787,375,857 and $883,568,917, respectively.
The cost basis of investments for federal income tax purposes at December 31,
1997 was $363,758,696 and, accordingly, net unrealized appreciation of
investments for federal income tax purposes was $74,343,619 (gross unrealized
appreciation--$83,583,627; gross unrealized depreciation--$9,240,008).
Note 5. Capital The Fund offers Class A,
Class B, Class C and Class Z 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 the
first year. Class B shares will automatically convert to Class A shares on a
B-36
<PAGE>
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. Effective March 18, 1997, the Fund commenced offering
Class Z shares. Class Z shares are not subject to any sales or redemption charge
and are offered exclusively for sale to a limited group of investors.
The Fund has authorized 200 million shares of common stock at $.01 par value
per share equally divided into four classes, designated Class A, Class B, Class
C and Class Z shares.Transactions in shares of common stock were as follows:
Class A Shares Amount
- ------------------------------ ----------- -------------
Year ended
December 31, 1997:
Shares sold................... 26,028,147 $ 403,257,239
Shares issued in reinvestment
of dividends and
distributions............... 1,629,888 23,021,141
Shares reacquired............. (28,489,469) (443,979,190)
----------- -------------
Net decrease in shares
outstanding before
conversion.................. (831,434) (17,700,810)
Shares issued upon conversion
from Class B................ 670,378 10,138,513
----------- -------------
Net decrease in shares
outstanding................. (161,056) $ (7,562,297)
----------- -------------
----------- -------------
Year ended
December 31, 1996:
Shares sold................... 45,256,796 $ 735,771,997
Shares issued in reinvestment
of 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
----------- -------------
----------- -------------
Class B
- ------------------------------
Year ended
December 31, 1997:
Shares sold................... 9,457,319 $ 135,337,537
Shares issued in reinvestment
of distributions............ 4,638,652 60,246,458
Shares reacquired............. (13,888,004) (200,836,623)
----------- -------------
Net increase in shares
outstanding before
conversion.................. 207,967 (5,252,628)
Shares reacquired upon
conversion into Class A..... (721,300) (10,138,513)
----------- -------------
Net decrease in shares
outstanding................. (513,333) $ (15,391,141)
----------- -------------
----------- -------------
Class B Shares Amount
- ------------------------------ ----------- -------------
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
----------- -------------
----------- -------------
Class C
- ------------------------------
Year ended
December 31, 1997:
Shares sold................... 297,583 $ 4,319,397
Shares issued in reinvestment
of distributions............ 106,388 1,380,420
Shares reacquired............. (360,051) (5,302,665)
----------- -------------
Net increase in shares
outstanding................. 43,920 $ 397,152
----------- -------------
----------- -------------
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
----------- -------------
----------- -------------
[CAPTION]
Class Z
- ------------------------------
March 18, 1997(a) through
December 31, 1997:
Shares sold................... 45,102 $ 708,662
Shares issued in reinvestment
of distributions 4,760 66,404
Shares reacquired (6,278) (100,943)
----------- -------------
Net increase in shares
outstanding 43,584 $ 674,123
----------- -------------
----------- -------------
(a) Commencement of offering of Class Z shares.
B-37
<PAGE>
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
Financial Highlights
<TABLE>
<CAPTION>
Class A
---------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------------
1997 1996 1995(a) 1994(a) 1993(a)
----------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.......... $ 15.41 $ 15.18 $ 11.99 $ 13.56 $ 12.77
----------- -------- -------- ------- -------
Income from investment operations:
Net investment loss......................... (.12) (.14) (.11) (.07) (.07)
Net realized and unrealized gain (loss) on
investment transactions................... 2.60 2.64 3.82 (1.19) 2.63
----------- -------- -------- ------- -------
Total from investment operations.......... 2.48 2.50 3.71 (1.26) 2.56
----------- -------- -------- ------- -------
Less distributions:
Distributions from net realized gains from
investment transactions................... (3.42) (2.27) (.52) (.31) (1.77)
----------- -------- -------- ------- -------
Total distributions....................... (3.42) (2.27) (.52) (.31) (1.77)
----------- -------- -------- ------- -------
Net asset value, end of year................ $ 14.47 $ 15.41 $ 15.18 $ 11.99 $ 13.56
----------- -------- -------- ------- -------
----------- -------- -------- ------- -------
TOTAL RETURN(b):............................ 17.33% 16.45% 31.20% (9.53)% 20.26%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............... $ 133,973 $145,120 $124,340 $88,069 $97,596
Average net assets (000).................... $ 139,933 $136,482 $109,740 $93,620 $90,332
Ratios to average net assets:
Expenses, including distribution fee...... 1.37% 1.41% 1.44% 1.49%(d) 1.42%(d)
Expenses, excluding distribution fee...... 1.19% 1.23% 1.27% 1.32%(d) 1.30%(d)
Net investment loss....................... (.82)% (.93)% (.83)% (.59)% (.53)%
For Class A, B, C and Z shares:
Portfolio turnover rate(c).................. 182% 113% 106% 110% 112%
Average commission rate paid per share $.0590 $.0588 $.0592 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.
See Notes to Financial Statements.
B-38
<PAGE>
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
Financial Highlights
<TABLE>
<CAPTION>
Class B
----------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------
1997 1996 1995(a) 1994(a) 1993(a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 14.48 $ 14.49 $ 11.56 $ 13.18 $ 12.56
-------- -------- -------- -------- --------
Income from investment operations:
Net investment loss........................... (.23) (.24) (.22) (.17) (.18)
Net realized and unrealized gain (loss) on
investment transactions..................... 2.43 2.50 3.67 (1.14) 2.57
-------- -------- -------- -------- --------
Total from investment operations............ 2.20 2.26 3.45 (1.31) 2.39
-------- -------- -------- -------- --------
Less distributions:
Distributions from net realized gains from
investment transactions..................... (3.42) (2.27) (.52) (.31) (1.77)
-------- -------- -------- -------- --------
Total distributions......................... (3.42) (2.27) (.52) (.31) (1.77)
-------- -------- -------- -------- --------
Net asset value, end of year.................. $ 13.26 $ 14.48 $ 14.49 $ 11.56 $ 13.18
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(b):.............................. 16.48% 15.54% 30.11% (10.20)% 19.21%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $284,191 $317,768 $290,751 $257,059 $252,911
Average net assets (000)...................... $300,520 $304,841 $265,597 $261,285 $179,456
Ratios to average net assets:
Expenses, including distribution fee........ 2.19% 2.23% 2.27% 2.32%(c) 2.30%(c)
Expenses, excluding distribution fee........ 1.19% 1.23% 1.27% 1.32%(c) 1.30%(c)
Net investment loss......................... (1.64)% (1.75)% (1.66)% (1.39)% (1.40)%
</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.
B-39
<PAGE>
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
Financial Highlights
<TABLE>
<CAPTION>
Class C Class Z
--------------------------------------------------------- -------------
August 1, March 18,
1994(c) 1997(f)
Year Ended December 31, Through Through
--------------------------------------- December 31, December 31,
1997 1996 1995(a) 1994(a) 1997
------- -------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 14.48 $ 14.49 $ 11.56 $ 11.62 $ 14.48
------- -------- ------------ ------------ -------------
Income from investment operations:
Net investment loss..................... (.22) (.22) (.22) (.05) (.22)
Net realized and unrealized gain (loss)
on investment transactions............ 2.42 2.48 3.67 (.01) 3.18
------- -------- ------------ ------------ -------------
Total from investment operations...... 2.20 2.26 3.45 (.06) 2.96
------- -------- ------------ ------------ -------------
Less distributions:
Distributions from net realized gains
from investment transactions.......... (3.42) (2.27) (.52) -- (2.91)
------- -------- ------------ ------------ -------------
Total distributions................... (3.42) (2.27) (.52) -- (2.91)
------- -------- ------------ ------------ -------------
Net asset value, end of period.......... $ 13.26 $ 14.48 $ 14.49 $ 11.56 $ 14.53
------- -------- ------------ ------------ -------------
------- -------- ------------ ------------ -------------
TOTAL RETURN(b):........................ 16.48% 15.54% 30.11% (.52)% 21.90%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $ 6,750 $ 6,735 $ 4,897 $ 1,100 $ 633
Average net assets (000)................ $ 6,796 $ 5,862 $ 2,961 $ 225 $ 121
Ratios to average net assets:
Expenses, including distribution
fee................................. 2.19% 2.23% 2.27% 6.23%(d)(e) 1.19%(d)
Expenses, excluding distribution
fee................................... 1.19% 1.23% 1.27% 5.23%(d)(e) 1.19%(d)
Net investment loss................... (1.64)% (1.75)% (1.63)% (3.36)%(d) (.85)%(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 a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods 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.
(f) Commencement of offering Class Z shares.
See Notes to Financial Statements.
B-40
<PAGE>
REPORT OF INDEPENDENT AUDITORS
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, 1997, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the three years in the period then ended
for Class A, B, C shares, and for the period from March 18, 1997 (commencement
of operations) to December 31, 1997 for Z shares. 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 two 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, 1997 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, 1997, the results of
its operations for the year then ended, and the changes in its net assets for
each of the two years in the period then ended, and the financial highlights for
each of the three years in the period then ended for Class A, B, C shares, and
for the period from March 18, 1997 (commencement of operations) to December 31,
1997 for Z shares in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
February 10, 1998
B-41
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk and 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 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 off-set 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.
STANDARD DEVIATION
Standard Deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential.
Standard deviation is only one of several measures of a fund's volatility.
I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This following chart shows the long-term performance of various asset
classes and the rate of inflation.
Each Investment Provides a Different Opportunity
[CHART]
- ----------
Source: Stocks, Bonds, Bills and Inflation 1997 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. This chart is
for illustrative purposes only and is not indicative of the past,
present, or future performance of any asset class or any Prudential
Mutual Fund.
Generally, stock returns are due to capital appreciation and reinvesting any
gains. Bond returns are due mainly to reinvesting interest. Also, stock prices
usually are more volatile than bond prices over the long-term. Small stock
returns for 1926-1980 are those of stocks comprising the 5th quintile of the
New York Stock Exchange. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P
Composite Index, a market-weighted, unmanaged index of 500 stocks (currently)
in a variety of industries. It is often used as a broad measure of stock
market performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate
bonds, U.S. high yield bonds and world government bonds on an annual basis
from 1987 through 1997. The total returns of the indices include accrued
interest, plus the price changes (gains or losses) of the underlying
securities during the period mentioned. The data is provided to illustrate the
varying historical total returns and investors should not consider this
performance data as an indication of the future performance of the Fund or of
any sector in which the Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information
has not been verified. The figures do not reflect the operating expenses and
fees of a mutual fund. See "Fund Expenses" in the prospectus. The net effect
of the deduction of the operating expenses of a mutual fund on the historical
total returns, including the compounded effect over time, could be
substantial.
Historical Total Returns of Different Bond Market Sectors
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
-------------------------------------------------------------------------------------------------------------------
U.S. Government
Treasury
Bonds/1/ 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% -3.4% 18.4% 2.7% 9.6%
-------------------------------------------------------------------------------------------------------------------
U.S. Government
Mortgage
Securities/2/ 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% -1.6% 16.8% 5.4% 9.5%
-------------------------------------------------------------------------------------------------------------------
U.S. Investment Grade
Corporate Bonds/1/ 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% -3.9% 22.3% 3.3% 10.2%
-------------------------------------------------------------------------------------------------------------------
U.S. High Yield
Corporate Bonds/4/ 5.0% 12.5% 0.8% -9.6% 46.2% 15.8% 17.1% -1.0% 19.2% 11.4% 12.8%
-------------------------------------------------------------------------------------------------------------------
World Government
Bonds/5/ 35.2% 2.3% -3.4% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3%)
-------------------------------------------------------------------------------------------------------------------
Difference between
highest and lowest 33.2% 10.2% 18.8% 24.9% 30.9% 11.0% 10.3% 9.9% 5.5% 8.7% 17.1%
returns percent
-------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
/1/ Lehman Brothers Treasury Bond Index is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one
year.
/2/ Lehman Brothers Mortgage-Backed Securities Index is an unmanaged index
that includes over 600 15- and 30-year fixed-rate mortgaged-backed
securities of the Government National Mortgage Association (GNMA), Federal
National Mortgage Association (FNMA), and the Federal Home Loan Mortgage
Corporation (FHLMC).
/3/ Lehman Brothers Corporate Bond Index includes over 3,000 public fixed-
rate, nonconvertible investment-grade bonds. All bonds are U.S. dollar-
denominated issues and include debt issued or guaranteed by foreign
sovereign governments, municipalities, governmental agencies or
international agencies. All bonds in the index have maturities of at least
one year.
/4/ Lehman Brothers High Yield Bond Index is an unmanaged index comprising
over 750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or
lower by Moody's Investors Service (or rated BB+ or lower by S&P or Fitch
Investors Service). All bonds in the index have maturities of at least one
year.
/5/ Salomon Brothers World Government Index (Non U.S.) include 800 bonds
issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada,
Italy, Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and
Austria. All bonds in the index have maturities of at least one year.
II-2
<PAGE>
This chart illustrates the performance of major world stock markets for the
period from December 1985 through December 1997. It does not represent the
performance of any Prudential Mutual Fund.
AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS (12/31/86-12/31/97)
(IN U.S. DOLLARS)
Netherlands 20.5%
Spain 20.4%
Sweden 20.4%
Hong Kong 19.7%
Belgium 19.5%
Switzerland 17.9%
USA 17.1%
UK 16.6%
France 15.6%
Germany 12.1%
Austria 9.6%
Japan 6.6%
- ----------
Source: Morgan Stanley Capital International (MSCI) and Lipper Analytical
Services, Inc. Used with permission. Morgan Stanley Country indices
are unmanaged indices which include those stocks making up the largest
two-thirds of each country's total stock market capitalization.
Returns reflect the reinvestment of all distributions. This chart is
for illustrative purposes only and is not indicative of the past,
present or future performance of any specific investment. Investors
cannot invest directly in stock indices.
This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 stock index with and without reinvested
dividends.
1969-1997 CAPITAL APPRECIATION AND REINVESTING DIVIDENDS-$228,266 CAPITAL
APPRECIATION ONLY-$80,535
[CHART]
- ----------
Source: Stocks, Bonds, Bills, and Inflation 1997 Yearbook, Ibbotson
Associates, Chicago (annually updates work by Rober G. Ibbotson and
Rex A. Sinquefeld). Used with permission. All rights reserved. This
chart is used for illustrative purposes only and is not intended to
represent the past, present or future performance of any Prudential
Mutual Fund. Common stock total return is based on the Standard &
Poor's 500 Stock Index, a market-value-weighed index made up of 500 of
the largest stocks in the U.S. based upon their stock market value.
Investors cannot invest directly in indices.
II-3
<PAGE>
WORLD STOCK MARKET CAPITALIZATION BY REGION
WORLD TOTAL--$9.2 TRILLION
Pacific Basin 15.6%
Europe 32.1%
U.S. 49.8%
Canada 2.5%
- ----------
Source: Morgan Stanley Capital International, December 31, 1997. Used with
permission. This chart represents the capitalization of major world
stock markets as measured by the Morgan Stanley Capital International
(MSCI) World Index. The total market capitalization is based on the
value of approximately 1,600 companies in 22 countries (representing
approximately 60% of the aggregate market value of the stock
exchanges). This chart is for illustrative purposes only and does not
represent the allocation of any Prudential Mutual Fund.
----------------
The chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1997)
[CHART]
- ----------
Source: Stocks, Bonds, Bills and Inflation 1997 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A.
Singuefield). Used with permission. All rights reserved. This chart
illustrates the historical yield of the long-term U.S. Treasury Bond
from 1926-1996. Yields represent that of an annually renewed one-bond
portfolio with a remaining maturity of approximately 20 years. This
chart is for illustrative purposes only and should not be construed to
represent the yields of any Prudential Mutual Fund.
II-4
<PAGE>
The following chart, although not relevant to share ownership in the Fund,
may provide useful information about the effects of a hypothetical investment
diversified over different asset portfolios. The chart shows the range of
annual total returns for major stock and bond indices for the period from
December 31, 1976 through December 31, 1996. The horizontal "Best Returns
Zone" band shows that a hypothetical blended portfolio constructed of one-
third U.S. stock (S&P 500), one-third foreign stock (EAFE Index), and one-
third U.S. bonds (Lehman Index) would have eliminated the "highest highs" and
"lowest lows" of any single asset class.
The Range of Annual Total Returns for Major Stock &
Bond Indices Over the Past 20 Years
(12/31/76-12/31/96)*
S&P 500 EAFE LEHMAN AGGREGATE
37.6% 69.9% 32.6%
- ----------
* Source: Prudential Investment Corporation based on data from Lipper
Analytical New Application (LANA). Past performance is not
indicative of future results. The S&P 500 Index is a weighted,
unmanaged index comprised of 500 stocks which provides a broad
indication of stock price movements. The Morgan Stanley EAFE Index
is an unmanaged index comprised of 20 overseas stock markets in
Europe, Australia, New Zealand and the Far East. The Lehman
Aggregate Index includes all publicly-issued investment grade debt
with maturities over one year, including U.S. government and agency
issues, 15 and 30 year fixed-rate government agency mortgage
securities, dollar denominated SEC registered corporate and
government securities, as well as asset-back securities. Investors
cannot invest directly in stock or bond market indices.
II-5
<PAGE>
APPENDIX III--INFORMATION RELATING TO 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, 1996 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, 1996. Principal products and services include life and health insurance,
other healthcare products, property and casualty insurance, securities
brokerage, asset management, investment advisory services and real estate
brokerage. Prudential (together with its subsidiaries) employs more than
81,000 persons worldwide, and maintains a sales force of approximately 11,500
agents and 6,400 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 nearly 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 22 million
life insurance policies in force today with a face value of $1 trillion.
Prudential has the largest capital base ($12.1 billion) of any life insurance
company in the United States. The Prudential provides auto insurance for
approximately 1.6 million cars and insures approximately 1.2 million homes.
Money Management. 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. As of December 31, 1996, Prudential had more than $322 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. In Pensions & Investments,
May 12, 1996, Prudential was ranked third in terms of total assets under
management.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 37,000 brokers
and agents across the United States./2/
Healthcare. Over two decades ago, Prudential introduced the first federally-
funded, for-profit HMO in the country. Today, approximately 4.6 million
Americans receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Bank, a wholly-owned subsidiary of
Prudential, has nearly $1 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of October 31, 1997 Prudential Investments Fund Management was the 17th
largest mutual fund company 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.
- ----------
/1/ Prudential Investments serves as the Subadvisor to substantially all of
the Prudential Mutual Funds. Wellington Management Company serves as the
subadvisor to Global Utility Fund, Inc., Nicholas-Applegate Capital
Management as the subadviser to Nicholas-Applegate Fund, Inc., Jennison
Associates Capital Corp., as the subadvisor to Prudential Jemison Series
Fund, Inc. and Mercator Asset Management LP as the Subadvisor to
International Stock Series, a portfolio of Prudential World Fund, Inc.
There are multiple subadvisors for The Target Portfolio Trust.
/2/ As of December 31, 1996.
III-1
<PAGE>
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
approximately 200 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 its important to a Prudential
mutual fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions
in foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual 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
- ----------
/3/ As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
/4/ Trading date 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.
III-2
<PAGE>
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 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 changes 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.
- ----------
/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 taxing 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.
III-3
