<PAGE>
As filed with the Securities and Exchange Commission on March 15, 1999
Registration No. 33-38461
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [_]
[X]
Post-Effective Amendment No. 13
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
[X]
Amendment No. 15
(Check appropriate box or boxes)
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NICHOLAS-APPLEGATE FUND, INC.
(Formerly Nicholas-Applegate Growth Equity Fund, Inc.)
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (973) 367-7530
Deborah A. Docs, Esq.
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102-4077
(Name and Address of Agent for Service of Process)
Approximate date of proposed public offering:
As soon as practicable after the effective
date of the Registration Statement.
It is proposed that this filing will become effective
(check appropriate box):
[X] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)
[_] on (date) pursuant to paragraph (a) of Rule 485.
[_] 75 days after filing pursuant to paragraph
(a)(ii).
[_] on (date) pursuant to paragraph (a)(ii) of Rule
485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new
effective date for a previously filed post-
effective amendment.
Title of Securities Being Registered . . . . Shares of common stock, par value
$.01 per share.
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<PAGE>
FUND TYPE:
---------------------------------
Stock
INVESTMENT OBJECTIVE:
---------------------------------
Capital appreciation
Nicholas-Applegate
Growth Equity Fund, Inc.
[LOGO OF PRUDENTIAL INVESTMENTS APPEARS HERE]
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PROSPECTUS: MARCH 15, 1999
As with all mutual funds, the
Securities and Exchange
Commission has not approved or
disapproved the Fund's shares,
nor has the SEC determined
that this prospectus is
complete or accurate. It is a
criminal offense to state [LOGO OF PRUDENTIAL
otherwise. INVESTMENTS APPEARS HERE]
<PAGE>
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Table of Contents
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<TABLE>
<C> <S>
1 Risk/Return Summary
1 Investment Objective and Principal Strategies
1 Principal Risks
2 Evaluating Performance
3 Fees and Expenses
5 How the Fund Invests
5 Investment Objective and Policies
6 Other Investments
6 Additional Strategies
7 Investment Risks
9 How the Fund is Managed
9 Manager
9 Investment Adviser
10 Portfolio Managers
10 Distributor
10 Year 2000 Readiness Disclosure
12 Fund Distributions and Tax Issues
12 Distributions
13 Tax Issues
14 If You Sell or Exchange Your Shares
15 How to Buy, Sell and Exchange Shares of the Fund
15 How to Buy Shares
23 How to Sell Your Shares
27 How to Exchange Your Shares
29 Financial Highlights
30 Class A Shares
32 Class B Shares
34 Class C Shares
35 Class Z Shares
36 The Prudential Mutual Fund Family
For More Information (Back Cover)
</TABLE>
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[GRAPHIC]
Nicholas Applegate Growth Equity Fund (800) 225-1852
<PAGE>
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Risk/Return Summary
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This section highlights key information about the Nicholas-Applegate Growth
Equity Fund, which we refer to as "the Fund." Additional information follows
this summary.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is capital appreciation. This means we seek
investments that will increase in value. We normally invest at least 90% of the
Fund's total assets in a diversified portfolio of equity securities primarily
in the common stock of U.S. companies.
To achieve our objective, we look for securities that will provide
investment returns above those of the Standard & Poor's 500 Stock Index (the
S&P 500). We intend to invest primarily in stocks from a universe of U.S.
companies with market capitalizations corresponding to the middle 90% of the
Russell Midcap Growth Index at time of purchase. As of December 30, 1998, the
middle 90% included companies with market capitalizations between approximately
$1.6 billion and $10.7 billion. Market capitalization of a company is the total
market price of its publicly traded equity securities. The market
capitalization of companies in the index will change over time. While we make
every effort to achieve our objective, we can't guarantee success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Since the Fund
invests primarily in stocks, there is the risk that the price of a particular
stock we own could go down, or pay lower-than-expected dividends. Generally,
the stock prices of medium-size and small companies are less stable than large
companies, although this is not always the case. The Fund's net asset value may
be subject to above-average fluctuations.
In addition to an individual stock losing value, there is the risk that the
value of the equity markets as a whole could go down, which could affect the
value of all of the Fund's stock investments. Some of our investment strategies
also involve risk. Like any mutual fund, an investment in the Fund could lose
value, and you could lose money. For more detailed information about the risks
associated with the Fund, see "Investment Risks."
An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
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We're Growth Equity Investors
In deciding which stocks to buy, we use what is known as a growth equity
investment style. That is, we invest in stocks of companies that we expect 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.
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1
<PAGE>
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Risk/Return Summary
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EVALUATING PERFORMANCE
A number of factors--including risk--affect how the Fund performs. The
following bar chart shows the Fund's performance for each full calendar year of
operation for the last 10 years. The table shows how the Fund's average annual
returns for the periods indicated compare with those of a broad-based
securities market index and a group of similar mutual funds. They demonstrate
the risk of investing in the Fund and how returns can change from year to year.
Past performance does not mean that the Fund will achieve similar results in
the future.
[BAR CHART APPEARS HERE]
Annual Returns (Class A shares/1/)
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
36.83% (10.02)% 55.36% 8.96% 20.26% (9.53)% 31.20 16.45% 17.33% 12.83%
</TABLE>
BEST QUARTER: 25.05% (4th quarter of 1998)
WORST QUARTER: (20.08)% (3rd quarter of 1990)
1 These annual returns do not include sales charges. If the sales charges were
included, the annual returns would be lower than those shown.
Average Annual Returns/1/ (as of 12-31-98/1/)
<TABLE>
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<CAPTION>
1 YR 5 YRS 10 YRS SINCE INCEPTION
<S> <C> <C> <C> <C>
Class A shares 7.19% 11.70% 15.86% 12.65% (since 4-9-87)
Class B shares 6.87% 11.83% N/A 14.95% (since 6-10-91)
Class C shares 9.75% N/A N/A 16.05% (since 8-1-94)
Class Z shares 13.13% N/A N/A 19.32% (since 3-18-97)
S&P 500/2/ 28.60% 24.05% 19.19% N/A
Russell Midcap Growth
Index /3/ 17.86% 17.34% 17.30% N/A
Lipper Average/4/ 12.24% 102.87% 335.55% N/A
</TABLE>
1 The Fund's returns are after deduction of sales charges and expenses.
2 The Standard & Poor's 500 Stock Index--an unmanaged index of 500 stocks of
large U.S. companies--gives a broad look at how stock prices have performed.
These returns do not include the effect of any sales charges, and would be
lower if they did. S&P 500 returns since the inception of each class are
16.22% for Class A, 19.19% for Class B, 27.67% for Class C and 34.05% for
Class Z shares. Source: Lipper, Inc.
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2 Nicholas-Applegate Growth Equity Fund [GRAPHIC] (800) 225-1852
<PAGE>
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Risk/Return Summary
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3 Russell Midcap Growth Index measures the performance of those Russell Midcap
companies with higher price-to-book ratios and higher forecasted growth
values. The stocks are also members of the Russell 1000 Growth index. These
returns do not include the effect of any sales charges, and would be lower if
they did. Russell Midcap Growth Index returns since inception of each class
are 13.90% for Class A, 16.00% for Class B, 21.16% for Class C and 26.02% for
Class Z Shares. Source: Russell Indexes.
4 The Lipper Mid-Cap Funds Average gives the average return of all mutual funds
in the Lipper Mid-Cap Fund category. These returns do not include the effect
of any sales charges, and would be lower if they did. Lipper returns since
the inception of each class are 12.55% for Class A, 14.65% for Class B,
18.78% for Class C and 22.41% for Class Z shares. Source: Lipper, Inc.
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Nicholas-Applegate Growth Equity Fund (800) 225-1852
[GRAPHIC]
2--1
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Risk/Return Summary
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FEES AND EXPENSES
These tables show the sales charges, fees and expenses for each share class of
the Fund--Class A, B, C and Z. Each share class has different sales charges--
known as loads--and expenses, but represents an investment in the same fund.
Class Z shares are available only to a limited group of investors. For more
information about which share class may be right for you, see "How to Buy, Sell
and Exchange Shares of the Fund."
Shareholder Fees/1/ (paid directly from your investment)
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<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on 5% None 1% None
purchases (as a percentage of offering
price)
Maximum deferred sales charge (load) None 5%/2/ 1%/3/ None
imposed on sales (as a percentage of the
lower of original purchase price or sale
proceeds)
Maximum sales charge (load) on reinvested None None None None
dividends and other distributions
Redemption fees None None None None
Exchange fee None None None None
Annual Fund Operating Expenses (deducted from Fund assets)
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<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Management fees .95% .95% .95% .95%
+ Distribution (12b-1) and service fees .30%/4/ 1.00% 1.00% None
+ Other expenses .29% .29% .29% .29%
= Total annual Fund operating expenses 1.54% 2.24% 2.24% 1.24%
Waivers and/or reimbursements .05% None None None
Net annual Fund operating expenses 1.49% 2.24% 2.24% 1.24%
</TABLE>
1 Your broker may charge you a separate or additional fee for purchases and
sales of shares.
2 The Contingent Deferred Sales Charge (CDSC) for Class B shares decreases by
1% annually to 1% in the fifth and sixth years and 0% in the seventh year.
Class B shares convert to Class A shares approximately seven years after
purchase.
3 The CDSC for Class C shares is 1% for shares redeemed within 18 months of
purchase.
4 For the fiscal year ending December 31, 1999, the Distributor of the Fund has
contractually agreed to reduce its distribution and service fees for Class A
shares to .25 of 1% of the average daily net assets of the Class A shares.
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3
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Risk/Return Summary
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Example
This example will help you compare the fees and expenses of the Fund's
different share classes and the cost of investing in the Fund with the cost of
investing in other mutual Funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that
the Fund's operating expenses remain the same. After the first year, the
example does not take into consideration the Distributor's agreement to reduce
its distribution and service fees for Class A shares. Although your actual
costs may be higher or lower, based on these assumptions, your costs would be:
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<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $640 $ 936 $1,253 $2,148
Class B shares/1/ $727 $1,000 $1,300 $2,282
Class C shares $425 $ 793 $1,288 $2,649
Class Z shares $126 $ 393 $ 681 $1,500
</TABLE>
You would pay the following expenses on the same investment if you did not sell
your shares:
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<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $640 $936 $1,253 $2,148
Class B shares $227 $700 $1,200 $2,282
Class C shares $325 $793 $1,288 $2,249
Class Z shares $126 $393 $ 681 $1,500
</TABLE>
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Nicholas-Applegate Growth Equity Fund (800) 225-1852
[GRAPHIC]
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How the Fund Invests
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is capital appreciation. This means we seek
investments that will increase in value. While we make every effort to achieve
our objective, we can't guarantee success.
In pursuing our objective, we normally invest at least 90% of the Fund's
total assets in a diversified portfolio of equity securities--primarily in the
common stock of companies that we believe will provide investment returns above
those of the S&P 500. This means that we focus on securities whose increases in
price plus dividends, as a percentage of the current stock price, are higher
than the average for the stocks that make up the S&P 500.
We buy common stock of companies with market capitalizations (total market
price of publicly traded equity securities) corresponding to the middle 90% of
the Russell Midcap Growth Index at time of purchase. As of December 30, 1998,
the middle 90% included companies with capitalization between approximately
$1.6 billion and $10.7 billion. Capitalizations of companies in the Index will
change with market conditions and company prospects.
For more information, see "Investment Risks" and the Statement of Additional
Information, "Description of the Fund, Its Investments and Risks." The
Statement of Additional Information--which we refer to as the SAI--contains
additional information about the Fund. To obtain a copy, see the back cover
page of this prospectus.
The Fund's investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board can change investment policies
that are not fundamental.
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We Use a Growth-Equity Management Approach
Our growth equity investment strategy uses a bottom-up (company-by-company)
stock selection process. Our portfolio management team uses three strict
criteria in selecting stocks: evidence of positive fundamental change,
sustainable earnings growth and timeliness of investment. Our sell discipline
is nonemotional. When a stock fails to meet these three criteria, it is
replaced with a more appropriate candidate. Using these guidelines, we focus on
companies with the potential to generate the earnings growth necessary to
provide long-term capital appreciation.
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5
<PAGE>
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How the Fund Invests
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OTHER INVESTMENTS
In addition to the principal strategies, we may also make the following
investments to try to increase the Fund's returns or protect its assets if
market conditions warrant.
Money Market Instruments
Under normal circumstances, the Fund may invest up to 10% of its total assets
in money market instruments. Money market instruments include the commercial
paper of U.S. corporations, short-term obligations of U.S. banks, certificates
of deposit and short-term obligations issued or guaranteed by the U.S.
government or its agencies.
Temporary Defensive Investments
In response to adverse market, economic or political conditions, we may
temporarily invest up to 100% of the Fund's assets in money market instruments.
Investing heavily in these securities limits our ability to achieve capital
appreciation, but may help to preserve the Fund's assets when the equity
markets are unstable. The Fund will only purchase money market instruments in
one of the two highest short-term quality ratings of a nationally recognized
statistical rating organization.
Repurchase Agreements
The Fund also may use repurchase agreements, where a party agrees to sell a
security to the Fund and then repurchase it at an agreed-upon price at a stated
time. This creates a fixed return for the Fund.
ADDITIONAL STRATEGIES
The Fund is also authorized to hold foreign securities and illiquid securities,
purchase put and call options, borrow money, lend its securities, and use
certain other strategies. The Fund is subject to certain investment
restrictions that are fundamental policies, which means they cannot be changed
without shareholder approval. For more information about these strategies and
restrictions, see the SAI.
Portfolio Turnover
As a result of the strategies described above, the Fund may have an annual
portfolio turnover rate of up to 200%. Portfolio turnover is generally
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Nicholas-Applegate Growth Equity Fund (800) 225-1852
[GRAPHIC]
6
<PAGE>
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How the Fund Invests
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the percentage found by dividing the lesser of portfolio purchases or sales by
the monthly average value of the portfolio. High portfolio turnover (100% or
more) results in higher brokerage commissions and other transaction costs and
can affect the Fund's performance. It can also result in a greater amount of
distributions as ordinary income rather than long-term capital gains.
INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Fund is no
exception. Since the Fund's holdings can vary significantly from broad market
indexes, performance of the Fund can deviate from performance of the indexes.
This chart outlines the key risks and potential rewards of the Fund's principal
and other investments. See, too, "Description of the Fund, Its Investments and
Risks" in the SAI.
<TABLE>
Investment Type
% of Fund's Total Risks Potential Rewards
Assets
<S> <C> <C>
. Individual stocks . Historically,
Common stock of could lose value stocks have
U.S. companies outperformed
other
investments over
the long term
At least 65%, but . The equity
normally 90% markets could go
down, resulting
in a decline in . Generally,
value of the economic growth
Fund's means higher
investments corporate
. Companies that profits, which
pay dividends may lead to an
not do so if they increase in
don't have stock prices,
profits or known as capital
adequate cash appreciation
flow
. May be a source
of dividend
. Changes in income
economic or
political
conditions, both
domestic and
international,
may result in a
decline in value
of the Fund's
investments
. The Fund's net
asset value may
be subject to
above-average
fluctuations
because greater-
than-average risk
will be assumed
in investing in
companies to
achieve higher
than average
capital growth
</TABLE>
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7
<PAGE>
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How the Fund Invests
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Investment Type (cont'd)
% of Fund's Total Risks Potential Rewards
Assets
Money market . Limits potential . May preserve the
instruments for capital Fund's assets
appreciation
Up to 100% on a
temporary basis . Credit Risk--the
default of an
issuer would
leave the Fund
with unpaid
interest or
principal. The
lower a bond's
quality, the
higher its
potential
volatility.
. Market Risk--the
risk that the
market value of
an investment may
move up or down,
sometimes rapidly
or unpredictably.
Market risk may
affect an
industry, a
sector or the
market as a
whole.
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Nicholas-Applegate Growth Equity Fund (800) 225-1852
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How the Fund is Managed
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BOARD OF DIRECTORS
The Fund's Board of Directors oversees the actions of the Manager,
Investment Adviser and Distributor and decides on general policies. The Board
also oversees the Fund's officers who conduct and supervise the daily business
operations of the Fund.
MANAGER
Prudential Investments Fund Management LLC (PIFM)
Gateway Center Three, 100 Mulberry Street
Newark, NJ 07102-4077
Under a management agreement with the Fund, PIFM supervises the Fund's
investment operations and administers its business affairs. For the fiscal year
ended December 31, 1998, the Fund paid PIFM management fees of .95% of the
Fund's average net assets.
As of January 31, 1999, PIFM served as the Manager to all 46 of the
Prudential mutual funds, and as Manager or administrator to 22 closed-end
investment companies, with aggregate assets of approximately $71.7 billion.
INVESTMENT ADVISER
Nicholas-Applegate Capital Management (NACM)
600 West Broadway
San Diego, CA 92101-3311
Under a sub-advisory agreement with the Fund, NACM manages the investment
operations of the Fund. It is compensated by PIFM, not the Fund. For the fiscal
year ended December 31, 1998, PIFM paid NACM sub-advisory fees of .75% of the
Fund's average net assets.
As of December 31, 1998, NACM served as investment adviser to a variety of
institutional and individual clients, with aggregate assets of approximately
$31 billion. NACM was organized in 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.
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9
<PAGE>
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How the Fund is Managed
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PORTFOLIO MANAGERS
The Fund is managed under the general supervision of Arthur E. Nicholas (who
has been the Chief Investment Officer of NACM since its organization) and
Catherine Somhegyi, NACM's Chief Investment Officer-- Global Equity, who has
been employed by NACM since 1987. NACM uses a team management approach for the
day-to-day management of the Fund's portfolio. The members of the team are
Andrew B. Gallagher, William H. Chenoweth, Emmy Sobieski and Thomas J.
Sullivan. Mr. Gallagher has been employed by NACM since 1992. Mr. Chenoweth has
been employed by NACM since 1998; he was previously employed by Turner
Investment Partners, Inc. as a senior portfolio manager and securities analyst.
Ms. Sobieski has been employed by NACM since 1998; she was previously employed
by Farmers Insurance Investment Division as a portfolio manager. Mr. Sullivan
has been employed by NACM since 1994; he was previously employed by Donaldson,
Lufkin & Jenrette Securities Corporation as an operations liaison.
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Fund's
shares under a Distribution Agreement with the Fund. As authorized by the
Agreement, you may pay sales charges to PIMS as shown in "How to Buy, Sell and
Exchange Shares of the Fund." The Fund also has Distribution and Service Plans
under Rule 12b-1 of the Investment Company Act. Under the Plans and the
Distribution Agreement, PIMS pays the expenses of distributing the Fund's Class
A, B, C and Z shares and provides certain shareholder support services. The
Fund pays distribution and other fees to PIMS as compensation for its services
for each class of shares other than Class Z. These fees--known as 12b-1 fees--
are shown in the "Fees and Expenses" tables.
YEAR 2000 READINESS DISCLOSURE
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 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. This
could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services.
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Nicholas-Applegate Growth Equity Fund (800) 225-1852
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<PAGE>
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How the Fund is Managed
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Although, at this time, there can be no assurance that there will be no adverse
impact on the Fund, the Manager, the Investment Adviser, 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. The Fund and its Board receive, and have received since early
1998, satisfactory quarterly reports from the principal service providers as to
their preparations for year 2000 readiness, although there can be no assurance
that the service providers (or other securities market participants) will
successfully complete the necessary changes in a timely manner. Moreover, the
Fund at this time has not considered retaining alternative service providers or
directly undertaken efforts to achieve year 2000 readiness, the latter of which
would involve substantial expenses without an assurance of success.
Additionally, issuers of securities generally as well as those purchased by
the Fund may confront Year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/or a specific
issuer's performance and could result in a decline in the value of the
securities held by the Fund.
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11
<PAGE>
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Fund Distributions and Tax Issues
- --------------------------------------------------------------------------------
Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the Fund pays dividends of ordinary income and distributes
long-term capital gains, if any, to shareholders. These distributions are
subject to federal income taxes, unless you hold your shares in a 401(k) plan,
an Individual Retirement Account (IRA) or some other qualified tax-deferred
plan or account. Dividends and distributions from the Fund may also be subject
to state income tax in the state where you live.
Also, if you sell shares of the Fund for a profit, you may have to pay
capital gains taxes on the amount of your profit, unless you hold your shares
in a qualified tax-deferred plan or account.
The following briefly discusses some of the important federal income tax
issues you should be aware of, but is not meant to be tax advice. For tax
advice, please speak with your tax adviser.
DISTRIBUTIONS
The Fund pays dividends to shareholders out of any net investment income, plus
any short-term capital gains typically once a year. For example, if the Fund
owns an ACME Corp. stock and the stock pays a dividend, the Fund will pay out a
portion of this dividend to its shareholders, assuming the Fund's income is
more than its costs and expenses. The dividends you receive from the Fund will
be taxed as ordinary income whether or not they are reinvested in the Fund.
The Fund also distributes realized net capital gains to shareholders--
typically once a year--which are generated when the Fund sells its assets for a
profit. For example, if the Fund bought 100 shares of ACME Corp. stock for a
total of $1,000 and more than one year later sold the shares for a total of
$1,500, the Fund has net long-term capital gains of $500, which it will pass on
to shareholders (assuming the Fund's total gains are greater than any losses it
may have). Capital gains are taxed differently depending on how long the Fund
holds the security--if a security is held more than one year before it is sold,
long-term capital gains are taxed at the rate of 20% but if the security is
held one year or less, short-term capital gains are taxed at ordinary income
rates of up to 39.6%. Different rates apply to corporate shareholders.
For your convenience, dividends and distributions of capital gains are
automatically reinvested in the Fund without any sales charge. If you ask us to
pay the distributions in cash, we will send you a check if your account is with
the Transfer Agent. Otherwise, if your account is with a broker, you will
receive a credit to your account. Either way, the distributions may be
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Nicholas-Applegate Growth Equity Fund (800) 225-1852
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<PAGE>
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Fund Distributions and Tax Issues
- --------------------------------------------------------------------------------
subject to taxes, unless your shares are held in a qualified tax-deferred plan
or account. For more information about automatic reinvestment and other
shareholder services, see "Step 4: Additional Shareholder Services" in the next
section.
TAX ISSUES
Form 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year. If you own
shares of the Fund as part of a qualified tax-deferred plan or account, your
taxes are deferred, so you will not receive a Form 1099. However, you will
receive a Form 1099 when you receive any distributions from your qualified tax-
deferred plan or account.
Fund distributions are generally taxable to you in the calendar year they
are received, except when we declare certain dividends in the fourth quarter
and actually pay them in January of the following year. In such cases, the
dividends are treated as if they were paid on December 31 of the prior year.
Corporate shareholders are eligible for the 70% dividends-received deduction
for certain dividends.
Withholding Taxes
If federal tax law requires you to provide the Fund with your tax
identification number and certifications as to your tax status, and you fail to
do this, we will withhold and pay to the U.S. Treasury 31% of your
distributions and sale proceeds. If you are subject to backup withholding, we
will withhold and pay to the U.S. Treasury 31% of your distributions. Dividends
of net investment income and short-term capital gains paid to a nonresident
foreign shareholder generally will be subject to a U.S. withholding tax of 30%.
This rate may be lower, depending on any tax treaty the U.S. may have with the
shareholder's country.
If You Purchase Just Before Record Date
If you buy shares of the Fund just before the record date for a distribution
(the date that determines who receives the distribution), we will pay that
distribution to you. As explained above, the distribution may be subject to
income or capital gains taxes. You may think you've done well since you bought
shares one day and soon thereafter received a distribution. That is not so
because when dividends are paid out the value of each share of the Fund
decreases by the amount of the dividend to reflect the payout. The distribution
you receive makes up for the decrease in share value. However, the timing of
your purchase means that part of your investment came back to you as taxable
income.
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13
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Fund Distributions and Tax Issues
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Qualified Retirement Plans
Qualified retirement plans and accounts allow you to defer paying taxes on
investment income and capital gains. Contributions to these plans may also be
tax deductible, although distributions from these plans generally are taxable.
In the case of Roth IRA accounts, contributions are not tax deductible, but
distributions from the plan may be tax-free. Please contact your financial
adviser for information on a variety of Prudential mutual funds that are
suitable for retirement plans offered by Prudential.
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of the Fund for a profit, you have realized a capital
gain, which is subject to tax unless you hold shares in a qualified tax-
deferred plan or account. The amount of tax you pay depends on how
long you owned your shares. If you sell shares of the Fund for a loss, you may
have a capital loss, which you may use to offset certain capital gains you
have.
Exchanging your shares of the Fund for the shares of another Prudential
mutual fund is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the
taxes described above.
Any gain or loss you may have from selling or exchanging Fund shares will
not be reported on the Form 1099; however, proceeds from the sale or exchange
will be reported on Form 1099-B. Therefore, unless you hold your shares in a
qualified tax-deferred plan or account, you or your financial adviser should
keep track of the dates on which you buy and sell--or exchange--Fund shares, as
well as the amount of any gain or loss on each transaction. For tax advice,
please see your tax adviser.
Automatic Conversion of Class B Shares
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares--which happens automatically approximately seven years after
purchase--is not a "taxable event". This opinion, however, is not binding on
the Internal Revenue Service (IRS). For more information about the automatic
conversion of Class B shares, see "Class B Shares Convert to Class A Shares
After Approximately Seven Years" in the next section.
- ----------------------------------------
CAPITAL GAIN
(taxes owed)
RECEIPTS FROM SALE OR
CAPITAL LOSS
(offset against gain)
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HOW TO BUY SHARES
Step 1: Open an Account
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Fund for you, call Prudential Mutual Fund Services
LLC (PMFS) at (800) 225-1852, or contact:
Prudential Mutual Fund Services LLC
Attn: Investment Services
P.O. Box 15020
New Brunswick, NJ 08906-5020
To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, you will receive an account number.
For additional information about purchasing shares of the Fund, see the back
cover page of this prospectus. We have the right to reject any purchase order
(including an exchange into the Fund) or suspend or modify the Fund's sale of
its shares.
Step 2: Choose a Share Class
Individual investors can choose among Class A, Class B, Class C and Class Z
shares of the Fund, although Class Z shares are available only to a limited
group of investors.
Multiple share classes let you choose a cost structure that better meets
your needs. With Class A shares, you pay the sales charge at the time of
purchase, but the operating expenses each year are lower than the expenses of
Class B and Class C shares. With Class B shares, you only pay a sales charge if
you sell your shares within six years (that is why it is called a Contingent
Deferred Sales Charge or CDSC), but the operating expenses each year are higher
than the Class A share expenses. With Class C shares, you pay a 1% front-end
sales charge and a 1% CDSC if you sell within 18 months of purchase, but the
operating expenses are also higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:
. The amount of your investment
. The length of time you expect to hold the shares and the impact of the
varying distribution fees
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. The different sales charges that apply to each share class--Class A's
front-end sales charge vs. Class B's CDSC vs. Class C's low front-end
sales charge and low CDSC
. Whether you qualify for any reduction or waiver of sales charges
. The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase
. Whether you qualify to purchase Class Z shares.
See "How to Sell Your Shares" for a description of the impact of CDSCs.
Share Class Comparison. Use this chart to help you compare the Fund's different
share classes. The discussion following this chart will tell you whether you
are entitled to a reduction or waiver of any sales charges.
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<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Minimum purchase $1,000 $1,000 $2,500 None
amount
Minimum amount for $100 $100 $100 None
subsequent purchases/1/
Maximum initial 5% of the public None 1% of the public None
sales charge offering price offering price
Contingent Deferred None If sold during: 1% on sales None
Sales Charge Year 1 5% made within
(CDSC)/2/ Year 2 4% 18 months of
Year 3 3% purchase/2/
Year 4 2%
Years 5/6 1%
Year 7 0%
Annual distribution .30 of 1%; 1% 1% None
(12b-1) and service fees (.25 of 1%
(shown as a percentage currently)
of average net
assets)/3/
</TABLE>
1 The minimum investment requirements do not apply to certain retirement and
employee savings plans and custodial accounts for minors. The minimum initial
and subsequent investment for purchases made through the Automatic Investment
Plan is $50. For more information, see "Additional Shareholder Services--
Automatic Investment Plan."
2 For more information about the CDSC and how it is calculated, see ""How to
Sell Your Shares--Contingent Deferred Sales Charge (CDSC)." Class C shares
bought before November 2, 1998, have a 1% CDSC if sold within one year.
3 These distribution fees are paid from the Fund's assets on a continuous
basis. Over time, the fees will increase the cost of your investment and may
cost you more than paying other types of sales charges. The service fee for
Class A, Class B and Class C shares is .25 of 1%. The distribution fee for
Class A shares is limited to .30 of 1% (including the .25 pf 1% service fee)
and is .75 of 1% for Class B and Class C shares.
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Reducing or Waiving Class A's Initial Sales Charge
The following describes the different ways investors can reduce or avoid paying
Class A's initial sales charge.
Increase the Amount of Your Investment. You can reduce Class A's sales charge
by increasing the amount of your investment. This table shows you how the sales
charge decreases as the amount of your investment increases.
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<TABLE>
<CAPTION>
SALES CHARGE AS % SALES CHARGE AS % DEALER
AMOUNT OF PURCHASE OF OFFERING PRICE OF AMOUNT INVESTED REALLOWANCE
<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 million and above/1/ None None None
</TABLE>
1 If you invest $1 million or more, you can buy only Class A shares, unless you
qualify to buy Class Z shares.
To satisfy the purchase amounts above, you can:
. Invest with an eligible group of related investors
. Buy the Class A shares of two or more Prudential mutual funds at the same
time
. Use your Rights of Accumulation, which allow you to combine the value of
Prudential mutual fund shares you already own with the value of the
shares you are purchasing to determine the applicable sales charge (note:
you must notify the transfer Agent if you qualify for Rights of
Accumulation)
. Sign a Letter of Intent, stating in writing that you or an eligible group
of related investors will purchase a certain amount of shares in the Fund
and other Prudential mutual funds within 13 months.
Benefit Plans. Benefit Plans can avoid Class A's initial sales charges if 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
under the exchange privilege) or 250 eligible employees or
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participants. For these purposes, a Benefit Plan is a pension, profit-sharing
or other employee benefit plan qualified under Section 401 of the Internal
Revenue Code, a deferred compensation or annuity plan under Sections 403(b) and
457 of the Internal Revenue Code, a "rabbi" trust, or a nonqualified deferred
compensation plan sponsored by an employer that has a tax qualified benefit
plan with Prudential. Class A shares may also be purchased without a sales
charge by participants who are repaying loans from Benefit Plans where
Prudential (or its affiliates) provides administrative or recordkeeping
services, sponsors the product or provides account services.
Certain Prudential retirement programs--such as PruArray Association Benefit
Plans and PruArray Savings Programs--may also be exempt from Class A's sales
charge. For more information, see the SAI or contact your financial adviser. In
addition, waivers are available to investors in certain programs sponsored by
brokers, investment advisers and financial planners who have agreements with
Prudential Investments Advisory Group relating to:
. Mutual fund "wrap" or asset allocation programs, where the sponsor places
Fund trades and charges its clients a management, consulting or other fee
for its services
. Mutual fund "supermarket" programs, where the sponsor links its
customers' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
Other Types of Investors. Other investors pay no sales charge, including
certain officers, employees or agents of Prudential and its affiliates,
Prudential Mutual Funds, the subadvisers of the Prudential Mutual Funds and
clients of brokers that have entered into a selected dealer agreement with the
Distributor. To qualify for a reduction or waiver of the sales charge, you must
notify the Transfer Agent or your broker at the time of purchase. For more
information, about reducing or eliminating Class A's sales charge, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares--Reduction and Waiver of
Initial Sales Charge--Class A Shares."
Waiving Class C's Initial Sales Charge
Benefit Plans. Benefit Plans (as defined above) may purchase Class C shares
without paying an initial sales charge. Participants who are repaying loans
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from Benefit Plans where Prudential (or its affiliates) provides administrative
or recordkeeping services, sponsors the product or provides account services
may also purchase Class C Shares without an initial sales charge.
Prudential Retirement Plans. The initial sales charge will be waived for
purchases of Class C shares by both qualified and nonqualified retirement and
deferred compensation plans participating in a PruArray Plan and other plans if
Prudential also provides administrative or recordkeeping services.
Investment of Redemption Proceeds from Other Investment Companies. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential
Securities Incorporated or one of its affiliates. Such purchases must be made
within 60 days of the redemption. To qualify for this waiver, you must do one
of the following:
. Purchase your shares through an account at Prudential Securities
. Purchase your shares through an ADVANTAGE Account or an Investor Account
with Pruco Securities Corporation
. Purchase your shares through another broker.
This waiver is not available to investors who purchase shares directly from
the Transfer Agent. If you are entitled to the waiver, you must notify either
the Transfer Agent or your broker. The Transfer Agent may require any
supporting documents it considers to be appropriate.
Qualifying for Class Z Shares
Class Z shares of the Fund can be purchased by any of the following:
. Any Benefit Plan as defined above, and certain nonqualified plans,
provided the Benefit Plan--in combination with other plans sponsored by
the same employer or group of related employers--has at least $50 million
in defined contribution assets
. Participants in any fee-based program or trust program sponsored by
Prudential or an affiliate which includes mutual funds as investment
options and the Fund as an available option
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. 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
. Benefit Plans for which an affiliate of the Distributor provides
administrative or recordkeeping services and, as of September 20, 1996,
were either Class Z shareholders of the Prudential mutual funds or
executed a letter of intent to purchase Class Z shares of the Prudential
mutual funds
. The Prudential Securities Cash Balance Pension Plan, an employee- defined
benefit plan sponsored by Prudential Securities
. Current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund)
. Employees of Prudential and/or Prudential Securities who participate in a
Prudential-sponsored employee savings plan
. Prudential with an investment of $10 million or more.
In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates may pay brokers, financial advisers and other persons a
commission of up to 4% of the purchase price for Class B shares, up to 2% of
the purchase price for Class C shares, and a finder's fee for Class Z shares
from their own resources based on a percentage of the net asset value of shares
sold or otherwise.
Class B Shares Convert to Class A Shares After Approximately Seven Years
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you purchased with reinvested
dividends and other distributions. Since the 12b-1 fees for Class A shares are
lower than for Class B shares, converting to Class A shares lowers your Fund
expenses.
When we do the conversion, you will get fewer Class A shares than the number
of converted Class B shares if the price of the Class A shares is higher than
the price of Class B shares. The total dollar value will be the same, so you
will not have lost any money by getting fewer Class A shares. We do the
conversions quarterly, not on the anniversary date of your purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--
Conversion Feature--Class B Shares."
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Mutual Fund Shares
The NAV of mutual fund shares changes every day because the value of a fund's
portfolio changes constantly. For example, if Fund XYZ holds ACME Corp. stock
in its portfolio and the price of ACME stock goes up while the value of the
fund's other holdings remains the same and expenses don't change, the NAV of
Fund XYZ will increase.
- --------------------------------------------------------------------------------
Step 3: Understanding the Price You'll Pay
The price you pay for each share of the Fund is based on the share value. The
share value of a mutual fund--known as the net asset value or NAV--is
determined by a simple calculation: it's the total value of the Fund (assets
minus liabilities) divided by the total number of shares outstanding. For
example, if the value of the investments held by Fund XYZ (minus its
liabilities) is $1,000 and there are 100 shares of Fund XYZ owned by
shareholders, the price of one share of the fund--or the NAV--is $10 ($1,000
divided by 100). We value portfolio securities based upon market quotations or,
if not readily available, at fair value as determined in good faith under
procedures established by the Fund's Board. Most national newspapers report the
NAVs of most mutual funds, which allows investors to check the prices of mutual
funds daily.
We determine the NAV of our shares once each business day at 4:15 p.m. New
York Time on days that the New York Stock Exchange is open for trading. We do
not determine the NAV on days when we have not received any orders to purchase,
sell or exchange Fund shares, or when changes in the value of the Fund's
portfolio do not materially affect the NAV.
What Price Will You Pay for Shares of the Fund?
For Class A and Class C shares, you'll pay the public offering price, which is
the NAV next determined after we receive your order to purchase, plus an
initial sales charge (unless you're entitled to a waiver). For Class B and
Class Z shares, you will pay the NAV next determined after we receive your
order to purchase (remember, there are no up-front sales charges for these
share classes). Your broker may charge you a separate or additional fee for
purchases of shares.
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Step 4: Additional Shareholder Services
As a Fund shareholder, you can take advantage of the following services and
privileges:
Automatic Reinvestment. As we explained in the "Fund Distributions and Tax
Issues" section, the Fund pays out--or distributes--its net investment income
and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Fund at NAV without any sales
charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker or notify the Transfer Agent
in writing (at the address below) at least five business days before the date
we determine who receives dividends.
Prudential Mutual Fund Services LLC
Attn: Account Maintenance
P.O. Box 15015
New Brunswick, NJ 08906-5015
Automatic Investment Plan. You can make regular purchases of Fund shares for as
little as $50 by having the funds automatically withdrawn from your bank or
brokerage account at specified intervals.
Retirement Plan Services. Prudential offers a wide variety of retirement plans
for individuals and institutions, including large and small businesses. For
information on IRAs, including Roth IRAs, or SEP-IRAs for a one-person
business, please contact your financial adviser. If you are interested in
opening a 401(k) or other company-sponsored retirement plan (SIMPLES, SEP
plans, Keoghs, 403(b) plans, pension and profit-sharing plans), your financial
adviser will help you determine which retirement plan best meets your needs.
Complete instructions about how to establish and maintain your plan and how to
open accounts for you and your employees will be included in the retirement
plan kit you receive in the mail.
The PruTector Program. Optional group term life insurance--which protects the
value of your Prudential mutual fund investment for your beneficiaries against
market declines--is available to investors who purchase their shares through
Prudential. This insurance is subject to various restrictions and charges and
is not available in all states.
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Systematic Withdrawal Plan. A systematic withdrawal plan is available that will
provide you with monthly or quarterly checks. Remember, the sale of Class B and
Class C shares may be subject to a CDSC.
Reports to Shareholders. Every year, we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Fund. To reduce Fund expenses, we will send one
annual shareholder report, one semi-annual shareholder report and one annual
prospectus per household, unless you instruct us or your broker otherwise.
HOW TO SELL YOUR SHARES
You can sell your shares of the Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Fund--also known as redeeming your shares--the
price you will receive will be the NAV next determined after the Transfer
Agent, the Distributor or your broker receives your order to sell (less any
applicable CDSC). If your broker holds your shares, he must receive your order
to sell by 4:15 p.m. New York Time to process the sale on that day. Otherwise
contact:
Prudential Mutual Fund Services LLC
Attn: Redemption Services
P.O. Box 15010
New Brunswick, NJ 08906-5010
Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent, the Distributor or your broker receives your sell
order. If you hold shares through a broker, we will credit payment to your
account. If you are selling shares you recently purchased with a check, we may
delay sending you the proceeds until your check clears, which can take up to 10
days from the purchase date. You can avoid the delay if you purchase shares by
wire, certified check or cashier's check. Your broker may charge you a separate
or additional fee for sales of shares.
Restrictions on Sales
At certain times you may not be able to sell shares of the Fund, or we may
delay paying you the proceeds from a sale. This may happen during
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unusual market conditions or emergencies when the Fund can't determine the
value of its assets or sell its holdings. For more information, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares--Sale of Shares."
If you are selling more than $50,000 of shares, you want the check sent to
someone or some place that is not in our records, or you are a business or a
trust, and you hold your shares directly with the Transfer Agent, you will need
to have the signature on your sell order guaranteed by a financial institution.
For more information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Sale of Shares--Signature Guarantee."
Contingent Deferred Sales Charge (CDSC)
If you sell Class B shares within six years of purchase or Class C shares
within 18 months of purchase (one year for Class C shares purchased before
November 2, 1998), you will have to pay a CDSC. To keep the CDSC as low as
possible, we will sell amounts representing shares in the following order:
. Amounts representing shares you purchased with reinvested dividends and
distributions
. Amounts representing shares that represent the increase in NAV above the
total amount of your payments for shares made during the past six years
for Class B shares (five years for Class B shares purchased before
January 22, 1990) and 18 months for Class C shares (one year for Class C
shares purchased before November 2, 1998)
. Amounts representing the cost of shares held beyond the CDSC period (six
years for Class B shares and 18 months for Class C shares).
Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid--or at least
minimize--the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts representing the
cost of shares held for the longest period of time within the applicable CDSC
period.
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As we noted before in the "Share Class Comparison" chart, the CDSC for Class
B shares is 5% in the first year, 4% in the second, 3% in the third, 2% in the
fourth and 1% in the fifth and sixth years. The rate decreases on the first day
of the month following the anniversary date of your purchase, not on the
anniversary date itself. The CDSC is 1% for Class C shares-- which is applied
to shares sold within 18 months of purchase (or one year for Class C shares
purchased before November 2, 1998). For both Class B and Class C shares, the
CDSC is calculated based on the lesser of the original purchase price or the
redemption proceeds. For purposes of determining how long you've held your
shares, all purchases during the month are grouped together and considered to
have been made on the last day of the month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after initial purchase, excluding
any time shares were held in a money market fund.
Waiver of the CDSC--Class B Shares
The CDSC will be waived if the Class B shares are sold:
. After a shareholder dies or is disabled (or, in the case of a trust
account, the death or disability of the grantor). This waiver applies to
individual shareholders, as well as shares owned in joint tenancy (with
rights of survivorship), provided the shares were purchased before the
death or disability
. To provide for certain distributions--made without IRS penalty--from a
tax-deferred retirement plan, IRA or Section 403(b) custodial account
. On certain sales from a Systematic Withdrawal Plan.
For more information on the above and other waivers, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Waiver of Contingent Deferred Sales
Charge--Class B Shares."
Waiver of the CDSC--Class C Shares
Prudential Retirement Plans. The CDSC will be waived for purchases of Class C
shares by both qualified and nonqualified retirement and deferred compensation
plans participating in a PruArray Plan and other plans if Prudential also
provides administrative or recordkeeping services. The
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CDSC will also be waived on redemptions sponsored by Prudential and its
affiliates to the extent that the redemption proceeds are invested in the
Guaranteed Investment Account, a group annuity insurance product sponsored by
Prudential, the Guaranteed Insulated Separate Account, a separate account
offered by Prudential, and shares of the Stable Value Fund, an unaffiliated
bank collective fund.
Other Benefit Plans. The CDSC will be waived on redemptions from Benefit Plans
holding shares through a broker not affiliated with Prudential and for which
the broker provides administrative or recordkeeping services.
Redemption in Kind
If the sales of Fund shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of the Fund's net assets, we can then give you
securities from the Fund's portfolio instead of cash. If you want to sell the
securities for cash, you would have to pay the costs charged by a broker.
Small Accounts
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your
account. We would do this to minimize the Fund's expenses paid by other
shareholders. We will give you 60 days' notice, during which time you can
purchase additional shares to avoid this action. This involuntary sale does not
apply to shareholders who own their shares as part of a 401(k) plan, an IRA, or
some other tax-deferred plan or account.
90-Day Repurchase Privilege
After you redeem your shares, you may reinvest any of the redemption proceeds
in shares of the same Fund for 90 days without paying an initial sales charge.
Also, if you paid a CDSC when you redeemed your shares, we will credit your new
account with the appropriate number of shares to reflect the amount of the CDSC
you paid. To take advantage of this one-time privilege, you must notify the
Transfer Agent or your broker at the time of the repurchase. See the SAI,
"Purchase, Redemption and Pricing of Fund Shares--Sale of Shares."
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Retirement Plans
To sell shares and receive a distribution from your retirement account, call
your broker or the Transfer Agent for a distribution request form. Special
distribution and income tax withholding requirements apply to distributions
from retirement plans and you must submit a withholding form with your request
to avoid delay. If your retirement plan account is held by your employer or
plan trustee, you must arrange for the distribution request to be signed and
sent by the plan administrator or trustee. For additional information, see the
SAI.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Fund for shares of the same class in
certain other Prudential mutual funds--including certain money market funds--if
you satisfy the minimum investment requirements. For example, you can exchange
Class A shares of the Fund for Class A shares of another Prudential mutual
fund, but you can't exchange Class A shares for Class B, Class C or Class Z
shares. Class B and Class C shares may not be exchanged into money market funds
other than Prudential Special Money Market Fund, Inc. After an exchange, at
redemption, the CDSC will be calculated from the first day of the month after
your initial purchase, excluding any time shares were held in a money market
fund. We may change the terms of the exchange privilege after giving you 60
days' notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
Prudential Mutual Fund Services LLC
Attn: Exchange Processing
P.O. Box 15010
New Brunswick, NJ 08906-5010
If you exchange--and then sell--Class B shares within approximately six
years of your original purchase, or Class C shares within 18 months of your
original purchase, you must still pay the applicable CDSC. If you have
exchanged Class B or Class C shares into a money market fund, the time you hold
the shares in the money market account will not be counted for purposes of
calculating the required holding periods for CDSC liability.
- --------------------------------------------------------------------------------
27
<PAGE>
How to Buy, Sell and
- --------------------------------------------------------------------------------
Exchange Shares of the Fund
- --------------------------------------------------------------------------------
Remember, as we explained in the section entitled "Fund Distributions and
Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange are
worth more than you paid for them, you may have to pay capital gains tax. For
additional information about exchanging shares, see the SAI, "Shareholder
Investment Account--Exchange Privilege."
If you own Class B or Class C shares and qualify to purchase Class A shares
without paying an initial sales charge, we will automatically exchange your
Class B or Class C shares which are not subject to a CDSC for Class A shares.
We make such exchanges on a quarterly basis, if you qualify for this exchange
privilege. We have obtained a legal opinion that this exchange is not a
"taxable event" for federal income tax purposes. This opinion is not binding on
the IRS.
Frequent Trading
Frequent trading of Fund shares in response to short-term fluctuations in the
market--also known as "market timing"--may make it very difficult to manage the
Fund's investments. When market timing occurs, the Fund may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Fund's performance may be hurt. When large dollar amounts
are involved, market timing can also make it difficult to use long-term
investment strategies because we cannot predict how much cash the Fund will
have to invest. When in our opinion such activity would have a disruptive
effect on portfolio management, the Fund reserves the right to refuse purchase
orders and exchanges into the Fund by any person, group or commonly controlled
account. The Fund may notify a market timer of rejection of an exchange or
purchase order after the day on which the order is placed. If the Fund allows a
market timer to trade Fund shares, it may require the market timer to enter
into a written agreement to follow certain procedures and limitations.
- --------------------------------------------------------------------------------
Nicholas-Applegate Growth Equity Fund (800) 225-1852
[GRAPHIC]
28
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The financial highlights will help you evaluate the Fund's financial
performance. The total return in each chart represents the rate that a
shareholder earned on an investment in that share class of the Fund, assuming
reinvestment of all dividends and other distributions. The information is for
each share class for the periods indicated.
Review each chart with the financial statements and report of independent
accountants, which appear in the annual report and the SAI and are available
upon request. Additional performance information for each share class is
contained in the annual report, which you can receive at no charge.
- --------------------------------------------------------------------------------
29
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
CLASS A SHARES
The financial highlights for the four years ended December 31, 1998, were
audited by Ernst & Young LLP, and the financial highlights for the year ended
December 31, 1994, were audited by other independent auditors, whose reports
were unqualified.
<TABLE>
<CAPTION>
Class A/2/ Shares (fiscal years ended 12-31)
- --------------------------------------------------------------------------------
Per Share Operating Performance 1998 1997 1996 1995/4/ 1994/4/
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $14.47 $15.41 $15.18 $11.99 $13.56
Income from investment
operations:
Net investment loss (.17) (.12) (.14) (.11) (.07)
Net realized and unrealized
gain (loss) on investment
transactions 1.95 2.60 2.64 3.82 (1.19)
Total from investment
operations 1.78 2.48 2.50 3.71 (1.26)
- --------------------------------------------------------------------------------
Less distributions:
Dividends from net investment
income -- -- -- -- --
Distributions from net realized
gains (.87) (3.42) (2.27) (.52) (.31)
Total distributions (.87) (3.42) (2.27) (.52) (.31)
Net asset value, end of year $15.38 $14.47 $15.41 $15.18 $11.99
Total return/1/ 12.83% 17.33% 16.45% 31.20% (9.53)%
- --------------------------------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data 1998 1997 1996 1995/4/ 1994/4/
<S> <C> <C> <C> <C> <C>
Net assets, end of year (000) $130,362 $133,973 $145,120 $124,340 $88,069
Average net assets (000) $124,408 $139,933 $136,482 $109,740 $93,620
Ratios to average net assets:
Expenses, including
distribution fees 1.45% 1.37% 1.41% 1.44% 1.49%/3/
Expenses, excluding
distribution fees 1.24% 1.19% 1.23% 1.27% 1.32%/3/
Net investment income (1.19)% (.82)% (.93)% (.83)% (.59)%
Portfolio turnover/5/ 171% 182% 113% 106% 110%
Asset coverage or borrowing -- -- -- -- --
Total debt outstanding (000
omitted) -- -- -- -- --
</TABLE>
- --------------------------------------------------------------------------------
1 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported.
2 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.
3 Annualized.
4 Calculated based upon weighted average shares outstanding during the periods
due to effects of open-ending, Fund share sales and the resulting issuance
from a stock rights offering.
5 Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
- --------------------------------------------------------------------------------
Nicholas-Applegate Growth Equity Fund (800) 225-1852
[GRAPHIC]
30
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A/2/ Shares (fiscal years ended 12-31) (continued)
- --------------------------------------------------------------------------------
Per Share Operating Performance
1993(/4/) 1992(/4/) 1991(/4/) 1990(/4/) 1989(/3/)(/4/)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $ 12.77 $11.73 $10.19 $11.42 $8.55
Income from investment
operations:
Net investment income
(loss) (.07) (.07) (.10) .02 (.25)
Net realized and
unrealized gain (loss)
on investment
transactions 2.63 1.11 5.50 (.66) 3.39
Total from investment
operations 2.56 1.04 5.40 (.64) 3.14
- ---------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net
investment income -- -- -- (.02) --
Distributions from net
realized gains (1.77) -- (3.86) (.06) (0.28)
Total distributions (1.77) -- (3.86) (.08) (0.28)
Increase (decrease)
resulting from fund
share transactions -- -- -- (.51) .01
Net asset value, end of
year $ 13.56 $12.77 $11.73 $10.19 $11.42
Total return/1/ 20.26% 8.87% 55.50% (10.03)% 36.83%
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data 1993(/4/) 1992(/4/) 1991(/4/) 1990(/4/) 1989(/3/)(/4/)
<S> <C> <C> <C> <C> <C>
Net assets, end of year
(000) $ 97,596 $84,169 $63,028 $120,987 $108,415
Average net assets (000) $ 90,332 $74,005 $104,819 $116,094 $98,874
Ratios to average net
assets:
Expenses, including
distribution fees 1.42%(/7/) 1.54%(/7/) 1.94%(/6/)(/7/) 1.63%(/6/)(/7/) 4.55%(/6/)(/7/)
Expenses, excluding
distribution fees 1.30%(/7/) 1.44%(/7/) 1.90%(/7/) 1.63%(/7/) 4.55%(/7/)
Net investment income (.53)% (.63)% (.83)% .24% (2.36)%
Portfolio turnover(/5/) 112% 107% 115% 149% 120%
Asset coverage or
borrowing -- -- -- -- 371%
Total debt outstanding
(000 omitted) -- -- -- -- $ 40,000
</TABLE>
- --------------------------------------------------------------------------------
1 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each
period reported.
2 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.
3 Not audited by Ernst & Young LLP or Coopers & Lybrand LLP.
4 Calculated based upon weighted average shares outstanding during the periods
due to effects of open-ending, Fund share sales and the resulting issuance
from a stock rights offering.
5 Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
6 Ratios of expenses, before loan interest, commitment fees and nonrecurring
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.
7 Current year amounts have been restated from prior periods presentation.
- --------------------------------------------------------------------------------
31
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
CLASS B SHARES
The financial highlights for the four years ended December 31, 1998, were
audited by Ernst & Young LLP, and the financial highlights for the year ended
December 31, 1994, were audited by other independent auditors, whose reports
were unqualified.
<TABLE>
<CAPTION>
Class B/2/ Shares (fiscal years ended 12-31)
- ------------------------------------------------------------------------------
Per Share Operating Performance 1998 1997 1996 1995/3/
<S> <C> <C> <C> <C>
Net asset value, beginning of year $13.26 $14.48 $14.49 $11.56
Income from investment operations:
Net investment loss (.29) (.23) (.24) (.22)
Net realized and unrealized gain (loss)
on investment transactions 1.79 2.43 2.50 3.67
Total from investment operations 1.50 2.20 2.26 3.45
- ------------------------------------------------------------------------------
Less distributions:
Distributions from net realized gains (.87) (3.42) (2.27) (.52)
Total distributions (.87) (3.42) (2.27) (.52)
Net asset value, end of year $13.89 $13.26 $14.48 $14.49
Total return/1/ 11.87% 16.48% 15.54% 30.11%
- ------------------------------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data 1998 1997 1996 1995/3/
<S> <C> <C> <C> <C>
Net assets, end of year (000) $236,242 $284,191 $317,768 $290,751
Average net assets (000) $250,317 $300,520 $304,841 $265,597
Ratios to average net assets:
Expenses, including distribution fees 2.24% 2.19% 2.23% 2.27%
Expenses, excluding distribution fees 1.24% 1.19% 1.23% 1.27%
Net investment income (1.98)% (1.64)% (1.75)% (1.66)%
Portfolio turnover/4/ 171% 182% 113% 106%
</TABLE>
- --------------------------------------------------------------------------------
1 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each
period reported.
2 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.
3 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.
4 Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
- --------------------------------------------------------------------------------
Nicholas-Applegate Growth Equity Fund (800) 225-1852
[GRAPHIC]
32
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B/4/ Shares (fiscal years ended 12-31)
(continued)
- -------------------------------------------------------------------------------
Per Share Operating Performance 1994/5/ 1993/5/ 1992/5/ 1991/1/,/5/
<S> <C> <C> <C> <C>
Net asset value, beginning of
year $13.18 $12.56 $11.65 $12.43
Income from investment
operations:
Net investment income (loss) (.17) .18 .16 .08
Net realized and unrealized gain
(loss) on investment
transactions (1.14) 2.57 1.07 3.16
Total from investment operations (1.31) 2.39 0.91 3.08
- -------------------------------------------------------------------------------
Less distributions:
Distributions from net realized
gains (.31) (1.77) -- (3.86)
Total distributions (.31) (1.77) -- (3.86)
Net asset value, end of year $11.56 $13.18 $12.56 $11.65
Total return/2/ 10.20% 19.21% 7.81% 26.82%
- -------------------------------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data 1994/6/ 1993/5/ 1992 1991
<S> <C> <C> <C> <C>
Net assets, end of year (000) $257,059 $252,911 $123,306 $12,877
Average net assets (000) $261,285 $179,456 $80,531 $1,922
Ratios to average net assets:
Expenses, including distribution
fees 2.32%/8/ 2.30%/8/ 2.44%/8/ 3.77%/3/,/7/,/8/
Expenses, excluding distribution
fees 1.32%/8/ 1.30%/8/ 1.44%/8/ 2.77%/3/,/8/
Net investment income (1.39)% (1.40)% (1.56)% (3.17)%/3/
Portfolio turnover/6/ 110% 112% 107% 115%
</TABLE>
- --------------------------------------------------------------------------------
1 Information shown is for the period June 10, 1991, when Class B Shares were
first offered, through December 31, 1991.
2 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each
period reported.
3 Annualized.
4 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.
5 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.
6 Portfolio turnover is calculated on the basis of the Fund as a whole without
distinguishing between the classes of shares issued.
7 Ratio of expenses, before loan interest, commitment fees and nonrecurring
expenses was 3.76% for Class B Shares.
8 Current year amounts have been restated from prior period presentation.
- --------------------------------------------------------------------------------
33
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
CLASS C SHARES
The financial highlights for the four years ended December 31, 1998, were
audited by Ernst & Young LLP, and the financial highlights for the period from
August 1, 1994 through December 31, 1994, were audited by other independent
auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
Class C Shares (fiscal years ended 12-31)
- -------------------------------------------------------------------------------
Per Share Operating
Performance 1998 1997 1996 1995 1994/1/
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $13.26 $14.48 $14.49 $11.56 $11.62
Income from investment
operations:
Net investment loss (.28) (.22) (.22) (.22) (.05)
Net realized and unrealized
gain (loss) on investment
transactions 1.78 2.42 2.48 3.67 (.01)
Total from investment
operations 1.50 2.20 2.26 3.45 (.06)
- -------------------------------------------------------------------------------
Less distributions:
Distributions from net
realized gains (.87) (3.42) (2.27) (.52) --
Total distributions (.87) (3.42) (2.27) (.52) --
Net asset value, end of period $13.89 $13.26 $14.48 $14.49 $11.56
Total return/2/ 11.87% 16.48% 15.54% 30.11% (.52)%
- -------------------------------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net assets, end of period
(000) $6,146 $6,750 $6,735 $4,897 $1,100
Average net assets (000) $6,164 $ 6,796 $5,862 $2,961 $225
Ratios to average net assets:
Expenses, including
distribution fees 2.24% 2.19% 2.23% 2.27% 6.23%/3/,/4/
Expenses, excluding
distribution fees 1.24% 1.19% 1.23% 1.27% 5.23%/3/,/4/
Net investment income (1.98)% (1.64)% (1.75)% (1.63)% (3.36)%/3/
Portfolio turnover 171% 182% 113 106% 110%
</TABLE>
- --------------------------------------------------------------------------------
1 Information shown is for the period August 1, 1994, when Class C shares were
first offered, through December 31, 1994.
2 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported. Total return for periods of less than a full year is not
annualized.
3 Annualized.
4 Current year amounts have been restated from prior period presentation.
- --------------------------------------------------------------------------------
Nicholas-Applegate Growth Equity Fund (800) 225-1852
[GRAPHIC]
34
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
CLASS Z SHARES
The financial highlights for the two years ended December 31, 1998, and for the
period from March 1, 1997 through December 31, 1997, were audited by Ernst &
Young LLP, whose reports were unqualified.
<TABLE>
<CAPTION>
Class Z Shares (fiscal years ended 12-31)
- --------------------------------------------------------------
Per Share Operating Performance 1998 1997/1/
<S> <C> <C>
Net asset value, beginning of period $14.53 $14.48
Income from investment operations:
Net investment loss (.12) (.22)
Net realized and unrealized gain (loss) on
investment transactions 1.95 3.18
Total from investment operations 1.83 2.96
- --------------------------------------------------------------
Less distributions:
Distributions from net realized gains (.87) (2.91)
Total distributions (.87) (2.91)
Net asset value, end of period $15.49 $14.53
Total return/2/ 13.13% 21.90%
- --------------------------------------------------------------
<CAPTION>
Ratios/Supplemental Data 1998 1997/1/
<S> <C> <C>
Net assets, end of period (000) $1,649 $633
Average net assets (000) $1,318 $121
Ratios to average net assets:
Expenses, including distribution fees 1.24% 1.19%/3/
Expenses, excluding distribution fees 1.24% 1.19%/3/
Net investment income (.99)% (.85)%/3/
Portfolio turnover 171% 182%
</TABLE>
- --------------------------------------------------------------------------------
1 Information shown is for the period March 18, 1997, when Class Z shares were
first offered, through December 31, 1997.
2 Total return assumes reinvestment of dividends and any other distributions.
It is calculated assuming shares are purchased on the first day and sold on
the last day of each period reported. Total return for periods of less than a
full year is not annualized.
3 Annualized.
- --------------------------------------------------------------------------------
35
<PAGE>
- --------------------------------------------------------------------------------
The Prudential Mutual Fund Family
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Prudential offers a broad range of mutual funds designed to meet your
individual needs. For information about these funds, contact your financial
adviser or call us at (800) 225-1852. Read the prospectus carefully before you
invest or send money.
STOCK FUNDS
Prudential Distressed Securities Fund, Inc.
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
The Prudential Investment Portfolios, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Mid-Cap Value Fund
Prudential Real Estate Securities Fund
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Tax-Managed Equity Fund
Prudential 20/20 Focus Fund
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Asset Allocation/Balanced Funds
Prudential Balanced Fund
Prudential Diversified Funds
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund
GLOBAL FUNDS
Global Stock Funds
Prudential Developing Markets Fund
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Index Series Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
Global Utility Fund, Inc.
Global Bond Funds
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
The Global Total Return Fund, Inc.
- --------------------------------------------------------------------------------
Nicholas Applegate Growth Equity Fund (800) 225-1852
[GRAPHIC]
36
<PAGE>
- --------------------------------------------------------------------------------
The Prudential Mutual Fund Family
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BOND FUNDS
Taxable Bond Funds
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Index Series Fund
Prudential Bond Market Index Fund
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Tax-Exempt Bond Funds
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income Series
Insured Series
Prudential Municipal Series Fund
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
MONEY MARKET FUNDS
Taxable Money Market Funds
Cash Accumulation Trust
Liquid Assets Fund
National Money Market Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
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
- --------------------------------------------------------------------------------
37
<PAGE>
FOR MORE INFORMATION
----------------------------------------------------------------
Please read this prospectus before you invest in the Fund and keep it for fu-
ture reference. For information or shareholder questions contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 15005
NEW BRUNSWICK, NJ 08906-5005
(800) 225-1852
(732) 417-7555
(if calling from outside the U.S.)
- --------------------------------------------------------------------------------
Outside Brokers Should Contact:
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 778-8769
- --------------------------------------------------------------------------------
Visit Prudential's Web Site At:
HTTP://WWW.PRUDENTIAL.COM
- --------------------------------------------------------------------------------
Additional information about the Fund can be obtained without charge and can be
found in the following documents:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
(incorporated by reference into this prospectus)
ANNUAL REPORT
(contains a discussion of the market conditions and investment strategies
that significantly affected the Fund's performance)
SEMI-ANNUAL REPORT
You can also obtain copies of Fund documents from the Securities and Exchange
Commission as follows:
By Mail:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
(The SEC charges a fee to copy documents.)
In Person:
Public Reference Room in Washington, DC
(For hours of operation, call 1(800) SEC-0330)
Via the Internet:
http://www.sec.gov
- --------------------------------------------------------------------------------
CUSIP NUMBERS:
CLASS A: 653698-20-9
CLASS B: 653698-30-8
CLASS C: 653698-40-7
CLASS Z: 653698-50-6
Investment Company Act File No:
33-38461
MF151A [RECYCLE LOGO APPEARS HERE] Printed on Recycled Paper
<PAGE>
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
Statement of Additional Information
dated March 15, 1999
Nicholas-Applegate Growth Equity Fund (the "Fund") is a series of Nicholas-
Applegate Fund, Inc. (the "Company"), an open-end, diversified management
investment company. 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, 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 stocks from a universe of U.S. companies with
market capitalizations corresponding to the middle 90% of the Russell Midcap
Growth Index at the time of purchase. As of December 30, 1998, the middle 90%
included companies with capitalizations between approximately $1.6 billion and
$10.7 billion. Capitalizations of companies in the Index will change with
market conditions and new developments. 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 15, 1999, a copy of which
may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Fund History.............................................................. B-2
Description of the Fund, Its Investments and Risks........................ B-2
Investment Restrictions................................................... B-6
Directors and Principal Officers.......................................... B-8
Investment Advisory and Other Services.................................... B-10
Capital Shares, Other Securities and Organization......................... B-17
Purchase, Redemption and Pricing of Fund Shares........................... B-18
Shareholder Investment Account............................................ B-29
Net Asset Value........................................................... B-34
Dividends, Distributions and Taxes........................................ B-35
Performance Information................................................... B-36
Financial Statements...................................................... B-39
Report of Independent Auditors............................................ B-51
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>
FUND HISTORY
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.
DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS
Classification. The Fund is a diversified, open-end, management investment
company.
Investment Strategies, Policies and Risks. The Fund's investment objective
is capital appreciation. While the principal investment policies and
strategies for seeking to achieve this objective are described in the Fund's
Prospectus, the Fund may from time to time also use the securities,
instruments, policies and strategies described below in seeking to achieve its
objective. The Fund may not achieve its objective and you could lose money.
Foreign Securities. The Fund is authorized to invest up to 20% of its total
assets in foreign securities, ADRs and other similar receipts or shares,
although it currently intends to do so only occasionally. Any such securities
will be traded on U.S. exchanges or the NASDAQ National Market System.
Foreign securities involve certain risks, which should be considered
carefully by an investor in the Fund. These risks include political or
economic instability in the country of the issuer, the difficulty of
predicting international trade patterns, the possibility of imposition of
exchange controls and the risk of currency fluctuations. Such securities may
be subject to greater fluctuations in price than securities issued by U.S.
corporations. In addition, there may be less publicly available information
about a foreign company than about a domestic company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies.
There is generally less government regulation of securities exchanges, brokers
and listed companies abroad than in the United States, and, for certain
foreign countries, there is a possibility of expropriation, confiscatory
taxation or diplomatic developments which could affect investment in those
countries.
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, although it currently intends to do so only occasionally
and only for hedging purposes. The Fund does not presently intend to purchase
options that are not traded on a national securities exchange.
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.
B-2
<PAGE>
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 is a type of insurance
policy to hedge against a substantial increase in the market price of a
security it intends to purchase. 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.
The Fund may also purchase "put" and "call" options with respect to the S&P
500. Such options may be purchased as a hedge against changes resulting from
market conditions in the values of securities which are held in the Fund's
portfolio or which it intends to purchase or sell, or when they are
economically appropriate for the reduction of risks inherent in the ongoing
management of the Fund. The distinctive characteristics of options on stock
indices create certain risks that are not present with stock options
generally. Because the value of an index option depends upon movements in the
level of the index rather than the price of a particular stock, whether the
Fund will realize a gain or loss on the purchase or sale of an option on an
index depends upon movements in the level of stock prices in the stock market
generally rather than movements in the price of a particular stock.
Accordingly, successful use by the Fund of options on the S&P 500 would be
subject to the Investment Adviser's ability to predict correctly movements in
the direction of the stock market generally. This requires different skills
and techniques than predicting changes in the price of individual stocks.
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.
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 (the 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. (NASD).
B-3
<PAGE>
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and privately placed commercial paper for which there is a
readily available market are treated as liquid only when deemed liquid under
procedures established by the Board of Directors. The Fund's investment in
Rule 144A securities could have the effect of increasing illiquidity to the
extent that qualified institutional buyers become, for a limited time,
uninterested in purchasing Rule 144A securities. 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 others, 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 (for example, 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, (a) 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 (b) 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.
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. The Fund participates
in a $1 billion joint committed syndicated credit agreement with other
Prudential mutual funds. The Fund may pledge up to 30% of its total assets to
secure these borrowings. 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. If the Fund's asset coverage for borrowings falls below 300%,
the Fund will take prompt action (within 3 days) to reduce its borrowings. If
the 300% asset coverage should decline as a result of market fluctuations or
other reasons, the Fund may be required to sell portfolio securities to reduce
the debt and restore the 300% asset coverage, even though it may be
disadvantageous from an investment standpoint to sell securities at that time.
Lending of Securities
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and financial institutions, provided
that outstanding loans do not exceed in the aggregate 25% of the value of the
Fund's total assets and that the loans are callable at any time by the Fund.
As a matter of fundamental policy, the Fund will not lend more than 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 Fund's Board of Directors. The
loans must at all times be secured by cash or other liquid assets or secured
by an irrevocable letter of credit in favor of the Fund in an amount equal to
at least 100%, determined daily, of the market value of the loaned securities.
The collateral is segregated pursuant to applicable regulations. During the
time portfolio securities are on loan, the borrower will pay the Fund an
amount equivalent to any dividend or interest paid on such securities and the
Fund may invest the cash collateral and earn additional income, or it may
receive an agreed-upon amount of interest income from the borrower. The
advantage of such loans is that the Fund continues to receive payments in lieu
of the interest and dividends on the loaned securities, while at the same time
earning interest either directly from the borrower or on the collateral, which
will be invested in short-term obligations.
A loan may be terminated by the borrower or by the Fund at any time. If the
borrower fails to maintain the requisite amount of collateral, the loan
automatically terminates and the Fund could use the collateral to replace the
securities while holding the borrower liable for any excess of replacement
cost over collateral. As with any extensions of credit, there are risks of
delay in recovery and in some cases loss of rights in the collateral should
the borrower of the securities fail financially. However, these loans of
portfolio securities will only be made to firms determined to be creditworthy
pursuant to procedures approved by the Board of Directors of the Fund. On
termination of the loan, the borrower is required to return the securities to
the Fund, and any gain or loss in the market price during the loan would inure
to the Fund.
Since voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such rights if the
matters involved would have a material effect on the Fund's investment in the
securities which are the subject of the loan. The Fund will pay reasonable
finders',
B-4
<PAGE>
administrative and custodial fees in connection with a loan of its securities
or may share the interest earned on collateral with the borrower.
Defensive Strategy and 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. 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.
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, 1998 and December 31, 1997 were 171% and 182%, 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
"Brokerage Allocation and Other Practices" and "Dividends, Distributions and
Taxes."
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.
B-5
<PAGE>
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 (1) 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 (2) 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.
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.
B-6
<PAGE>
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 During Past Five Years
---------------- ------------- ----------------------
<C> <C> <S>
*Arthur E. Nicholas (52) 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
Mutual Funds (since 1998);
Chairman/President of Nicholas-
Applegate Securities.
Fred C. Applegate (53) Director Private Investor. Formerly
885 La Jolla Corona Court President, Nicholas-Applegate
La Jolla, California Capital Management (August 1984-
December 1991). Trustee and
Chairman of the Board of
Trustees, Nicholas-Applegate
Mutual Funds (since 1993).
Dann V. Angeloff (63) 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
Mutual Funds (since 1998).
Theodore J. Coburn (45) Director Partner, Brown, Coburn & Co.
17 Cotswold Road (investment banking firm) (since
Brookline, Massachusetts 1991); research associate,
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 Mutual Funds (since
1998); Director, Emerging
Germany Fund (since 1991),
Moovies, Inc. (since 1995).
*Robert F. Gunia (52) Director and Vice President, The Prudential
Gateway Center Three Vice President Insurance Company of America
100 Mulberry Street (Prudential) (since September
Newark, New Jersey 07102-4077 1997); Executive Vice President
and Treasurer, Prudential
Investment Fund Management LLC
(PIFM); Senior Vice President
(since March 1987), 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), Prudential
Mutual Fund Management, Inc.;
Vice President and Director, The
Asia Pacific Fund, Inc. (since
May 1989); Director, The High
Yield Income Fund, Inc. (since
October 1996).
*+Arthur B. Laffer (58) Director Chairman of 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), Oxigene
Inc. (since 1998), and MasTec,
Inc. (construction) (since
1994); Chairman, Calport Asset
Management, Inc. (since 1992);
Distinguished University
Professor and Director,
Pepperdine University (September
1985-May 1988), Professor of
Business Economics, University
of Southern California (1978-
1984); Trustee, Nicholas-
Applegate Mutual Funds (since
1993).
</TABLE>
B-8
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupations
Name and Address the Fund During Past Five Years
---------------- ------------- ----------------------
<C> <C> <S>
Charles E. Young (67) Director Chancellor Emeritus (July
10920 Wilshire Blvd. 1987-present), Chancellor
Ste. 1835 (from September 1968 to
Los Angeles, California 90024 July 1997), University of
California at Los Angeles;
Director, Intel Corp.
(since April 1974), Academy
of Television Arts and
Sciences Foundation (since
October 1988), Los Angeles
World Affairs Council
(since October 1977), Town
Hall of California (since
1982); Trustee, Nicholas-
Applegate Mutual Funds
(since 1993).
Grace Torres (39) Treasurer and First Vice President (since
Gateway Center Three Chief Accounting December 1996), PIFM;
100 Mulberry Street Officer formerly First Vice
Newark, New Jersey 07102-4077 President, Prudential
Securities (March 1994-
September 1996); Vice
President, Bankers Trust
Corporation (July 1989-
March 1994).
Stephen M. Ungerman (45) Assistant Treasurer Tax Director, Prudential
Gateway Center Three Investments (since March
100 Mulberry Street 1996); formerly First Vice
Newark, New Jersey 07102-4077 President, Prudential
Mutual Fund Management,
Inc. (February 1993-
September 1996).
Deborah A. Docs (41) Secretary Vice President and Associate
Gateway Center Three General Counsel (since
100 Mulberry Street December 1996), PIFM; Vice
Newark, New Jersey 07102-4077 President and Associate
General Counsel (June 1991-
September 1996), Prudential
Mutual Fund Management,
Inc.; Vice President and
Associate General Counsel,
Prudential Securities.
Robert E. Carlson (68) Assistant Secretary Partner, Paul, Hastings,
555 South Flower Street Janofsky & Walker LLP (law
22nd Floor firm) (since August 1988);
Los Angeles, California formerly Partner (through
his Professional
Corporation), Hufstedler,
Miller, Carlson & Beardsley
(law firm) (1967-1988).
</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 of portion of last two fiscal years his son was an
employee of the Investment Adviser.
Some directors and officers of the Fund are also trustees, directors and
officers of some or all of the other investment companies distributed by
Prudential Securities Incorporated. The officers conduct and supervise the
daily business operations of the Fund, while the Directors review such actions
and decide on general policy.
The Fund pays each of its Directors who is not an affiliated person of PIFM
or the Adviser annual compensation of $10,000 and $1,000 per Board meeting
attended, and in addition, pays to all Directors 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.
B-9
<PAGE>
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended December 31, 1998 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, 1998.
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 March 5, 1999 the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding common stock of the Fund.
As of March 5, 1999, there were no beneficial owners, directly or
indirectly, of more than 5% of the outstanding shares of any class of common
stock of the Fund.
As of March 5, 1999, Prudential Securities was the record holder for other
beneficial owners of 3,424,317 Class A shares (or 42% of the outstanding Class
A shares), 9,906,653 Class B shares (or 59% of the outstanding Class B
shares), 293,767 Class C shares (or 62% of the outstanding Class C shares) and
90,403 Class Z shares (or 99% 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.
INVESTMENT ADVISORY AND OTHER SERVICES
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, 1999, PIFM
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $71.7 billion. According to the
Investment Company Institute, as of November 30, 1998 the Prudential Mutual
Funds were the 18th 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
B-10
<PAGE>
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.
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.
For the fiscal years ended December 31, 1998, 1997 and 1996, PIFM received
net management and administrative fees of $762,503, $892,503 and $892,788.
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,
B-11
<PAGE>
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 23 partners (including Mr. Nicholas)
who manage a staff of approximately 530 employees including 47 portfolio
managers.
Under the terms of the Subadvisory Agreement with the Company and PIFM, 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 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.
During the years ended December 31, 1996, 1997 and 1998, the Fund and the
Manager paid the Investment Adviser aggregate advisory fees of $3,358,584,
$3,357,513 and $2,868,464 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 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.
B-12
<PAGE>
Principal Underwriter, Distributor and Rule 12b-1 Plans
Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of the Fund. Prior to June 1, 1998,
Prudential Securities Incorporated (Prudential Securities) was the Fund's
distributor. PIMS and Prudential Securities are subsidiaries of Prudential.
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 expenses incurred under the Plans include commissions and account
servicing fees paid to, or on account of, brokers or financial institutions
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 the Distributor associated with the sale of
Fund shares, including lease, utility, communications and sales promotion
expenses. The distribution and/or service fees may also be used by the
Distributor to compensate on a continuing basis brokers in consideration for
the distribution, marketing, administrative and other services and activities
provided by brokers with respect to the promotion of the sale of the Fund's
shares and the maintenance of related shareholder accounts.
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.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis dealers in consideration for the
distribution, marketing, administrative and other services and activities
provided by dealers with respect to the promotion of the sale of the Fund's
shares and the maintenance of related shareholder accounts.
Class A Plan. 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 1% of the average daily net assets of the Class A
shares. The Class A Plan provides that (1) 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 (2) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30
of 1%. The Distributor has contractually agreed to limit its distribution-
related fees payable 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, 1999
and voluntarily limited its distribution-related fees for the fiscal year
ended December 31, 1998 to .25 of 1% of the average daily net assets of the
Class A shares.
For the fiscal year ended December 31, 1998, the Distributor and Prudential
Securities collectively received payments of approximately $261,300 under the
Class A Plan and spent approximately $180,400 in distributing the Fund's
shares. This amount was primarily expended for payments of account servicing
fees to financial advisers and other persons who sell Class A shares. For the
fiscal year ended December 31, 1998, the Distributor and Prudential Securities
also collectively received approximately $101,700 in initial sales charges in
connection with the sale of Class A shares.
Class B and Class C Plans. 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 Plan
provides that (1) up to .25 of 1% of the average daily net assets of the Class
B shares may be paid as a service fee and (2) up to .75 of 1% (not including
the service fee) of the average daily net assets of the Class B shares (asset-
based sales charge) may be paid for distribution-related expenses with respect
to the Class B shares. The Class C Plan provides that (1) up to .25 of 1% of
the average daily net assets of the Class C shares may be paid as a service
fee for providing personal service and/or maintaining shareholder accounts and
(2) up to .75 of 1% of the average daily net assets of the Class C shares may
be paid for distribution-related expenses with respect to Class C shares. The
service fee (.25 of 1% of average daily net assets) is used to pay for
personal service and/or the maintenance of shareholder accounts. The
Distributor also
B-13
<PAGE>
receives contingent deferred sales charges from certain redeeming shareholder
and, with respect to Class C shares, an initial sales charge.
Class B Plan. For the fiscal year ended December 31, 1998, the Distributor
and Prudential Securities collectively received approximately $2,503,200 from
the Fund under the Class B Plan and spent approximately $875,600 in
distributing the Fund's Class B shares. It is estimated that of the latter
total amount, approximately 0.1% ($700) was spent on printing and mailing of
prospectuses to other than current shareholders; 30.7% ($268,200) on
compensation to broker-dealers for commissions to representatives and other
expenses, including an allocation of overhead and other branch office
distribution-related expenses, incurred for distribution of Fund shares; and
69.2% ($604,700) on the aggregate of (1) payments of commissions and account
servicing fees to financial advisers (51.4% or $449,300) and (2) an allocation
of overhead and other branch office distribution-related expenses for payments
of related expenses (17.8% or $155,400). The term "overhead and other branch
office distribution-related expenses" represents (a) the expenses of operating
Prudential Securities' and Pruco Securities Corporation's (Prusec's) branch
offices 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) 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 (and Prudential Securities as its predecessor) also receive
the proceeds of contingent deferred sales charges paid by investors upon
certain redemptions of Class B shares. For the fiscal year ended December 31,
1998, the Distributor and Prudential Securities collectively received
approximately $434,000 in contingent deferred sales charges attributable to
Class B shares.
Class C Plan. For the fiscal year ended December 31, 1998, the Distributor
and Prudential Securities collectively received approximately $61,600 under
the Class C Plan and spent approximately $56,800 in distributing Class C
shares. Of the latter total amount, approximately 3.9% ($2,200) on
compensation to broker-dealers for commissions to representatives and other
expenses, including an allocation of overhead and other branch office
distribution-related expenses, incurred for distribution of Fund shares; and
96.1% ($54,500) on the aggregate of (i) payments of commissions and account
servicing fees to financial advisers (90.8% or $51,500) and (ii) an allocation
of overhead and other branch office distribution-related expenses for payments
of related expenses (5.3% or $3,000). For the fiscal year ended December 31,
1998, the Distributor and Prudential Securities also collectively receive
approximately $400 on initial sales charges. The Distributor (and Prudential
Securities as its predecessor) also receive the proceeds of contingent
deferred sales charges paid by investors upon certain redemptions of Class C
shares. For the fiscal year ended December 31, 1998, the Distributor and
Prudential Securities collectively received approximately $2,400 in contingent
deferred sales charges attributable to Class C shares.
Distribution expenses attributable to the sale of Class A, Class B and Class
C shares of the Fund are allocated to each such class based upon the ratio of
sales of each such class to the sales of Class A, Class B and Class C 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.
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 Directors who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the Class A, Class B or Class C Plan or in any agreement related
to the Plans (Rule 12b-1 Directors), cast in person at a meeting called for
the purpose of voting on such continuance. A Plan may be terminated at any
time, without penalty, by the vote of a majority of the Rule 12b-1 Directors
or by the vote of the holders of a majority of the outstanding shares of the
applicable class of the Fund on not more than 30 days' written notice to any
other party to the Plan. 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-14
<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.
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 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.
Fee Waivers/Subsidies
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. In addition,
the Distributor has contractually agreed to waive a portion of its
distribution fees for the Class A shares for the fiscal year ending December
31, 1999. Fee waivers and subsidies will increase the Fund's total return.
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.
Other Service Providers
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 any foreign assets of the Fund held outside the
United States.
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 of $10.00
per shareholder account and a new account set-up fee of $2.00 for each
manually established shareholder account. PMFS is also reimbursed for its out-
of-pocket expenses, including but not limited to postage, stationery,
printing, allocable communication expenses and other costs.
Ernst & Young LLP, 515 Flower Street, Los Angeles, California 90071, serves
as the Fund's independent accountants and in that capacity audits the Fund's
annual financial statements.
BROKERAGE ALLOCATION AND OTHER PRACTICES
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
B-15
<PAGE>
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.
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
securities 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
B-16
<PAGE>
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 below shows certain information regarding the payment of
commissions by the Fund, including the commissions paid to Prudential
Securities, for the three years ended December 31, 1998.
<TABLE>
<CAPTION>
Fiscal year ended December 31,
--------------------------------
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
Total brokerage commissions paid by the
Fund.................................... $1,452,439 $1,554,271 $914,031
Total brokerage commissions paid to
Prudential Securities................... $ 0 $ 0 $ 0
Percentage of total brokerage commissions
paid to Prudential Securities........... 0% 0% 0%
</TABLE>
Of the total brokerage commissions paid during the year ended December 31,
1998, $1,019,039 or (70%) 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.
The Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company
Act) and their parents at December 31, 1998. As of December 31, 1998, the Fund
held no such securities.
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
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 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 on
any matter submitted to shareholders that relates solely to its distribution
and/or service fee arrangements and has separate voting rights on any other
matter submitted to shareholders in which the interests of one class differ
from the interests of another class, (iii) each class has a different exchange
privilege, (iv) only Class B shares have a conversion feature, and (v) Class Z
shares are offered exclusively for sales to a limited group of investors. See
"How the Fund is Managed--Distributor." In accordance with the Company's
Charter, the Board of Directors may authorize the creation of additional
series of common stock, and classes within series, with such preferences,
privileges, limitations and voting and dividend rights as the Board may
determine.
The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares of the Fund are also redeemable at the option of the
Company under certain circumstances as described under "Shareholder Guide--How
to Sell Your Shares." Each share of each class of Common Stock is equal as to
earnings, assets and voting privileges, except as noted above, and each class
bears the expenses related to the distribution of its shares with the
exception of Class Z shares, which are not subject to any distribution or
service fees. Except for the conversion feature applicable to Class B shares,
there are no conversion, preemptive or other subscription rights. In the event
of liquidation, each share of Common Stock of the Fund is entitled to its
portion of all of the Fund's assets after all debts 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
B-17
<PAGE>
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.
PURCHASE, REDEMPTION AND PRICING 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 (1) 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.
Purchase by Wire. For an initial purchase of shares of the Fund by wire, you
must complete an application and telephone PMFS at (800) 225-1852 (toll-free)
to receive an account number. PMFS will request the following information:
your name, address, tax identification number, class election, dividend
distribution election, amount being wired and wiring bank. You should then
give instructions to your bank to transfer funds by wire to State Street Bank
and Trust Company (State Street), Boston, Massachusetts, Custody and
Shareholder Services Division, Attention: Prudential Equity Income Fund,
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 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.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Nicholas-Applegate Fund,
Inc., Class A, Class B, Class C or Class Z shares and your name and individual
account number. You do not need to call PMFS to make subsequent purchase
orders utilizing Federal Funds. The minimum amount which may be invested by
wire is $1,000.
Issuance of Fund Shares for Securities
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (i) reorganizations, (ii) statutory mergers, or
(iii) other acquisitions of portfolio securities that meet the investment
objective and policies of the Fund, are liquid and not subject to restrictions
on resale, have a value that is readily ascertainable via listing on or
trading in a recognized United States or international exchange or market, and
are approved by the Fund's investment adviser.
B-18
<PAGE>
Specimen Price Make-up
Under the current distribution arrangements between the Fund and the
Distributor, the Distributor sells Class A shares at a maximum sales charge of
5%, sells Class C* shares with a 1% sales charge, and sells Class B* and Class
Z shares at NAV. Using the NAV at December 31, 1998, the maximum offering
price of the Fund's shares is as follows:
<TABLE>
<S> <C>
Class A
Net asset value.................................................. $15.38
Maximum sales charge (5% of offering price)...................... .81
------
Offering price to public......................................... $16.19
======
Class B
Net asset value, offering price and redemption price per Class B
share*.......................................................... $13.89
======
Class C
Net asset value, offering price and redemption price per Class C
share*.......................................................... $13.89
Sales charges (1% of offering price) ............................ .14
------
Offering price to public......................................... $14.03
======
Class Z
Net asset value, offering price and redemption price per Class Z
share........................................................... $15.49
======
</TABLE>
----------
*Class B and Class C shares are subject to a contingent
deferred sales charge on certain redemptions.
Selecting a Purchase Alternative
The following will assist you in determining which method of purchase best
suits your individual circumstances, based on the Fund's current fees and
expenses:
If you intend to hold your investment in the Fund for less than 4 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to an initial sales charge of 5% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B
shares.
If you intend to hold your investment for longer than 4 years, but less than
5 years, and do not qualify for a reduced sales charge on Class A shares, you
should consider purchasing Class B or Class C shares over Class A shares. This
is because the initial sales charge plus the cumulative annual distribution-
related fee on Class A shares would exceed those of the Class B and Class C
shares if you redeem your investment during this time period. In addition,
more of your money would be invested initially in the case of Class C shares,
because of the relatively low initial sales charge, and all of your money
would be invested initially in the case of Class B shares, which are sold at
NAV.
If you qualify for a reduced sales charge on Class A shares, you may benefit
by purchasing 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
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 shares and 5 years in the case of
Class C shares for the higher cumulative annual distribution-related fee on
those shares plus, in the case of Class C shares, the 1% initial sales charge
to exceed the initial sales charge plus the cumulative annual distribution-
related fees 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.
B-19
<PAGE>
Reduction and Waiver of Initial Sales Charge--Class A Shares
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 or annuity plans under Sections 401(a), 403(b) and 457 of the
Internal Revenue Code, "rabbi" trusts and non-qualified deferred compensation
plans that are sponsored by any employer that has a tax qualified plan with
Prudential (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 recordkeeping (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 provides
administrative or recordkeeping services, provided that (1) the plan has at
least $1 million in existing assets or 250 eligible employees and (2) 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 PruArray Program (benefit plan recordkeeping service) (hereafter referred
to as a PruArray Plan). All Benefit Plans of a company (or affiliated
companies under common control) for which Prudential serves as plan
administrator or recordkeeper are aggregated in meeting the $1 million
threshold, provided that Prudential has been notified in advance of the
entitlement to the waiver of the sales charge based on the aggregated assets.
The term "existing assets" includes stock issued by a plan sponsor, shares of
Prudential Mutual Funds and shares of certain unaffiliated mutual funds that
participate in the PruArray Plan (Participating Fund). "Existing assets" also
include monies invested in The Guaranteed Investment Account (GIA), a group
annuity insurance product issued by Prudential, The Guaranteed Insulated
Separate Account, a separate account offered by Prudential and units of The
Stable Value Fund (SVF), an unaffiliated bank collective fund. Class A shares
may also be purchased at NAV by plans that have monies invested in GIA and
SVF, provided (1) the purchase is made with the proceeds of a redemption from
either GIA or SVF and (2) 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 a PruArray Plan 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 (1)
have retirement plan assets in the aggregate of at least $1 million or 250
participants in the aggregate and (2) 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 (1)
employees who open an IRA or Savings Accumulation Plan account with the
Transfer Agent and (2) 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
the Distributor or the Transfer Agent, by:
. officers of the Prudential Mutual Funds (including the Fund),
. employees of the Distributor, Prudential Securities, 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,
. employees of subadvisers of the Prudential Mutual Funds provided that
purchases at NAV are permitted by such person's employer,
B-20
<PAGE>
. 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,
. registered representatives and employees of brokers who have entered
into a selected dealer agreement with the Distributor provided that
purchases at NAV are permitted by such person's employer,
. investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) 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, (2) 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 (3) the financial adviser served as the client's broker on the
previous purchase,
. investors in Individual Retirement Accounts, provided the purchase is
made in a directed rollover to such individual Retirement Account with
the proceeds of a tax-free rollover of assets from a Benefit Plan for
which Prudential provides administrative or recordkeeping services and
further provided that such purchase is made within 60 days of receipt of
the Benefit Plan distribution,
. orders placed by broker-dealers, investment advisors or financial
planners who have entered into an agreement with the Distributor, who
place trades for their own accounts or the accounts of their clients and
who charge a management, consulting or other fee for their services
(e.g. mutual fund "wrap" or asset allocation programs), and
. orders placed by clients of broker-dealers, investment advisers or
financial planners who place trades for customer accounts if the
accounts are linked to the master account of such broker-dealer,
investment adviser or financial planner and the broker-dealer,
investment adviser or financial planner charges its clients a separate
fee for its services (e.g. mutual fund "supermarket programs").
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the broker
facilitating the transaction that the sale qualifies for the reduced or waived
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.
Combined Purchase and Cumulative Purchase Privilege. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the
purchases may be combined to take advantage of the reduced sales charges
applicable to larger purchases. See "How to Buy, Sell and Exchange Shares of
the Fund--Reducing or Waiving Class A's Initial Sales Charge" in the
Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
. an individual,
. the individual's spouse, their children and their parents,
. the individual's and spouse's Individual Retirement Account (IRA),
. 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),
. a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children,
. a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse, and
. one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that
employer).
B-21
<PAGE>
The Transfer Agent, the Distributor or your broker 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 your broker will not be
aggregated to determine the reduced sales charge. 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. The Distributor or the Transfer Agent must be notified
at the time of purchase that the investor is entitled to a reduced sales
charge. The reduced sales charges will be granted subject to confirmation of
the investor's holdings. Rights of accumulation are not available to
individual participants in any retirement or group plans.
Letters of Intent. Reduced sales charges also 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,
Prudential or its affiliates, and through your broker will not be aggregated
to determine the reduced sales charge.
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. If 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)
must 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.
B-22
<PAGE>
Class B Shares
The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following
receipt of an order in proper form by the Transfer Agent, your broker or the
Distributor. Although there is no sales charge imposed at the time of
purchase, redemptions of Class B shares may be subject to a CDSC. See "Sale of
Shares--Contingent Deferred Sales Charge" below.
The Distributor will pay, from its own resources, sales commissions of up to
4% of the purchase price of Class B shares to brokers, 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.
Class C Shares
The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, brokers, financial advisers and other
persons which distribute Class C shares a sales commission of up to 2% of the
purchase price at the time of the sale.
Waiver of Initial Sales Charge--Class C Shares
Benefit Plans. Class C shares may be purchased at NAV, without payment of an
initial sales charge, by Benefit Plans (as defined above). 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 recordkeeping (Direct Account Benefit
Plans) and Benefit Plans sponsored by Prudential. Prudential Securities or its
subsidiaries (Prudential Securities or Subsidiary Prototype Benefit Plans).
Class C shares may be purchased at NAV by participants who are repaying the
loans made from such plans to the participant.
Prudential Retirement Plans. The initial sales charge will be waived with
respect to purchases of Class C shares by qualified and non-qualified
retirement and deferred compensation plans participating in the PruArray Plan
and other plans for which Prudential provides administrative or recordkeeping
services.
Investments of Redemption Proceeds from Other Investment
Companies. Investors may purchase Class C shares at NAV, without the initial
sales charge, with the proceeds from the redemption of shares of any
unaffiliated registered investment company which were not held through an
account with any Prudential affiliate. Such purchases must be made within 60
days of the redemption. Investors eligible for this waiver include: (i)
investors purchasing shares through an account at Prudential Securities; (ii)
investors purchasing shares through an ADVANTAGE Account or an Investor
Account with Pruco Securities Corporation (Prusec); and (iii) investors
purchasing shares though other Dealers. This waiver is not available to
investors who purchase shares directly from the Transfer Agent. You must
notify the Transfer Agent directly or through your Dealer if you are entitled
to this waiver and provide the Transfer Agent with such supporting documents
as it may deem appropriate.
Class Z Shares
Class Z shares of the Fund currently are available for purchase by the
following categories of investors:
. 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,
. participants in any fee-based program or trust program sponsored by an
affiliate of the Distributor which includes mutual funds as investment
options and for which the Fund is an available option,
. 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 investment option,
B-23
<PAGE>
. Benefit Plans for which an affiliate of the Distributor provides
administrative or recordkeeping services 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,
. the Prudential Securities Cash Balance Pension Plan, an employee defined
benefit plan sponsored by Prudential Securities,
. current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund);
. employees of Prudential and/or Prudential Securities who participate in
a Prudential-sponsored employee savings plan and
. Prudential with an investment of $10 million or more.
After a Benefit Plan qualifies to purchase Class Z shares, all subsequent
purchases will be for Class Z shares.
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.
Class Z shares of the Fund may also be purchased by certain savings,
retirement and deferred compensation plans, qualified or non-qualified under
the Internal Revenue Code of 1986, as amended (the Internal Revenue Code),
provided that (1) the plan purchases shares of the Fund pursuant to an
investment management agreement with The Prudential Insurance Company of
America or its affiliates, (2) the Fund is an available investment option
under the agreement and (3) the plan will participate in the PruArray and
SmartPath Programs (benefit plan recordkeeping services) sponsored by PMFS
LLC. [These plans include pension, profit-sharing, stock-bonus or other
employee benefit plans under Section 401 of the Internal Revenue Code and
deferred compensation and annuity plans under Sections 457 or 403(b)(7) of the
Internal Revenue Code.
Sale of 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 (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent, the Distributor or your broker. In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable CDSC, as described in "Contingent Deferred Sales Charges" below. If
you are redeeming your shares through a broker, your broker must receive your
sell order before the Fund computes its NAV for that day (that is, 4:15 P.M.,
New York time) in order to receive that day's NAV. Your broker will be
responsible for furnishing all necessary documentation to the Distributor and
may charge you for its services in connection with redeeming shares of the
Fund.
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 face of the
certificates, must be received by the Transfer Agent, the Distributor or your
broker 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 08906-5010, the Distributor or to your
broker.
Signature Guarantee. If the proceeds of the redemption (1) exceed $50,000,
(2) are to be paid to a person other than the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or (4)
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
B-24
<PAGE>
manager of most Prudential Insurance and Financial Services or Preferred
Services offices. In the case of redemptions from a PruArray 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, the Distributor or your broker
of the certificate and/or written request, except as indicated below. If you
hold shares through a broker, payment for shares presented for redemption will
be credited to your account at your broker, unless you indicate otherwise.
Such payment may be postponed or the right of redemption suspended at times
(1) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (2) when trading on such Exchange is restricted, (3)
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
(4) during any other period when the Commission, by order, so permits;
provided that applicable rules and regulations of the Commission shall govern
as to whether the conditions prescribed in (2), (3) or (4) exist.
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, which may take 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 cashier's check.
Redemption in Kind. If the Trustees determine 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. 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 Fund
may redeem all of the shares of any shareholder, other than a shareholder
which is an IRA or other tax-deferred retirement plan, whose account has a net
asset value of less than $500 due to a redemption. The 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 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. Any CDSC paid in connection with such redemption will
be credited (in shares) to your account. (If less than a full repurchase is
made, the credit will be on a pro rata basis.) You must notify the Transfer
Agent, either directly or through the Distributor or your broker, at the time
the repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales
Charge" below. Exercise of the repurchase privilege will generally not affect
federal tax treatment of any gain realized upon redemption. However, if the
redemption was made within a 30 day period of the repurchase and if the
redemption resulted in a loss, some or all of the loss, depending on the
amount reinvested, may not be allowed for federal income tax purposes.
Contingent Deferred Sales Charge
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 18 months of purchase (or one year in the case of
shares purchased prior to November 2, 1998), 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 18 months, in the case of Class C
shares (one year for Class C shares purchased before November 2, 1998). 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 CDSC will be paid to and retained by the
Distributor.
B-25
<PAGE>
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of 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.
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...................................... 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 NAV above the total amount of payments
for the purchase of Class B shares made during the preceding six years (five
years for Class B shares purchased prior to January 22, 1990 and 18 months for
Class C shares (one year for Class C shares bought before November 2, 1998);
then of amounts representing the cost of shares held beyond the applicable
CDSC period; and finally, of amounts representing the cost of shares held for
the longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided
to redeem $500 of your investment. Assuming at the time of the redemption the
NAV had appreciated to $12 per share, the value of your Class B shares would
be $1,260 (105 shares at $12 per share). The CDSC would not be applied to the
value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500
minus $260) would be charged at a rate of 4% (the applicable rate in the
second year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
Waiver of Contingent Deferred Sales Charge--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), 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 are:
(1) in the case of a tax-deferred retirement plan, a lump-sum or other
distribution after retirement;
(2) in the case of an IRA (including a Roth IRA), a lump-sum or other
distribution after attaining age 59 1/2 or a periodic distribution based on
life expectancy;
(3) in the case of a Section 403(b) custodial account, a lump sum or other
distribution after attaining age 59 1/2; and
B-26
<PAGE>
(4) 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.
(5) Finally, the CDSC will be waived to the extent that the proceeds from
shares redeemed are invested in Prudential Mutual Funds. The Guaranteed
Investment Account, the Guaranteed Insulated Separate Account, or units of The
Stable Value Fund.
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 Prudential Securities 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.
Finally, the CDSC will be waived to the extent that the proceeds from shares
redeemed are invested in Prudential Mutual Funds, The Guaranteed Investment
Account, the Guaranteed Insulated Separate Account or units of The Stable
Value Fund.
Systematic Withdrawal Plan. The 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 Fund.
You must notify the Fund's Transfer Agent either directly or through your
broker, 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.
In connection with these waivers, the Transfer Agent will require you to
submit the supporting documentation set forth below.
<TABLE>
<S> <C>
</TABLE>
Category of Waiver Required Documentation
Death A copy of the shareholder's death
certificate or, in the case of a
trust, a copy of the grantor's death
certificate, plus a copy of the
trust agreement identifying the
grantor.
Disability--An individual will be A copy of the Social Security
considered disabled if he or she is Administration award letter or a
unable to engage in any substantial letter from a physician on the
gainful activity by reason of any physician's letterhead stating that
medically determinable physical or the shareholder (or, in the case of
mental impairment which can be a trust, the grantor) is permanently
expected to result in death or to be disabled. The letter must also
of long-continued and indefinite indicate the date of disability.
duration.
Distribution from an IRA or 403(b) A copy of the distribution form from
Custodial Account the custodial firm indicating (i)
the date of birth of the shareholder
and (ii) that the shareholder is
over age 59 1/2 and is taking a
normal distribution--signed by the
shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the
reason for the distribution.
Excess Contributions A letter from the shareholder (for
an IRA) or the plan
administrator/trustee on company
letterhead indicating the amount of
the excess and whether or not taxes
have been paid.
B-27
<PAGE>
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 purchased 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 Distributor or 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.
Waiver of Contingent Deferred Sales Charge--Class C Shares
Prudential Retirement Plans. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in a PruArray Plan and other plans for which Prudential provides
administrative or recordkeeping services. The CDSC will also be waived on
redemptions from Benefit Plans sponsored by Prudential and its affiliates to
the extent that the redemption proceeds are invested in The Guaranteed
Investment Account, the Guaranteed Insulated Separate Account and units of The
Stable Value Fund.
Other Benefit Plans. The CDSC will be waived on redemptions from Benefit
Plans holding shares through a Dealer not affiliated with Prudential and for
whom the Dealer provides administrative or recordkeeping services.
Conversion Feature--Class B Shares
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected
at relative net asset value without the imposition of any additional sales
charge.
Since the 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 purchased and then held in your account.
Each time any Eligible Shares in your account convert to Class A shares, all
shares or amounts representing Class B shares then in your account that were
acquired through the automatic reinvestment of dividends and other
distributions will convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as described
B-28
<PAGE>
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 NAV 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.
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been
made on the last day of the month, or for Class B shares acquired through
exchange, or a series of exchanges, on the last day of the month in which the
original payment for purchases of such Class B shares was made. For Class B
shares previously exchanged for shares of a money market fund, the time period
during which such shares were held in the money market fund will be excluded.
For example, Class B shares held in a money market fund for one year would 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 (1) 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 (2) 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.
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 its 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 broker. 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
B-29
<PAGE>
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.
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.
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.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
In periods of severe market or economic conditions the telephone exchange of
shares may be difficult to implement and you should make exchanges by mail by
writing to Prudential Mutual Fund Services LLC, at the address noted above.
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 of the Fund for Class B and Class C shares, respectively, of
certain other Prudential Mutual Funds and shares of Prudential Special Money
Market Fund, a money market fund. No CDSC will be payable upon such exchange,
but a CDSC may be payable upon the redemption of the Class B and Class C
shares acquired as a result of an exchange. The applicable sales charge will
be that imposed by the fund in which shares were initially purchased and the
purchase date will be deemed to be the first day of the month after the
initial purchase, rather than the date of the exchange.
Class B and Class C shares of the Fund may also be exchanged for Class B and
Class C shares, respectively, of an eligible money market fund without
imposition of any CDSC at the time of exchange. Upon subsequent redemption
from such money market fund or after re-exchange into the Fund, such shares
will be subject to the CDSC calculated without regard to the time such shares
were held in the money market fund. In order to minimize the period of time in
which shares are subject to a CDSC, shares exchanged out of the money market
fund will be exchanged on the basis of their remaining holding periods, with
the longest remaining holding periods being transferred first. In measuring
the time period shares are held in a money market fund
B-30
<PAGE>
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.
Special Exchange Privileges. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for
shareholders who qualify to purchase Class Z shares. Under this exchange
privilege, amounts representing any Class B and Class C shares which are not
subject to a CDSC held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends
and distributions, (2) amounts representing the increase in the net asset
value above the total amount of payments for the purchase of Class B or Class
C shares and (3) amounts representing Class B or Class C shares held beyond
the applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities, Prusec or
another broker that they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares
when they elect to have those assets become a part of the fee-based program.
Upon leaving the program (whether voluntarily or not), such Class Z shares
(and, to the extent provided for in the program, Class Z shares acquired
through participation in the program) will be exchanged for Class A shares at
net asset value. Similarly, participants in Prudential Securities' 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 Prudential Securities 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 Prudential Securities Cash Balance Pension Plan may only exchange its
Class Z shares for Class Z shares of those Prudential Mutual Funds which
permit investment by the Prudential Securities Cash Balance Pension Plan.
Additional details about the exchange privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent, the
Distributor or your broker. 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
B-31
<PAGE>
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 Investment Plan."
- ----------
/1/Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Information about the costs of private colleges is from the Digest of
Education Statistics, 1992; The National Center for Educational Statistics;
and the U.S. Department of Education. Average costs for private institutions
include tuition, fees and room and board for the 1993-1994 academic year.
/2/The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the Fund.
The investment return and principal value of investment will fluctuate so that
an investor's shares when redeemed may be worth more or less than their
original cost.
Automatic Investment Plan ("AIP")
Under AIP, 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 brokerage account (including a Prudential Securities 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 AIP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your broker.
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.
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.
The Transfer Agent, the Distributor or your broker acts 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
B-32
<PAGE>
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-deferred accounts" under
Section 403(b)(7) of the Internal Revenue Code are available through the
Distributor. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants or a pooled account arrangement. Information regarding the
establishment of these plans, their administration, custodial fees and other
details are available from the Distributor 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.
Tax-Deferred Retirement Accounts
Individual Retirement Accounts. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account
until the earnings are withdrawn. The following chart represents a comparison
of the earnings in a personal savings account with those in an IRA, assuming a
$2,000 annual contribution, 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, such as, 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 financial
advisor 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.
B-33
<PAGE>
NET ASSET VALUE
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
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 will be determined at a 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, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of
investments listed on a securities exchange and NASDAQ National Market System
securities (other than options on stock and stock indices) are valued at the
last sale price on such exchange or system 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, or at the bid price on such day in the absence of an asked price.
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 by the Manager in
consultation with the Investment Adviser to be over-the-counter, are valued on
the basis of valuations provided by an independent pricing agent or principal
market maker 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 or, if there was no sale on the applicable commodities
exchange or board of trade on such day, at the mean between the most recently
quoted bid and asked prices on such 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 forward 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 Investment Adviser (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 Investment Adviser including its portfolio manager, traders,
and its research and credit analysts, on the basis of the following factors:
cost of the security, transactions in comparable securities, relationships
among various securities and such other factors as may be determined by the
Manager, Investment Adviser, Board of Directors or Valuation Committee to
materially affect the value of the security. 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.
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. NAV is calculated separately for each class. The NAV of
Class B and Class C shares will
B-34
<PAGE>
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.
Taxes, Dividends and Distributions. 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 capital 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; and (b) 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 20% for individual shareholders and 35% for
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.
B-35
<PAGE>
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes
of calculating gain or loss realized upon a sale or exchange of shares of the
Fund.
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A and Class Z shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share distributions of net capital gains, if any, will be paid in the same
amount for Class A, Class B, Class C and Class Z shares. See "Net Asset
Value."
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.
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.
Average annual total return is computed according to the following formula:
P(1+T)n = ERV
Where:P= a hypothetical initial payment of $1000.
T= average annual total return.
n= number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5, or 10 year periods at the end of the
period (or fractional portion thereof).
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal
or state income taxes that may be payable upon redemption.
Below are the average annual total returns for the Fund's share classes for
the periods ended December 31, 1998.
<TABLE>
<CAPTION>
1 5 10 Since
Year Years Years Inception
----- ----- ----- ---------
<S> <C> <C> <C> <C> <C>
Class A.......................... 7.19% 11.70% 15.86% 12.65% (4-9-87)
Class B.......................... 6.87 11.83 N/A 14.95 (6-10-91)
Class C.......................... 9.75 N/A N/A 16.05 (8-1-94)
Class Z.......................... 13.13 N/A N/A 19.32 (3-18-97)
</TABLE>
The average annual total return for Class A shares for the one year, five
year, ten year and since inception periods ended on December 31, 1998 was
7.19%, 11.70, 15.86 and 12.65% respectively. The average annual total return
for Class B shares for the one year, five year and since inception periods
ended December 31, 1998 was 6.87%, 11.83% and 14.95%, respectively. The
average annual total return for Class C shares for the one year and since
inception periods ended December 31, 1998 was 9.75% and 16.05%, respectively.
The average annual total return for Class Z shares for the one year and since
inception periods ended December 31, 1998 were 13.13% and 19.32%,
respectively.
Aggregate Total Return. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares. See "How the Fund Calculates Performance" in the
Prospectus.
B-36
<PAGE>
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.
Below are the aggregate total returns for the Fund's share classes for the
periods ended December 31, 1998.
<TABLE>
<CAPTION>
1 5 10 Since
Year Years Years Inception
----- ----- ------ ---------
<S> <C> <C> <C> <C> <C>
Class A......................... 12.83% 82.99% 358.63% 325.77% (4-9-87)
Class B......................... 11.87 75.92 N/A 186.72 (6-10-91)
Class C......................... 11.87 N/A N/A 94.88 (8-1-94)
Class Z......................... 13.13 N/A N/A 37.21 (3-18-97)
</TABLE>
Yield. The Fund may from time to time advertise its yield as calculated over
a 30-day period. Yield is calculated separately for Class A, Class B, Class C
and Class Z shares. The yield will be computed by dividing the Fund's net
investment income per share earned during this 30-day period by the maximum
offering price per share on the last day of this period. Yield is calculated
according to the following formula:
a - b
YIELD = 2[(----- +1) /6/-1]
cd
<TABLE>
<S> <C> <C> <C>
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
the average daily number of shares outstanding during the period that were entitled to receive
c = dividends.
d = the maximum offering price per share on the last day of the period.
</TABLE>
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period.
The Fund's 30-day yields for the period ended December 31, 1998 were
(1.14)%, (1.90)%, (1.88)% and (1.01)% for Class A, Class B, Class C and Class
Z shares, respectively.
B-37
<PAGE>
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. Set forth
below is a chart which compares the performance of different types of
investments over the long-term and the rate of inflation./1/
Performance Comparison of Different Types of Investments
Over the Long Term (12/31/25-12/31/98)
[BAR GRAPH APPEARS HERE]
Common Stocks 11.2%
Long-Term Gov't. Bonds 5.3%
Inflation 3.1%
/1/Source: Ibbotson Associates. 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.
B-38
<PAGE>
NICHOLAS-APPLEGATE FUND, INC. Portfolio of Investments
NICHOLAS-APPLEGATE GROWTH EQUITY FUND December 31, 1998
<TABLE>
<CAPTION>
Shares Description Value
(Note 1)
- -------------------------------------------------------
<C> <S> <C>
COMMON STOCKS--98.8%
CAPITAL GOODS--21.0%
Drugs & Healthcare--2.6%
84,800 Bausch & Lomb, Inc......... $ 5,088,000
42,400 Guidant Corp............... 4,674,600
------------
9,762,600
------------
Leisure & Recreation--0.7%
51,900 Harley-Davidson, Inc....... 2,458,763
------------
Retail/Wholesale Specialty Chain--17.7%
49,200 Abercrombie & Fitch Co.*... 3,480,900
25,400 Amazon.Com, Inc.*.......... 8,159,750
112,500 Bed Bath & Beyond, Inc.*... 3,839,062
94,200 Costco Companies, Inc.*.... 6,800,062
151,875 Dollar Tree Stores Inc.*... 6,635,039
216,800 Family Dollar Stores,
Inc...................... 4,769,600
56,500 Kohl's Corp.*.............. 3,471,219
107,900 Micro Warehouse, Inc*...... 3,648,369
65,000 Rite Aid Corp.............. 3,221,563
114,800 Safeway Inc.*.............. 6,995,625
174,100 Staples, Inc.*............. 7,605,994
136,000 Starbucks Corp.*........... 7,633,000
------------
66,260,183
------------
CONSUMER NON-DURABLES--18.1%
Aerospace--0.9%
61,800 Gulfstream Aerospace
Corp.*................... 3,290,850
------------
Airlines--0.6%
71,200 Comair Holdings, Inc....... 2,403,000
------------
Business Services--3.4%
85,850 Concord EFS, Inc.*......... 3,637,894
113,200 Fiserv, Inc.*.............. 5,822,725
66,400 Metzler Group, Inc.
(The)*................... 3,232,850
------------
12,693,469
------------
Drugs & Healthcare--12.9%
112,000 Allegiance Corp............ 5,222,000
81,600 Allergan, Inc.............. 5,283,600
38,700 Cardinal Health, Inc....... 2,936,363
58,100 Elan Corp. PLC (ADR)*...... $ 4,041,581
66,300 Forest Laboratories,
Inc.*.................... 3,526,331
58,300 Genzyme Corp.*............. 2,900,425
33,100 Immunex Corp.*............. 4,164,394
67,900 McKesson Corporation....... 5,368,344
173,300 Watson Pharmaceuticals,
Inc.*.................... 10,896,237
44,500 Wellpoint Health Networks
Inc.*.................... 3,871,500
------------
48,210,775
------------
Equipment Rental--0.3%
36,300 United Rentals Inc.*....... 1,202,437
------------
ENERGY--3.3%
Oil & Gas-Production/Pipeline--1.6%
87,000 Burlington Resources,
Inc...................... 3,115,688
65,100 Diamond Offshore Drilling,
Inc...................... 1,542,056
52,300 Transocean Offshore Inc.... 1,402,294
------------
6,060,038
------------
Oil Services--1.7%
231,200 Global Industries, Ltd.*... 1,416,100
67,000 Smith International,
Inc.*.................... 1,687,562
103,100 Veritas DGC, Inc.*......... 1,340,300
102,600 Weatherford International,
Inc.*.................... 1,987,875
------------
6,431,837
------------
FINANCIAL SERVICES--11.2%
Financial/Business Services
53,900 Capital One Financial
Corp..................... 6,198,500
93,700 CIT Group*................. 2,980,831
87,000 Donaldson, Lufkin &
Jenrette, Inc............ 3,567,000
72,500 FINOVA Group, Inc.......... 3,910,469
41,700 Firstar Corp............... 3,888,525
48,800 Hartford Life, Inc......... 2,842,600
113,800 PaineWebber Group, Inc..... 4,395,525
147,550 Paychex, Inc............... 7,589,603
59,800 ReliaStar Financial
Corp..................... 2,758,275
69,300 Schwab Charles Corp.
(The).................... 3,893,794
------------
42,025,122
------------
</TABLE>
See Notes to Financial Statements.
B-39
<PAGE>
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND (cont'd)
<TABLE>
<CAPTION>
Shares Description Value
(Note 1)
- -------------------------------------------------------
<C> <S> <C>
GENERAL BUSINESS--10.8%
Advertising--3.3%
26,900 CMG Information Services,
Inc.*.................... $ 2,864,850
86,000 Lamar Advertising Co.*..... 3,203,500
214,350 Outdoor Systems, Inc.*..... 6,430,500
------------
12,498,850
------------
Home Furnishings--0.8%
120,800 Shaw Industries, Inc....... 2,929,400
------------
Media--6.7%
129,800 Clear Channel
Communications, Inc.*.... 7,074,100
60,500 Cox Communications,
Inc.*.................... 4,182,063
70,400 Infinity Broadcasting
Corp.*................... 1,927,200
88,400 Jacor Communications,
Inc.*.................... 5,690,750
183,900 USA Networks, Inc.*........ 6,091,687
------------
24,965,800
------------
TECHNOLOGY--34.4%
Computer Networks--8.6%
98,900 3Com Corp.*................ 4,431,956
126,000 Ascend Communications,
Inc.*.................... 8,284,500
210,600 Maxtor Corp.*.............. 2,948,400
112,600 Network Appliance, Inc.*... 5,067,000
115,200 Novell, Inc.*.............. 2,088,000
39,300 RF Micro Devices Inc.*..... 1,822,538
158,300 Seagate Technology,
Inc.*.................... 4,788,575
41,200 Symbol Technologies,
Inc...................... 2,634,225
------------
32,065,194
------------
Computer Services--0.9%
47,000 At Home Corp.*............. 3,489,750
------------
Computer Software--11.1%
102,200 Citrix Systems, Inc.*...... 9,919,787
76,500 Compuware Corp.*........... 5,976,562
34,500 Infoseek Corp.*............ 1,703,438
24,200 Inktomi Corp.*............. 3,130,875
125,700 Netscape Communications
Corp.*................... 7,636,275
64,300 Networks Associates,
Inc.*.................... 4,259,875
69,800 VERITAS Software Corp.*.... $ 4,183,638
20,000 Yahoo! Inc.*............... 4,738,750
------------
41,549,200
------------
Electronic Components--1.4%
84,400 ASM Lithography Holding
NV*...................... 2,574,200
29,400 Solectron Corp.*........... 2,732,362
------------
5,306,562
------------
Semiconductors--5.5%
136,800 Applied Materials, Inc.*... 5,839,650
37,100 Broadcom Corp.*............ 4,479,825
65,300 Micron Technology, Inc.*... 3,301,731
69,500 Novellus Systems, Inc.*.... 3,440,250
53,100 Xilinx, Inc.*.............. 3,458,138
------------
20,519,594
------------
Telecommunication Equipment--2.4%
164,700 General Instrument
Corp.*................... 5,589,506
79,500 Teradyne, Inc.*............ 3,368,813
------------
8,958,319
------------
Telecommunication Services--4.5%
89,500 American Tower Corp.*...... 2,645,844
93,400 Crown Castle International
Corp.*................... 2,194,900
80,900 Qwest Communications
Int'l., Inc.*............ 4,045,000
110,700 Sprint PCS *............... 2,559,937
135,500 WinStar Communications,
Inc.*.................... 5,284,500
------------
16,730,181
------------
Total common stocks
(cost $282,139,845)...... 369,811,924
------------
<CAPTION>
Principal
Amount
(000)
- ----------
<C> <S> <C>
SHORT-TERM INVESTMENTS--2.1%
Commercial Paper
$ 7,956 Northern States Power Co.
5.05%, 1/4/99............ 7,952,652
------------
</TABLE>
See Notes to Financial Statements.
B-40
<PAGE>
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND (cont'd)
<TABLE>
<CAPTION>
Principal
Amount Description Value
(000) (Note 1)
- -------------------------------------------------------
<C> <S> <C>
Other
$ 5 Seven Seas Money Market
Fund..................... $ 5,272
------------
Total short-term
investments
(cost $7,957,925)........ 7,957,924
------------
Total Investments--100.9%
(cost $290,097,770; Note
4)....................... 377,769,848
------------
Liabilities in excess of
other assets--(0.9%)..... (3,370,520)
------------
Net Assets--100%........... $374,399,328
============
</TABLE>
- ---------------
* Non-income producing.
ADR--American Depository Receipt.
See Notes to Financial Statements.
B-41
<PAGE>
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets December 31, 1998
-----------------
<S> <C>
Investments, at value (cost $290,097,770)............................................. $ 377,769,848
Cash.................................................................................. 152,374
Receivable for investments sold....................................................... 9,011,094
Receivable for Fund shares sold....................................................... 2,357,893
Dividends and interest receivable..................................................... 78,080
Prepaid expenses...................................................................... 53,394
-------------
Total assets...................................................................... 389,422,683
-------------
Liabilities
Payable for investments purchased..................................................... 12,904,232
Payable for Fund shares reacquired.................................................... 1,394,507
Management fee payable................................................................ 277,930
Distribution fee payable.............................................................. 212,349
Accrued expenses...................................................................... 234,337
-------------
Total liabilities................................................................. 15,023,355
-------------
Net Assets............................................................................ $ 374,399,328
=============
Net assets were comprised of:
Common stock, at par................................................................ $ 260,308
Paid-in capital in excess of par.................................................... 250,684,837
-------------
250,945,145
Accumulated net realized gain on investments........................................ 35,782,105
Net unrealized appreciation on investments.......................................... 87,672,078
-------------
Net assets, December 31, 1998......................................................... $ 374,399,328
=============
Class A:
Net asset value and redemption price per share
($130,362,161 / 8,475,178 shares of common stock issued and outstanding).......... $15.38
Maximum sales charge (5% of offering price)......................................... .81
------
Maximum offering price to public.................................................... $16.19
======
Class B:
Net asset value, offering price and redemption price per share
($236,241,847 / 17,006,638 shares of common stock issued and outstanding)......... $13.89
======
Class C:
Net asset value, offering price and redemption price per share
($6,146,000 / 442,459 shares of common stock issued and outstanding).............. $13.89
Maximum sales charge (1% of offering price)......................................... .14
------
Maximum offering price to public.................................................... $14.03
======
Class Z:
Net asset value, offering price and redemption price per share
($1,649,320 / 106,487 shares of common stock issued and outstanding).............. $15.49
======
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-42
<PAGE>
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
December 31,
Net Investment Loss 1998
-------------
<S> <C>
Income
Dividends (net of foreign
withholding taxes
of $343)......................... $ 551,149
Interest........................... 446,141
-------------
Total income..................... 997,290
-------------
Expenses
Management fees.................... 3,630,967
Distribution fee--Class A.......... 261,257
Distribution fee--Class B.......... 2,503,173
Distribution fee--Class C.......... 61,638
Transfer agent's fees and
expenses......................... 680,000
Custodian's fees and expenses...... 103,000
Reports to shareholders............ 100,000
Directors' fees.................... 77,000
Registration fees.................. 50,000
Audit fees and expense............. 33,500
Insurance expense.................. 33,000
Legal fees and expenses............ 25,000
Miscellaneous...................... 5,390
-------------
Total expenses................... 7,563,925
-------------
Net investment loss.................. (6,566,635)
-------------
Realized and Unrealized
Gain on Investments
Net realized gain on investment
transactions....................... 35,691,553
Net change in unrealized appreciation
of investments..................... 13,250,865
-------------
Net gain on investments.............. 48,942,418
-------------
Net Increase in Net Assets
Resulting from Operations............ $ 42,375,783
=============
</TABLE>
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
Increase (Decrease) December 31, December 31,
in Net Assets 1998 1997
------------------ -------------
<S> <C> <C>
Operations
Net investment loss... $ (6,566,635) $ (6,194,430)
Net realized gain on
investment
transactions........ 35,691,553 94,942,716
Net change in
unrealized
appreciation
(depreciation)
on investments...... 13,250,865 (18,521,412)
------------------ -------------
Net increase in net
assets resulting
from operations..... 42,375,783 70,226,874
------------------ -------------
Distributions to
shareholders from net
realized gains on
investments
Class A............. (7,262,297) (27,098,267)
Class B............. (15,902,446) (63,813,523)
Class C............. (391,936) (1,442,170)
Class Z............. (81,237) (66,424)
------------------ -------------
(23,637,916) (92,420,384)
------------------ -------------
Fund share transactions
(Note 5)
(net of share
conversions)
Net proceeds from
shares subscribed... 176,084,464 543,622,835
Net asset value of
shares issued to
shareholders in
reinvestment of
distributions....... 21,975,782 84,714,423
Cost of shares
reacquired.......... (267,946,119) (650,219,421)
------------------ -------------
Net decrease in net
assets from Fund
share
transactions........ (69,885,873) (21,882,163)
------------------ -------------
Total decrease.......... (51,148,006) (44,075,673)
Net Assets
Beginning of year....... 425,547,334 469,623,007
------------------ -------------
End of year............. $ 374,399,328 $ 425,547,334
================== =============
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-43
<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 of U.S. companies, the
earnings and securities prices of which the investment adviser expects to grow
at a rate above that of the S&P 500. The Fund intends to invest primarily in
stocks from a universe of U.S. companies with market capitalizations
corresponding to the middle 90% of the Russell Midcap Growth Index at time of
purchase. Capitalization of companies in the Index will change with market
conditions.
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. Realized and unrealized gains and losses from
security transactions are calculated on the identified cost basis. Dividend
income is recorded on the ex-dividend date and interest income is recorded on an
accrual basis. Expenses are recorded on the accrual basis which may require the
use of certain estimates by management.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
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, 1998 the Fund decreased accumulated net investment loss by
$6,566,635 and decreased paid-in capital by $6,566,635 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 investment advisory services and supervises the
subadviser's
- --------------------------------------------------------------------------------
B-44
<PAGE>
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, 1998, PIFM earned $3,630,967 in management fees of which it
paid $2,868,464 to NACM under the foregoing agreements.
The Fund had a distribution agreement with Prudential Securities Incorporated
("PSI"), which acted as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund through May 31, 1998. Prudential Investment
Management Services LLC ("PIMS") became the distributor of the Fund effective
June 1, 1998 and is serving the Fund under the same terms and conditions as
under the arrangement with PSI. The Fund compensated PSI and PIMS 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 are accrued daily and
payable monthly. No distribution or service fees are paid to PSI or PIMS as
distributor for the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS 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 .21 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, 1998.
PSI and PIMS have advised the Fund that they have received approximately
$102,000 in front-end sales charges resulting from sales of Class A shares and
after November 2, 1998 Class C shares for the year ended December 31, 1998. From
these fees, PSI and PIMS 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 and PIMS have advised the Fund that for the year ended December 31, 1998,
they received approximately $436,400 in contingent deferred sales charges
imposed upon certain redemptions by Class B and C shareholders.
PSI, PIFM, PIMS 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, 1998. 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 29, 1998 and has been extended through February 28, 1999
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, 1998, the Fund incurred fees of approximately
$572,000 for the services of PMFS. As of December 31, 1998, approximately
$45,100 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, 1998 aggregated $644,599,740 and $744,085,307, respectively.
The cost basis of investments for federal income tax purposes at December 31,
1998 was $290,185,266 and, accordingly, net unrealized appreciation of
investments for federal income tax purposes was $87,584,582 (gross unrealized
appreciation--$97,200,513; gross unrealized depreciation--$9,615,931).
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.
Prior to November 2, 1998, Class C
- --------------------------------------------------------------------------------
B-45
<PAGE>
shares were sold with a contingent deferred sales charge of 1% during the first
year. Effective November 2, 1998, Class C shares are sold with a front-end sales
charge of 1% and a contingent deferred sales charge of 1% during the first 18
months. Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. A special exchange
privilege is also available for shareholders who qualified to purchase Class A
shares at net asset value. 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:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------- ----------- -------------
<S> <C> <C>
Year ended December 31, 1998:
Shares sold................... 7,446,667 $ 106,396,040
Shares issued in reinvestment
of dividends and
distributions............... 449,538 6,346,234
Shares reacquired............. (9,167,087) (131,574,252)
----------- -------------
Net decrease in shares
outstanding before
conversion.................. (1,270,882) (18,831,978)
Shares issued upon conversion
from Class B................ 489,749 7,024,166
----------- -------------
Net decrease in shares
outstanding................. (781,133) $ (11,807,812)
=========== =============
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)
=========== =============
<CAPTION>
Class B Shares Amount
- ------- ----------- -------------
<S> <C> <C>
Year ended December 31, 1998:
Shares sold................... 5,070,770 $ 65,665,558
Shares issued in reinvestment
of distributions............ 1,182,446 15,174,732
Shares reacquired............. (10,146,490) (131,935,822)
----------- -------------
Net decrease in shares
outstanding before
conversion.................. (3,893,274) (51,095,532)
Shares reacquired upon
conversion into Class A..... (538,840) (7,024,166)
----------- -------------
Net decrease in shares
outstanding................. (4,432,114) $ (58,119,698)
=========== =============
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)
=========== =============
<CAPTION>
Class C
- -------
<S> <C> <C>
Year ended December 31, 1998:
Shares sold................... 178,150 $ 2,342,004
Shares issued in reinvestment
of distributions............ 29,154 373,747
Shares reacquired............. (274,036) (3,655,185)
----------- -------------
Net decrease in shares
outstanding................. (66,732) $ (939,434)
=========== =============
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
=========== =============
</TABLE>
- --------------------------------------------------------------------------------
B-46
<PAGE>
<TABLE>
<CAPTION>
Class Z Shares Amount
- ------- ----------- -------------
<S> <C> <C>
Year ended December 31, 1998:
Shares sold................... 111,423 $ 1,680,862
Shares issued in reinvestment
of dividends and
distributions............... 5,739 81,069
Shares reacquired............. (54,259) (780,860)
----------- -------------
Net increase in shares
outstanding................. 62,903 $ 981,071
=========== =============
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
=========== =============
</TABLE>
- ---------------
(a) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
B-47
<PAGE>
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
Financial Highlights
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............... $ 14.47 $ 15.41 $ 15.18 $ 11.99 $ 13.56
-------- -------- -------- -------- -------
Income from investment operations:
- ---------------------------------
Net investment loss.............................. (.17) (.12) (.14) (.11) (.07)
Net realized and unrealized gain (loss) on
investment transactions........................ 1.95 2.60 2.64 3.82 (1.19)
-------- -------- -------- -------- -------
Total from investment operations............... 1.78 2.48 2.50 3.71 (1.26)
-------- -------- -------- -------- -------
Less distributions:
- ------------------
Distributions from net realized gains from
investment transactions........................ (.87) (3.42) (2.27) (.52) (.31)
-------- -------- -------- -------- -------
Total distributions............................ (.87) (3.42) (2.27) (.52) (.31)
-------- -------- -------- -------- -------
Net asset value, end of year..................... $ 15.38 $ 14.47 $ 15.41 $ 15.18 $ 11.99
======== ======== ======== ======== =======
TOTAL RETURN(b):................................. 12.83% 17.33% 16.45% 31.20% (9.53)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).................... $130,362 $133,973 $145,120 $124,340 $88,069
Average net assets (000)......................... $124,408 $139,933 $136,482 $109,740 $93,620
Ratios to average net assets:
Expenses, including distribution fee........... 1.45% 1.37% 1.41% 1.44% 1.49%(d)
Expenses, excluding distribution fee........... 1.24% 1.19% 1.23% 1.27% 1.32%(d)
Net investment loss............................ (1.19)% (.82)% (.93)% (.83)% (.59)%
For Class A, B, C and Z shares:
Portfolio turnover rate(c)....................... 171% 182% 113% 106% 110%
</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 year 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-48
<PAGE>
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
Financial Highlights
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------
1998 1997 1996 1995(a) 1994(a)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.............. $ 13.26 $ 14.48 $ 14.49 $ 11.56 $ 13.18
-------- -------- -------- -------- --------
Income from investment operations:
- ---------------------------------
Net investment loss............................. (.29) (.23) (.24) (.22) (.17)
Net realized and unrealized gain (loss) on
investment transactions....................... 1.79 2.43 2.50 3.67 (1.14)
-------- -------- -------- -------- --------
Total from investment operations.............. 1.50 2.20 2.26 3.45 (1.31)
-------- -------- -------- -------- --------
Less distributions:
- ------------------
Distributions from net realized gains from
investment transactions....................... (.87) (3.42) (2.27) (.52) (.31)
-------- -------- -------- -------- --------
Total distributions........................... (.87) (3.42) (2.27) (.52) (.31)
-------- -------- -------- -------- --------
Net asset value, end of year.................... $ 13.89 $ 13.26 $ 14.48 $ 14.49 $ 11.56
======== ======== ======== ======== ========
TOTAL RETURN(b):................................ 11.87% 16.48% 15.54% 30.11% (10.20)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................... $236,242 $284,191 $317,768 $290,751 $257,059
Average net assets (000)........................ $250,317 $300,520 $304,841 $265,597 $261,285
Ratios to average net assets:
Expenses, including distribution fee.......... 2.24% 2.19% 2.23% 2.27% 2.32%(c)
Expenses, excluding distribution fee.......... 1.24% 1.19% 1.23% 1.27% 1.32%(c)
Net investment loss........................... (1.98)% (1.64)% (1.75)% (1.66)% (1.39)%
</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 year 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-49
<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,
1998 1997 1996 1995(a) 1994(a) 1998 1997
------ ------ -------- -------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................. $13.26 $14.48 $ 14.49 $ 11.56 $ 11.62 $ 14.53 $ 14.48
------ ------ -------- -------- ------------ ------- ----------
Income from investment
- ----------------------
operations:
----------
Net investment loss......... (.28) (.22) (.22) (.22) (.05) (.12) (.22)
Net realized and unrealized
gain (loss) on investment
transactions.............. 1.78 2.42 2.48 3.67 (.01) 1.95 3.18
------ ------ -------- -------- ---------- ------- ----------
Total from investment
operations................ 1.50 2.20 2.26 3.45 (.06) 1.83 2.96
------ ------ -------- -------- ---------- ------- ----------
Less distributions:
- ------------------
Distributions from net
realized gains from
investment transactions... (.87) (3.42) (2.27) (.52) -- (.87) (2.91)
------ ------ -------- -------- ---------- ------- ----------
Total distributions....... (.87) (3.42) (2.27) (.52) -- (.87) (2.91)
------ ------ -------- -------- ---------- ------- ----------
Net asset value, end of
period.................... $13.89 $13.26 $ 14.48 $ 14.49 $ 11.56 $ 15.49 $ 14.53
====== ====== ======== ======== ========== ======= ==========
TOTAL RETURN(b):............ 11.87% 16.48% 15.54% 30.11% (.52)% 13.13% 21.90%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)..................... $6,146 $6,750 $ 6,735 $ 4,897 $ 1,100 $ 1,649 $ 633
Average net assets (000).... $6,164 $6,796 $ 5,862 $ 2,961 $ 225 $ 1,318 $ 121
Ratios to average net
assets:
Expenses, including
distribution fee........ 2.24% 2.19% 2.23% 2.27% 6.23%(d)(e) 1.24% 1.19%(d)
Expenses, excluding
distribution fee........ 1.24% 1.19% 1.23% 1.27% 5.23%(d)(e) 1.24% 1.19%(d)
Net investment loss....... (1.98)% (1.64)% (1.75)% (1.63)% (3.36)%(d) (.99)% (.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-50
<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, 1998, 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 four years in the period then ended for
Class A, B, C shares, and for each of the two fiscal years in the period ended
December 31, 1998 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 the year ended December 31, 1994 for Class A and Class B shares,
and for the period from August 1, 1994 (commencement of 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 and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1998 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, 1998, 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 four years in the period then ended for Class A, B, C shares, and
for each of the two fiscal years in the period ended December 31, 1998 for Z
shares, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
February 12, 1999
B-51
<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
(VALUE OF $1 INVESTED ON 12/31/25)
[GRAPH APPEARS HERE]
[PLOT POINTS TO COME]
Small Stocks -- $5,116.95 Long-Term Bonds -- $44.18
Common Stocks -- $2,350.89 Treasury Bills -- $14.94
Inflation -- $ 9.16
Source:Ibbotson Associates. 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 1988
through 1998. 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 "Risk/Return Summary--Fees and 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>
- ------------------------------------------------------------------------------------------
YEAR 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS/1/ 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% -3.4% 18.4% 2.7% 9.6% 10.0%
- -------------------------------------------------------------------------------------------
U.S. GOVERNMENT
MORTGAGE
SECURITIES/2/ 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% -1.6% 16.8% 5.4% 9.5% 7.0%
- ------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE
CORPORATE BONDS/3/ 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% -3.9% 22.3% 3.3% 10.2% 8.6%
- ------------------------------------------------------------------------------------------
U.S. HIGH YIELD
BONDS/4/ 12.5% 0.8% -9.6% 46.2% 15.8% 17.1% -1.0% 19.2% 11.4% 12.8% 1.6%
- ------------------------------------------------------------------------------------------
WORLD GOVERNMENT
BONDS/5/ 2.3% -3.4% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% -4.3% 5.3%
- ------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN
HIGHEST AND LOWEST
RETURNS PERCENT 10.2% 18.8% 24.9% 30.9% 11.0% 10.3% 9.9% 5.5% 8.7% 17.1% 8.4%
- ------------------------------------------------------------------------------------------
</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. Data
retrieved from Lipper, Inc.
/5/ Salomon Smith Barney 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 12/31/85 through 12/31/98. It does not represent the performance of
any Prudential Mutual Fund.
AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS 12/31/85-12/31/98 (IN
U.S. DOLLARS)
[BAR CHART APPEARS HERE]
Belgium 22.7%
Spain 22.5%
The Netherlands 20.85
Sweden 19.9%
Switzerland 18.3%
USA 18.1%
Hong Kong 17.8%
France 17.4%
UK 16.7%
Germany 13.4%
Austria 8.9%
Japan 6.5%
Source: Morgan Stanley Capital International (MSCI) and Lipper, Inc. as of
12/31/98. 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.
[LINE GRAPH APPEARS HERE]
[PLOT POINTS TO COME]
Capital Appreciation and
Reinvesting Dividends -- $391,707
Capital Appreciation only -- $133,525
Source: Lipper, Inc. 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-
weighted 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: $15.8 TRILLION
[PIE CHART APPEARS HERE]
U.S. 51.0%
Europe 34.7%
Pacific Basin 12.5%
Canada 1.8%
Source: Morgan Stanley Capital International, December 31, 1998. 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
1577 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.
II-4
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
LONG TERM U.S. TREASURY BOND YIELD IN PERCENT (1926-1998)
[LINE GRAPH]
- ------------------------------------------
Source: Stocks, Bonds, Bills, and Inflation 1998 Yearbook, Ibbotson
Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. The chart illustrates
the historical yield of the long-term U.S. Treasury Bond from 1926-1997.
Yields represent that of an annually renewed one-bond portfolio with a
remaining maturity of approximately 20 years. This chart is for illustrative
purposes and should not be construed to represent the yields of any Prudential
Mutual Fund.
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, 1997 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, 1997. 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
[79,000] persons worldwide, and maintains a sales force of approximately
10,100 agents and 6,500 domestic and international 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 40 million people
worldwide. Long one of the largest issuers of life insurance, Prudential has
25 million life insurance policies in force today with a face value of almost
$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 more than 1.5 million cars and insures more than 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, 1997, Prudential had more than $370 billion in
assets under management. Prudential Investments, a business group of
Prudential (of which Prudential Mutual Funds is a key part), manages over $211
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 and more than 1,100 offices throughout the United States./2/
[Healthcare. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.9
million Americans receive healthcare from a Prudential managed care
membership.]
Financial Services. The Prudential Savings Bank FSB, 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 December 30, 1997 Prudential Investments Fund Management is the 18th
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.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
- ----------
/1/ PIC 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 one of the subadvisors to Prudential Investment Portfolios,
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>
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 LLC, 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 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
- ----------
/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.
/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.
III-2
<PAGE>
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 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
Annuities. As of December 31, 1997, assets held by Prudential Securities for
its clients approximated $235 billion. During 1997, over 29,000 new customer
accounts were opened each month at Prudential Securities./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.
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey.
Three 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.
- ----------
/6/ As of December 31, 1994.
/7/ As of December 31, 1997.
/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
<PAGE>
PART C
OTHER INFORMATION
Item 23.
Exhibits:
(a) (1) Articles of Amendment and Restatement of Charter of Registrant,
incorporated by reference to Exhibit 1(a) to Post Effective
Amendment No. 11 to the Registration Statement on Form N-1A (File
No. 33-38461) filed via Edgar on March 4, 1998.
(2) Articles of Amendment of Charter of Registrant, incorporated by
reference to Exhibit 1(b) to Post Effective Amendment No. 11 to the
Registration Statement on Form N-1A (File No. 33-38461) filed via
Edgar on March 4, 1998.
(3) Certificate of Correction, incorporated by reference to Exhibit
1(c) to Post Effective Amendment No. 11 to the Registration Statement
on Form N-1A (File No. 33-38461) filed via Edgar on March 4, 1998.
(4) Articles of Amendment of Charter, incorporated by reference to
Exhibit 1(d) to Post Effective Amendment No. 11 to the Registration
Statement on Form N-1A (File No. 33-38461) filed via Edgar on March
4, 1998.
(5) Articles of Amendment of Charter of the Registrant, incorporated
by reference to Exhibit 1(e) to Post Effective Amendment No. 11 to
the Registration Statement on Form N-1A (File No. 33-38461) filed via
Edgar on March 4, 1998.
(6) Articles of Amendment of Charter of the Registrant, incorporated
by reference to Exhibit 1(f) to Post Effective Amendment No. 11 to
the Registration Statement on Form N-1A (File No. 33-38461) filed via
Edgar on March 4, 1998.
(7) Articles Supplementary, incorporated by reference to Exhibit 1(g)
to Post-Effective Amendment No. 10 to the Registration Statement on
Form N-1A (File No. 33-38461) filed via Edgar on March 7, 1997.
(8) Articles Supplementary, incorporated by reference to Exhibit (a)
(8) to Post-Effective Amendment No. 12 to the Registration Statement
on Form N-1A (File No. 33-38461) filed via Edgar on January 12, 1999.
(b) (1) Amended and Restated By-Laws of the Registrant, incorporated by
reference to Exhibit 2(a) to Post Effective Amendment No. 11 to the
Registration Statement on Form N-1A (File No. 33-38461) filed via
Edgar on March 4, 1998.
(2) Amended By-Laws of Registrant, incorporated by reference to
Exhibit 2(b) to Post Effective Amendment No. 11 to the Registration
Statement on Form N-1A (File No. 33-38461) filed via Edgar on March
4, 1998.
(c) (1) Specimen stock certificates for Class A shares, incorporated by
reference to Exhibit 4(a) to Post Effective Amendment No. 11 to the
Registration Statement on Form N-1A (File No. 33-38461) filed via
Edgar on March 4, 1998.
(2) Specimen stock certificates for Class B shares, incorporated by
reference to Exhibit 4(b) to Post Effective Amendment No. 11 to the
Registration Statement on Form N-1A (File No. 33-38461) filed via
Edgar on March 4, 1998.
(d) (1) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc., incorporated by reference to Exhibit
5(a) to Post Effective Amendment No. 11 to the Registration
Statement on Form N-1A (File No. 33-38461) filed via Edgar on March
4, 1998.
(2) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and Nicholas-Applegate Capital Management, incorporated by
reference to Exhibit 5(b) to Post Effective Amendment No. 11 to the
Registration Statement on Form N-1A (File No. 33-38461) filed via
Edgar on March 4, 1998.
(e) (1) Distribution Agreement with Prudential Investment Management
Services LLC, incorporated by reference to Exhibit (e) (1) to Post-
Effective Amendment No. 12 to the Registration Statement on form N-
1A (File No. 33-38461) filed via Edgar on January 12, 1999.
(2) Selected Dealer Agreement, incorporated by reference to Exhibit
(e) (2) to Post-Effective Amendment No. 12 to the Registration
Statement on Form N-1A (File No. 33-38461) filed via Edgar on January
12, 1999.
C-1
<PAGE>
(f) Not Applicable.
(g) (1) Custodian Contract between the Registrant and State Street Bank
and Trust Company, incorporated by reference to Exhibit 8(a) to
Post-Effective Amendment No. 11 to the Registration Statement on
Form N-1A (File No. 33-38461) filed via Edgar on March 4, 1998.
(2) Addendum to Custodian Contract between the Registrant and State
Street Bank and Trust Company, incorporated by reference to Exhibit
8(b) to Post-Effective Amendment No. 11 to the Registration statement
on Form N-1A (File No. 33-38461) filed via Edgar on March 4, 1998.
(h) (1) Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc., incorporated by reference to
Exhibit 9(a) to Post-Effective Amendment No. 11 to the Registration
Statement on Form N-1A (File No. 33-38461) filed via Edgar on March
4, 1998.
(2) Credit Facility Agreement between the Registrant and
Deutschebank.*
(i) Opinion of counsel, incorporated by reference to Exhibit 10 to Post-
Effective Amendment No. 11 to the Registration Statement on Form N-
1A (File No. 33-38461) filed via Edgar on March 4, 1998.
(j) Consent of Independent Accounts.*
(k) Not applicable.
(l) Not applicable.
(m) (1) Amended and Restated Distribution and Service Plan for Class A
Shares, incorporated by reference to Exhibit (m) (1) to Post-
Effective Amendment No. 12 to the Registration Statement on Form N-
1A (File No. 33-38461) filed via Edgar on January 12, 1999.
(2) Amended and Restated Distribution and Service Plan for Class B
Shares, incorporated by reference to Exhibit (m) (2) to Post-
Effective Amendment No. 12 to the Registration Statement on Form N-1A
(File No. 33-38461) filed via Edgar on January 12, 1999.
(3) Amended and Restated Distribution and Service Plan for Class C
Shares, incorporated by reference to Exhibit (m) (3) to Post-
Effective Amendment No. 12 to the Registration Statement on Form N-1A
(File No. 33-38461) filed via Edgar on January 12, 1999.
(n) Financial Data Schedules.*
(o) Amended Rule 18f-3 Plan, incorporated by reference to Exhibit (o) to
Post-Effective Amendment No. 12 to the Registration Statement on
Form N-1A (File No. 33-38461) filed via Edgar on January 12, 1999.
- ----------
*Filed herewith.
Item 24. Persons Controlled by or under Common Control with Registrant.
None.
Item 25. Indemnification.
Section 9 of the Management Agreement filed herewith as Exhibit (a)(1)
generally provides that the Manager will not be liable for any error of
judgment or for any loss suffered by the Registrant in connection with the
matters to which the Management Agreement relates, except a loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation
for services or for willful misfeasance, bad faith, gross negligence or
reckless disregard of duty. See "Manager" in the Statement of Additional
Information.
Under Section 5 of the Subadvisory Agreement filed herewith as Exhibit
(a)(2) the Investment Adviser is provided with indemnification by the
Registrant against liabilities, costs and expenses that the Investment Adviser
may incur in connection with any action, suit, investigation or other
proceeding arising out of or otherwise based on any action actually or
allegedly taken or omitted to be taken by the Investment Adviser in connection
with the performance of its duties or obligations under the Subadvisory
Agreement or otherwise as an Investment Adviser of the Registrant; provided,
however, that no indemnification shall be provided
C-2
<PAGE>
by the Registrant with respect to any liability of the Investment Adviser to
the Registrant or its shareholders by reason of the willful misfeasance, bad
faith or gross negligence in the performance of the Investment Adviser's
duties, by reason of its reckless disregard of its duties and obligations or
by reason of its breach of fiduciary duty under the Subadvisory Agreement. See
"Investment Adviser" in the Statement of Additional Information.
Indemnification of Prudential Securities (the "Distributor"), the
Distributor of the Class A, Class B, Class C and Class Z Common Stock,
respectively, of the Fund, is provided in Section 10 of the Distribution
Agreement filed herewith as Exhibit (e), which provision provides that the
Fund will indemnify the named Distributor and its officers, directors, and
control persons for any and all claims, demands, liabilities and expenses
which any of them may incur for untrue statements of fact, or omissions to
state a material fact, in the Registrant's Registration Statement or
Prospectus. such indemnification is only afforded such Distributor or its
officers, directors and control persons if a determination is made that the
person to be indemnified was not liable by reason of willful misfeasance, bad
faith or gross negligence in the performance of such person's duties or by
reason of its reckless disregard of such person's obligations under the
Distributor's Distribution Agreement with the Fund.
Liability of the Registrant's custodian, State Street Bank and Trust
Company, is limited under Section 3.10 of the Custodian Agreement filed
herewith as Exhibit (g) (1) and (2).
Indemnification of the Registrant's transfer agent, Prudential Mutual Fund
Services LLC ("PMFS"), is provided in Article 5 of the Transfer Agent
Agreement filed herewith as Exhibit (h). In Section 5.01 of Article 5 of the
Transfer Agent Agreement, the Fund has agreed to indemnify PMFS for, and hold
it harmless from, any losses, damages, costs, expenses and liability arising
out of or attributable to: (i) the actions of PMFS or its agents and
subcontractors taken pursuant to the Transfer Agent Agreement (provided that
such actions are taken in good faith and without negligence or willful
misconduct); (ii) the Fund's failure to perform its obligations under the
Transfer Agent Agreement; (iii) the reliance by PMFS or its agents on
information, records or documents received by PMFS from or on behalf of the
Fund; (iv) the reliance by PMFS on any instructions or requests of the Fund;
or (v) the offer or sale of shares of the Fund in violation of any
registration requirements imposed under Federal or applicable state securities
laws.
The Registrant, its officers and directors, and the Investment Adviser are
insured under an errors and omissions liability insurance policy which,
generally, covers claims by the Registrant's shareholders based on negligent
acts by the insureds, negligent failure to discover dishonest acts and the
costs and expenses of defending those claims. Such insurance does not protect
nor purport to protect the insured parties from liability to the Registrant or
its shareholders to which such person would otherwise be subject by reason of
such person's commission of fraud, dishonesty or malicious acts or omissions
or any willful breach of duty, neglect, misstatement, misleading statement or
other act done or wrongfully attempted in the performance of such person's
duties.
Section 2-418 of the General Corporation Law of the State of Maryland
provides that a corporation may indemnify any director who is made a party to
any proceeding by reason of his or her service as a director, except in
circumstances where the director acted in bad faith or with active and
deliberate dishonesty, or the director received an improper personal benefit,
or in the case of any criminal proceeding, the director had reasonable cause
to believe that the act or omission was unlawful. The indemnification afforded
a director may be made with respect to judgments, penalties, fines,
settlements and reasonable expenses actually incurred by the director in
connection with the proceeding. However, if the proceeding was won by or in
the right of the corporation, indemnification may not be made in respect to
any proceeding in which the director shall have been adjudicated to be liable
to the corporation. The indemnification and advancement of expenses provided
or authorized by Section 2-418 of the Maryland General Corporation Law are not
exclusive of any other rights, by indemnification or otherwise, to which a
director may be entitled under the charter, bylaws, a resolution of
shareholders or directors, an agreement or otherwise, both as to action in an
official capacity and as to action in another capacity while holding such
office. A corporation, in addition, may indemnify and advance expenses to an
officer, employee or agent who is not a director to the same extent that it
may indemnify directors under Section 2-418 of the Maryland General
Corporation Law. Section 10 of Article Eighth of the Registrant's Charter
filed herewith as Exhibit 1A provides the Directors and officers of the
Registrant with affirmative indemnification rights to the fullest extent
provided by Maryland law or of any other applicable jurisdiction consistent
with applicable law.
In addition, Section 2-405.2 of the Maryland General Corporation Law
provides that the charter of a corporation may include any provision expanding
or limiting the liability of the corporation's directors and officers to the
corporation or its shareholders
C-3
<PAGE>
for money damages except (i) to the extent that it is proved that the person
actually received an improper benefit or profit in money, property or
services, for the amount of the benefit or profit in money, property or
services actually received or (ii) to the extent that a judgment or other
financial adjudication adverse to the person is entered in a proceeding based
on a finding in the proceeding that the person's action, or failure to act,
was the result of active and deliberate dishonesty and was material to the
cause of action adjudicated in the proceeding. Section 12 of Article Eighth of
the Registrant's Charter filed herewith as Exhibit 1A limits the personal
liability of the Directors and officers of the Registrant for money damages to
the fullest extent permitted by Maryland law, but does not protect any
director or officer against any liability which such person would otherwise be
subject by reason of such person's willful misfeasance, bad faith, gross
negligence or reckless disregard of such person's duties.
Notwithstanding the provisions of the Registrant's Charter which provide or
purport to provide affirmative indemnification rights to the officers and
directors of the Registrant, consistent with the applicability of Section
17(h) of the Investment Company Act of 1940, as amended, to the Registrant and
its activities, such Charter provisions will not be construed to protect the
officers and directors of the Registrant against any liability that any such
person may otherwise be subject to by reason of such person's willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of such person's office.
Pursuant to Rule 484 under the Securities Act of 1933, as amended, the
Registrant furnishes the following undertaking:
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit of proceeding) is
asserted by such director, officer, or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
Item 26. Business and other Connections of Investment Adviser (a)
Prudential Investments Fund Management LLC (PIFM)
See "How the Fund Is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Investment Advisory and Other Services" in
the Statement of Additional Information constituting Part B of this
Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, Newark, NJ 07102.
<TABLE>
<CAPTION>
Name and Address Position with PIMF Principal Occupations
---------------- ------------------ ---------------------
<C> <C> <S>
Robert F. Gunia Executive Vice President Vice President, Prudential Investments;
and Treasurer Executive Vice President and Treasurer,
PIFM; Senior Vice President, Prudential
Securities Incorporated
Neil A. McGuinness Executive Vice President Executive Vice President and Director of
Marketing, PMF&A; Executive Vice President,
PIFM.
Robert J. Sullivan Executive Vice President Executive Vice President, PMF&A; Executive
Vice President, PIFM.
</TABLE>
Nicholas-Applegate Capital Management, the Investment Adviser of the
Registrant, is a registered investment adviser primarily engaged in the
investment advisory business. Its general partner is Nicholas-Applegate
Capital Management Holdings,
C-4
<PAGE>
L.P., a California limited partnership, which is engaged only in the business
of acting as such general partner and as general partner of certain investment
limited partnerships.
Item 27. Principal Underwriters
(a) Prudential Investment Management Services LLC (PIMS)
PIMS is distributor for Cash Accumulation Trust, Command Government Fund,
Command Money Fund, Command Tax-Free Fund, Global Utility Fund, Inc.,
Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund),
Prudential Balanced Fund, Prudential California Municipal Fund, Prudential
Distressed Securities Fund, Inc., Prudential Diversified Bond Fund, Inc.,
Prudential Emerging Growth Fund, Inc., Prudential Equity Fund, Inc.,
Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc., Prudential
Global Genesis Fund, Inc., Prudential Global Limited Maturity Fund, Inc.,
Prudential Government Income Fund, Inc., Prudential Government Securities
Trust, Prudential High Yield Fund, Inc., Prudential High Yield Total Return
Fund, Inc., Prudential Index Series Fund, Prudential Institutional Liquidity,
Prudential Intermediate Global Income Fund, Inc., Portfolio, Inc., Prudential
International Bond Fund, Inc., Prudential Mid-CapValue Fund, Prudential
MoneyMart Assets, Inc., Prudential Mortgage Income Fund, Inc., Prudential
Municipal Bond Fund, Prudential Municipal Series Fund, Prudential National
Municipals Fund, Inc., Prudential Natural Resources Fund, Inc., Prudential
Pacific Growth Fund, Inc., Prudential Real Estate Securities Fund, Prudential
Small-Cap Quantum Fund, Inc., Prudential Small Company Value Fund, Inc.,
Prudential Special Money Market Fund, Inc., Prudential Structured Maturity
Fund, Inc., Prudential 20/20 Focus Fund, Prudential Tax-Free Money Fund, Inc.,
Prudential Utility Fund, Inc., Prudential World Fund, Inc. and The Target
Portfolio Trust.
(b) Information concerning the directors and officers of PIMS is set forth
below.
<TABLE>
<CAPTION>
Positions and Positions and
Offices with Offices with
Name(1) Underwriter Registrant
- ------- ------------- -------------
<S> <C> <C>
E. Michael Caulfield.... President None
Mark R. Fetting......... Executive Vice President None
Gateway Center Three
100 Mulberry Street
Newark, New Jersey
07102
Jean D. Hamilton........ Executive Vice President None
Ronald P. Joelson....... Executive Vice President None
John R. Strangfeld, Executive Vice President None
Jr. ...................
Mario A. Mosse ......... Senior Vice President and Chief Operating Officer None
Scott S. Wallner........ Vice President, Secretary and Chief Legal Officer None
Michael G. Williamson... Vice President, Comptroller and Chief Financial Officer None
C. Edward Chaplin....... Treasurer None
</TABLE>
- ----------
(/1/)The address of each person named is Prudential Plaza, 751 Broad Street,
Newark, New Jersey 07102 unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
Item 28. Location of Accounts and Records
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices
of State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, 02171 The Prudential Investment Corporation, Prudential Plaza,
751 Broad Street, Newark, New Jersey 07102, the Registrant, Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07192-4077, and Prudential
Mutual Fund Services LLC, Raritan Plaza One, Edison, New Jersey 08837.
Documents required by Rules 31a-1(b)(5), (6), (7), (9), (10) and (11) and 31a-
1(f) and Rules 31a-1(b)(4) and (11) and 31a-1(d) will be kept at Three Gateway
Center, 100 Mulberry Street, Newark, New Jersey 07102-4077 and the remaining
accounts, books and other documents required by such other pertinent
provisions of Section 31(a) and the Rules promulgated thereunder will be kept
by State Street Bank and Trust Company and Prudential Mutual Fund Services
LLC.
C-5
<PAGE>
Item 29. Management Services
Other than as set forth under the captions "How the Fund is Managed--
Manager" and "How the Fund is Managed-Distributor" in the Prospectus and the
caption "Investment Advisory and Other Services" in the Statement of
Additional Information, constituting Parts A and B, respectively, of this
Post-Effective Amendment to the Registration Statement, Registrant is not a
party to any management-related service contract.
Item 30. Undertakings
Not applicable.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement under Rule 485(b) under the Securities Act of 1933 and
has duly caused this Post-Effective Amendment to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Newark, and State of New Jersey, on the 15th day of March, 1999.
NICHOLAS-APPLEGATE FUND, INC.
By: /s/ Arthur E. Nicholas
------------------------------------
Arthur E. Nicholas, President
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <C> <S>
/s/ Arthur E. Nicholas Chairman, President and Director March 15, 1999
--------------------------------------
Arthur E. Nicholas
/s/ Dann V. Angeloff Director March 15, 1999
--------------------------------------
Dann V. Angeloff
/s/ Fred C. Applegate Director March 15, 1999
--------------------------------------
Fred C. Applegate
/s/ Theodore J. Coburn Director March 15, 1999
--------------------------------------
Theodore J. Coburn
/s/ Robert F. Gunia Director March 15, 1999
--------------------------------------
Robert F. Gunia
/s/ Arthur B. Laffer Director March 15, 1999
--------------------------------------
Arthur B. Laffer
/s/ Charles E. Young Director March 15, 1999
--------------------------------------
Charles E. Young
/s/ Grace Torres Treasurer and Principal Financial March 15, 1999
-------------------------------------- and Accounting Officer
Grace Torres
</TABLE>
C-7
<PAGE>
NICHOLAS-APPLEGATE FUND, INC.
POST-EFFECTIVE AMENDMENT NO. 12
EXHIBIT INDEX
Exhibit Number Description
(a) (1) Articles of Amendment and Restatement of Charter of Registrant,
incorporated by reference to Exhibit 1(a) to Post-Effective
Amendment No. 11 to the Registration Statement on Form N-1A (File
No. 33-38461) filed via EDGAR on March 4, 1998.
(2) Articles of Amendment of Charter of Registrant, incorporated by
reference to Exhibit 1(b) to Post-Effective Amendment No. 11 to the
Registration Statement on Form N-1A (File No. 33-38461) filed via
EDGAR on March 4, 1998.
(3) Certificate of Correction, incorporated by reference to Exhibit
1(c) to Post-Effective Amendment No. 11 to the Registration Statement
on Form N-1A (File No. 33-38461) filed via EDGAR on March 4, 1998.
(4) Articles of Amendment of Charter, incorporated by reference to
Exhibit 1(d) to Post-Effective Amendment No. 11 to the Registration
Statement on Form N-1A (File No. 33-38461) filed via EDGAR on March
4, 1998.
(5) Articles of Amendment of Charter of the Registrant, incorporated
by reference to Exhibit 1(e) to Post-Effective Amendment No. 11 to
the Registration Statement on Form N-1A (File No. 33-38461) filed via
EDGAR on March 4, 1998.
(6) Articles of Amendment of Charter of the Registrant, incorporated
by reference to Exhibit 1(f) to Post-Effective Amendment No. 11 to
the Registration Statement on Form N-1A (File No. 33-38461) filed via
EDGAR on March 4, 1998.
(7) Articles Supplementary, incorporated by reference to Exhibit 1(g)
to Post-Effective Amendment No. 10 to the Registration Statement on
Form N-1A (File No. 33-38461) filed via EDGAR on March 7, 1997.
(8) Articles Supplementary, incorporated by reference to Exhibit )(a)
(8) to Post-Effective Amendment No. 12 to the Registration
Statement on Form N-1A (File No. 33-38461) filed via Edgar on
January 12, 1999.
(b) (1) Amended and Restated By-Laws of the Registrant, incorporated by
reference to Exhibit 2(a) to Post-Effective Amendment No. 11 to the
Registration Statement on Form N-1A (File No. 33-38461) filed via
EDGAR on March 4, 1998.
(2) Amended By-Laws of Registrant, incorporated by reference to
Exhibit 2(b) to Post-Effective Amendment No. 11 to the Registration
Statement on Form N-1A (File No. 33-38461) filed via EDGAR on March
4, 1998.
(c) (1) Specimen stock certificates for Class A shares, incorporated by
reference to Exhibit 4(a) to Post-Effective Amendment No. 11 to the
Registration Statement on Form N-1A (File No. 33-38461) filed via
EDGAR on March 4, 1998.
(2) Specimen stock certificates for Class B shares, incorporated by
reference to Exhibit 4(b) to Post-Effective Amendment No. 11 to the
Registration Statement on Form N-1A (File No. 33-38461) filed via
EDGAR on March 4, 1998.
(d) (1) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc., incorporated by reference to Exhibit
5(a) to Post-Effective Amendment No. 11 to the Registration
Statement on Form N-1A (File No. 33-38461) filed via EDGAR on March
4, 1998.
(2) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and Nicholas-Applegate Capital Management, incorporated by
reference to Exhibit 5(b) to Post-Effective Amendment No. 11 to the
Registration Statement on Form N-1A (File No. 33-38461) filed via
EDGAR on March 4, 1998.
(e) (1) Distribution Agreement with Prudential Investment Management
Services LLC, incorporated by reference to Exhibit (e) (1) to Post-
Effective Amendment No. 12 to the Registration Statement on Form N-
1A (File No. 33-38461) filed via Edgar on January 12, 1999.
(2)Selected Dealer Agreement, incorporated by reference to Exhibit
(e) (2) to Post-Effective Amendment No. 12 to the Registration
Statement on Form N-1A (File No. 33-38461) filed via Edgar on January
12, 1999.
(g) (1) Custodian Contract between the Registrant and State Street Bank
and Trust Company, incorporated by reference to Exhibit 8(a) to
Post-Effective Amendment No. 11 to the Registration Statement on
Form N-1A (File No. 33-38461) filed via EDGAR on March 4, 1998.
<PAGE>
Exhibit Description
Number
(2) Addendum to Custodian Contract between the Registrant and State
Street Bank and Trust Company, incorporated by reference to Exhibit
8(b) to Post-Effective Amendment No. 11 to the Registration Statement
on Form N-1A (File No. 33-38461) filed via EDGAR on March 4, 1998.
(h) (1) Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc., incorporated by reference to
Exhibit 9(a) to Post-Effective Amendment No. 11 to the Registration
Statement on Form N-1A (File No. 33-38461) filed via EDGAR on March
4, 1998.
(2) Credit Facility Agreement between the Registrant and
Deutschebank.*
(i) Opinion of counsel, incorporated by reference to Exhibit 10 to Post-
Effective Amendment No. 11 to the Registration Statement on Form N-
1A (File No. 33-38461) filed via Edgar on March 4, 1998.
(j) Consent of Independent Accountants.*
(k) Not applicable.
(l) Not applicable.
(m) (1) Amended and Restated Distribution and Service Plan for Class A
Shares, incorporated by reference to Exhibit (m) (1) to Post-
Effective Amendment No. 12 to the Registration Statement on Form N-
1A (File No. 33-38461) filed via Edgar on January 12, 1999.
(2) Amended and Restated Distribution and Service Plan for Class B
Shares, incorporated by reference to Exhibit (m) (2) to Post-
Effective Amendment No. 12 to the Registration Statement on Form N-1A
(File No. 33-38461) filed via Edgar on January 12, 1999.
(3) Amended and Restated Distribution and Service Plan for Class C
Shares, incorporated by reference to Exhibit (m) (3) to Post-
Effective Amendment No. 12 to the Registration Statement on Form N-1A
(File No. 33-38461) filed via Edgar on January 12, 1999.
(n) Financial Data Schedules.*
(o) Amended Rule 18f-3 Plan, incorporated by reference to Exhibit (o) to
Post-Effective Amendment No. 12 to the Registration Statement on
Form N-1A (File No. 33-38461) filed via Edgar on January 12, 1999.
----------
* Filed herewith.
<PAGE>
================================================================================
CREDIT AGREEMENT
Among
THE FUND PORTFOLIOS LISTED FROM TIME TO TIME
ON SCHEDULE I HERETO,
VARIOUS BANKS,
THE BANK OF NEW YORK,
as Documentation Agent,
MELLON BANK N.A. and CITIBANK, N.A.,
as Co-Syndication Agents,
STATE STREET BANK AND TRUST COMPANY,
as Operations Agent,
and
DEUTSCHE BANK AG, NEW YORK BRANCH,
as Administrative Agent
-------------------------------------------
Dated as of March 11, 1999
-------------------------------------------
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
SECTION 1. Amount and Terms of Credit........................................1
1.01 The Commitments.....................................................1
1.02 Minimum Amount of Each Borrowing....................................3
1.03 Notice of Borrowing.................................................3
1.04 Disbursement of Funds...............................................4
1.05 Ledger..............................................................4
1.06 Conversions.........................................................4
1.07 Pro Rata Borrowings.................................................5
1.08 Interest............................................................5
1.09 Interest Periods....................................................6
1.10 Increased Costs; Illegality; Etc....................................6
1.11 Compensation........................................................9
1.12 Replacement of Banks................................................9
1.13 Extension of Expiry Date...........................................10
1.14 Addition of New Borrowers..........................................10
1.15 Removal of Borrowers...............................................11
SECTION 2. Fees; Reductions of Commitment...................................11
2.01 Fees...............................................................11
2.02 Voluntary Termination of Unutilized Commitments; Termination of
Commitments......................................................11
SECTION 3. Prepayments; Payments; Taxes.....................................11
3.01 Voluntary Prepayments..............................................11
3.02 Mandatory Repayments...............................................12
3.03 Method and Place of Payment........................................12
3.04 Net Payments.......................................................13
SECTION 4. Conditions Precedent to the Effective Date.......................15
4.01 Execution of Agreement.............................................15
4.02 Officers'Certificate...............................................15
4.03 Opinion of Counsel.................................................15
4.04 Proceedings; Etc...................................................15
4.05 Adverse Change; Etc................................................15
4.06 Litigation.........................................................16
4.07 Fees, Etc..........................................................16
4.08 Existing Credit Facilities.........................................16
(i)
<PAGE>
Page
----
SECTION 5. Conditions Precedent to All Loans................................16
5.01 No Default; Representations and Warranties.........................16
5.02 Notice of Borrowing................................................17
SECTION 6. Representations, Warranties and Agreements.......................17
6.01 Corporate or Trust Status..........................................17
6.02 Power and Authority................................................17
6.03 No Violation.......................................................18
6.04 Governmental Approvals.............................................18
6.05 Financial Statements; Financial Condition; Undisclosed
Liabilities; etc.................................................18
6.06 Litigation.........................................................19
6.07 True and Complete Disclosure.......................................19
6.08 Use of Proceeds; Margin Regulations................................19
6.09 ERISA..............................................................19
6.10 Compliance with Statutes, Etc......................................20
6.11 Investment Company.................................................20
6.12 Investment Adviser.................................................20
6.12 Affiliation with the Banks.........................................20
6.13 Senior Status......................................................20
6.14 Year 2000 Matters..................................................20
SECTION 7. Affirmative Covenants............................................21
7.01 Information Covenants..............................................21
7.02 Books, Records and Inspections.....................................22
7.03 Compliance with Statutes; Etc......................................22
7.04 Investment Company.................................................22
7.05 Compliance with Investment Practices...............................22
7.06 Compliance with Regulation U.......................................22
7.07 Use of Proceeds....................................................23
SECTION 8. Negative Covenants...............................................23
8.01 Liens..............................................................23
8.02 Consolidation, Merger, Sale or Purchase of Assets, Etc.............23
8.03 Indebtedness.......................................................24
8.04 Restrictions on Issuance of Capital Stock..........................25
8.05 Modifications of Investment Practices, Articles of Incorporation,
By-Laws and Certain Other Agreements.............................25
8.06 Business...........................................................25
8.07 ERISA..............................................................25
8.08 Affiliated Person..................................................25
8.09 Asset Coverage Ratio...............................................25
SECTION 9. Events of Default................................................25
9.01 Payments...........................................................25
(ii)
<PAGE>
Page
----
9.02 Representations; Etc...............................................25
9.03 Covenants..........................................................26
9.04 Default Under Other Agreements.....................................26
9.05 Bankruptcy; Etc....................................................26
9.06 Judgments..........................................................27
9.07 Investment Adviser.................................................27
9.08 Custody Agreement..................................................27
SECTION 10. Definitions and Accounting Terms................................27
10.01 Defined Terms.....................................................27
SECTION 11. The Agents......................................................36
11.01 Appointment.......................................................36
11.02 Nature of Duties..................................................36
11.03 Lack of Reliance on the Agents....................................37
11.04 Certain Rights of the Agents......................................37
11.05 Reliance..........................................................37
11.06 Indemnification...................................................37
11.07 The Agents in their Individual Capacities.........................38
11.08 Resignation by the Agents.........................................38
SECTION 12. Miscellaneous...................................................38
12.01 Payment of Expenses, Indemnification, Etc.........................38
12.02 Right of Setoff...................................................39
12.03 Notices...........................................................40
12.04 Benefit of Agreement..............................................40
12.05 No Waiver; Remedies Cumulative....................................42
12.06 Payments Pro Rata.................................................42
12.07 Calculations; Computations........................................42
12.08 GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE; WAIVER OF
JURY TRIAL.......................................................43
12.09 Counterparts......................................................44
12.10 Effectiveness.....................................................44
12.11 Table of Contents and Headings Descriptive........................44
12.12 Amendment or Waiver; Etc..........................................44
12.13 Survival..........................................................45
12.14 Domicile of Loans.................................................45
12.15 Limited Recourse..................................................45
12.16 Confidentiality...................................................45
(iii)
<PAGE>
SCHEDULES
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Schedule I Borrowers
Schedule II Commitments
Schedule III Bank Addresses
Schedule IV Custody Agreements
Schedule V Investment Advisory Agreements
EXHIBITS
- --------
Exhibit A Form of Notice of Borrowing
Exhibit B Form of Officers' Certificate
Exhibit C Form of Opinion of the General Counsel of the Investment Adviser,
counsel to the Borrowers
Exhibit D Form of Assignment and Assumption Agreement
(iv)
<PAGE>
CREDIT AGREEMENT, dated as of March 11, 1999, among the separate mutual
fund portfolios listed from time to time on Schedule I hereto (each such
portfolio a "Borrower" and, collectively, the "Borrowers"), the Banks party
hereto from time to time, The Bank of New York, as Documentation Agent, Mellon
Bank N.A. and Citibank, N.A., as Co-Syndication Agents, State Street Bank and
Trust Company, as Operations Agent and Deutsche Bank AG, New York Branch, as
Administrative Agent (all capitalized terms used herein and defined in Section
10 are used herein as therein defined).
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, subject to and upon the terms and conditions herein set forth, the
Banks are willing to make available to the Borrowers the credit facilities
provided for herein;
NOW, THEREFORE, IT IS AGREED:
SECTION 1. Amount and Terms of Credit.
--------------------------
1.01 The Commitments. (a) Subject to and upon the terms and conditions set
---------------
forth herein, each Bank severally agrees, at any time and from time to time on
and after the Effective Date and prior to the Expiry Date, upon the request of a
Borrower, to make loans (each a "Revolving Loan" and, collectively, the
"Revolving Loans") to such Borrower, which Loans (i) shall, at the option of
such Borrower, be Base Rate Loans, IBOR Loans or LIBOR Loans, provided that
except as otherwise specifically provided in Section 1.10(b), all Loans
comprising the same Borrowing shall at all times be of the same Type, (ii) may
be repaid and reborrowed in accordance with the provisions hereof, (iii) shall
not exceed for any Bank at any time outstanding, when added to such Bank's
Percentage of all then outstanding Swingline Loans, that aggregate principal
amount which equals the Commitment of such Bank at such time and (iv) shall not
exceed in the aggregate for any Borrower at any time that amount which, when
added to all Swingline Loans made to such Borrower which remain outstanding,
equals such Borrower's Borrowing Base at such time.
(b) Subject to and upon the terms and conditions set forth herein, the
Swingline Bank may, in its sole discretion, agree to make, at any time and from
time to time on and after the Effective Date and prior to the Swingline Expiry
Date, a revolving loan or revolving loans (each a "Swingline Loan" and,
collectively, the "Swingline Loans") to the Borrower, which Swingline Loans (i)
shall, at the option of the respective Borrower, be made and maintained as Base
Rate Loans or IBOR Loans, provided that notwithstanding anything to the contrary
in Section 1.09 or elsewhere in this Agreement, only Interest Periods of one day
shall be available in the case of Swingline Loans maintained as IBOR Loans, (ii)
may be repaid and reborrowed in accordance with the provisions hereof, (iii)
shall not exceed in aggregate principal amount at any time outstanding, when
combined with the aggregate principal amount of all Revolving Loans then
outstanding at such time, an amount equal to the Total Commitment at such time
(after giving effect to any reductions to the Total Commitment on such date),
(iv) shall not exceed for any Borrower in aggregate principal amount at any time
outstanding, when combined with the
<PAGE>
aggregate principal amount of all Revolving Loans then outstanding to such
Borrower at such time, such Borrower's Borrowing Base at such time and (v) shall
not exceed in aggregate principal amount at any time outstanding the Maximum
Swingline Amount. Notwithstanding anything to the contrary contained in this
Section 1.01(b), the Swingline Bank shall not make any Swingline Loan to any
Borrower after it has received written notice from such Borrower or the Required
Banks stating that a Default or an Event of Default exists and is continuing
with respect to such Borrower until such time as the Swingline Bank shall have
received written notice (i) of rescission of all such notices from the party or
parties originally delivering such notice, (ii) of the waiver of such Default or
Event of Default by the Required Banks or (iii) that the Agents in good faith
believe that such Default or Event of Default no longer exists.
(c) On any Business Day and in any case within 7 Business Days of the
making of any such Swingline Loan (provided that any failure to give such notice
within such seven Business Day period shall not effect the obligation of the
respective Borrower or any other Bank to accept such notice and fund the
Revolving Loan or Revolving Loans referred to below), the Swingline Bank may, in
its sole discretion, give notice to the Banks that its outstanding Swingline
Loans shall be funded with one or more Borrowings of Revolving Loans (provided
that such notice shall be deemed to have been automatically given upon the
occurrence of a Default or an Event of Default under Section 9.05 or upon the
exercise of any of the remedies provided in the last paragraph of Section 9), in
which case one or more Borrowings of Revolving Loans constituting Base Rate
Loans (each such Borrowing, a "Mandatory Borrowing") shall be made on the
immediately succeeding Business Day by all Banks with a Commitment (without
giving effect to any reductions thereto pursuant to the last paragraph of
Section 9) pro rata based on each such Bank's Percentage (determined before
--- ----
giving effect to any termination of the Commitments pursuant to the last
paragraph of Section 9) and the proceeds thereof shall be remitted to the
Swingline Bank and applied by the Swingline Bank to repay the Swingline Bank for
such outstanding Swingline Loans. Each such Bank hereby irrevocably agrees to
make Revolving Loans upon one Business Day's notice pursuant to each Mandatory
Borrowing in the amount and in the manner specified in the preceding sentence
and on the date specified in writing by the Swingline Bank notwithstanding (i)
that the amount of the Mandatory Borrowing may not comply with the Minimum
Borrowing Amount otherwise required hereunder, (ii) any failure to satisfy any
conditions specified in Section 5, (iii) any Default or Event of Default
existing on such date, (iv) the date of such Mandatory Borrowing and (v) the
amount of the Total Commitment at such time. In the event that any Mandatory
Borrowing cannot for any reason be made on the date otherwise required above
(including, without limitation, as a result of the commencement of a proceeding
under the Bankruptcy Code with respect to any Borrower), then each such Bank
hereby agrees that it shall forthwith purchase (as of the date the Mandatory
Borrowing would otherwise have occurred, but adjusted for any payments received
by the Swingline Bank from the respective Borrower on or after such date and
prior to such purchase) from the Swingline Bank such participations in the
outstanding Swingline Loans as shall be necessary to cause such Banks to share
in such Swingline Loans ratably based upon their respective Percentages
(determined before giving effect to any termination of the Commitments pursuant
to the last paragraph of Section 9), provided that (x) all interest payable on
the Swingline Loans shall be for the account of the Swingline Bank until the
date as of which the respective participation is purchased and, to the extent
attributable to the purchased participation, shall be payable to the participant
from and
2
<PAGE>
after such date and (y) at the time any purchase of participations pursuant to
this sentence is actually made, the purchasing Bank shall be required to pay the
Swingline Bank interest on the principal amount of the participation purchased
for each day from and including the day upon which the Mandatory Borrowing would
otherwise have occurred to but excluding the date of payment for such
participation, at the overnight Federal Funds Rate for the first three days and
at the rate otherwise applicable to Revolving Loans maintained as Base Rate
Loans hereunder for each day thereafter.
1.02 Minimum Amount of Each Borrowing. The aggregate principal amount of
--------------------------------
each Borrowing of (i) Revolving Loans shall not be less than $1,000,000 and, if
greater, shall be in an integral multiple of $100,000 and (ii) Swingline Loans
shall not be less than $250,000 and, if greater, shall be in an integral
multiple of $100,000. More than one Borrowing may occur on the same date, but at
no time shall there be outstanding more than three Borrowings of Fixed Rate
Loans for the account of any one Borrower.
1.03 Notice of Borrowing. Whenever a Borrower desires to make a Borrowing
-------------------
hereunder (excluding Mandatory Borrowings), it shall give the Operations Agent
at its Notice Office prior notice of each desired Base Rate Loan or IBOR Loan
(which must be given prior to 12:00 Noon (New York time) (or 3:00 P.M. (New York
time) in the case of Swingline Loans) if such notice is given on the day such
Borrowing is desired) and at least three Business Days' prior notice of each
desired LIBOR Loan, provided that any such notice shall be deemed to have been
given on a certain day only if given before 12:00 Noon (New York time) on such
day. Each such notice (each a "Notice of Borrowing") shall be given by the
respective Borrower, in the form of Exhibit A and executed by an authorized
signatory for such Borrower, appropriately completed to specify the principal
amount of the Revolving Loan (or Swingline Loan, in the case of Loans designated
as such) to be made pursuant to such Borrowing, the date of such Borrowing
(which shall be a Business Day), the Borrower on behalf of which such Revolving
Loan is being requested, the Asset Coverage Ratio, together with the
calculations necessary to compute the Asset Coverage Ratio, of such Borrower as
of the close of business on the latest Business Day preceding the date of such
Notice of Borrowing after giving pro forma effect to such Borrowing, whether the
--- -----
Loan being made pursuant to such Borrowing is to be initially maintained as a
Base Rate Loan, IBOR Loan or, if such Loan is a Revolving Loan, LIBOR Loan and,
if a Revolving Loan to be maintained as a Fixed Rate Loan, the initial Interest
Period to be applicable thereto, provided that a Borrower may provide telephonic
notice to the Operations Agent of its intent to make a Borrowing, which
telephonic notice shall be deemed effective if given within the time required
above in this Section 1.03 and promptly followed by a Notice of Borrowing, which
Notice of Borrowing shall be received by the Operations Agent on the day of such
telephonic notice and prior to any disbursement of funds in connection with such
Borrowing. Any telephonic notice given pursuant to the immediately preceding
sentence shall be deemed to be a representation and warranty by the Borrower
giving such notice that all of the facts required to be set forth in a Notice of
Borrowing are true as of the time of the giving of such notice. The Operations
Agent shall promptly give each Bank notice of such proposed Borrowing, of such
Bank's proportionate share thereof and of the other matters required by the
immediately preceding sentence to be specified in the Notice of Borrowing.
3
<PAGE>
1.04 Disbursement of Funds. Except as otherwise specifically provided in
---------------------
the immediately succeeding sentence, no later than 2:00 P.M. (New York time) on
the date specified in each Notice of Borrowing, each Bank will make available
its pro rata portion of each such Borrowing requested to be made on such date,
--- ----
in Dollars and in immediately available funds at the Payment Office of the
Operations Agent, and the Operations Agent will make the aggregate of the
amounts so made available by the Banks available to the appropriate Borrower at
the Payment Office or, if specified in the Notice of Borrowing, such Borrower's
account with its Custodian in accordance with the standard instructions provided
in the Notice of Borrowing. Unless the Operations Agent shall have been notified
by any Bank prior to the date of Borrowing that such Bank does not intend to
make available to the Operations Agent such Bank's portion of any Borrowing to
be made on such date, the Operations Agent may assume that such Bank has made
such amount available to the Operations Agent on such date of Borrowing and the
Operations Agent may, in reliance upon such assumption, make available to the
respective Borrower a corresponding amount. If such corresponding amount is not
in fact made available to the Operations Agent by such Bank, the Operations
Agent shall be entitled to recover such corresponding amount on demand from such
Bank. If such Bank does not pay such corresponding amount forthwith upon the
Operations Agent's demand therefor, the Operations Agent shall promptly notify
the respective Borrower or Borrowers, and such Borrower or Borrowers shall
immediately pay (from the assets of such Borrower or Borrowers) such
corresponding amount to the Operations Agent. The Operations Agent shall also be
entitled to recover on demand from such Bank or the respective Borrower, as the
case may be, interest on such corresponding amount in respect of each day from
the date such corresponding amount was made available by the Operations Agent to
such Borrower or Borrowers until the date such corresponding amount is recovered
by the Operations Agent, at a rate per annum equal to (i) if recovered from such
Bank, at the overnight Federal Funds Rate and (ii) if recovered from the
respective Borrower, the rate of interest applicable to the respective
Borrowing, as determined pursuant to Section 1.08. Nothing in this Section 1.04
shall be deemed to relieve any Bank from its obligation to make Loans hereunder
or to prejudice any rights which any Borrower may have against any Bank as a
result of any failure by such Bank to make Loans hereunder.
1.05 Ledger. Each Bank will note on its internal records the amount of each
------
Revolving Loan made by it (and the Swingline Bank shall note the amount of each
Swingline Loan made by it), the Borrower to whom such Loan was made, and each
payment in respect thereof, and will, prior to any transfer of any of its
interest therein, note the outstanding principal amount of Loans (broken down by
Borrower) to be so transferred. Failure to make any such notation (or any error
in such notation) shall not affect the Obligations of the respective Borrowers
in respect of such Loans.
1.06 Conversions. The Borrowers shall have the option to convert, on any
-----------
Business Day occurring on or after the Effective Date, all or a portion equal to
at least $250,000 (or at least $500,000 with respect to LIBOR Loans and, in any
event, if greater, in an integral multiple of $100,000) of the outstanding
principal amount of a Borrowing of one or more Types of Revolving Loans made to
a particular Borrower into a Borrowing of another Type of Revolving Loan to such
Borrower, provided that (i) except as otherwise provided in Section 1.10(b),
Fixed Rate Loans may be converted into Base Rate Loans only on the last day of
an Interest Period applicable to the Loans being converted and no such partial
conversion of LIBOR
4
<PAGE>
Loans shall reduce the outstanding principal amount of such LIBOR Loans made
pursuant to a single Borrowing to less than $500,000, (ii) Base Rate Loans may
only be converted into Fixed Rate Loans if no Default or Event of Default is in
existence on the date of the conversion and (iii) no conversion pursuant to this
Section 1.06 shall result in a greater number of Borrowings of Fixed Rate Loans
than is permitted under Section 1.02. Each such conversion shall be effected by
the respective Borrower giving the Operations Agent at its Notice Office prior
to 12:00 Noon (New York time) at least three Business Days' prior notice (each a
"Notice of Conversion") specifying the Revolving Loans to be so converted, the
Borrowing(s) pursuant to which such Revolving Loans were made and, if to be
converted into Fixed Rate Loans, the Interest Period to be initially applicable
thereto. The Operations Agent shall give each Bank prompt notice of any such
proposed conversion. Upon any such conversion the proceeds thereof will be
deemed to be applied directly on the day of such conversion to prepay the
outstanding principal amount of the Revolving Loans being converted.
1.07 Pro Rata Borrowings. All Borrowings of Revolving Loans under this
-------------------
Agreement shall be incurred from the Banks pro rata on the basis of their
--- ----
respective Commitments. It is understood that no Bank shall be responsible for
any default by any other Bank of its obligation to make respective Loans
hereunder and that each Bank shall be obligated to make the respective Revolving
Loans provided to be made by it hereunder, regardless of the failure of any
other Bank to make its Revolving Loans hereunder.
1.08 Interest. (a) Each Borrower to which a Base Rate Loan is made agrees
--------
to pay interest in respect of the unpaid principal amount of such Base Rate
Loans made to such Borrower from the date the proceeds thereof are made
available to such Borrower until the maturity thereof (whether by acceleration
or otherwise) at a rate per annum which shall be equal to the sum of the
Applicable Margin plus the Base Rate in effect from time to time.
(b) Each Borrower to which a LIBOR Loan is made agrees to pay interest in
respect of the unpaid principal amount of such LIBOR Loans made to such Borrower
from the date the proceeds thereof are made available to such Borrower until the
maturity thereof (whether by acceleration or otherwise) at a rate per annum
which shall, during each Interest Period applicable thereto, be equal to the sum
of the Applicable Margin plus the LIBOR for such Interest Period.
(c) Each Borrower to which an IBOR Loan is made agrees to pay interest in
respect of the unpaid principal amount of such IBOR Loans made to such Borrower
from the date the proceeds thereof are made available to such Borrower until the
maturity thereof (whether by acceleration or otherwise) at a rate per annum
which shall, during each Interest Period applicable thereto, be equal to the sum
of the Applicable Margin plus the IBOR for such Interest Period.
(d) Overdue principal and, to the extent permitted by law, overdue
interest in respect of each Loan and any other overdue amount payable hereunder
shall, in each case, bear interest at a rate per annum equal to the greater of
(i) 2% per annum in excess of the rate otherwise applicable to Revolving Loans
maintained as Base Rate Loans from time to time and (ii) the rate which is 2% in
excess of the rate then borne by such Loan, in each case with such interest to
be payable on demand.
5
<PAGE>
(e) Accrued (and theretofore unpaid) interest shall be payable (i) in
respect of each Base Rate Loan, upon repayment or prepayment (on the amount
repaid or prepaid), (ii) in respect of each Fixed Rate Loan, on the last day of
each Interest Period applicable thereto or on any repayment or prepayment (on
the amount repaid or prepaid), and (iii) in respect of each Loan, at maturity
(whether by acceleration or otherwise) and, after such maturity, on demand.
(f) Upon each Interest Determination Date, the Operations Agent shall
determine the Fixed Rate for each Interest Period applicable to Fixed Rate Loans
and shall promptly notify the respective Borrower and the Banks thereof. Each
such determination shall, absent manifest error, be final and conclusive and
binding on all parties hereto.
1.09 Interest Periods. At the time it gives any Notice of Borrowing or
----------------
Notice of Conversion in respect of the making of, or conversion into, any Fixed
Rate Loan (in the case of the initial Interest Period applicable thereto) or on
the third Business Day prior to the expiration of an Interest Period applicable
to any such LIBOR Loan or one Business Day prior to the expiration of an
Interest Period applicable to any such IBOR Loan (in the case of any subsequent
Interest Period), the Borrowers shall have the right to elect, by giving the
Operations Agent notice thereof, the interest period (each an "Interest Period")
applicable to such Fixed Rate Loan, which Interest Period shall be (i) in the
case of a LIBOR Loan, a one month period, and (ii) in the case of an IBOR Loan,
a period of up to thirty days, at the option of such Borrower, provided that:
(v) all Fixed Rate Loans comprising a Borrowing shall at all times have the same
Interest Period; (w) the initial Interest Period for any Fixed Rate Loan shall
commence on the date of Borrowing of such Revolving Loan (including the date of
any conversion thereof into a Revolving Loan of a different Type) and each
Interest Period occurring thereafter in respect of such Revolving Loan shall
commence on the day on which the next preceding Interest Period applicable
thereto expires; (x) if any Interest Period relating to a LIBOR Loan begins on a
day for which there is no numerically corresponding day in the calendar month at
the end of such Interest Period, such Interest Period shall end on the last
Business Day of such calendar month; (y) if any Interest Period would otherwise
expire on a day which is not a Business Day, such Interest Period shall expire
on the next succeeding Business Day, provided that if any Interest Period for a
LIBOR Loan would otherwise expire on a day which is not a Business Day but is a
day of the month after which no further Business Day occurs in such month, such
Interest Period shall expire on the next preceding Business Day; and (z) no
Interest Period shall extend beyond the Expiry Date. If, upon the expiration of
any Interest Period applicable to a Borrowing of Fixed Rate Loans, the
respective Borrower has failed to elect, or is not permitted to elect, a new
Interest Period to be applicable to such Fixed Rate Loans as provided in this
Section 1.09, such Borrower shall be deemed to have elected to convert such
Fixed Rate Loans into Base Rate Loans effective as of the expiration date of
such current Interest Period.
1.10 Increased Costs; Illegality; Etc. (a) In the event that any Bank shall
---------------------------------
have reasonably determined (which determination shall, absent manifest error, be
final and conclusive and binding upon all parties hereto but, with respect to
clause (i) below, may be made only by the Agents):
(i) on any Interest Determination Date that, by reason of any changes
arising after the date of this Agreement affecting the London interbank
Eurodollar market or the
6
<PAGE>
domestic interbank Eurodollar market, adequate and fair means do not exist
for ascertaining the applicable interest rate on the basis provided for in
the definition of LIBOR or IBOR; or
(ii) at any time, that such Bank shall incur increased costs or
reductions in the amounts received or receivable hereunder with respect to
any Fixed Rate Loan because of (x) any change since the date of this
Agreement in any applicable law or governmental rule, regulation, order,
guideline or request (whether or not having the force of law) or in the
interpretation or administration thereof and including the introduction of
any new law or governmental rule, regulation, order, guideline or request,
such as, for example, but not limited to (A) a change in the basis of
taxation of payment to any Bank of the principal of or interest on the
Loans or any other amounts payable hereunder (except for changes in the
rate of tax on, or determined by reference to, the net income or profits of
such Bank, pursuant to the laws of the jurisdiction in which it is
organized or in which its principal office or applicable lending office is
located or any subdivision thereof or therein) or (B) a change in official
reserve requirements, but, in all events, excluding reserves required under
Regulation D to the extent included in the computation of the LIBOR or IBOR
and/or (y) other circumstances since the date of this Agreement affecting
such Bank, the London interbank Eurodollar market or the domestic interbank
Eurodollar market or the position of such Bank in either such market; or
(iii) at any time, that the making or continuance of any Fixed Rate
Loan has been made (x) unlawful by any law or governmental rule, regulation
or order, (y) impossible by compliance by any Bank in good faith with any
governmental request (whether or not having force of law) or (z)
impracticable as a result of a contingency occurring after the date of this
Agreement which materially and adversely affects the London interbank
Eurodollar market or the domestic interbank Eurodollar market;
then, and in any such event, such Bank (or the Agents, in the case of clause (i)
above) shall promptly give notice (by telephone confirmed in writing) to the
affected Borrower or Borrowers and, except in the case of clause (i) above, to
the Operations Agent of such determination (which notice the Operations Agent
shall promptly transmit to each of the other Banks) not later than 11:00 A.M.
(New York time) on the date such Borrowing was to occur. Thereafter (x) in the
case of clause (i) above, LIBOR Rate Loans and/or IBOR Rate Loans, as the case
may be, shall no longer be available until such time as the Operations Agent
notifies the Borrowers and the Banks that the circumstances giving rise to such
notice by the Operations Agent no longer exist, and any Notice of Borrowing or
Notice of Conversion given by any of the Borrowers with respect to any affected
Fixed Rate Loans which have not yet been incurred (including by way of
conversion) shall be deemed rescinded, (y) in the case of clause (ii) above, the
respective Borrowers shall pay to such Bank, within five Business Days of its
written demand therefor, such additional amounts (in the form of an increased
rate of, or a different method of calculating, interest or otherwise as such
Bank shall reasonably determine) as shall be required to compensate such Bank
for such increased costs or reductions in amounts received or receivable
hereunder (a written notice as to the additional amounts owed to such Bank,
showing the basis for the calculation thereof, submitted to the affected
Borrowers by such Bank shall, absent manifest error, be final and conclusive and
binding on all the parties hereto) and (z) in the case of clause
7
<PAGE>
(iii) above, the respective Borrowers shall take one of the actions specified in
Section 1.10(b) as promptly as possible and, in any event, within the time
period required by law.
(b) At any time that any Fixed Rate Loan is affected by the circumstances
described in Section 1.10(a)(ii) or (iii), the respective Borrower may (and in
the case of a Fixed Rate Loan affected by the circumstances described in Section
1.10(a)(iii) shall) either (x) if the affected Fixed Rate Loan is then being
made initially or pursuant to a conversion, cancel the respective Borrowing by
giving the Operations Agent telephonic notice (confirmed in writing) on the same
date (if practicable) that such Borrower was notified by the affected Bank or
the Operations Agent pursuant to Section 1.10(a)(ii) or (iii), or if such notice
is given one Business Day (or such shorter period as may be acceptable to the
Operations Agent) prior to the date scheduled for such Borrowing, change the
Type of Loan or (y) if the affected Fixed Rate Loan is then outstanding, upon at
least three Business Days' written notice to the Operations Agent, require the
affected Bank to convert such Fixed Rate Loan into a Base Rate Loan, provided
that, if more than one Bank is affected at any time, all affected Banks must be
treated the same pursuant to this Section 1.10(b).
(c) If at any time after the date of this Agreement any Bank reasonably
determines that the introduction of or any change since the date of this
Agreement in any applicable law or governmental rule, regulation, order,
guideline, directive or request (whether or not having the force of law)
concerning capital adequacy, or any change since the date of this Agreement in
interpretation or administration thereof by any governmental authority, central
bank or comparable agency, will have the effect of increasing the amount of
capital required or expected to be maintained by such Bank or any corporation
controlling such Bank based on the existence of such Bank's portion of the Total
Commitment or its obligations hereunder, then the Borrowers shall pay to such
Bank within three Business Days of its written demand therefor, such additional
amounts as shall be required to compensate such Bank or such other corporation
for the increased cost to such Bank or such other corporation or the reduction
in the rate of return to such Bank or such other corporation as a result of such
increase of capital; provided that the Borrowers shall be permitted, subject to
Section 1.11, to mitigate such costs to the extent practicable by either
canceling any outstanding Notice of Borrowing or changing the Type of Loan
specified in any outstanding Notice of Borrowing as prescribed above in clause
(b) of this Section 1.10. In determining such additional amounts, each Bank will
act reasonably and in good faith and will use averaging and attribution methods
which are reasonable, provided that such Bank's determination of compensation
owing under this Section 1.10(c) shall, absent manifest error, be final and
conclusive and binding on all the parties hereto. Each Bank, upon determining
that any additional amounts will be payable pursuant to this Section 1.10(c),
will give prompt written notice thereof to the affected Borrowers, which notice
shall show the basis for calculation of such additional amounts, provided,
however, that failure to give any such notice shall not release or diminish any
obligation of the Borrowers to pay additional amounts pursuant to this Section
1.10(c) upon receipt of such notice.
(d) Each Bank agrees that, upon the occurrence of any event giving rise to
the operation of Section 1.10(a)(ii) or (iii) or 1.10(c) with respect to such
bank, it will, if requested by the Borrower, use reasonable efforts (subject to
overall policy considerations of such Bank) to avoid or mitigate any additional
amounts payable to the greatest extent practicable (including
8
<PAGE>
transferring the Loans affected by such event to another lending office, unless
in the opinion of such Bank, such efforts would result in the Bank (or its
lending office) suffering an economic, legal or regulatory disadvantage. Nothing
in this clause (d) shall affect or postpone any of the obligations of the
Borrower or the right of any Bank provided in this Section 1.10.
1.11 Compensation. Each Borrower agrees that it shall compensate each Bank,
------------
upon its written request (which request shall set forth the basis for requesting
such compensation), for all reasonable losses, expenses and liabilities
(including, without limitation, any loss, expense or liability incurred by
reason of the liquidation or reemployment of deposits or other funds required by
such Bank to fund its Fixed Rate Loans, but not for loss of profit) which such
Bank may sustain in respect of Loans made to such Borrower or a Notice of
Borrowing or Notice of Conversion delivered by such Borrower: (i) if for any
reason (other than a default by such Bank or the Operations Agent) a Borrowing
by such Borrower of, or conversion from or into, Fixed Rate Loans does not occur
on a date specified therefor in a Notice of Borrowing or Notice of Conversion
(whether or not withdrawn by such Borrower or deemed withdrawn pursuant to
Section 1.10(a) or otherwise); (ii) if any repayment (including any repayment
made pursuant to Section 3.02 or a result of an acceleration of the Revolving
Loans of such Borrower pursuant to Section 9) or conversion of any of such
Borrower's Fixed Rate Loans occurs on a date which is not the last day of an
Interest Period with respect thereto; (iii) if any prepayment of a Fixed Rate
Loan of such Borrower is not made on any date specified in a notice of
prepayment given by such Borrower; or (iv) as a consequence of (a) any other
default by such Borrower to repay any Loan when required by the terms of this
Agreement or (b) any election made by such Borrower pursuant to Section 1.10(b).
1.12 Replacement of Banks. (x) If any Bank defaults in its obligations to
--------------------
make Loans (a "Defaulting Bank") or (y) upon the occurrence of any event giving
rise to the operation of Section 1.10(a)(ii) or (iii), Section 1.10(c) or
Section 3.04 with respect to any Bank which results in such Bank charging to the
Borrower increased costs in excess of those being generally charged by the other
Banks, the Borrower shall have the right, if no Default or Event of Default will
exist immediately after giving effect to the respective replacement, to replace
such Bank (the "Replaced Bank") with one or more other Eligible Transferees,
none of whom shall constitute a Defaulting Bank at the time of such replacement
(collectively, the "Replacement Bank") reasonably acceptable to the Agents,
provided that (i) at the time of any replacement pursuant to this Section 1.12,
the Replacement Bank shall enter into one or more Assignment and Assumption
Agreements pursuant to Section 12.04(b) pursuant to which the Replacement Bank
shall acquire all of the Commitments and outstanding Loans of the Replaced Bank
and, in connection therewith, shall pay to the Replaced Bank in respect thereof
an amount equal to the sum of (A) an amount equal to the principal of, and all
accrued interest on, all outstanding Loans together with all then unpaid
interest with respect thereof at such time and (B) an amount equal to all
accrued, but theretofore unpaid, Fees owing to the Replaced Bank pursuant to
Section 2.01, and (ii) all obligations of the Borrowers owing to the Replaced
Bank (other than those specifically described in clause (i) above in respect of
which the assignment purchase price has been, or is concurrently being, paid)
shall be paid in full to such Replaced Bank concurrently with such replacement.
Upon the execution of the respective Assignment and Assumption Agreements and
the payment of amounts referred to in clauses (i) and (ii) above, the
Replacement Bank shall become a Bank
9
<PAGE>
hereunder and the Replaced Bank shall cease to constitute a Bank hereunder,
except with respect to indemnification provisions under this Agreement which
shall survive as to such Replaced Bank.
1.13 Extension of Expiry Date. Not less than 45 days and not more than 60
------------------------
days prior to the Expiry Date then in effect, the Borrowers may make a written
request (the "Extension Request") to the Operations Agent at its Notice Office,
which request the Operations Agent shall promptly transmit to each of the Banks,
that the Expiry Date then in effect be extended to the date which occurs 364
days after the Requested Extension Effective Date specified by the Borrowers in
the Extension Request. Each Extension Request shall specify a date (the
"Requested Extension Effective Date"), which shall be a Business Day not earlier
than 40 days after the giving of the respective notice and not later than the
Expiry Date then in effect, on which such extension of the Expiry Date, if
granted by the Banks, shall occur. Each Extension Request shall also be
accompanied by a certificate of an authorized officer of the Borrowers stating
that no Default or Event of Default has occurred and is continuing. Each Bank,
acting in its sole discretion and with no obligation to grant any extension
pursuant to this Section 1.13, shall, by written notice to the Borrowers and the
Operations Agent, such notice to be given within 30 days of its receipt of the
relevant Extension Request, advise the Borrowers and the Operations Agent
whether such Bank agrees to such extension, provided that (a) any Bank that
fails to so notify the Borrowers and the Operations Agent shall be deemed to
have elected not to grant such extension, (b) any extension of the Expiry Date
pursuant to this Section 1.13 shall only be effective if all of the Banks agree
to such extension and (c) any effectiveness of such extension shall occur on the
Requested Extension Expiry Date. The Operations Agent shall notify the Borrowers
and each Bank of the effectiveness of any such extension.
1.14 Addition of New Borrowers. The Investment Adviser may from time to
-------------------------
time request in writing (each such request, an "Additional Borrower Request")
that a separate affiliated mutual fund portfolio be included hereunder as an
additional Borrower subject to the terms and conditions of this Agreement (any
such separate mutual fund portfolio, an "Additional Borrower"). Such Additional
Borrower Request shall be delivered to each of the Banks and the Operations
Agent and shall include (a) a certification by an authorized officer of the
Borrowers that (i) the representations, warranties and agreements of the
Borrowers contained in Section 6 are true and correct as if made on the date of
such certification and on the date such Additional Borrower becomes a Borrower
hereunder and (ii) no Default or Event of Default has occurred and is continuing
or will occur as a result of such Additional Borrower becoming a Borrower
hereunder and (b) true and correct copies of the most recent audited and
unaudited financial statements of such Additional Borrower. Upon receipt of an
Additional Borrower Request each Bank shall in its sole discretion determine
whether it shall consent to such request, any such consent to be in writing and
delivered to the Operations Agent. Failure by any Bank to deliver such a consent
within 30 days after receipt of such request shall be deemed a refusal to
consent on the part of such Bank. To the extent the Operations Agent receives
written consents from all Banks with respect to a particular Additional Borrower
Request, the Operations Agent shall notify the Borrowers thereof, and such
Additional Borrower shall become a Borrower hereunder (at which time Schedule I
hereto shall be deemed to be amended to include such new Borrower) upon delivery
to the Agents of (x) certified copies of documents relating to such Additional
Borrower of the type referred to in Section 4.05 and (y) an executed counterpart
hereof and/or an assumption agreement in form satisfactory to the Agents.
10
<PAGE>
1.15 Removal of Borrowers. Any Borrower may, from time to time upon written
--------------------
notice to the Operations Agent, elect to remove itself as a Borrower hereunder,
provided that at such time such removed Borrower has no Loans or other
Obligations outstanding under this Agreement. Upon the effectiveness of such
removal, such removed Borrower shall cease to be a Borrower for all purposes of
this Agreement, except that all indemnification provisions of this Agreement
shall survive as to such removed Borrower.
SECTION 2. Fees; Reductions of Commitment.
------------------------------
2.01 Fees. (a) Each Borrower agrees to pay to the Operations Agent, for pro
---- ---
rata distribution to each Bank, its pro rata share (as calculated in accordance
- ---- --- ----
with the last sentence of this Section 2.01(a)) of a commitment fee (the
"Commitment Fee") for the period from the Effective Date to and including the
Expiry Date (or such earlier date as the Total Commitment shall have been
terminated), computed at a rate for each day equal to 0.065% per annum on the
daily average Total Unutilized Commitment. Accrued Commitment Fees shall be due
and payable quarterly in arrears on the fifteenth day of the month following
such calendar quarter end (unless such day is not a Business Day, in which case
such accrued Commitment Fees shall be payable on the latest preceding Business
Day) and on the Expiry Date, or such earlier date upon which the Total
Commitment is terminated, with the allocation of such obligation among the
Borrowers to be pro rata according to the relevant asset size of the respective
Borrowers (or, upon prior written notice to the Agents, based on such other
method acceptable to the Agents as the Investment Advisor shall determine in
compliance with the Investment Company Act).
(b) Each Borrower agrees to pay to the Agents, for the Agents' own account,
its pro rata share according to the relevant asset size of the respective
--- ----
Borrowers (or, upon prior written notice to the Agents, such other method of
allocation acceptable to the Agents as the Investment Advisor shall determine in
compliance with the Investment Company Act) of such other fees as have been
agreed to in writing by the Borrowers and the Agents.
2.02 Voluntary Termination of Unutilized Commitments; Termination of
---------------------------------------------------------------
Commitments. Upon at least three Business Days' prior notice to the Operations
- -----------
Agent at its Notice Office (which notice the Operations Agent shall promptly
transmit to each of the Banks), the Borrowers shall have the right, at any time
or from time to time, without premium or penalty, to terminate the Total
Unutilized Commitment, in whole or in part, in integral multiples of $10,000,000
in the case of partial reductions to the Total Unutilized Commitment, provided
that each such reduction shall apply proportionately to permanently reduce the
Commitment of each Bank.
SECTION 3. Prepayments; Payments; Taxes.
----------------------------
3.01 Voluntary Prepayments. The respective Borrowers shall have the right
---------------------
to prepay any Loan or Loans, without premium or penalty, in whole or in part at
any time and from time to time on the following terms and conditions: (i) the
respective Borrower shall give the Operations Agent prior to 11:00 A.M. (New
York time) at its Notice Office (x) on the same Business Day prior written
notice (or
11
<PAGE>
telephonic notice promptly confirmed in writing) of its intent to prepay
Swingline Loans, (y) at least one Business Day's prior written notice (or
telephonic notice promptly confirmed in writing) of its intent to prepay Base
Rate Loans or IBOR Loans that are Revolving Loans, and (z) at least three
Business Days' prior written notice (or telephonic notice promptly confirmed in
writing) of its intent to prepay LIBOR Loans, the amount of such prepayment and
the Types of Loans to be prepaid, the Borrower or Borrowers to whom such Loans
were made and, in the case of Fixed Rate Loans, the specific Borrowing or
Borrowings pursuant to which made, which notice the Operations Agent shall
promptly transmit to each of the Banks; (ii) each prepayment shall be in an
aggregate principal amount of at least $500,000, provided that if any partial
prepayment of Fixed Rate Loans made pursuant to any Borrowing shall reduce the
outstanding Fixed Rate Loans made pursuant to such Borrowing to an amount less
than $1,000,000, then such Borrowing may not be continued as a Borrowing of
Fixed Rate Loans and any election of an Interest Period with respect thereto
shall have no force or effect; (iii) prepayments of Fixed Rate Loans made
pursuant to this Section 3.01 may only be made on the last day of an Interest
Period applicable thereto; and (iv) each prepayment in respect of Loans made
pursuant to a Borrowing shall be applied pro rata among such Loans.
--- ----
3.02 Mandatory Repayments. (a) On any day on which the aggregate
--------------------
outstanding principal amount of Loans exceeds the Total Commitment as then in
effect, the respective Borrowers shall prepay principal of Loans made to such
Borrowers in an aggregate amount equal to such excess, provided that, in the
event that such repayment is required as a result of a partial reduction in the
Total Commitment, (x) the allocation of such required prepayment of Loans of the
respective Borrowers shall be determined by the Borrowers or (y) in the absence
of a determination by the Borrowers, the Operations Agent shall allocate such
mandatory repayments to outstanding Loans in its discretion, with an eye toward,
but no obligation to, minimize breakage costs owing pursuant to Section 1.11.
(b) On any day on which the aggregate outstanding principal amount of Loans
made to any Borrower exceeds the Borrowing Base of such Borrower as then in
effect, such Borrower shall prepay principal of such Loans equal to such excess.
(c) On any day upon which any Borrower has had any Loans in any principal
amount outstanding for more than 45 consecutive days, such Borrower shall repay
on such day all then outstanding Loans made to such Borrower, together with
accrued interest thereon.
(d) Notwithstanding anything to the contrary contained elsewhere in this
Agreement, each Borrower promises to repay all then outstanding Revolving Loans
in full on the Expiry Date, and each Borrower promises to repay all then
outstanding Swingline Loans in full on the Swingline Expiry Date.
3.03 Method and Place of Payment. Except as otherwise specifically provided
---------------------------
herein, all payments under this Agreement shall be made (or a federal reserve
wire number delivered) to the Operations Agent for the account of the Bank or
Banks entitled thereto not later than 12:00 Noon (New York time) on the date
when due and shall be made in Dollars in immediately available funds at the
Payment Office of the Operations Agent. Whenever any payment to be made
hereunder shall be stated to be due on a day which is not a Business Day, the
due date thereof shall be extended to the next succeeding Business Day and, with
respect to payments of principal, interest shall be payable at the applicable
rate during such extension.
12
<PAGE>
3.04 Net Payments. (a) All payments made by the Borrowers hereunder will be
------------
made without setoff, counterclaim or other defense. Except as provided in
Section 3.04(b), all such payments will be made free and clear of, and without
deduction or withholding for, any present or future taxes, levies, imposts,
duties, fees, assessments or other charges of whatever nature now or hereafter
imposed by any jurisdiction or by any political subdivision or taxing authority
thereof or therein with respect to such payments (but excluding, except as
provided in the two succeeding sentences, taxes imposed on or measured by the
net income or profits of a Bank pursuant to the laws of the jurisdiction in
which it is organized or in which the principal office or applicable lending
office of such Bank is located or any subdivision thereof or therein), and any
interest, penalties or similar liabilities with respect thereto (all such
non-excluded taxes, levies, imposts, duties, fees, assessments or other charges
being referred to collectively as "Taxes"). If any Taxes are so levied or
imposed, each applicable Borrower agrees to pay the full amount of such Taxes
levied in respect of the payments of such Borrower, and such additional amounts
as may be necessary so that every payment of all amounts due from such Borrower
under this Agreement, after withholding or deduction for or on account of any
Taxes, will not be less than the amount provided for herein provided, however,
that no such Borrower shall be required to increase any such amounts payable to
any Bank (or assignee of such Bank) that is not organized under the laws of the
United States if such Bank fails to comply with subsection (b) of this Section
3.04. If any amounts are payable in respect of Taxes pursuant to the preceding
sentence, then the applicable Borrower agrees to reimburse each Bank, upon the
written request of such Bank, for taxes imposed on or measured by the net income
or profits of such Bank pursuant to the laws of the jurisdiction in which the
principal office or applicable lending office of such Bank is located or under
the laws of any political subdivision or taxing authority of any such
jurisdiction in which the principal office or applicable lending office of such
Bank is located and for any withholding or income or similar taxes imposed by
the United States of America as such Bank shall determine are payable by, or
withheld from, such Bank in respect of such amounts so paid to or on behalf of
such Bank pursuant to the preceding sentence and in respect of any amounts paid
to or on behalf of such Bank pursuant to this sentence. The Borrowers will
furnish to the Operations Agent, within 45 days after the date the payment of
any Taxes are due pursuant to applicable law, certified copies of tax receipts
evidencing such payment by the Borrowers. The Borrowers agree to indemnify and
hold harmless each Bank, and reimburse each Bank upon its written request, for
the amount of any Taxes so levied or imposed and paid by such Bank.
(b) Each Bank which is not a United States person (as such term is defined
in Section 7701(a)(30) of the Code) for U.S. Federal income tax purposes agrees
(i) to provide to the Borrowers and the Operations Agent, on or prior to the
Effective Date, two original signed copies of Internal Revenue Service Form 4224
or Form 1001 certifying to such Bank's entitlement as of such date to an
exemption from United States withholding tax with respect to payments to be made
under this Agreement and (ii) (x) with respect to any such Bank that is an
assignee or transferee of an interest under this Agreement pursuant to Section
1.12 or 12.04 (unless the respective Bank was already a Bank hereunder
immediately prior to such assignment or transfer), upon the date of such
assignment or transfer to such Bank, and (y) with respect to any such Bank, from
time to time upon the reasonable written request of the Borrowers or the
Operations Agent after the Effective Date, such Bank will provide to the
Borrowers and the Operations Agent two original signed copies of Internal
Revenue Service Form 4224 or Form
13
<PAGE>
1001 (or any successor forms) certifying to such Bank's entitlement as of such
date to an exemption from, or reduction in, United States withholding tax with
respect to payments to be made under this Agreement or it shall promptly notify
the Borrowers and the Operations Agent of its inability as a result of a change
in law or treaty to deliver any such form or certificate, in which case such
Bank shall not be required to deliver any such form or certificate pursuant to
this clause (b). Notwithstanding anything to the contrary contained in Section
3.04(a), but subject to the immediately succeeding sentence, the Borrowers shall
be entitled, to the extent they are required to do so by law, to deduct or
withhold income or similar taxes imposed by the United States (or any political
subdivision or taxing authority thereof or therein) from interest, fees or other
amounts payable hereunder (without any obligation to pay the respective Bank
additional amounts with respect thereto) for the account of any Bank which is
not a United States person (as such term is defined in Section 7701(a)(30) of
the Code) for U.S. Federal income tax purposes and which has not provided to
such Borrower such forms required to be provided to the Borrowers pursuant to
the first sentence of this Section 3.04(b). Notwithstanding anything to the
contrary contained in the preceding sentence and except as set forth in Section
12.04(b), each Borrower agrees to indemnify each Bank in the manner set forth in
Section 3.04(a) in respect of any amounts deducted or withheld by it as
described in the immediately preceding sentence as a result of any changes that
are effective after the Effective Date in any applicable law, treaty,
governmental rule, regulation, guideline or order, or in the interpretation
thereof, relating to the deducting or withholding of income or similar Taxes
provided, however, that the Borrowers shall not be obligated to indemnify a Bank
for any amount so withheld or deducted as a result of a failure of such Bank to
comply with any certification, indemnification or other reporting requirements
of this Section 3.04 if compliance with such requirements is a precondition to
exemption from, or reduction in, United States withholding tax with respect to
payments made under this Agreement, including without limitation, the delivery
by such Bank of the forms specified in this Section 3.04(b); provided further,
however, that the Borrowers' obligation to pay such additional amounts (other
than amounts incurred as a result of such delay) shall be reinstated upon
receipt of such forms specified in this Section 3.04(b) or evidence that action
with respect to obtaining such exemption or reduction has been taken.
(c) If the Borrowers are compelled to make the additional payments required
by subsections (a) and (b) of this Section 3.04, the Borrowers are entitled to
remove the Bank with respect to which such payment is made if such payment is in
excess of additional payments charged by other Banks, provided that no Bank
shall be removed unless and until all obligations owing to such Bank hereunder
have been paid in full.
(d) Any Bank claiming any additional amounts payable pursuant to this
Section 3.04 shall use its best efforts (consistent with its internal policy and
legal and regulatory restrictions) to take any actions permissible if the taking
of such action would avoid the need for, or reduce the amount of, any such
additional amounts which may thereafter accrue and would not, in the reasonable
judgment of such Bank, be otherwise disadvantageous to such Bank including
changing the jurisdiction of its lending office. If such additional amounts
cannot be eliminated by such actions, the Borrowers shall have the right to
replace the affected Bank hereunder with a Bank not so affected which is
reasonably acceptable to the Agents and a majority of the remaining Banks upon
payment to such affected Bank of outstanding principal, accrued interest and
fees and all other amounts due pursuant to this Agreement, including any
14
<PAGE>
amounts payable hereunder. No replacement of a Bank shall be made pursuant
hereto if, after giving affect thereto, any amount shall be owing to such
replaced Bank.
SECTION 4. Conditions Precedent to the Effective Date. The obligation of
------------------------------------------
each Bank to make Loans hereunder and the occurrence of the Effective Date are
subject to the satisfaction of each of the following conditions:
4.01 Execution of Agreement. On or prior to the Effective Date, this
----------------------
Agreement shall have been executed and delivered as provided in Section 12.10.
4.02 Officers' Certificate. On the Effective Date, the Operations Agent
---------------------
shall have received a certificate dated the Effective Date signed on behalf of
the Borrowers by any authorized officer of the Borrowers and attested to by any
other authorized officer of the Borrowers, in the form of Exhibit B with
appropriate insertions, together with copies of the Articles of Incorporation or
Declaration of Trust and By-Laws of the Borrowers, the resolutions of the
Borrowers referred to in such certificate and the Prospectuses, Statements of
Additional Information, Investment Advisory Agreement and Custody Agreements of
each of the Borrowers referred to in such certificate, and the foregoing shall
be in form reasonably acceptable to the Agents.
4.03 Opinion of Counsel. On the Effective Date, the Operations Agent shall
------------------
have received from the Chief Legal Officer of the Investment Adviser, an opinion
addressed to the Agents and each of the Banks and dated the Effective Date
covering the matters set forth in Exhibit C and such other matters incident to
the transactions contemplated herein as the Agents may request.
4.04 Proceedings; Etc. On the Effective Date, all corporate and legal
----------------
proceedings and all instruments and agreements in connection with the
transactions contemplated by this Agreement and the other Credit Documents shall
be reasonably satisfactory in form and substance to the Agents and the Required
Banks, and the Agents shall have received all information and copies of all
documents and papers, including records of corporate proceedings, governmental
approvals, good standing certificates and bring-down telegrams, if any, which
the Agents reasonably may have requested in connection therewith, such documents
and papers where appropriate to be certified by proper corporate or governmental
authorities.
4.05 Adverse Change; Etc. (a) On the Effective Date, nothing shall have
-------------------
occurred (and the Banks shall not have become aware of any facts or conditions
not previously known) which either Agent or the Required Banks shall determine
has, or could reasonably be expected to have, a material adverse effect on the
rights or remedies of the Agents or the Banks, or on the ability of any Borrower
to perform its obligations to the Agents and the Banks under any Credit Document
or which has, or could reasonably be expected to have, a material adverse effect
on the business, operations, property, assets, liabilities, condition (financial
or otherwise) or prospects of any Borrower or the Borrowers taken as a whole.
(b) On or prior to the Effective Date, all necessary governmental (domestic
and foreign) and third party approvals, if any, in connection with the
transactions contemplated by
15
<PAGE>
the Credit Documents and otherwise referred to herein or therein shall have been
obtained and remain in effect, and all applicable waiting periods shall have
expired without any action being taken by any competent authority which
restrains, prevents or imposes materially adverse conditions upon the
consummation of the transactions contemplated by the Credit Documents and
otherwise referred to herein or therein. Additionally, there shall not exist any
judgment, order, injunction or other restraint issued or filed or a hearing
seeking injunctive relief or other restraint pending or notified prohibiting or
imposing materially adverse conditions upon the consummation of the transactions
contemplated by the Credit Documents or the making of any Loans.
4.06 Litigation. On the Effective Date, no litigation by any entity
----------
(private or governmental) shall be pending or, to the knowledge of such
Borrower, threatened with respect to this Agreement or any documentation
executed in connection herewith or the transactions contemplated hereby, or
which either Agent or the Required Banks shall determine could reasonably be
expected to have a material adverse effect on the business, operations,
property, assets, liabilities, condition (financial or otherwise) or prospects
of any Borrower or the Borrowers taken as a whole.
4.07 Fees, Etc. On the Effective Date, the Borrowers shall have paid to the
---------
Agents and the Banks all costs, fees and expenses (including, without
limitation, outside legal fees and expenses) payable to the Agents and the Banks
to the extent then due.
4.08 Existing Credit Facilities. (a) On the Effective Date, the commitments
--------------------------
under the Existing Credit Facilities shall have been terminated, all loans
thereunder shall have been repaid in full, together with all accrued and unpaid
interest thereon, all accrued and unpaid fees thereon shall have been paid in
full, all letters of credit (if any) issued thereunder shall have been
terminated and all other amounts then owing pursuant to the Existing Credit
Facilities shall have been repaid in full, and the Agents shall have received
evidence in form, scope and substance reasonably satisfactory to them that the
matters set forth in this Section 4.08(a) have been satisfied at such time.
(b) On the Effective Date, all security interests and Liens created under
the Existing Credit Facilities (if any) with respect to the capital stock of,
and/or assets owned by, the Borrowers shall have been terminated and released,
and the Agents shall have received all such releases as they may have requested,
which releases shall be in form and substance reasonably satisfactory to the
Agents.
SECTION 5. Conditions Precedent to All Loans. No Loan shall be made to any
---------------------------------
Borrower hereunder unless the following conditions are satisfied:
5.01 No Default; Representations and Warranties. At the time of each such
------------------------------------------
Loan and also after giving effect thereto (i) there shall exist no Default or
Event of Default with respect to the Borrower receiving such Loan, (ii) the
respective Borrower shall be in full compliance with the Investment Company Act
(including, without limitation, Section 18 thereof), except such noncompliance
as could not, individually or in the aggregate, reasonably be expected to have a
material adverse effect on the business, operations, property, assets,
liabilities or condition (financial or otherwise) of such Borrower and (iii) all
representations and warranties by or with
16
<PAGE>
respect to such Borrower contained herein shall be true and correct in all
material respects with the same effect as though such representations and
warranties had been made on the date of the making of such Loan (it being
understood and agreed that any representation or warranty which by its terms is
made as of a specified date shall be required to be true and correct in all
material respects only as of such specified date).
5.02 Notice of Borrowing. Prior to the making of each Loan (other than a
-------------------
Mandatory Borrowing), the Operations Agent shall have received a Notice of
Borrowing meeting the requirements of Section 1.03.
The acceptance of the proceeds of each Loan shall constitute a
representation and warranty by the respective Borrower receiving such proceeds
to the Banks that all the conditions specified in Section 4 and in Sections 5.01
and 5.02 and applicable to such Loan are satisfied as of that time. All of the
certificates, legal opinions and other documents and papers referred to in
Section 4 and in Section 5, unless otherwise specified, shall be delivered to
the Operations Agent at its Notice Office and shall be in form and substance
reasonably satisfactory to the Agents.
SECTION 6. Representations, Warranties and Agreements. In order to induce
------------------------------------------
the Banks to enter into this Agreement and to make the Loans, each of the
Borrowers makes the following representations, warranties and agreements as to
itself, all of which shall survive the execution and delivery of this Agreement
and the making of the Loans, with the incurrence of each Loan on or after the
Effective Date being deemed to constitute a representation and warranty that the
matters specified in this Section 6 are true and correct in all material
respects on and as of the Effective Date and on the date of each such Loan (it
being understood and agreed that any representation or warranty which by its
terms is made as of a specified date shall be required to be true and correct in
all material respects only as of such specified date).
6.01 Corporate or Trust Status. Such Borrower (i) is a corporation or trust
-------------------------
or a series of a corporation or trust which is duly organized and validly
existing and in good standing under the laws of the jurisdiction of its
establishment or incorporation, (ii) has the corporate or trust power and
authority to own its property and assets and to transact the business in which
it is engaged and presently proposes to engage and (iii) is duly qualified and
is authorized to do business and is in good standing in each jurisdiction where
the ownership, leasing or operation of its property or the conduct of its
business requires such qualifications except for failures to be so qualified
which, individually or in the aggregate, could not reasonably be expected to
have a material adverse effect on the business, operations, property, assets,
liabilities or condition (financial or otherwise) of such Borrower or the
corporation or trust of which such Borrower is a series taken as a whole.
6.02 Power and Authority. Such Borrower has the power and authority to
-------------------
execute, deliver and perform the terms and provisions of each of the Credit
Documents and has taken all necessary action (or such action has been taken on
its behalf) to authorize the execution, delivery and performance by it of each
of the Credit Documents. Such Borrower (or the corporation or trust of which it
is a series) has duly executed and delivered each of the Credit Documents to
which it is a party, and each of the Credit Documents constitutes (assuming due
authorization and execution by the parties thereto other than the Borrowers) its
legal, valid and
17
<PAGE>
binding obligation enforceable against it in accordance with its terms, except
to the extent that the enforceability thereof may be limited by applicable
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other
similar laws generally affecting creditors' rights and by equitable principles
(regardless of whether enforcement is sought in equity or at law).
6.03 No Violation. Neither the execution, delivery or performance
------------
(including the incurrence of Loans hereunder) by such Borrower of any of the
Credit Documents, nor compliance by such Borrower with the terms and provisions
hereof and thereof, (i) will contravene any provision of any material law,
statute, rule or regulation (including, without limitation, the Investment
Company Act) or any order, writ, injunction or decree of any court or
governmental instrumentality applicable to such Borrower, (ii) will conflict
with or result in any breach of any of the terms, covenants, conditions or
provisions of, or constitute a default under, or result in the creation or
imposition of (or the obligation to create or impose) any Lien upon any of the
property or assets of such Borrower pursuant to the terms of any indenture,
mortgage, deed of trust, credit agreement or loan agreement, or any other
material agreement, contract or instrument to which such Borrower is a party or
by which it or any of its property or assets is bound or to which it may be
subject or (iii) will violate or conflict with the Investment Practices or any
provision of the Articles of Incorporation or Declaration of Trust, as
applicable, or By-Laws of such Borrower.
6.04 Governmental Approvals. No order, consent, approval, license,
----------------------
authorization or validation of, or filing, recording or registration with
(except as have been obtained or made prior to the Effective Date and which
remain in full force and effect), or exemption by, any governmental or public
body or authority, or any subdivision thereof, is required to authorize, or is
required in connection with, (i) the execution, delivery or performance by such
Borrower of any Credit Document to which it is a party or (ii) the legality,
validity, binding effect or enforceability of any such Credit Document.
6.05 Financial Statements; Financial Condition; Undisclosed Liabilities;
-------------------------------------------------------------------
etc. (a) The financial statements, together with the notes and schedules
- ---
thereto, of such Borrower furnished to the Banks prior to the Effective Date
present fairly the financial condition of such Borrower at the respective dates
of such statements and the results of the operations of such Borrower for the
period covered thereby. All such financial statements have been prepared in
accordance with generally accepted accounting principles and practices in the
U.S. consistently applied. As of the Effective Date, since the respective dates
of such financial statements, there has been no material adverse change in the
business, operations, property, assets, liabilities, condition (financial or
otherwise) or prospects of such Borrower, the corporation of which such Borrower
is a series (if applicable), or, to the best knowledge of such Borrower, all of
the Borrowers taken as a whole that would materially and adversely affect the
ability of any Borrower to perform its obligations hereunder.
(b) Except as fully disclosed in the financial statements delivered
pursuant to Section 6.05(a) and open trading and shareholder redemption
obligations incurred in the ordinary course of business, there were as of the
Effective Date no liabilities or obligations with respect to such Borrower of
any nature whatsoever (whether absolute, accrued, contingent or otherwise and
whether or not due) which, either individually or in the aggregate, would be
material to such
18
<PAGE>
Borrower. As of the Effective Date, except for open trading and shareholder
redemption obligations incurred in the ordinary course of business, such
Borrower knows of no basis for the assertion against it or any other Borrower of
any liability or obligation of any nature whatsoever that is not fully disclosed
in the financial statements delivered pursuant to Section 6.05(a) which, either
individually or in the aggregate, could be material to any Borrower.
6.06 Litigation. There are no actions, suits or proceedings pending or, to
----------
the best knowledge of such Borrower after due inquiry, threatened (i) with
respect to any Credit Document or (ii) that would reasonably be expected to have
a material adverse effect on the business, operations, property, assets,
liabilities or condition (financial or otherwise) of such Borrower or the
corporation of which such Borrower is a series (if applicable).
6.07 True and Complete Disclosure. None of the factual information
----------------------------
furnished by or on behalf of such Borrower in writing to the Banks (including,
without limitation, all information contained in the Credit Documents) for
purposes of or in connection with this Agreement, the other Credit Documents or
any transaction contemplated herein or therein, and no other such factual
information (taken as a whole) hereafter furnished by or on behalf of such
Borrower in writing to either Agent or any of the Banks, contains, on the date
as of which such information is dated or certified, an untrue statement of a
material fact or omits, on the date as of which such information is dated or
certified, a material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
6.08 Use of Proceeds; Margin Regulations. (a) The proceeds of all Loans
-----------------------------------
shall be used by such Borrower to finance temporarily until settlement the sale
or purchase of portfolio securities by such Borrower, the repurchase or
redemption of shares of such Borrower, or for other temporary or emergency
purposes consistent with such Borrower's Investment Practices.
(b) Neither the making of any Loan nor the use of the proceeds thereof by
such Borrower will violate or be inconsistent with the provisions of Regulations
T, U or X of the Board of Governors of the Federal Reserve System.
6.09 ERISA. (a) Neither such Borrower nor any ERISA Affiliate of such
-----
Borrower (other than the Investment Advisor) has ever maintained or contributed
to or been obligated to contribute to any "employee benefit plan" (as defined in
Section 3(3) of ERISA).
(b) To the best knowledge of such Borrower after due inquiry, the
Investment Advisor has never maintained or contributed to or been obligated to
contribute to any "employee benefit plan" (as defined in Section 3(3) of ERISA)
other than a Defined Contribution Plan. To the best knowledge of such Borrower
after due inquiry, (i) each Defined Contribution Plan (and each related trust,
insurance contract or fund) of the Investment Advisor is in substantial
compliance with its terms and with all applicable laws, including without
limitation ERISA and the Code, (ii) each Defined Contribution Plan (and each
related trust, if any) of the Investment Advisor which is intended to be
qualified under Section 401(a) of the Code has received a determination letter
from the Internal Revenue Service to the effect that it meets the requirements
of Sections 401(a) and 501(a) of the Code, (iii) all contributions required to
be made with respect to a Defined Contribution Plan of the Investment Advisor
have been timely made, (iv) the
19
<PAGE>
Investment Advisor has not incurred any material liability to or on account of a
Defined Contribution Plan pursuant to Section 409, 502(i) or 502(l) of ERISA or
Section 4975 of the Code nor does it expect to incur any such liability under
any of the foregoing sections with respect to any Defined Contribution Plan, (v)
no condition exists which presents a material risk to the Investment Advisor or
any ERISA Affiliate of incurring a liability to or on account of a Defined
Contribution Plan pursuant to the foregoing provisions of ERISA and the Code and
(vi) no action, suit, proceeding, hearing, audit or investigation with respect
to the administration, operation or the investment of assets of any Defined
Contribution Plan (other than routine claims for benefits) is pending, expected
or threatened.
6.10 Compliance with Statutes, Etc. Such Borrower is in compliance with (i)
-----------------------------
all applicable statutes (including, without limitation, the Investment Company
Act), regulations and orders of, and all applicable restrictions imposed by, all
governmental bodies, domestic or foreign, in respect of the conduct of its
business and the ownership of its property, except such noncompliance as could
not, individually or in the aggregate, reasonably be expected to have a material
adverse effect on the business, operations, property, assets, liabilities or
condition (financial or otherwise) of such Borrower or the corporation or trust
of which such Borrower is a series (if applicable), or any material adverse
effect on the legality, validity or enforceability of this Agreement or any of
the other Credit Documents and (ii) all investment policies and restrictions set
forth in such Borrower's Articles of Incorporation or Declaration of Trust,
By-Laws and Investment Practices in all material respects.
6.11 Investment Company. Such Borrower is duly registered as an open-end
------------------
management investment company or is a series thereof under the Investment
Company Act, and such registration has not been revoked or rescinded and is in
full force and effect.
6.12 Investment Adviser. The Investment Adviser is the Manager of such
------------------
Borrower and is duly registered as an investment adviser under the Investment
Advisers Act, provided that, when not prohibited by law or regulation or by any
other restriction (contractual or otherwise), and so long as no Default or Event
of Default exists or would result therefrom, upon prior written notice to the
Operations Agent, the Investment Adviser may delegate a successor Manager that
is an affiliate of the Manager and which is also duly registered under the
Investment Advisers Act.
6.12 Affiliation with the Banks. Neither the respective Borrower nor any
--------------------------
Affiliated Person of such Borrower is an Affiliated Person of any Bank.
6.13 Senior Status. Except to the extent secured by Liens permitted by
-------------
Section 8.01, the Indebtedness of each Borrower hereunder ranks pari passu with
all other senior Indebtedness of the respective Borrower.
6.14 Year 2000 Matters. Although such Borrower does not generally own or
-----------------
operate systems which are susceptible to the Year 2000 Issue, such Borrower has
been advised by its Manager, distributor, transfer agent and Custodian that each
has been actively working on necessary changes to their computer systems to
prepare for the Year 2000 Issue. As of the Effective Date, such Borrower and its
directors have received, since early 1998, satisfactory
20
<PAGE>
quarterly reports from its principal service providers as to their preparations
for the Year 2000 Issue.
SECTION 7. Affirmative Covenants. Each Borrower covenants and agrees that
---------------------
on and after the Effective Date and until the Commitments have terminated and
the Loans, together with interest, Fees and all other Obligations incurred
hereunder, are paid in full:
7.01 Information Covenants. Such Borrower will deliver, or cause to be
---------------------
delivered, to the Operations Agent with sufficient copies for each of the Banks:
(a) Semi-Annual and Annual Financial Statements. Within 75 days after the
-------------------------------------------
close of each semi-annual and as soon as practicable but not more than 120 days
after the close of each annual accounting period in each fiscal year of such
Borrower, a statement of assets and liabilities and a statement of operations as
of the end of such accounting period, in each case with respect to such Borrower
and setting forth comparative figures applicable for the related periods in the
prior fiscal year, all of which shall be certified by an officer of such
Borrower, subject to normal year-end audit adjustments, together with, in the
case of annual statements, a certification by an independent certified public
accountant of recognized standing stating that its regular audit was conducted
in accordance with generally accepted audit standards.
(b) Officer's Certificates. At the time of the delivery of the financial
----------------------
statements provided for in Section 7.01(a), a certificate of an officer of such
Borrower to the effect that the representations and warranties by or with
respect to such Borrower are true and correct in all material respects and no
Default or Event of Default has occurred and is continuing or, if any Default or
Event of Default has occurred and is continuing, specifying the nature and
extent thereof.
(c) Notice of Default or Litigation. Promptly, and in any event within
-------------------------------
five Business Days after any executive officer of such Borrower obtains
knowledge thereof, notice of (i) the occurrence of any event which constitutes a
Default or an Event of Default or (ii) any litigation or governmental
investigation or proceeding pending (A) against any Borrower or Borrowers which
could reasonably be expected to have a material adverse affect on the business,
operations, property, assets, liabilities or condition (financial or otherwise)
of such Borrower or (B) with respect to any Credit Document.
(d) ERISA Reports. As soon as possible and, in any event, within twenty
-------------
(20) days after such Borrower knows or has reason to know of the occurrence of
any of the following, such Borrower will deliver to each of the Banks a
certificate of an executive officer of such Borrower setting forth the full
details as to such occurrence and the action, if any, that the Borrower or its
ERISA Affiliates are required or propose to take, together with any notices
required or proposed to be given to or filed with or by such Borrower, a Defined
Contribution Plan participant or the Defined Contribution Plan administrator
with respect thereto: (i) that any contribution required to be made with respect
to a Defined Contribution Plan has not been timely made; (ii) that such Borrower
will or may incur any liability with respect to a Defined Contribution Plan
under Section 4975 of the Code or Section 409, 502(i) or 502(l) of ERISA; or
21
<PAGE>
(iii) that such Borrower may incur any material liability pursuant to any
Defined Contribution Plan.
(e) Other Reports and Filings. Promptly, copies of all financial
-------------------------
information, proxy materials, prospectuses, statements of additional
information, and other information and reports (including without limitation all
information, material and reports filed or distributed pursuant to Section 30 of
the Investment Company Act) which such Borrower shall deliver to their
shareholders.
(f) Other Information. From time to time, such other information or
-----------------
documents (financial or otherwise) with respect to such Borrower (including,
without limitation, the investments of such Borrower) as any Bank may reasonably
request in writing.
7.02 Books, Records and Inspections. Such Borrower will keep proper books
------------------------------
of record and account with respect to its operations which reflect in all
material respects the transactions to which it is a party in conformity with
generally accepted accounting principles and applicable law. Such Borrower will
permit officers and designated representatives of the Agents or any Bank to
visit and inspect any of the properties of such Borrower, and to examine the
books of account of such Borrower and discuss the affairs, finances and accounts
of such Borrower with, and be advised as to the same by, its respective
officers, and independent accountants, all at such reasonable times and
intervals during normal business hours and, to the extent permissible under
applicable banking regulations and auditing standards, upon reasonable advance
notice and to such reasonable extent as either Agent or such Bank may request.
7.03 Compliance with Statutes; Etc. Such Borrower will comply with all
-----------------------------
applicable statutes (including, without limitation, the Investment Company Act),
regulations and orders of, and all applicable restrictions imposed by, all
governmental bodies, domestic or foreign, in respect of the conduct of its
business and the ownership of its property, except such noncompliance as could
not, individually or in the aggregate, reasonably be expected to have a material
adverse effect on the business, operations, property, assets, liabilities or
condition (financial or otherwise) of such Borrower or the corporation or trust
of which such Borrower is a series (if applicable), or any material adverse
effect on the legality, validity or enforceability of this Agreement or any of
the other Credit Documents.
7.04 Investment Company. Such Borrower will at all times (i) be a
------------------
registered, open-end management investment company or a series thereof under the
Investment Company Act and (ii) qualify and be treated as a regulated investment
company under the Code.
7.05 Compliance with Investment Practices. Such Borrower will at all times
------------------------------------
comply in all material respects with the investment policies and restrictions
set forth in its Investment Practices.
7.06 Compliance with Regulation U. Upon the request of any Bank, such
----------------------------
Borrower will furnish to any Bank such information as such Bank may reasonably
require to determine compliance by such Borrower with Regulation U.
22
<PAGE>
7.07 Use of Proceeds. All proceeds of the Loans shall be used as provided
---------------
in Section 6.08(a).
SECTION 8. Negative Covenants. Each Borrower covenants and agrees that on
------------------
and after the Effective Date and until the Commitments have terminated and the
Loans, together with interest, Fees and all other Obligations incurred by such
Borrower hereunder are paid in full:
8.01 Liens. Such Borrower will not create, incur, assume or suffer to exist
-----
any Lien upon or with respect to any of its property or assets (real or
personal, tangible or intangible), whether now owned or hereafter acquired, or
sell any such property or assets subject to an understanding or agreement,
contingent or otherwise, to repurchase such property or assets, assign any right
to receive income or permit the filing of any financing statement under the UCC
or any other similar notice of Lien under any similar recording or notice
statute or execute any control agreement with respect to any of its property or
assets; provided that the provisions of this Section 8.01 shall not prevent the
creation, incurrence, assumption or existence of the following:
(i) inchoate Liens for taxes, assessments or governmental charges or
levies not yet due or Liens for taxes, assessments or governmental charges
or levies being contested in good faith and by appropriate proceedings for
which adequate reserves have been established in accordance with generally
accepted accounting principles;
(ii) Liens in respect of property or assets of such Borrower imposed
by law, which were incurred in the ordinary course of business and do not
secure Indebtedness for borrowed money, such as carriers', warehousemen's,
materialmen's, mechanics', brokers' and custodians' liens and other similar
Liens arising in the ordinary course of business and (a) which do not in
the aggregate materially detract from the value of such Borrower's property
or assets or materially impair the use thereof in the operation of the
business of such Borrower or (b) which are being contested in good faith by
appropriate proceedings, which proceedings have the effect of preventing
the forfeiture or sale of the property or assets subject to any such Lien;
(iii) Hedging Agreements and Liens in respect thereof;
(iv) Liens incurred by such Borrower in favor of such Borrower's
Custodian; and
(v) Liens incurred by such Borrower in the ordinary course of
business in connection with portfolio investments to the extent such Liens
are permitted by the provisions of such Borrower's Prospectus.
8.02 Consolidation, Merger, Sale or Purchase of Assets, Etc. Such
------------------------------------------------------
Borrower will not wind up, liquidate or dissolve its affairs or enter into any
transaction of merger or consolidation, or convey, sell, lease or otherwise
dispose of all or substantially all of their respective property or assets, or
enter into any sale-leaseback transactions, or purchase or otherwise acquire (in
one or a series of related transactions) all or substantially all of the
property
23
<PAGE>
or assets of any Person (or agree to do any of the foregoing at any future time)
without the consent of the Required Banks (which consent shall not be
unreasonably withheld), except:
(i) So long as no Default or Event of Default with respect to such
Borrower has occurred and is continuing, or would result therefrom, such
Borrower may merge with or into, or acquire all or substantially all the
assets of, another Borrower so long as the surviving Borrower assumes all
of the Obligations (including, without limitation, all indemnity
obligations) of such non-surviving Borrower; and
(ii) such Borrower may sell its assets and purchase investments, in
each case in the ordinary course of business as described in such
Borrower's Prospectus.
8.03 Indebtedness. Such Borrower will not contract, create, incur,
------------
assume or suffer to exist any Indebtedness, except:
(i) Indebtedness incurred pursuant to this Agreement and the other
Credit Documents;
(ii) accrued expenses, deferred taxes and current trade accounts
payable, in each case incurred in the ordinary course of business;
(iii) Indebtedness in favor of such Borrower's Custodian consisting of
extensions of credit from the Custodian in the ordinary course of business;
(iv) Indebtedness in respect of judgments or awards that have been in
force for less than the applicable period for taking an appeal so long as
judgments or awards do not constitute an Event of Default and so long as
execution is not levied thereunder or in respect of which such Borrower (A)
shall at the time in good faith be prosecuting an appeal or proceedings for
review and in respect of which a stay of execution shall have been obtained
pending such appeal or review or (B) shall have obtained a performance bond
and Indebtedness in respect of such performance bond; and
(v) Indebtedness (other than Indebtedness for borrowed money)
arising in connection with any other transaction permissible under the
Investment Company Act and such Borrower's investment objectives and
fundamental investment restrictions, including, but not limited to, Reverse
Repurchase Agreements, mortgage dollar rolls, delayed delivery transactions
(provided that the assets with respect thereto are segregated), when-issued
securities (provided that the assets with respect thereto are segregated)
and loans from other Borrowers or any other Borrower; provided that (x)
Indebtedness of such Borrower pursuant to Reverse Repurchase Agreements
shall not exceed 5.0% of such Borrower's total net asset value and (y) all
such Indebtedness incurred by such Borrower pursuant to this clause (v)
shall not exceed in the aggregate 50% of such Borrower's Asset Coverage
Numerator.
Notwithstanding anything to the contrary contained in this Agreement, in no
event shall such Borrower contract, create, incur, assume or suffer to exist any
Senior Securities other than the Loans pursuant to this Agreement.
24
<PAGE>
8.04 Restriction on Issuance of Capital Stock. No Borrower will issue
----------------------------------------
any preferred stock which would constitute a senior security under the
Investment Company Act.
8.05 Modifications of Investment Practices, Articles of Incorporation,
----------------------------------------------------------------
By-Laws and Certain Other Agreements. Such Borrower will not amend or modify, or
- ------------------------------------
permit the amendment or modification of, (i) such Borrower's Investment
Practices in any material respect, (ii) such Borrower's Articles of
Incorporation (including, without limitation, by the filing or modification of
any certificate of designation) or Declaration of Trust, as applicable, or
By-Laws, or any agreement entered into by it with respect to its capital stock,
or enter into any new agreement with respect to its capital stock or (iii) its
Investment Advisory Agreement or the Custody Agreements other than any
amendments or modifications pursuant to clauses (ii) or (iii) of this Section
8.05 which are not materially adverse to the interests of the Banks.
8.06 Business. Such Borrower will not engage (directly or indirectly)
--------
in any business other than the business in which such Borrower is engaged on the
Effective Date and other businesses reasonably related thereto.
8.07 ERISA. Such Borrower will not, or will not permit any ERISA
-----
Affiliate (other than the Investment Advisor) to maintain or contribute or
become obligated to contribute to any "employee benefit plan" (as defined in
Section 3(3) of ERISA) or "plan".
8.08 Affiliated Person. Neither such Borrower nor any Affiliated
-----------------
Person of such Borrower will directly or indirectly own, control or hold with
power to vote 5% or more of the outstanding voting securities of (or otherwise
be or become an Affiliated Person of) any Agent or any Bank.
8.09 Asset Coverage Ratio. (i) No Borrower (other than a Specified
--------------------
Borrower) shall at any time permit its Asset Coverage Ratio to be less than
3.0:1.0 or such greater ratio as is provided in such Borrower's Prospectus and
(ii) no Specified Borrower shall at any time permit its Asset Coverage Ratio to
be less than 4.0:1.0 or such greater ratio as is provided in such Specified
Borrower's Prospectus.
SECTION 9. Events of Default. If at any time any of the following
-----------------
specified events (each an "Event of Default") shall be in effect with respect to
a Borrower:
9.01 Payments. Such Borrower shall (i) default in the payment when due
--------
of any principal of any Loan or (ii) default, and such default shall continue
unremedied for two or more Business Days, in the payment when due of any
interest on any Loan, or any Fees or any other amounts owing under this
Agreement or with respect to any Loan other than as covered above in clauses (i)
and (ii); or
9.02 Representations; Etc. Any representation, warranty or statement
--------------------
made by such Borrower herein or in any other Credit Document or in any
certificate delivered pursuant hereto or thereto shall prove to be untrue in any
material respect on the date as of which made or deemed made; or
25
<PAGE>
9.03 Covenants. Such Borrower shall (i) default in the due performance or
---------
observance by it of any term, covenant or agreement contained in Section
7.01(c), 7.04, 7.05, 7.07 or Section 8, other than Section 8.09; (ii) default in
the due performance or observance by it of any term, covenant or agreement
contained in Section 8.09 and such default shall continue unremedied for a
period of three days; or (iii) default in the due performance or observance by
it of any other term, covenant or agreement contained in this Agreement and such
default shall continue unremedied for a period of 30 days after written notice
to such Borrower by the Operations Agent or any Bank; or
9.04 Default Under Other Agreements. Such Borrower shall (i) default in any
------------------------------
payment of any Indebtedness (other than the Obligations) having an aggregate
principal amount in excess of $5,000,000, beyond the period of grace, if any,
provided in the instrument or agreement under which such Indebtedness was
created or (ii) default in the observance or performance of any agreement or
condition relating to any such Indebtedness having an aggregate principal amount
in excess of $5,000,000, or contained in any instrument or agreement evidencing,
securing or relating thereto, or any other event shall occur or condition exist,
the effect of which default or other event or condition is to cause, or to
permit the holder or holders of such Indebtedness (or a trustee or agent on
behalf of such holder or holders) to cause (determined without regard to whether
any notice is required), any such Indebtedness to become due prior to its stated
maturity;
9.05 Bankruptcy; Etc. Such Borrower or any corporation or trust of which
---------------
such Borrower is a series shall commence a voluntary case concerning itself
under Title 11 of the United States Code entitled "Bankruptcy", as now or
hereafter in effect, or any successor thereto (the "Bankruptcy Code"); or an
involuntary case is commenced against such Borrower or any corporation or trust
of which such Borrower is a series, and the petition is not controverted within
10 days, or shall continue in effect unstayed for any period of 60 consecutive
days, after commencement of the case; or a custodian (as defined in the
Bankruptcy Code) is appointed for, or takes charge of, all or substantially all
of the property of such Borrower or any corporation or trust of which such
Borrower is a series, or such Borrower or any corporation or trust of which such
Borrower is a series commences any other proceeding under any reorganization,
arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or
liquidation or similar law of any jurisdiction whether now or hereafter in
effect relating to such Borrower or any corporation or trust of which such
Borrower is a series, or there is commenced against such Borrower or any
corporation or trust of which such Borrower is a series any such proceeding
which shall continue in effect unstayed for any period of 60 consecutive days,
or such Borrower or any corporation or trust of which such Borrower is a series
is adjudicated insolvent or bankrupt; or any order of relief or other order
approving any such case or proceeding is entered; or such Borrower or any
corporation or trust of which such Borrower is a series suffers any appointment
of any custodian or the like for it or any substantial part of its property to
continue undischarged or unstayed for a period of 60 consecutive days; or such
Borrower or any corporation or trust of which such Borrower is a series makes a
general assignment for the benefit of creditors; or any corporate or trust
action is taken by such Borrower or any corporation or trust of which such
Borrower is a series for the purpose of effecting any of the foregoing; or
26
<PAGE>
9.06 Judgments. One or more judgments or decrees shall be entered against
---------
such Borrower (whether or not other Borrowers are parties thereto) involving a
liability (not fully covered by a reputable and solvent insurance company or
otherwise paid or discharged) in the aggregate amount of $5,000,000 and such
judgments and decrees either shall be final and non-appealable or shall not be
vacated, discharged or stayed or bonded pending appeal for any period of 30
consecutive days; or
9.07 Investment Adviser. (i) The Investment Adviser shall cease to be such
------------------
Borrower's Manager, except to the extent the Operations Agent has received prior
notice of the appointment of a successor Manager that is an affiliate of the
Investment Adviser or (ii) any Investment Advisory Agreement with such Borrower
shall cease to be in full force and effect or the Investment Adviser shall deny
or disaffirm any material obligations to be performed by it under any Investment
Advisory Agreement with such Borrower or shall default in the performance of any
of its obligations thereunder; or
9.08 Custody Agreement. Any Custody Agreement with such Borrower shall
-----------------
cease to be in full force and effect, or such Borrower or the Custodian shall
have given notice, pursuant to any Custody Agreement, of the termination of such
Custody Agreement, except in either case to the extent the Banks have received
prior notice of the appointment of a successor custodian that is a bank or trust
company organized under the laws of the U.S. having assets under custody of at
least $10,000,000,000 and a long-term debt rating of not less than A from a
recognized rating organization and such successor Custodian has entered into an
agreement that is in all material respects the same as such Custody Agreement
immediately prior to the termination thereof or otherwise in form and substance
satisfactory to the Agents;
then, and in any such event, and at any time thereafter, if any Event of Default
shall then be continuing, the Operations Agent, upon the written request of the
Required Banks, shall by written notice to such Borrower, take any or all of the
following actions, without prejudice to the rights of the Operations Agent or
any Bank to enforce its claims against such Borrower (provided, that, if an
Event of Default specified in Section 9.05 shall occur, the result which would
occur upon the giving of written notice by the Operations Agent to such Borrower
as specified in clauses (i) and (ii) below shall occur automatically without the
giving of any such notice): (i) declare the Total Commitment with respect to
such Borrower terminated, whereupon the Total Commitment with respect to such
Borrower shall forthwith terminate immediately and any accrued but unpaid
Commitment Fee owing by such Borrower shall forthwith become due and payable
without any other notice of any kind; and (ii) declare the principal of and any
accrued interest in respect of all Loans, and all other Obligations owing from
such Borrower hereunder to be, whereupon the same shall become, forthwith due
and payable without presentment, demand, protest or other notice of any kind,
all of which are hereby waived by each Borrower.
SECTION 10. Definitions and Accounting Terms.
10.01 Defined Terms. As used in this Agreement, the following terms shall
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have the following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
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"Additional Borrower" shall have the meaning provided in Section 1.14.
"Additional Borrower Request" shall have the meaning provided in Section
1.14.
"Administrative Agent" shall mean Deutsche Bank AG, acting through its New
York Branch, in its capacity as Administrative Agent.
"Affiliated Person" shall have the meaning provided in the Investment
Company Act.
"Agents" shall mean, collectively, the Operations Agent and the
Administrative Agent.
"Agreement" shall mean this Credit Agreement, as modified,
supplemented or amended from time to time.
"Applicable Margin" shall mean (i) in the case of Loans maintained as Base
Rate Loans, 0% and (ii) in the case of Loans maintained as Fixed Rate Loans,
0.375%.
"Asset Coverage Denominator" shall mean, at any time with
respect to any Borrower, the aggregate amount of Senior Securities (including in
any event all Loans hereunder) representing Indebtedness of such Borrower at
such time, determined in accordance with Section 18 of the Investment Company
Act.
"Asset Coverage Numerator" shall mean, at any time with respect to any
Borrower, the total value of the investments and other assets of such Borrower,
less all liabilities and Indebtedness of such Borrower not represented by Senior
Securities, all determined in accordance with Section 18 of the Investment
Company Act, provided that for purposes of this Agreement (i) in no event shall
the total value of the investments and other assets of such Borrower as so
calculated exceed such total value as would be determined in computing net asset
value as described in the relevant Prospectus and (ii) in no event shall the
liabilities and Indebtedness (other than Senior Securities) of such Borrower be
less than the respective liabilities attributed to such Borrower for purposes of
calculating net asset value as described in such Borrower's Prospectus.
"Asset Coverage Ratio" shall mean, at any time with respect to any
Borrower, the ratio of the Asset Coverage Numerator for such Borrower at such
time to the Asset Coverage Denominator for such Borrower at such time.
"Assignment and Assumption Agreement" shall mean an Assignment and
Assumption Agreement substantially in the form of Exhibit D (appropriately
completed).
"Bank" shall mean each financial institution listed on Schedule II, as well
as any Person which becomes a "Bank" hereunder pursuant to Section 12.04(b).
"Bankruptcy Code" shall have the meaning provided in Section 9.05.
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"Base Rate" at any time shall mean the higher of (i) 0.25% in excess of the
Federal Funds Rate and (ii) the Prime Lending Rate.
"Base Rate Loan" shall mean each Loan designated or deemed designated as
such by the respective Borrower at the time of the incurrence thereof or
conversion thereto.
"Borrower" shall have the meaning provided in the first paragraph of this
Agreement.
"Borrowing" shall mean and include the borrowing of one Type of Loan from
all the Banks on a given date (or resulting from a conversion or conversions on
such date) having in the case of Fixed Rate Loans the same Interest Period,
provided that Base Rate Loans incurred pursuant to Section 1.10(b) shall be
considered part of the related Borrowing of Fixed Rate Loans.
"Borrowing Base" shall mean, at any time for each Borrower, an amount equal
to the lesser of (i) 33 1/3% of the current market value of the total assets
contained in such Borrower's portfolio determined daily according to independent
pricing sources and (ii) any explicit maximum borrowing amount then specified by
such Borrower's Prospectus.
"Business Day" shall mean (i) for all purposes other than as covered by
clauses (ii) and (iii) below, any day except Saturday, Sunday and any day which
shall be in New York City or Boston a legal holiday or a day on which banking
institutions are authorized or required by law or other government action to
close, (ii) with respect to all notices and determinations in connection with,
and payments of principal and interest on, Fixed Rate Loans, any day which is a
Business Day described in clause (i) above and which is also a day for trading
by and between banks in the domestic or London (as the case may be) interbank
Eurodollar market and (iii) with respect to the Asset Coverage Ratio information
required to be delivered in each Notice of Borrowing, any day on which the
respective Borrower's net asset value is required to be calculated in accordance
with its Prospectus as in effect on the Effective Date.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time and the regulations promulgated and the rulings issued thereunder.
Section references to the Code are to the Code, as in effect at the date of this
Agreement, and to any subsequent provision of the Code, amendatory thereof,
supplemental thereto or substituted therefor.
"Commitment" shall mean, for each Bank, the amount set forth opposite such
Bank's name in Schedule II directly below the column entitled "Commitment", as
same may be (i) reduced from time to time pursuant to Sections 2.02 and/or 9 or
(ii) adjusted from time to time as a result of assignments to or from such Bank
pursuant to Section 12.04(b).
"Commitment Fee" shall have the meaning provided in Section 2.01(a).
"Contingent Obligation" shall mean, as to any Person, any obligation of
such Person guaranteeing or intended to guarantee any Indebtedness, lease,
dividend or other obligation ("primary obligations") of any other Person (the
"primary obligor") in any manner, whether directly or indirectly, including,
without limitation, any obligation of such Person,
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whether or not contingent, (i) to purchase any such primary obligation or any
property constituting direct or indirect security therefor, (ii) to advance or
supply funds (a) for the purchase or payment of any such primary obligation or
(b) to maintain working capital or equity capital of the primary obligor or
otherwise to maintain the net worth or solvency of the primary obligor, (iii) to
purchase property, securities or services primarily for the purpose of assuring
the owner of any such primary obligation of the ability of the primary obligor
to make payment of such primary obligation or (iv) otherwise to assure or hold
harmless the holder of such primary obligation against loss in respect thereof;
provided, however, that the term Contingent Obligation shall not include
endorsements of instruments for deposit or collection in the ordinary course of
business. The amount of any Contingent Obligation shall be deemed to be an
amount equal to the stated or determinable amount of the primary obligation in
respect of which such Contingent Obligation is made or, if not stated or
determinable, the maximum reasonably anticipated liability in respect thereof
(assuming such Person is required to perform thereunder) as determined by such
Person in good faith.
"Credit Documents" shall mean this Agreement and any other documents
executed and delivered in connection herewith.
"Credit Event" shall mean the making of a Loan.
"Custodian" shall mean State Street Bank and Trust Company or any successor
Custodian appointed pursuant to the requirements of Section 9.08.
"Custody Agreements" shall mean the custody agreements listed on Schedule
IV hereto, as amended from time to time in accordance with the terms hereof and
thereof and any similar agreements with any successor Custodian to the extent
such agreements meet the requirements of Section 9.08.
"Default" shall mean any event, act or condition which with notice or lapse
of time, or both, would constitute an Event of Default.
"Defined Contribution Plan" shall mean any pension plan as defined in
Section 3(34) of ERISA, which is maintained or contributed to by (or to which
there is an obligation to contribute) the Investment Advisor or any Borrower.
"Dollars" and the sign "$" shall each mean freely transferable lawful money
of the United States.
"Effective Date" shall have the meaning provided in Section 12.10.
"Eligible Transferee" shall mean and include any bank (as defined in the
Investment Company Act); provided that no Affiliated Person of any Borrower and
no Affiliated Person of such an Affiliated Person of any Borrower shall be an
Eligible Transferee.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations promulgated and rulings issued
thereunder. Section references to ERISA are to ERISA, as in effect at the date
of this Agreement, and to any
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subsequent provisions of ERISA, amendatory thereof, supplemental thereto or
substituted therefor.
"ERISA Affiliate" shall mean each person (as defined in Section 3(9) of
ERISA) which together with any Borrower would be deemed to be a "single
employer" within the meaning of Section 414(b), (c), (m) or (o) of the Code.
"Event of Default" shall have the meaning provided in Section 9.
"Existing Credit Facilities" shall mean the Credit Agreement, dated as of
December 19, 1997, between the Prudential Series Fund and Deutsche Bank and any
other "redemption facility" to which any Borrower is a party.
"Expiry Date" shall mean March 10, 2000 or such date to which the Expiry
Date may be extended in accordance with Section 1.13 of this Agreement.
"Extension Request" has the meaning provided in Section 1.13.
"Federal Funds Rate" shall mean, for any period, a fluctuating interest
rate equal for each day during such period to the weighted average of the rates
on overnight Federal Funds transactions with members of the Federal Reserve
System arranged by Federal Funds brokers, as published for such day (or, if such
day is not a Business Day, for the next preceding Business Day) by the Federal
Reserve Bank of New York, or, if such rate is not so published for any day which
is a Business Day, the average of the quotations for such day on such
transactions received by the Operations Agent from three Federal Funds brokers
of recognized standing selected by the Operations Agent.
"Fees" shall mean all amounts payable pursuant to or referred to in Section
2.01.
"Fixed Rate Loan" shall mean collectively IBOR Loans and LIBOR Loans.
"Hedging Agreement" shall mean any financial futures contracts, agreement
to purchase and sell (or write) exchange listed or over-the-counter put and call
options on securities, fixed income indices and securities indices, Interest
Rate Protection Agreements, foreign exchange contracts, currency swap agreements
or other similar agreements or arrangements, Repurchase Agreements, Reverse
Repurchase Agreements or any other securities or financial instruments or
arrangements with a leveraging effect created in the ordinary course of the
investment process or operations of any Borrower to the extent permitted by such
Borrower's Investment Practices.
"IBOR" shall mean (i) the average of the offered quotations to the
Operations Agent and the Administrative Agent in the domestic interbank
Eurodollar market for Dollar deposits of amounts in immediately available funds
comparable to the principal amount of the IBOR Loan of the Agents for which an
interest rate is then being determined with maturities comparable to the
Interest Period to be applicable to such IBOR Loan determined as of 12:00 Noon
(or in the case of a Swingline Loan, 3:00 P.M.) (New York time) on the date
which is the commencement of such Interest Period, divided (and rounded upward
to the next whole multiple
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of 1/16 of 1%) by (ii) a percentage equal to 100% minus the then stated maximum
rate of all reserve requirements (including, without limitation, any marginal,
emergency, supplemental, special or other reserves required by applicable law)
applicable to any member bank of the Federal Reserve system in respect of
Eurocurrency funding or liabilities as defined in Regulation D (or any successor
category of liabilities under Regulation D).
"IBOR Loan" shall mean each Loan designated as such by the respective
Borrower at the time of the incurrence thereof or conversion thereto bearing
interest at the rates provided in Section 1.08(c).
"Indebtedness" shall mean, as to any Person, without duplication, (i) all
indebtedness (including principal, interest, fees and charges) of such Person
for borrowed money or for the deferred purchase price of property or services,
(ii) the face amount of all letters of credit issued for the account of such
Person and, without duplication, all drafts drawn thereunder, (iii) all
Indebtedness of the types described in clause (i), (ii), (iv), (v), (vi), (vii)
or (viii) of this definition secured by any Lien on any property owned by such
Person, whether or not such Indebtedness has been assumed by such Person, (iv)
the aggregate amount required to be capitalized under leases under which such
Person is the lessee, (v) all obligations of such person to pay a specified
purchase price for goods or services, whether or not delivered or accepted,
i.e., take-or-pay and similar obligations, (vi) all Contingent Obligations of
such Person, (vii) borrowings of securities by such Person and (viii) all
obligations under any Hedging Agreement or under any similar type of agreement.
"Interest Determination Date" shall mean, (i) with respect to any LIBOR
Loan, the second Business Day prior to the commencement of any Interest Period
relating to such LIBOR Loan and (ii) with respect to any IBOR Loan, the Business
Day which is the commencement of any Interest Period relating to such IBOR Loan.
"Interest Period" shall have the meaning provided in Section 1.09.
"Interest Rate Protection Agreement" shall mean any interest rate swap
agreement, interest rate cap agreement, interest collar agreement, interest rate
hedging agreement or other similar agreement or arrangement.
"Investment Adviser" shall mean Prudential Investment Fund Management LLC.
"Investment Advisers Act" shall mean the Investment Advisers Act of 1940,
as amended, including the rules and regulations promulgated thereunder.
"Investment Advisory Agreement" shall mean the Investment Advisory
Agreements, listed on Schedule V hereto.
"Investment Company Act" shall mean the Investment Company Act of 1940, as
amended, including the rules and regulations promulgated thereunder.
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"Investment Practices" shall mean the investment objectives and fundamental
investment policies and restrictions of a respective Borrower as set forth in
such Borrower's Prospectus.
"LIBOR" shall mean with respect to each Interest Period for a LIBOR Loan,
(i) the offered rate (rounded upward to the nearest 1/16 of one percent) for
deposits of Dollars for a period equivalent to such Interest Period at or about
11:00 A.M. (London time) on the second Business Day before the first day of such
Interest Period that is displayed on Telerate page 3750 (British Bankers'
Association Interest Settlement Rates) (or such other page as may replace such
page 3750 on such system or on any other system of the information vendor for
the time being designated by the British Bankers' Association to calculate the
BBA Interest Settlement Rate (as defined in the British Bankers' Association's
Recommended Terms and Conditions ("BBAIRS" terms) dated August 1985)), provided
that if on such date no such rate is so displayed, the Eurodollar Rate for such
period shall be the rate quoted to the Operations Agent as the offered rate for
deposits of Dollars in an amount approximately equal to the amount in relation
to which LIBOR is to be determined for a period equivalent to such period by
prime banks in the London interbank market at or about 11:00 A.M. (London time)
on the second Banking Day before the first day of such period, divided (and
rounded upward to the next whole multiple of 1/16 of 1%) by (ii) a percentage
equal to 100% minus the then stated maximum rate of all reserve requirements
(including, without limitation, any marginal, emergency, supplemental, special
or other reserves required by applicable law) applicable to any member bank of
the Federal Reserve System in respect of Eurocurrency funding or liabilities as
defined in Regulation D (or any successor category of liabilities under
Regulation D).
"LIBOR Loan" shall mean each Loan designated as such by the respective
Borrower at the time of the making thereof or conversion thereto bearing
interest at the rates provided in Section 1.08(b).
"Lien" shall mean any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), preference, priority or
other security agreement of any kind or nature whatsoever (including, without
limitation, any conditional sale or other title retention agreement, any
financing or similar statement or notice filed under the UCC or any other
similar recording or notice statute, and any lease having substantially the same
effect as any of the foregoing).
"Loan" shall mean each Revolving Loan and each Swingline Loan.
"Mandatory Borrowing" shall have the meaning provided in Section 1.01(c).
"Manager" shall mean as to each Borrower, the "Manager" as defined in such
Borrower's Prospectus on the Effective Date.
"Margin Stock" shall have the meaning provided in Regulations T, U and X.
"Maximum Swingline Amount" shall mean $50,000,000.
"Notice of Borrowing" shall have the meaning provided in Section 1.03.
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"Notice of Conversion" shall have the meaning provided in Section 1.06.
"Notice Office" shall mean the office of the Operations Agent located at
225 Franklin Street, Boston, MA 02210, Attention: Michelle C. Murphy, or such
other office as the Operations Agent may hereafter designate in writing as such
to the other parties hereto.
"Obligations" shall mean all amounts owing to the Agents or any Bank
pursuant to the terms of this Agreement or any other Credit Document.
"Operations Agent" shall mean State Street Bank and Trust Company in its
capacity as operations agent for the Banks, and shall include any successor to
the Operations Agent appointed pursuant to Section 11.08.
"Payment Office" shall mean the office of the Operations Agent located at
225 Franklin Street, Boston, MA 02210, Attention: Broker Loan Operations,
Reference: Prudential Funds, or such other office as the Operations Agent may
hereafter designate in writing as such to the other parties hereto.
"Percentage" of any Bank at any time shall mean a fraction (expressed as a
percentage) the numerator of which is the Commitment of such Bank at such time
and the denominator of which is the Total Commitment at such time; provided that
if a Percentage of any Bank is to be determined after the Total Commitment has
been terminated, then the Percentage of such Bank shall be determined
immediately prior (and without giving effect) to such termination.
"Person" shall mean any individual, partnership, limited liability company,
joint venture, firm, corporation, association, trust or other enterprise or any
government or political subdivision or any agency, department or instrumentality
thereof.
"Prime Lending Rate" shall mean the rate which the Operations Agent
announces from time to time as its prime lending rate, the Prime Lending Rate to
change when and as such prime lending rate changes. The Prime Lending Rate is a
reference rate and does not necessarily represent the lowest or best rate
actually charged to any customer. The Operations Agent may make commercial loans
or other loans at rates of interest at, above or below the Prime Lending Rate.
"Prospectus" shall mean each Borrower's prospectus, in each case together
with any Statement of Additional Information incorporated therein and as
supplemented, amended or modified from time to time in accordance with the
provisions of this Agreement.
"Regulation D" shall mean Regulation D of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor to all
or a portion thereof establishing reserve requirements.
"Regulation T" shall mean Regulation T of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor to all
or a portion thereof.
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"Regulation U" shall mean Regulation U of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor to all
or a portion thereof.
"Regulation X" shall mean Regulation X of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor to all
or a portion thereof.
"Repurchase Agreement" shall mean any agreement to purchase an asset
presently and then to sell such asset to any other Person in the future.
"Requested Extension Effective Date" shall have the meaning provided in
Section 1.13.
"Required Banks" shall mean Banks, the sum of whose outstanding Commitments
(or after the termination thereof, the total outstanding Loans) at such time
exceeds 50% of the Total Commitment (or after the termination thereof, the total
outstanding Loans).
"Reverse Repurchase Agreement" shall mean any agreement to
sell an asset presently and then to repurchase such asset in the future.
"Revolving Loan" shall have the meaning set forth in Section 1.01.
"Senior Securities" shall have the meaning ascribed to such
term in Section 18 of the Investment Company Act.
"Specified Borrower" shall mean each of Prudential High Yield Total Return
Fund, Prudential Developing Markets Equity Fund, Prudential Latin America Equity
Fund and Prudential Distressed Securities Fund.
"Subsidiary" shall mean, as to any Person, (i) any corporation more than
50% of whose stock of any class or classes having by the terms thereof ordinary
voting power to elect a majority of the directors of such corporation
(irrespective of whether or not at the time stock of any class or classes of
such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time owned by such Person and/or one or
more Subsidiaries of such Person and (ii) any partnership, association, joint
venture, limited liability company or other entity in which such Person and/or
one or more Subsidiaries of such Person has more than a 50% equity interest at
the time.
"Swingline Bank" shall mean State Street Bank and Trust Company.
"Swingline Expiry Date" shall mean the date which is seven Business Days
prior to the Expiry Date.
"Swingline Loan" shall have the meaning provided in Section 1.01(b).
"Taxes" shall have the meaning provided in Section 3.04(a).
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"Total Commitment" shall mean, at any time, the sum of the Commitments of
each of the Banks.
"Total Unutilized Commitment" shall mean, at any time, an
amount equal to the remainder of (i) the Total Commitment at such time less (ii)
the aggregate principal amount of Loans then outstanding, provided that, for
purposes of calculating the Commitment Fee pursuant to Section 2.01(a), "Total
Unutilized Commitment" shall mean an amount equal to the remainder of (i) the
Total Commitment at such time less (ii) the aggregate principal amount of
Revolving Loans then outstanding.
"Type" shall mean the type of Loan determined with regard to the interest
option applicable thereto, i.e., whether a Base Rate Loan or a Fixed Rate Loan.
-----
"UCC" shall mean the Uniform Commercial Code as from time to time in effect
in the relevant jurisdiction.
"United States" and "U.S." shall each mean the United States of America.
"Year 2000 Issue" shall mean the failure of computer software and hardware
systems and equipment containing embedded computer chips to properly receive,
transmit, process, manipulate, store, retrieve, re-transmit or otherwise use
data and information due to the occurrence of the year 2000 or the inclusion of
dates on or after January 1, 2000.
SECTION 11. The Agents.
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11.01 Appointment. The Banks hereby designate State Street Bank and Trust
-----------
Company as Operations Agent and Deutsche Bank AG, New York Branch, as
Administrative Agent to act as specified herein and in the other Credit
Documents. Each Bank hereby irrevocably authorizes the Agents to take such
action on its behalf under the provisions of this Agreement, the other Credit
Documents and any other instruments and agreements referred to herein or therein
and to exercise such powers and to perform such duties hereunder and thereunder
as are specifically delegated to or required of the Agents by the terms hereof
and thereof and such other powers as are reasonably incidental thereto. The
Agents may perform any of their duties hereunder by or through its respective
officers, directors, agents, employees or affiliates.
11.02 Nature of Duties. The Agents shall not have any duties or
----------------
responsibilities except those expressly set forth in this Agreement and the
other Credit Documents. None of the Agents nor any of their respective officers,
directors, agents, employees or affiliates shall be liable for any action taken
or omitted by it or them hereunder or under any other Credit Document or in
connection herewith or therewith, unless caused by its or their gross negligence
or willful misconduct. The duties of the Agents shall be mechanical and
administrative in nature; the Agents shall not have by reason of this Agreement
or any other Credit Document a fiduciary relationship in respect of any Bank;
and nothing in this Agreement or any other Credit Document, expressed or
implied, is intended to or shall be so construed as to impose upon the Agents
any obligations in
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respect of this Agreement or any other Credit Document except as expressly set
forth herein or therein.
11.03 Lack of Reliance on the Agents. Independently and without reliance
------------------------------
upon the Agents, each Bank, to the extent it deems appropriate, has made and
shall continue to make (i) its own independent investigation of the financial
condition and affairs of the Borrowers in connection with the making and the
continuance of the Loans and the taking or not taking of any action in
connection herewith and (ii) its own appraisal of the creditworthiness of the
Borrowers and, except as expressly provided in this Agreement, the Agents shall
not have any duty or responsibility, either initially or on a continuing basis,
to provide any Bank with any credit or other information with respect thereto,
whether coming into its possession before the making of any Loan or at any time
or times thereafter. The Agents shall not be responsible to any Bank for any
recitals, statements, information, representations or warranties herein or in
any document, certificate or other writing delivered in connection herewith or
for the execution, effectiveness, genuineness, validity, enforceability,
perfection, collectibility, priority or sufficiency of this Agreement or any
other Credit Document or the financial condition of any Borrower or Borrowers,
or be required to make any inquiry concerning either the performance or
observance of any of the terms, provisions or conditions of this Agreement or
any other Credit Document, or the financial condition of any Borrower or
Borrowers, or the existence or possible existence of any Default or Event of
Default.
11.04 Certain Rights of the Agents. If any Agent shall request instructions
----------------------------
from the Required Banks with respect to any act or action (including failure to
act) in connection with this Agreement or any other Credit Document, such Agent
shall be entitled to refrain from such act or taking such action unless and
until such Agent shall have received instructions from the Required Banks; and
the Agents shall not incur liability to any Person by reason of so refraining.
Without limiting the foregoing, no Bank shall have any right of action
whatsoever against the Agents as a result of the Agents acting or refraining
from acting hereunder or under any other Credit Document in accordance with the
instructions of the Required Banks.
11.05 Reliance. The Agents shall be entitled to rely, and shall be fully
--------
protected in relying, upon any note, writing, resolution, notice, statement,
certificate, telex, teletype or telecopier message, cablegram, radiogram, order
or other document or telephone message signed, sent or made by any Person that
such Agent believed to be the proper Person and, with respect to all legal
matters pertaining to this Agreement and any other Credit Document and its
duties hereunder and thereunder, upon advice of counsel selected by the Agents.
11.06 Indemnification. To the extent the Agents are not reimbursed and
---------------
indemnified by the Borrowers, the Banks will reimburse and indemnify the Agents,
in proportion to their respective Percentages, for and against any and all
liabilities, obligations, losses, damages, penalties, claims, actions,
judgments, costs, expenses or disbursements of whatsoever kind or nature which
may be imposed on, asserted against or incurred by the Agents in performing
their respective duties hereunder or under any other Credit Document, in any way
relating to or arising out of this Agreement or any other Credit Document;
provided that no Bank shall be liable for any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements resulting from such Agent's gross negligence or
willful misconduct.
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11.07 The Agents in their Individual Capacities. With respect to their
-----------------------------------------
respective obligations to make Loans under this Agreement, the Agents shall have
the rights and powers specified herein for a "Bank" and may exercise the same
rights and powers as though it were not performing the duties specified herein;
and the term "Banks", "Required Banks" or any similar terms shall, unless the
context clearly otherwise indicates, include the Agents in their individual
capacities. The Agents may accept deposits from, lend money to, and generally
engage in any kind of banking, trust or other business with the Borrowers or any
affiliate of a Borrower as if it were not performing the duties specified
herein, and may accept fees and other consideration from any Borrower or any
affiliate of a Borrower for services in connection with this Agreement and
otherwise without having to account for the same to the Banks.
11.08 Resignation by the Agents. (a) Either Agent may resign from the
-------------------------
performance of all its functions and duties hereunder and/or under the other
Credit Documents at any time by giving 15 Business Days' prior written notice to
the Borrowers and the Banks. Such resignation by the Operations Agent shall take
effect upon the appointment of a successor Operations Agent pursuant to Sections
11.08(b) and (c) below or as otherwise provided in this Agreement.
(b) Upon any such notice of resignation, the Banks shall appoint a
successor Operations Agent hereunder or thereunder who shall be a commercial
bank or trust company reasonably acceptable to the Borrowers (it being
understood and agreed that any Bank is deemed to be acceptable to the
Borrowers).
(c) If a successor Operations Agent shall not have been so appointed
within such 15 Business Day period, the Operations Agent, with the consent of
the Borrowers (such consent not to be unreasonably withheld), shall then appoint
a successor Operations Agent who shall serve as Operations Agent hereunder or
thereunder until such time, if any, as the Banks appoint a successor Operations
Agent as provided in Section 11.08(b).
(d) If no successor Operations Agent has been appointed pursuant to
Section 11.08(b) or 11.08(c) by the 20th Business Day after the date such notice
of resignation was given by the Operations Agent, the Operations Agent's
resignation shall become effective and the Banks shall thereafter perform all
the duties of the Operations Agent hereunder and/or under any other Credit
Document until such time, if any, as the Banks appoint a successor Operations
Agent as provided in Section 11.08(b).
(e) Upon the resignation of the Administrative Agent pursuant to clause
(a) above, the Operations Agent at such time shall assume all of the duties and
functions of the Administrative Agent.
SECTION 12. Miscellaneous.
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12.01 Payment of Expenses, Indemnification, Etc. The Borrowers shall: (i)
-----------------------------------------
whether or not the transactions herein contemplated are consummated, pay all
reasonable out-of-pocket costs and expenses of the Agents (including, without
limitation, the reasonable fees, costs and disbursements of White & Case LLP) in
connection with the preparation, execution and
38
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delivery of this Agreement and the other Credit Documents and the documents and
instruments referred to herein and therein and any amendment, waiver or consent
relating hereto or thereto, of the Agents in connection with their syndication
efforts with respect to this Agreement and of the Agents and each of the Banks
in connection with the enforcement of this Agreement and the other Credit
Documents and the documents and instruments referred to herein and therein
(including, without limitation, the reasonable fees and disbursements of counsel
for the Agents and for each of the Banks); (ii) pay and hold each of the Banks
harmless from and against any and all present and future stamp, excise and other
similar taxes with respect to the foregoing matters and save each of the Banks
harmless from and against any and all liabilities with respect to or resulting
from any delay or omission (other than to the extent attributable to such Bank)
to pay such taxes; and (iii) indemnify the Agents and each Bank, and each of
their respective officers, directors, employees, representatives and agents from
and hold each of them harmless against any and all liabilities, obligations
(including removal or remedial actions or any other environmental claims),
losses, damages, penalties, claims, actions, judgments, suits, costs, expenses
and disbursements (including reasonable attorneys' and consultants' fees and
disbursements) incurred by, imposed on or assessed against any of them as a
result of, or arising out of, or in any way related to, or by reason of, any
investigation, litigation or other proceeding (whether or not such Agent or any
Bank is a party thereto) related to the entering into and/or performance of this
Agreement or any other Credit Document or the use of any of the proceeds of any
Loans hereunder or the consummation of any transactions contemplated herein or
in any other Credit Document or the exercise of any of their rights or remedies
provided herein or in the other Credit Documents; provided that the Borrowers
shall have no obligation under this Section 12.01 to the Agents or any Bank with
respect to any liabilities, obligations, losses, damages, penalties, claims,
actions, judgments, suits, costs, expenses and disbursements to the extent
arising from the gross negligence or willful misconduct of the Person to be
indemnified. To the extent that the undertaking to indemnify, pay or hold
harmless any Person set forth in the preceding sentence may be unenforceable
because it is violative of any law or public policy, the Borrowers shall make
the maximum contribution to the payment and satisfaction of each of the
indemnified liabilities which is permissible under applicable law. Each
Borrower's obligations under this Section 12.01 are several and not joint, with
such obligations to be allocated to each Borrower pro rata based on the relative
asset size of the Borrowers (or, upon prior written notice to the Agents, based
on such other method acceptable to the Agents as the Investment Advisor shall
determine in compliance with the Investment Company Act).
12.02 Right of Setoff. In addition to any rights now or hereafter granted
---------------
under applicable law or otherwise, and not by way of limitation of any such
rights, upon the occurrence of an Event of Default each Bank is hereby
authorized at any time or from time to time, without presentment, demand,
protest or other notice of any kind to the defaulting Borrower, the Investment
Adviser or any other Person, any such notice being hereby expressly waived, to
setoff and to appropriate and apply any and all deposits (general or special)
and any other Indebtedness at any time held or owing by such Bank (including,
without limitation, by branches and agencies of such Bank wherever located) to
or for the credit or the account of such defaulting Borrower against and on
account of the Obligations and liabilities of such defaulting Borrower to such
Bank under this Agreement or under any of the other Credit Documents, including,
without limitation, all interests in Obligations purchased by such Bank pursuant
to Section 12.06(b), and all other
39
<PAGE>
claims of any nature or description arising out of or connected with this
Agreement or any other Credit Document, irrespective of whether or not such Bank
shall have made any demand hereunder. Each Bank agrees to promptly notify the
relevant Borrower after the exercise by such Bank of any right of setoff;
provided that any failure on the part of any Bank to so notify such Borrower
- --------
shall not affect the validity of such setoff.
12.03 Notices. Except as otherwise expressly provided herein, all notices
-------
and other communications provided for hereunder shall be in writing (including
facsimile, telegraphic, telex, telecopier or cable communication) and mailed by
overnight delivery, faxed, telegraphed, telexed, telecopied, cabled or
delivered: if to the Borrowers, at Prudential Investments Fund Management LLC,
100 Mulberry Street, Gateway Center 3, Newark, NJ 07102-4077, Attention: Grace
Torres; if to a Bank or the Administrative Agent, at such party's address
specified opposite its name on Schedule III; if to the Operations Agent, at its
Notice Office; or, as to the Borrowers or the Operations Agents, at such other
address as shall be designated by such party in a written notice to the other
parties hereto and, as to any Bank or the Administrative Agent, at such other
address as shall be designated by such party in a written notice to the
Borrowers and the Operations Agent. All such notices and communications shall,
when mailed by overnight delivery, faxed, telegraphed, telexed, telecopied, or
cabled or sent by overnight courier, be effective when deposited in the mails,
delivered to the telegraph company, cable company or overnight courier, as the
case may be, or sent by facsimile, telex or telecopier, except that notices and
communications to the Operations Agent shall not be effective until received by
the Operations Agent.
12.04 Benefit of Agreement. (a) This Agreement shall be binding upon and
--------------------
inure to the benefit of and be enforceable by the respective successors and
assigns of the parties hereto; provided, however, that no Borrower may assign or
transfer any of its rights, obligations or interest hereunder or under any other
Credit Document without the prior written consent of each of the Banks and,
provided further, that although any Bank may transfer, assign or grant
participations in its rights as provided hereunder, such Bank shall remain a
"Bank" for all purposes hereunder (and may not transfer or assign all or any
portion of its Commitment hereunder except as provided in Section 12.04(b)) and
the transferee, assignee or participant, as the case may be, shall not
constitute a "Bank" hereunder and, provided further, that no Bank shall transfer
or grant any participation under which the participant shall have rights to
approve any amendment to or waiver of this Agreement or any other Credit
Document except to the extent such amendment or waiver would extend the final
scheduled maturity of any Loan in which such participant is participating, or
reduce the rate or extend the time of payment of interest or Fees thereon
(except in connection with a waiver of applicability of any post-default
increase in interest rates) or reduce the principal amount thereof, or increase
the amount of the participant's participation over the amount thereof then in
effect (it being understood that a waiver of any Default or Event of Default or
of a mandatory reduction in the Total Commitment shall not constitute a change
in the terms of such participation, and that an increase in the Total Commitment
or Loan shall be permitted without the consent of any participant if the
participant's participation is not increased as a result thereof). In the case
of any such participation, the participant shall not have any rights under this
Agreement or any of the other Credit Documents (the participant's rights against
such Bank in respect of such participation to be those set forth in the
agreement executed by such Bank in favor of the participant relating thereto)
and all amounts
40
<PAGE>
payable by the Borrowers hereunder shall be determined as if such Bank had not
sold such participation. Notwithstanding the foregoing, so long as no Default or
Event of Default exists and is continuing, without the prior written consent of
the Borrowers, no Bank may grant a participation in its rights hereunder to any
participant which owns a majority interest in a mutual fund company with assets
under management of greater than $15,000,000,000.
(b) Notwithstanding the foregoing, any Bank (or any Bank together with one
or more other Banks) may (x) assign all or a portion of its Commitment and
related outstanding Obligations hereunder to its parent company and/or any
affiliate of such Bank or to one or more Banks, provided that any such assignee
is an Eligible Transferee or (y) assign all or a portion of such Commitment to
one or more Eligible Transferees, acceptable to the Agents, each of which
assignees shall become party to this Agreement as a Bank by execution of an
Assignment and Assumption Agreement, provided that (i) at such time Schedule II
shall be deemed modified to reflect the Commitments of such new Bank and of the
existing Banks, (ii) the consent of the Agents shall be required in connection
with any assignment to an Eligible Transferee pursuant to clause (y) above,
(iii) so long as no Default or Event of Default exists and is continuing, the
written consent of each Borrower shall be required in connection with any
assignment pursuant to clause (y) above, which consent shall not be unreasonably
withheld or delayed, except that such consent will not be deemed unreasonably
withheld or delayed if the Borrowers reasonably believe that the proposed
assignee is a competitor of the Prudential Family of Funds, (iv) no consent
shall be required in connection with any assignment pursuant to clause (x) above
unless the Borrowers reasonably believe that the proposed assignee is a
competitor of the Prudential Family of Funds, (v) assignments shall be in
minimum amounts of $5,000,000 and (vi) the Operations Agent shall receive, at
the time of each such assignment, from the assigning or assignor Bank, the
payment of a non-refundable fee of $3,500. To the extent of any assignment
pursuant to this Section 12.04(b), the assigning Bank shall be relieved of its
obligations hereunder with respect to its assigned Commitment. At the time of
each assignment pursuant to this Section 12.04(b) to a Person which is not
already a Bank hereunder and which is not a United States person (as such term
is defined in Section 7701(a)(30) of the Code) for U.S. Federal income tax
purposes, the respective assignee Bank shall, to the extent legally entitled to
do so, provide to the Borrowers the forms described in clause (ii) of Section
3.04(b). To the extent that an assignment of all or any portion of a Bank's
Commitment and related outstanding Obligations pursuant to this Section 12.04(b)
would, at the time of such assignment, result in increased costs under this
Agreement, including under Section 1.10, 1.11 or 3.04 from those being charged
by the respective assigning Bank prior to such assignment, then the Borrowers
shall not be obligated to pay such increased costs (although the Borrowers shall
be obligated to pay any other increased costs of the type described above
resulting from changes after the date of the respective assignment).
(c) Notwithstanding anything to the contrary contained in this Section
12.04, in connection with any participation or assignment the respective Bank
granting the assignment or participation shall (i), in the agreement with
respect thereto, obtain a representation from the participant or assignee to the
effect that it is not an Affiliated Person of the Investment Adviser or any
Borrower, or an Affiliated Person of such an Affiliated Person of the Investment
Adviser or any Borrower and (ii) inform such Person in writing that its review
of all non-public information made available to such Person is subject to the
confidentiality provisions contained in Section 12.16 of this Agreement.
41
<PAGE>
(d) Nothing in this Agreement shall prevent or prohibit any Bank from
pledging its Loans to a Federal Reserve Bank in support of borrowings made by
such Bank from such Federal Reserve Bank, provided that no such pledge shall
release the pledgor Bank from its obligations hereunder.
12.05 No Waiver; Remedies Cumulative. No failure or delay on the part of
------------------------------
the Agents or any Bank in exercising any right, power or privilege hereunder or
under any other Credit Document and no course of dealing between the Investment
Adviser and/or the Borrowers and the Agent or any Bank shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, power or
privilege hereunder or under any other Credit Document preclude any other or
further exercise thereof or the exercise of any other right, power or privilege
hereunder or thereunder. The rights, powers and remedies herein or in any other
Credit Document, unless expressly provided otherwise, are cumulative and not
exclusive of any rights, powers or remedies which the Agents or any Bank would
otherwise have. No notice to or demand on any Borrower or the Investment Adviser
shall in any case entitle any Borrower or the Investment Adviser to any other or
further notice or demand in similar or other circumstances or constitute a
waiver of the rights of the Agents or any Bank to any other or further action in
any circumstances without notice or demand.
12.06 Payments Pro Rata. (a) Except as otherwise provided in this
-----------------
Agreement, the Operations Agent agrees that promptly after its receipt of each
payment from or on behalf of any Borrower in respect of any Obligations
hereunder, it shall distribute such payment to the Banks (other than any Bank
that has consented in writing to waive its pro rata share of any such payment)
--- ----
pro rata based upon their respective shares, if any, of the Obligations with
- --- ----
respect to which such payment was received.
(b) Each of the Banks agrees that if it receives any amount hereunder
(whether by voluntary payment, by realization upon security, by the exercise of
the right of setoff or banker's lien, by counterclaim or cross action, by the
enforcement of any right under the Credit Documents, or otherwise) which is
applicable to the payment of the principal of, or interest on, the Loans or
Commitment Fee, and which is in a greater proportion (relative to the amount
then owed all Banks) than the amount received at the time by all other Banks,
then such Bank receiving such excess payment shall purchase for cash without
recourse or warranty from the other Banks an interest in the Obligations of the
respective Borrowers to such Banks in such amount as shall result in a
proportional participation by all the Banks in such amount; provided that if all
or any portion of such excess amount is thereafter recovered from such Bank,
such purchase shall be rescinded and the purchase price restored to the extent
of such recovery, but without interest.
12.07 Calculations; Computations. (a) The financial statements to be
--------------------------
furnished to the Banks pursuant hereto shall be made and prepared in accordance
with generally accepted accounting principles in the United States consistently
applied throughout the periods involved (except as set forth in the notes
thereto or as otherwise disclosed in writing by the relevant Borrower to the
Banks); provided, however, that, except as otherwise specifically provided
herein, all computations determining compliance with Section 8 shall utilize
accounting principles
42
<PAGE>
and policies in conformity with those used to prepare the historical financial
statements delivered to the Banks pursuant to Section 6.05(a).
(b) All computations of interest and Commitment Fees hereunder shall be
made on the basis of a year of 360 days for the actual number of days (including
the first day but excluding the last day) occurring in the period for which such
interest or Commitment Fees are payable.
12.08 GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE; WAIVER OF JURY
----------------------------------------------------------------
TRIAL. (a) THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND
- -----
OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN
ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK WITHOUT
REGARD TO THE CONFLICT OF LAW PROVISIONS THEREOF. ANY LEGAL ACTION OR PROCEEDING
WITH RESPECT TO THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT MAY BE BROUGHT IN
THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE SOUTHERN
DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF
THE BORROWERS HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS
PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID
COURTS. EACH OF THE BORROWERS HEREBY FURTHER IRREVOCABLY WAIVES ANY CLAIM THAT
SUCH COURTS LACK JURISDICTION OVER SUCH PERSON, AND AGREES NOT TO PLEAD OR
CLAIM, IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY
OTHER CREDIT DOCUMENT BROUGHT IN ANY OF THE AFORESAID COURTS, THAT ANY SUCH
COURT LACKS JURISDICTION OVER SUCH BORROWER. EACH OF THE BORROWERS FURTHER
IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED
COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY
REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, WITH RETURN RECEIPT REQUESTED, TO
SUCH PERSON AT ITS ADDRESS SET FORTH OPPOSITE ITS SIGNATURE BELOW, SUCH SERVICE
TO BECOME EFFECTIVE 30 DAYS AFTER RECEIPT. EACH OF THE BORROWERS TO THE EXTENT
PERMITTED BY LAW HEREBY IRREVOCABLY WAIVES ANY OBJECTION TO SUCH SERVICE OF
PROCESS AND FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY
ACTION OR PROCEEDING COMMENCED UNDER THIS AGREEMENT OR UNDER ANY OTHER CREDIT
DOCUMENT THAT SERVICE OF PROCESS WAS IN ANY WAY INVALID OR INEFFECTIVE. NOTHING
HEREIN SHALL AFFECT THE RIGHT OF THE AGENTS UNDER THIS AGREEMENT OR ANY BANK TO
SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL
PROCEEDINGS OR OTHERWISE PROCEED AGAINST ANY OTHER PARTY TO THIS AGREEMENT IN
ANY OTHER JURISDICTION.
(b) TO THE EXTENT PERMITTED BY LAW, EACH OF THE BORROWERS HEREBY
IRREVOCABLY WAIVES ANY OBJECTION WHICH IT
43
<PAGE>
MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS
OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER
CREDIT DOCUMENT BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (a) ABOVE AND HEREBY
FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT
THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN
AN INCONVENIENT FORUM.
(c) EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ALL
RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT
OF OR RELATING TO THIS AGREEMENT, THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY.
12.09 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the different parties hereto on separate counterparts, each
of which when so executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A set of counterparts
executed by all the parties hereto shall be lodged with the Borrowers at their
office for delivery or notices, the Agents and each of the Banks.
12.10 Effectiveness. This Agreement shall become effective on the date (the
-------------
"Effective Date") on which each Borrower and each of the Banks shall have signed
a counterpart hereof (whether the same or different counterparts) and shall have
delivered the same to the Operations Agent at its Notice Office or, in the case
of the Banks, shall have given to the Operations Agent telephonic (confirmed in
writing), written or telex notice (actually received) at such office that the
same has been signed and mailed to it and each of the conditions set forth in
Section 4 have been satisfied or waived. The Operations Agent will give the
Borrowers and each Bank prompt notice of the occurrence of the Effective Date.
12.11 Table of Contents and Headings Descriptive. The table of contents and
------------------------------------------
the headings of the several sections and subsections of this Agreement are
inserted for convenience only and shall not in any way affect the meaning or
construction of any provision of this Agreement.
12.12 Amendment or Waiver; Etc. Neither this Agreement nor any other Credit
------------------------
Document nor any terms hereof or thereof may be changed, waived, discharged or
terminated unless such change, waiver, discharge or termination is in writing
signed by each Borrower and the Required Banks, provided that no such change,
waiver, discharge or termination shall, without the consent of each Bank (with
Obligations being directly affected in the case of following clause (i)), (i)
extend the final scheduled maturity of any Loan, or reduce the rate or extend
the time of payment of interest or Fees thereon, or reduce the principal amount
thereof, (ii) amend, modify or waive any provision of Section 1.13, Section 1.14
or this Section 12.12, (iii) reduce the percentage specified in the definition
of Required Banks (it being understood that, with the consent of the Required
Banks, additional extensions of credit pursuant to this Agreement may be
included in the determination of the Required Banks on substantially the same
basis as the extensions of Commitments are included on the Effective Date) or
(iv) consent to the assignment
44
<PAGE>
or transfer by any Borrower of any of its respective rights or obligations under
this Agreement or any Credit Document; provided further, that no such change,
waiver, discharge or termination shall (i) increase the Total Commitment of any
Bank over the amount thereof then in effect without the consent of such Bank (it
being understood that waivers or modifications of conditions precedent,
covenants, Defaults or Events of Default or of a mandatory reduction in the
Total Commitment shall not constitute an increase of the Commitment of any Bank,
and that an increase in the available portion of the Commitment of any Bank
shall not constitute an increase in the Commitment of such Bank) or (ii) without
the consent of the Agents, amend, modify or waive any provision of Section 11 as
same applies to the Agents or any other provision as same relates to the rights
or obligations of an Agent.
12.13 Survival. All indemnities set forth herein including, without
--------
limitation, in Sections 1.10, 1.11, 3.04, 12.01 and 12.06 shall survive the
execution, delivery and termination of this Agreement and the making and
repayment of the Loans.
12.14 Domicile of Loans. Each Bank may transfer and carry its Loans at, to
-----------------
or for the account of any office, Subsidiary or affiliate of such Bank.
Notwithstanding anything to the contrary contained herein, to the extent that a
transfer of Loans pursuant to this Section 12.14 would, at the time of such
transfer, result in increased under this Agreement, including costs under
Section 1.10, 1.11 or 3.04 from those being charged by the respective Bank prior
to such transfer, then the relevant Borrower shall not be obligated to pay such
increased costs (although the Borrowers shall be obligated to pay any other
increased costs of the type above resulting from changes after the date of the
respective transfer).
12.15 Limited Recourse. (a) Anything contained in this Agreement to the
----------------
contrary notwithstanding, the agreements as set forth in this Agreement between
each Borrower and the Agents and Banks shall be several, separate and distinct
from those between each other Borrower and the Agents and Banks, and the
Obligations of each Borrower shall be repaid solely from the assets of such
Borrower. The Banks agree that repayment of the Obligations of a Borrower is
without recourse to the assets of any other Borrower. If such Borrower is a
corporation or trust, then the Banks may look solely to the assets of that
corporation or trust for repayment of the Obligations. If such Borrower is a
series of a corporation or trust, then the Banks may look solely to the assets
of that series of the corporation or trust and not to any other assets of the
corporation or trust of which it is a series.
(b) The parties hereto agree that, with respect to the obligations of any
Borrower which is a trust or a series of a trust, (i) the officers, trustees and
shareholders of such trust or series of a trust shall have no personal liability
in their capacity as officer, trustee or shareholder of such trust or series of
a trust and (ii) the Banks shall have no recourse to the personal assets or
property of any officer, trustee or shareholder of such trust; provided that
nothing in this clause (b) shall limit the recourse of the Banks to any assets
or property of any trust or any series of a trust.
12.16 Confidentiality. (a) Subject to the provisions of clause (b) of this
---------------
Section 12.16, each Bank agrees that it shall not disclose without the prior
consent of a Borrower (other than to its employees, auditors, advisors or
counsel or to another Bank), and shall use solely for
45
<PAGE>
the purpose of analyzing the financial condition of the Borrowers, any
information with respect to such Borrower which is now or in the future
furnished pursuant to this Agreement or any other Credit Document and which is
material non-public information of any Borrower, provided that any Bank may
disclose such information (i) as has become generally available to the public,
(ii) as may be required or appropriate in any report, statement or testimony
submitted to any municipal, state or Federal regulatory body having jurisdiction
over such Bank such as the Federal Reserve Board or the Federal Deposit
Insurance Corporation or similar organizations (whether in the United States or
elsewhere) or their successors, (iii) as may be required or appropriate in
respect of any summons or subpoena binding upon it or in connection with any
litigation, (iv) in order to comply with any law, order, regulation or ruling
applicable to such Bank, (v) to any of the Agents and (vi) to any prospective or
actual transferee or participant in connection with any contemplated transfer or
participation in any of the Commitments or any interest therein by such Bank,
provided that such prospective transferee agrees to be bound by the provisions
of this Section 12.16.
(b) Each Borrower hereby acknowledges and agrees that each Bank may share
with any of its affiliates any information related to such Borrower (including,
without limitation, any non-public customer information regarding the
creditworthiness of such Borrower, provided such Persons shall be subject to the
provisions of this Section 12.16 to the same extent as such Bank).
46
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
officers to execute and deliver this Agreement as of the date first above
written.
Address:
- -------
100 Mulberry Street, Gateway Center 3 AUTHORIZED OFFICER, on behalf
Newark, New Jersey 07102-4077 of each Borrower
Telephone No.: (973) 367-7501
Telecopier No.: (973) 367-8060
Attention: Grace Torres By /s/ Grace Torres
------------------------------
Title: Treasurer
STATE STREET BANK AND TRUST
COMPANY, Individually and as
Operations Agent
By /s/ Anne Marie Guialtieri
------------------------------
Title: Vice President
DEUTSCHE BANK AG, NEW YORK
BRANCH, as Administrative Agent
By /s/ John S. McGill
------------------------------
Title: Vice President
By
------------------------------
Title:
DEUTSCHE BANK AG, NEW YORK AND/OR
CAYMAN ISLANDS BRANCHES
By /s/ Gayma Z. Shivnarain
------------------------------
Title: Vice President
By /s/ Alan Krouk
------------------------------
Title: Associate
<PAGE>
THE BANK OF NEW YORK, Individually
and as Documentation Agent
By
------------------------------
Title:
<PAGE>
MELLON BANK N.A., Individually
and as Co-Syndication Agent
By
------------------------------
Title:
<PAGE>
CITIBANK, N.A., Individually
and as Co-Syndication Agent
By
------------------------------
Title:
<PAGE>
CREDIT LYONNAIS NEW YORK BRANCH
By
------------------------------
Title:
<PAGE>
BANQUE NATIONALE DE PARIS
By
------------------------------
Title:
By
------------------------------
Title:
<PAGE>
SOCIETE GENERALE
By
------------------------------
Title:
<PAGE>
THE BANK OF NOVA SCOTIA
By
------------------------------
Title:
<PAGE>
SCHEDULE I
----------
BORROWERS
---------
SCHEDULE OF FUNDS
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Prudential 20/20 Focus Fund
Prudential Balanced Fund
Prudential California Municipal Fund:
California Series
California Income Series
Prudential Developing Markets Fund
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
Prudential Distressed Securities Fund, Inc.
Prudential Diversified Funds:
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
Prudential Diversified Bond Fund, Inc.
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Government Income Fund, Inc.
Prudential Government Sec. Trust: Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Index Series Fund
Prudential Stock Index Fund
Prudential Small-Cap Index Fund
Prudential Pacific Index Fund
Prudential Europe Index Fund
Prudential Bond Market Index Fund
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
The Prudential Investment Portfolios, Inc.:
<PAGE>
Schedule I
Page 2
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Active Balanced Fund
Prudential Mid-Cap Value Fund
Prudential Municipal Bond Fund:
High Income Series
Insured Series
Prudential Municipal Series Fund:
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Real Estate Securities Fund
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential Utility Fund, Inc.
Prudential World Fund, Inc.:
International Stock Series
Global Series
Prudential Series Fund, Inc.:
Diversified Bond Portfolio
Equity Portfolio
Flexible Managed Portfolio
Conservative Balanced Portfolio Portfolio
Zero Coupon Bond 2000 Portfolio
High Yield Bond Portfolio
Stock Index Portfolio
Equity Income Portfolio
Natural Resources Portfolio
Government Income Portfolio
Zero Coupon Bond 2005 Portfolio
Small Capitalization Stock Portfolio
Prudential Jennison Portfolio
Global Portfolio
<PAGE>
SCHEDULE II
-----------
COMMITMENTS
-----------
Name of Bank Commitment
- ------------ ----------
Deutsche Bank AG, $250,000,000
New York and/or
Cayman Islands Branches
State Street Bank and Trust $100,000,000
Company
The Bank of New York $125,000,000
Mellon Bank N.A. $125,000,000
Citibank, N.A. $125,000,000
Credit Lyonnais New York Branch $100,000,000
Banque Nationale de Paris $75,000,000
Societe Generale $50,000,000
The Bank of Nova Scotia $50,000,000
TOTAL $1,000,000,000
==============
<PAGE>
SCHEDULE III
------------
BANK ADDRESSES
--------------
State Street Bank and Trust Company Mutual Fund Lending
Lafayette Corporate Center
2 Avenue de Lafayette, 2nd Floor
Boston, MA 02111
Telephone No.: (617) 662-2311
Telecopier No.: (617) 662-2325
Attention: Anne Marie Gualtieri
Deutsche Bank AG, 31 West 52nd Street
New York and/or New York, New York 10019
Cayman Islands Telephone No.: (212) 474-8124
Branches Telecopier No.: (212) 474-8346
Attention: Alan Krouk
The Bank of New York One Wall Street, 18th Floor
New York, NY 10286
Telephone No.: (212) 635-6958
Telecopier No.: (212) 635-6348
Attention: Scott Buitekant
Mellon Bank N.A. One Mellon Bank Center
Pittsburgh, PA 15258
Telephone No.: (412) 234-3187
Telecopier No.: (412) 234-0214
Attention: John Cooper
Citibank, N.A. 399 Park Avenue, 12th Floor
New York, NY 10043
Telephone No.: (212) 559-1631
Telecopier No.: (212) 953-4285
Attention: Maria Hackley
Banque Nationale de Paris 499 Park Avenue, 2nd Floor
New York, NY 10022
Telephone No.: (212) 415-9400
Telecopier No.: (212) 415-9717
Attention: Marquerite Lebon
<PAGE>
Schedule III
Page 2
Credit Lyonnais 1301 Avenue of the Americas, 12th Floor
New York, NY 10019
Telephone No.: (212) 261-7397
Telecopier No.: (212) 459-3182
Attention: Ira Stein
Societe Generale 1221 Avenue of the Americas
New York, NY 10020
Telephone No.: (212) 278-7015
Telecopier No.: (212) 278-7569
Attention: Indra Kish
The Bank of Nova Scotia 1 Liberty Plaza
New York, NY 10006
Telephone No.: (212) 225-5062
Telecopier No.: (212) 225-5090
Attention: John Morale
<PAGE>
SCHEDULE IV
-----------
CUSTODY AGREEMENTS
------------------
<PAGE>
SCHEDULE V
----------
INVESTMENT ADVISORY AGREEMENTS
------------------------------
<PAGE>
EXHIBIT 99.J
[LETTERHEAD OF ERNST & YOUNG LLP]
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Other Service Providers" in Post-Effective Amendment No. 13
under the Securities Act of 1933 and Amendment No. 15 under the Investment
Company Act of 1940 to the Registration Statement (Form N-1a, No. 33-38461) and
related Prospectus and Statement of Additional Information of Nicholas-Applegate
Fund, Inc. and to the use of our report dated February 12, 1999, with respect to
the financial statements and financial highlights of Nicholas-Applegate Growth
Equity Fund for the year ended December 31, 1998.
Ernst & Young LLP
Los Angeles, California
March 12, 1999
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