PRUDENTIAL STRATEGIST FUND, INC.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
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To our Shareholders:
Notice is hereby given that a Special Meeting of Shareholders of Prudential
Strategist Fund, Inc. (Strategist Fund) will be held at 3:00 P.M. on June 9,
1995, at 199 Water Street, New York, N.Y. 10292, for the following purposes:
1. To approve an Agreement and Plan of Reorganization and Liquidation
whereby all of the assets of Strategist Fund will be transferred to Prudential
Multi-Sector Fund, Inc. (Multi-Sector Fund) in exchange for shares of
Multi-Sector Fund and the assumption of the liabilities, if any, of Strategist
Fund.
2. To consider and act upon any other business as may properly come before
the Meeting or any adjournment thereof.
Only shares of common stock of Strategist Fund of record at the close of
business on April 7, 1995, are entitled to notice of and to vote at this Meeting
or any adjournment thereof.
S. Jane Rose
Secretary
Dated: April 27, 1995
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WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE SIGN AND PROMPTLY
RETURN THE ENCLOSED PROXY IN THE ENCLOSED SELF-ADDRESSED ENVELOPE. IN ORDER TO
AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE ASK YOUR COOPERATION
IN MAILING IN YOUR PROXY PROMPTLY.
- --------------------------------------------------------------------------------
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC.
PROSPECTUS
and
PRUDENTIAL STRATEGIST FUND, INC.
PROXY STATEMENT
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(800) 225-1852
----------------
Prudential Strategist Fund, Inc. (Strategist Fund) has registered as an
open-end, diversified management investment company. Prudential Multi-Sector
Fund, Inc. (Multi-Sector Fund) has registered as an open-end, non-diversified
management investment company. Both Strategist Fund and Multi-Sector Fund
(collectively, the Funds) are managed by Prudential Mutual Fund Management, Inc.
(PMF or the Manager) and have the same office address. The investment objective
of Strategist Fund is to seek a high total return (capital appreciation plus
dividend and interest income) consistent with reasonable risk. The primary
investment objective of Multi-Sector Fund is long-term growth of capital.
Current income is a secondary objective of Multi-Sector Fund.
This Prospectus and Proxy Statement is being furnished to shareholders of
Strategist Fund in connection with a proposed Agreement and Plan of
Reorganization and Liquidation (the Plan), whereby Multi-Sector Fund will
acquire all of the assets of Strategist Fund and assume the liabilities, if any,
of Strategist Fund. If the Plan is approved by Strategist Fund's shareholders,
all such shareholders will be issued shares of Multi-Sector Fund in place of the
shares of Strategist Fund held by them, and Strategist Fund will be liquidated.
Shareholders of Multi-Sector Fund are not being asked to vote on the Plan.
This Prospectus and Proxy Statement sets forth concisely information about
Multi-Sector Fund that prospective investors should know before investing. This
Prospectus and Proxy Statement is accompanied by the Prospectus of Multi-Sector
Fund, dated August 1, 1994, including a January 6, 1995 Supplement thereto,
which Prospectus is incorporated by reference herein, and the Annual Report to
Shareholders of Strategist Fund for the fiscal year ended February 28, 1995. The
Prospectus of Strategist Fund, dated August 1, 1994, including January 6, 1995
and March 17, 1995 Supplements thereto, and the Statement of Additional
Information of Multi-Sector Fund, dated August 1, 1994, including a November 1,
1994 Supplement thereto, have been filed with the Securities and Exchange
Commission (SEC), are incorporated herein by reference and are available without
charge upon written request to Prudential Mutual Fund Services, Inc., Raritan
Plaza One, Edison, New Jersey 08837 or by calling the toll-free number shown
above. Additional information, contained in a Statement of Additional
Information, dated April 27, 1995, forming a part of Multi-Sector Fund's
Registration Statement on Form N-14, has been filed with the SEC, is
incorporated herein by reference and is available without charge upon request to
the address or telephone number shown above.
Investors are advised to read and retain this Prospectus and Proxy Statement
for future reference.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURRACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Prospectus and Proxy Statement is April 27, 1995.
1
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC.
PRUDENTIAL STRATEGIST FUND, INC.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
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PROSPECTUS AND PROXY STATEMENT DATED APRIL 27, 1995
----------
SYNOPSIS
The following synopsis is a summary of certain information contained
elsewhere in this Prospectus and Proxy Statement and the Agreement and Plan of
Reorganization and Liquidation and is qualified by reference to the more
complete information contained herein as well as in the Strategist Fund
Prospectus and the enclosed Multi-Sector Fund Prospectus. Shareholders should
read the entire Prospectus and Proxy Statement carefully.
General
This Proxy Statement is furnished by the Board of Directors of Prudential
Strategist Fund, Inc. (Strategist Fund), in connection with the solicitation of
Proxies for use at a Special Meeting of Shareholders of Strategist Fund (the
Meeting) to be held at 3:00 P.M., on June 9, 1995 at 199 Water Street, New York,
New York 10292, Strategist Fund's principal executive office. The purpose of the
Meeting is to approve or disapprove an Agreement and Plan of Reorganization and
Liquidation (the Plan) whereby all of the assets of Strategist Fund will be
acquired by, and the liabilities of Strategist Fund, if any, will be assumed by,
Prudential Multi-Sector Fund, Inc. (Multi-Sector Fund) and such other business
as may properly come before the Meeting or any adjournment thereof. The Plan is
attached to this Prospectus and Proxy Statement as Appendix B. The transactions
contemplated by the Plan are set forth herein and in summary provide that
Multi-Sector Fund will acquire the assets, in exchange solely for shares of
common stock of Multi-Sector Fund, and assume the liabilities of Strategist
Fund.
Approval of the Plan requires the affirmative vote of a majority of shares
of Strategist Fund outstanding and entitled to vote. Shareholders vote in the
aggregate and not by separate class. Approval of the Plan by the shareholders of
Multi-Sector Fund is not required and the Plan is not being submitted for their
approval.
The Proposed Reorganization and Liquidation
The Boards of Directors of Strategist Fund and Multi-Sector Fund have
approved the Plan, which provides for the transfer of all of the assets of
Strategist Fund in exchange solely for shares of common stock of Multi-Sector
Fund and the assumption by Multi-Sector Fund of the liabilities, if any, of
Strategist Fund. Following shareholder approval, if obtained, and the exchange,
Class A, Class B and Class C shares of Multi-Sector Fund will be distributed to
Class A, Class B and Class C shareholders, respectively, of Strategist Fund, and
Strategist Fund will be liquidated. The reorganization will become effective as
soon as practicable after the Meeting. Each Strategist Fund Class A, Class B and
Class C shareholder will receive the number of full and fractional Class A,
Class B and Class C shares of Multi-Sector Fund equal in value (rounded to the
third decimal place) to such shareholder's Class A, Class B and Class C shares
of Strategist Fund as of the closing date.
For the reasons set forth below under "-Reasons for the Proposed
Reorganization and Liquidation" and "The Proposed Transaction_Reasons for the
Reorganization and Liquidation," the Boards of Directors of Strategist
2
<PAGE>
Fund and Multi-Sector Fund, including those Directors who are not "interested
persons" (Independent Directors) as that term is defined in the Investment
Company Act of 1940, as amended (Investment Company Act), have concluded that
the reorganization would be in the best interests of the shareholders of
Strategist Fund and Multi-Sector Fund and that the interests of shareholders of
each Fund will not be diluted as a result of the proposed transaction.
Accordingly, the Board of Directors of each Fund recommends approval of the
Plan.
Reasons for the Proposed Reorganization and Liquidation
There are a number of similarities between the Funds that led to
consideration of the Plan. Each Fund is an open-end investment company organized
as a Maryland corporation. Each Fund invests primarily in domestic and foreign
equity securities. Greg A. Smith, the portfolio manager of Strategist Fund,
makes asset allocation recommendations to The Prudential Investment Corporation
(PIC), Multi-Sector Fund's Subadviser, pursuant to a consulting agreement
between PIC and Greg A. Smith Asset Management Corporation, Strategist Fund's
Subadviser. Each Fund is managed by Prudential Mutual Fund Management, Inc. (PMF
or the Manager).
In addition, the Directors of each Fund believe that the reorganization may
achieve certain economies of scale that Strategist Fund alone cannot realize
because of its diminishing size, and that Multi-Sector Fund would realize the
benefits of a larger asset base in exchange for shares of its common stock. The
combination of the two Funds would eliminate certain duplicate expenses, such as
Directors' fees and those incurred in connection with separate audits and the
preparation of separate financial statements for each Fund.
There are also a number of differences between the Funds. See"-Certain
Differences Between Multi-Sector Fund and Strategist Fund" below.
Strategist Fund commenced investment operations in March 1983 as
Prudential-Bache Research Fund, Inc. Despite numerous attempts to refine
Strategist Fund's investment strategy, Strategist Fund has, in the market
environment of the past several years, been unable to attract sufficient new
assets to offset redemptions, which has resulted in increased expense ratios. As
of February 28, 1995, Strategist Fund had approximately $165 million in total
net assets which represents a 21% decline from total net assets of approximately
$209 million at February 28, 1994 and a 63% decline from total net assets of
approximately $446 million at February 29, 1988. As of February 28, 1995,
Multi-Sector Fund had total net assets of approximately $247 million, which
represents a 28% increase in total net assets from April 30, 1994 (Multi-Sector
Fund's most recent fiscal year-end). The ratios of total expenses to average net
assets for the Class A, Class B and Class C shares of Strategist Fund for the
fiscal year ended February 28, 1995 were 1.49%, 2.24% and 2.24% (annualized),
respectively, whereas the ratios of total expenses to average net assets for
Class A and Class B shares of Strategist Fund for the fiscal year ended February
28, 1994 (when shares of only these two classes were outstanding) were 1.34% and
2.13%, respectively. The expense ratios for Strategist Fund's shares will
increase even further if the number of outstanding shares, and therefore total
net assets under management, continue to diminish, which the Manager expects
will occur if the Plan is not approved. See "Fees and Expenses-Expense Ratios"
below.
For the fiscal years ended April 30, 1993 and 1994 and the six-month period
ended October 31, 1994, with respect to Multi-Sector Fund, and the fiscal years
ended February 28, 1993, 1994 and 1995, with respect to Strategist Fund,
Multi-Sector Fund has achieved higher total returns on Class A, Class B and
Class C shares than Strategist Fund has achieved on Class A, Class B and Class C
shares, respectively. The following table, derived from the "Financial
3
<PAGE>
Highlights" of each Fund, reflects their respective total returns on Class A
Class B and Class C shares for the periods indicated. "Financial Highlights" for
Multi-Sector Fund are set forth in Multi-Sector Fund's Prospectus, which
accompanies this Prospectus and Proxy Statement, and below under "Information
about Multi-Sector Fund-Financial Information." "Financial Highlights" for
Strategist Fund are set forth in Strategist Fund's Annual Report, which
accompanies this Prospectus and Proxy Statement, and its Prospectus, which is
available without charge upon written request to Prudential Mutual Fund
Services, Inc., Raritan Plaza One, Edison, New Jersey 08837 or by calling toll
free (800) 225-1852.
<TABLE>
<CAPTION>
Class A Class B Class C
------------------------------------------------ ------------------------------------------------ -----------
Year ended February 28/29, Year ended February 28/29,
------------------------------------------------ ------------------------------------------------ August 1,
1994**
through
February 28,
1995 1994 1993 1992 1991 1995 1994 1993 1992 1991 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Strategist
Fund* ...... (4.96)% 8.81% 3.74% 13.76% 6.74% (5.70)% 8.02% 2.91% 12.80% 6.03% 1.59%
----- ---- ---- ----- ---- ----- ---- ---- ----- ---- ----
Year ended April 30, Year ended April 30,
---------------------- ----------------------
Six Months June 29, Six Months June 29, August 1,
Ended 1990*** Ended 1990*** 1994**
October 31, through October 31, through through
1994 April 30, 1994 April 30, October 31,
(unaudited) 1994 1993 1992 1991 (unaudited) 1994 1993 1992 1991 1994
----------- ---- ---- ---- ---- ----------- ---- ---- ---- ---- ----
Multi-
Sector
Fund* ...... 11.41% 14.16% 15.14% 6.16% 17.64% 10.55% 13.22% 14.13% 5.39% 16.14% 5.38%
----- ----- ----- ---- ----- ----- ----- ----- ---- ----- ----
*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 reinvestments of dividends and distributions. Total returns
for periods of less than a full year are not annualized.
**Commencement of offering of Class C shares.
***Commencement of investment operations.
</TABLE>
The proposed transaction would give Multi-Sector Fund the opportunity to
increase its assets by acquiring securities consistent with its investment
objective and policies in exchange for the issuance of shares of its common
stock.
The Board of Directors of Strategist Fund has determined that approval of
the Plan would be in the best interests of Strategist Fund and its shareholders
for the reasons discussed above. See, also, "The Proposed Transaction-Reasons
for the Reorganization and Liquidation" below.
Certain Differences Between Multi-Sector Fund and Strategist Fund
There are a number of differences between the Funds. First, although
similar, the investment objective of each Fund is different. Strategist Fund's
investment objective is to seek a high total return (capital appreciation plus
dividend and interest income) consistent with reasonable risk. Multi-Sector
Fund's primary investment objective is long-term growth of capital. Current
income is a secondary objective of Multi-Sector Fund. Second, their management
fees are different. The management fee for Multi-Sector Fund is charged at an
annual rate of .65 of 1% of the Fund's average daily net assets. The management
fee for Strategist Fund is charged at an annual rate of .625 of 1% of the first
$500 million of average daily net assets, .55 of 1% of the next $500 million of
average daily net assets and .50 of 1% thereafter of that Fund's average daily
net assets. The management fee currently being paid by Strategist Fund is at an
annual rate of .625% of Strategist Fund's average daily net assets. Upon
consummation of the proposed transaction, PMF intends to waive a portion of its
management fee so that Multi-Sector Fund will pay a management fee at the same
annual rate as Strategist Fund. See "Fees and Expenses-Management Fees" below.
Third, the credit
4
<PAGE>
quality of the debt instruments in which the Funds may invest differs.
Strategist Fund may only invest in bonds which are securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, foreign
government securities or in obligations of banks or corporations rated A (upper
medium grade) or better by Standard & Poor's Ratings Group (S&P) or Moody's
Investors Service, Inc. (Moody's). Multi-Sector Fund may invest up to 30% of its
total assets in fixed-income securities rated Baa or lower by Moody's or BBB or
lower by S&P or in non-rated fixed-income securities of comparable quality.
Securities rated Baa by Moody's or BBB by S&P have speculative characteristics
and changes in economic conditions or other circumstances could lead to a
weakened capacity to make principal and interest payments. Securities rated BB
or lower by S&P or Ba or lower by Moody's, commonly known as "junk bonds", are
generally considered to be predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal. Multi-Sector Fund may
also invest in unrated fixed-income securities which, in the opinion of its
investment adviser, are of a quality comparable to rated securities in which
Multi-Sector Fund may invest. See "Principal Risk Factors-High Yield Securities"
below. Fourth, Strategist Fund has registered as a diversified management
investment company and Multi-Sector Fund has registered as a non-diversified
management investment company. A non-diversified investment company may invest
more than 5% of its total assets in the securities of one issuer, whereas a
diversified investment company, with respect to 75% of its total assets, may
invest no more than 5% of its total assets in the securities of one issuer. See
"Principal Risk Factors-Multi-Sector Fund Has Registered as a Non-Diversified
Management Investment Company" below. Fifth, Multi-Sector Fund may borrow from
banks to take advantage of investment opportunities in addition to borrowing for
temporary, extraordinary or emergency purposes or for the clearance of
transactions. Strategist Fund may borrow money only for temporary, extraordinary
or emergency purposes or for the clearance of transactions. See "Principal Risk
Factors-Borrowing." Sixth, Strategist Fund may invest no more than 15% of its
total assets in illiquid securities. Although the Board of Directors of
Multi-Sector Fund has authorized Multi-Sector Fund to invest up to 10% of its
net assets in illiquid securities, currently Multi-Sector Fund may invest only
up to 5% of its net assets in illiquid securities.
Structure of Multi-Sector Fund and Strategist Fund
Multi-Sector Fund is authorized to issue two billion shares and Strategist
Fund is authorized to issue 500 million shares of common stock, in each case
divided into three classes, designated Class A, Class B and Class C common
stock. Each class of common stock of each Fund represents an interest in the
same assets of that Fund and is identical in all respects except that (i) each
class bears different distribution expenses, (ii) each class has exclusive
voting rights with respect to its distribution and service plan (except that
each Fund has agreed with the Securities and Exchange Commission (SEC), in
connection with the conversion feature on Class B shares, to submit any
amendment of the Class A Plan to both Class A and Class B shareholders), (iii)
each class has a different exchange privilege and (iv) only Class B shares have
a conversion feature. The distribution systems for Class A, Class B and Class C
shares of each Fund are identical. Each Fund has received an order from the SEC
permitting the issuance and sale of multiple classes of common stock. Currently,
each Fund is offering three classes, designated Class A, Class B and Class C
shares. Pursuant to each Fund's Articles of Incorporation, each Fund's Board of
Directors may authorize the creation of additional series of common stock, and
classes within such series, with such preferences, privileges, limitations and
voting and dividend rights as that Fund's Board of Directors may determine.
The Board of Directors of each Fund may increase or decrease the number of
authorized shares of its respective Fund without approval by the shareholders.
Shares of each Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of each Fund under certain circumstances. Each share of
each class of common stock of each Fund is equal as to earnings, assets and
voting privileges, except as noted above, and each class bears the expenses of
each Fund related to the distribution of its shares. Except for the conversion
feature applicable to the Class B shares, there are no conversion, preemptive or
other subscription rights. In the event of liquidation, each share of common
stock of each Fund is entitled to its portion of all of that Fund's assets after
all debt and expenses of that Fund have been paid. Since Class B and Class C
shares generally bear higher distribution expenses than Class A shares, the
liquidation proceeds to shareholders of those
5
<PAGE>
classes are likely to be lower than to Class A shareholders. Neither Fund's
shares have cumulative voting rights for the election of Directors.
Investment Objectives and Policies
The primary investment objective of Multi-Sector Fund is long-term growth of
capital. Multi-Sector Fund seeks to achieve this objective by focusing its
investments in domestic and foreign securities, primarily equity securities of
companies in the economic sectors described under "Description of Economic
Sectors" in Appendix A to the Multi-Sector Fund Prospectus, which accompanies
this Prospectus and Proxy Statement. The Subadviser expects to make significant
shifts in Multi-Sector Fund's investments among those sectors that the
Subadviser believes may benefit from economic, demographic or other changes in
the 1990's and into the 21st century. Current income is a secondary objective of
Multi-Sector Fund. There can be no assurance that these objectives will be
achieved. Under normal circumstances, Multi-Sector Fund may also invest up to
35% of its total assets in U.S. Government securities, foreign government
securities and U.S. and foreign corporate debt obligations. These securities
will be rated primarily A or better by Moody's or S&P. Up to 30% of Multi-Sector
Fund's total assets may be invested in fixed-income securities rated Baa or
lower by Moody's or BBB or lower by S&P or in non-rated fixed-income securities
of comparable quality. Like Strategist Fund, Multi-Sector Fund may also engage
in short-selling and short-term trading, both techniques which may be considered
speculative and may result in higher risks and costs to the Fund, and may engage
in various hedging and income enhancement strategies, including the purchase and
sale of derivatives. These strategies include the purchase and sale of call
options, the purchase of put options and related short-term trading. See
"Principal Risk Factors-Hedging and Income Enhancement Activities" below.
Although the Board of Directors of Multi-Sector Fund has authorized Multi-Sector
Fund to invest up to 10% of its net assets in illiquid securities, currently
Multi-Sector Fund may invest only 5% of its net assets in illiquid securities.
Strategist Fund's investment objective is to seek high total return (capital
appreciation plus dividend and interest income) consistent with reasonable risk.
Strategist Fund seeks to achieve this objective by allocating its assets among
equity securities, fixed-income securities and cash, based on an evaluation of
current market and economic conditions by Greg A. Smith Asset Management
Corporation (GSAM), Strategist Fund's Subadviser. There can be no assurance that
such objective will be achieved. Strategist Fund may invest in domestic and
foreign securities. Strategist Fund may engage in short selling and short-term
trading. Strategist Fund may also engage in various hedging and income
enhancement strategies, including the purchase and sale of derivatives. These
strategies include the purchase and sale of put and call options and related
short-term trading. Strategist Fund may invest no more than 15% of its total
assets in illiquid securities.
The portfolio manager of Multi-Sector Fund anticipates realigning the
investment portfolio of the combined Fund following the consummation of the
transaction. The realignment of assets acquired from Strategist Fund may impact
the amount of brokerage commissions paid by Multi-Sector Fund. In addition, the
realignment of assets may impact the amount of gains recognized for federal
income tax purposes by Multi-Sector Fund and the amount of taxable income to be
recognized by a shareholder of Multi-Sector Fund.
Fees and Expenses
Management Fees. PMF, the Manager of each Fund and a wholly-owned subsidiary
of The Prudential Insurance Company of America (Prudential), is compensated,
pursuant to a management agreement with Strategist Fund, at an annual rate of
.625 of 1% of the first $500 million of the average daily net assets of
Strategist Fund, .55 of 1% of the next $500 million of the average daily net
assets of Strategist Fund, and .50 of 1% thereafter of the average daily net
assets of Strategist Fund and, pursuant to a management agreement with
Multi-Sector Fund, at an annual rate of .65 of 1% of the average daily net
assets of Multi-Sector Fund. For the fiscal year ended February 28, 1995,
Strategist Fund paid PMF management fees of .625 of 1% of Strategist Fund's
average daily net assets. For the fiscal year ended April 30, 1994, and the
six-month period ended October 31, 1994, Multi-Sector Fund paid PMF management
fees of .65 of 1% of Multi-Sector Fund's average daily net assets.
6
<PAGE>
Under Subadvisory Agreements between PMF and GSAM with respect to Strategist
Fund and between PMF and PIC with respect to Multi-Sector Fund, the Subadvisers
provide investment advisory services for the management of the respective Funds.
Pursuant to the Strategist Fund Subadvisory Agreement between PMF and GSAM, PMF
compensates GSAM for its services thereunder at an annual rate of .375 of 1% of
Strategist Fund's average daily net assets up to $500 million, .35 of 1% of the
Fund's average daily net assets between $500 million and $1 billion and .30 of
1% of the Fund's average daily net assets in excess of $1 billion. The
Multi-Sector Fund Subadvisory Agreement provides that PMF will reimburse PIC for
its reasonable costs and expenses in providing subadvisory services. PMF
continues to have responsibility for all investment advisory services pursuant
to the Management Agreements for both Funds and supervises the Subadvisers'
performance of their services.
Effective upon the consummation of Multi-Sector Fund's acquisition of the
assets and assumption of the liabilities, if any, of Strategist Fund, PMF has
voluntarily agreed to waive a portion of its management fee so that Multi-Sector
Fund will pay a management fee at an annual rate of .625 of 1% of the first $500
million of the average daily net assets of Multi-Sector Fund, .55 of 1% of the
next $500 million of the average daily net assets of Multi-Sector Fund, and .50
of 1% thereafter of the average daily net assets of Multi-Sector Fund, which is
the same rate payable by Strategist Fund. Fee waivers, however, may be
terminated at any time without notice.
Distribution Fees. Prudential Mutual Fund Distributors, Inc. (PMFD), a
wholly-owned subsidiary of PMF, serves as the distributor of the Class A shares
for both Funds. Prudential Securities Incorporated (Prudential Securities), a
wholly-owned subsidiary of Prudential, serves as the distributor of Class B and
Class C shares for both Funds.
Under separate Distribution and Service Plans adopted by each Fund (the
Class A Plan, Class B Plan, and Class C Plan, collectively, the Plans) pursuant
to Rule 12b-1 of the Investment Company Act, and under separate distribution
agreements, PMFD incurs the expenses of distributing the Class A shares for each
Fund and Prudential Securities incurs the expenses of distributing the Class B
and Class C shares for each Fund. These expenses include (i) commissions and
account servicing fees, (ii) advertising expenses, (iii) the cost of printing
and mailing prospectuses, and (iv) indirect and overhead costs associated with
the sale of each Fund's shares.
Under the Class A Plans, each Fund may pay PMFD for distribution expenses at
an annual rate of up to .30 of 1% of the average daily net assets of the Class A
shares. PMFD has advised the Funds that distribution fees under the Class A
Plans will not exceed .25 of 1% of the average daily net assets of the Class A
shares for the fiscal year ending February 28, 1996 for Strategist Fund and the
fiscal year ending April 30, 1996 for Multi-Sector Fund. For the fiscal year
ended February 28, 1995, PMFD received $29,580 under Strategist Fund's Class A
Plan and $24,800 in initial sales charges from sales of Strategist Fund's Class
A shares. For the fiscal year ended April 30, 1994 and the six-month period
ended October 31, 1994, PMFD received $108,720 and $67,498, respectively, under
Multi-Sector Fund's Class A Plan and $229,600 and $60,100, respectively, in
initial sales charges from sales of Multi-Sector Fund's Class A shares.
Under the Class B and Class C Plans, each Fund pays Prudential Securities
for distribution expenses at an annual rate of 1% of the average daily net
assets of the Class B and Class C shares, respectively, consisting, in each
case, of an asset-based sales charge of .75 of 1% of the average daily net
assets of the Fund's Class B and Class C shares and a service fee of .25 of 1%
of the average daily net assets of the Fund's Class B and Class C shares. For
the fiscal year ended February 28, 1995, Prudential Securities received
$1,669,441 under Strategist Fund's Class B Plan and approximately $190,300 in
contingent deferred sales charges from redemptions of Strategist Fund's Class B
shares. For the period August 1, 1994 (commencement of offering of Class C
shares) through February 28, 1995, Prudential Securities received $247 under
Strategist Fund's Class C Plan. For the fiscal year ended April 30, 1994, and
the six-month period ended October 31, 1994, Prudential Securities received
$1,089,811 and $679,410, respectively, from Multi-Sector Fund's Class B Plan and
approximately $283,400 and $170,500, respectively, in contingent deferred sales
charges from redemptions of Multi-Sector Fund's Class B shares. For the period
August 1, 1994 (commencement of offering of Class C shares) through October 31,
1994, Prudential Securities received $581 under Multi-Sector Fund's Class C
Plan.
7
<PAGE>
For the fiscal year ended February 28, 1995 for Strategist Fund and the
six-month period ended October 31, 1994 for Multi-Sector Fund, each Fund paid
distribution expenses of .25%, 1.00% and 1.00% (annualized for Multi-Sector
Fund) of the average daily net assets of its Class A, Class B and Class C
shares, respectively. The Funds record all payments made under the Plans as
expenses in the calculation of net investment income. Prior to August 1, 1994,
the Class A and Class B Plans of each Fund operated as "reimbursement type"
plans and, in the case of Class B, provided for the reimbursement of
distribution expenses incurred in current and prior years.
Effective August 1, 1994, the Class A and Class B Plans of each Fund became
compensation plans. The Class C Plan of each Fund is also a compensation plan.
Under each such compensation plan, each Fund is obligated to pay distribution
and/or service fees to its Distributor as compensation for distribution and
service activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, that 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 Class A Plan, Class B Plan and Class C Plan of each
Fund is identical to the Class A Plan, Class B Plan and Class C Plan of the
other Fund.
Other Expenses. Each Fund also pays certain other expenses in connection
with its operation, including accounting, custodian, legal, audit, transfer
agency and registration expenses. Although the basis for calculating these fees
and expenses is the same for each Fund, the per share effect on shareholder
returns is affected by the relative size of each Fund. Combining the Funds will
eliminate duplication of certain expenses. For example, only one annual audit of
the combined Fund will be required rather than separate audits of each Fund as
currently required.
Expense Ratios. For its fiscal year ended February 28, 1995, total expenses
stated as a percentage of average net assets of the Strategist Fund were 1.49%,
2.24% and 2.24% (annualized) for Class A, Class B and Class C shares,
respectively. For the fiscal year ended April 30, 1994, total expenses stated as
a percentage of average net assets of Multi-Sector Fund were 1.30% and 2.08% for
Class A and Class B shares, respectively, and for the six-month period ended
October 31, 1994 (unaudited), total expenses stated as a percentage of average
net assets of Multi-Sector Fund were 1.37%, 2.12% and 2.04% (in each case
annualized) for the Class A, Class B and Class C shares, respectively.
Following the reorganization, the actual expense ratios of Multi-Sector Fund
are expected to be more favorable than those for the fiscal year ended April 30,
1994 and the six-month period ended October 31, 1994. Set forth below is a
comparison of each Fund's operating expenses for, in the case of Strategist
Fund, the fiscal year ended February 28, 1995 and, in the case of Multi-Sector
Fund, the six-month period ended October 31, 1994 (annualized). The ratios are
also shown on a pro forma (estimated) combined basis, giving effect to the
reorganization.
<TABLE>
<CAPTION>
Annual Fund
Operating Expenses (as a
percentage of
average net assets) Strategist Fund Multi-Sector Fund Pro Forma Combined
------------------------- ------------------------- ---------------------------------
Class A Class B Class C(D) Class A Class B Class C(D) Class A Class B Class C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees ..... .625% .625% .625% .650% .650% .650% .625%(DD) .625%(DD) .625%(DD)
12b-1 Fees ........... .250 1.000 1.000 .250 1.000 1.000 .250 1.000 1.000
Other Expenses ....... .615 .615 .615 .470 .470 .470 .400 .400 .400
---- ----- ----- ----- ----- ----- ----- ----- -----
Total Fund Operating
Expenses ........... 1.49% 2.240% 2.240% 1.370% 2.120% 2.120% 1.275% 2.025% 2.025%
==== ===== ===== ===== ===== ===== ===== ===== =====
(D)Class C shares commenced investment operations on August 1, 1994. The ratios
for Class C shares of Multi-Sector Fund are based upon restated information
for the period August 1, 1994 through October 31, 1994 (annualized).
(DD)Effective upon consummation of the transaction, PMF has voluntarily agreed
to waive a portion of its management fee. See "Fees and Expenses-Management
Fees" above. Fee waivers may be terminated at any time without notice.
Without the waiver, the amount of the management fee would be .65% of
average daily net assets.
</TABLE>
8
<PAGE>
Set forth below is an example which shows the expenses that an investor in
the combined Fund would pay on a $1,000 investment, based upon the pro forma
ratios set forth above.
<TABLE>
Example 1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on
a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the
end of each time period
Class A .............................. $62 $88 $116 $196
Class B .............................. $71 $94 $119 $189
Class C .............................. $31 $64 $109 $235
You would pay the following expenses on the
same investment, assuming no redemption
Class A .............................. $62 $88 $116 $196
Class B .............................. $21 $64 $109 $207
Class C .............................. $21 $64 $109 $235
</TABLE>
The example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
Purchases and Redemptions
Purchases of shares of Multi-Sector Fund and Strategist Fund are made
through Prudential Securities, Pruco Securities Corporation (Prusec) or directly
from the respective Fund, through their transfer agent, Prudential Mutual Fund
Services, Inc. (PMFS or the Transfer Agent) at the net asset value per share
next determined after receipt of a purchase order by the Transfer Agent or
Prudential Securities plus a sales charge which may be imposed either (i) at the
time of purchase (Class A shares) or (ii) on a deferred basis (Class B or Class
C shares). Effective March 17, 1995, sales of Strategist Fund shares were
suspended.
The minimum initial investment for Class A and Class B shares of each Fund
is $1,000 per Class and $5,000 for Class C shares and the minimum subsequent
investment is $100 for all classes. Class A shares of each Fund are sold with an
initial sales charge of up to 5.00% of the offering price. Class B shares of
each Fund are sold without an initial sales charge but are subject to a
contingent deferred sales charge (declining from 5% to zero of the lower of the
amount invested or the redemption proceeds) which will be imposed on certain
redemptions made within six years of purchase. Although Class B shares are
subject to higher ongoing distribution-related expenses than Class A shares,
Class B shares will automatically convert to Class A shares (which are subject
to lower ongoing distribution-related expenses) approximately seven years after
purchase. Class C shares of each Fund are sold without an initial sales charge
and, for one year after purchase, are subject to a 1% contingent deferred sales
charge on redemptions. Like Class B shares, Class C shares are subject to higher
ongoing distribution-related expenses than Class A shares but do not convert to
another class.
Shares of each Fund may be redeemed at any time at the net asset value next
determined after Prudential Securities or the Transfer Agent receives the sell
order. As indicated above, the proceeds of redemptions of Class B and Class C
shares may be subject to a contingent deferred sales charge. For purposes of
determining any applicable contingent deferred sales charges, Strategist Fund
shareholders receiving Class B or Class C shares of Multi-Sector Fund pursuant
to the Plan will be credited with the time they held Class B or Class C shares
of Strategist Fund, as the case may be, in calculating the contingent deferred
sales charge with respect to such shares of Multi-Sector Fund so received. No
contingent deferred sales charges will be imposed in connection with the
reorganization.
Exchange Privileges
The exchange privileges available to shareholders of Multi-Sector Fund are
similar to the exchange privileges of shareholders of Strategist Fund.
Shareholders of both Strategist Fund and Multi-Sector Fund have an exchange
privilege with certain other Prudential Mutual Funds, including one or more
specified money market funds, subject to the minimum investment requirements of
such funds. Class A, Class B and Class C shares of each Fund may be exchanged
for Class A, Class B and Class C shares, respectively, of another fund on the
basis of relative net asset value. No sales charge will be imposed at the time
of the exchange. Any applicable contingent deferred sales charge payable
9
<PAGE>
upon the redemption of shares exchanged will be calculated from the first day of
the month after the initial purchase excluding the time shares were held in a
money market fund. Class B and Class C shares of either Fund may not be
exchanged into money market funds other than Prudential Special Money Market
Fund. For purposes of calculating the holding period applicable to the Class B
conversion feature, the time period during which Class B shares were held in a
money market fund will be excluded. An exchange will be treated as a redemption
and purchase for tax purposes.
Dividends and Distributions
Each Fund expects to pay dividends of net investment income, if any,
semi-annually and make distributions at least annually of any net capital gains.
Shareholders of both Funds receive dividends and other distributions in
additional shares of the Fund unless they elect to receive them in cash. A
Strategist Fund shareholder's election with respect to reinvestment of dividends
and distributions in Strategist Fund will be automatically applied with respect
to Multi-Sector Fund shares he or she receives pursuant to the reorganization.
Federal Tax Consequences of Proposed Reorganization
Prior to the consummation of the reorganization, the Funds shall have
received an opinion of Sullivan & Cromwell to the effect that the proposed
reorganization will constitute a tax-free reorganization within the meaning of
Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (the
Internal Revenue Code). Accordingly, no gain or loss will be recognized to
either Fund upon the transfer of assets and assumption of liabilities, if any,
or to shareholders of Strategist Fund upon their receipt of shares of
Multi-Sector Fund. The tax basis for the shares of Multi-Sector Fund received by
Strategist Fund shareholders will be the same as their tax basis for the shares
of Strategist Fund to be constructively surrendered in exchange therefor. In
addition, the holding period of the shares of Multi-Sector Fund to be received
pursuant to the reorganization will include the period during which the shares
of Strategist Fund to be constructively surrendered in exchange therefor were
held, provided the latter shares were held as capital assets by the shareholders
on the date of the exchange. See "The Proposed Transaction-Tax Considerations."
PRINCIPAL RISK FACTORS
Multi-Sector Fund Has Registered as a Non-Diversified Management Investment
Company
Multi-Sector Fund has registered as a "non-diversified" management
investment company. As a non-diversified investment company, more than 5% of
Multi-Sector Fund's total assets may be invested in the securities of one
issuer. As a result of such non-diversified status, Multi-Sector Fund's shares
may be more susceptible to adverse changes in the value of securities of a
particular company than would be the shares of a diversified investment company,
such as Strategist Fund. Strategist Fund, a diversified management investment
company, cannot invest, with respect to 75% of its total assets, more than 5% of
its total assets in the securities of a single issuer.
High Yield Securities
Multi-Sector Fund may invest up to 30% of its total assets in fixed-income
securities rated Baa or lower by Moody's or BBB or lower by S&P or in non-rated
fixed-income securities of comparable quality. Subsequent to its purchase by
Multi-Sector Fund, a fixed-income obligation may be assigned a lower rating or
cease to be rated. Such an event would not require the elimination of the issue
from the portfolio, but the Subadviser will consider such an event in
determining whether Multi-Sector Fund should continue to hold the security in
its portfolio. Securities rated Baa by Moody's or BBB by S&P have speculative
characteristics and changes in economic conditions or other circumstances could
lead to a weakened capacity to make principal and interest payments. Securities
rated BB or lower by S&P or Ba or lower by Moody's commonly known as "junk
bonds", are generally considered to be predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal. A description of
security ratings is contained in Appendix B to Multi-Sector Fund's Prospectus,
which accompanies this Prospectus and Proxy Statement. Multi-Sector Fund may
also invest in unrated fixed-income securities which, in the opinion of its
investment adviser, are of a quality comparable to rated securities in which
Multi-Sector Fund may invest.
Fixed-income securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity and the market perception of the creditworthiness of the issuer
(market risk). Lower rated or unrated (i.e., high yield)
10
<PAGE>
securities are more likely to react to developments affecting market and credit
risk than are more highly rated securities, which react primarily to movements
in the general level of interest rates.
Strategist Fund may invest in fixed-income securities which are issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, foreign
government securities or in obligations of banks or corporations rated A (upper
medium grade) or better by S&P or Moody's. These securities are perceived to be
of lower risk than the high-yield securities in which Multi-Sector Fund may
invest.
Foreign Investments
Multi-Sector Fund may invest in securities of foreign companies and
countries, which involve additional risks and considerations not typically
associated with investing in U.S. Government securities and domestic issuers.
Investments in obligations of foreign issuers may be subject to certain risks,
including future political and economic developments, the possible impositon of
withholding taxes on interest income, the seizure or nationalization of foreign
deposits and foreign exchange controls or other restrictions. In addition, there
may be less publicly available information about foreign issuers than about
domestic issuers and foreign issuers are generally not subject to the same
accounting, auditing and financial recordkeeping standards and requirements as
domestic issuers. In the event of a default with respect to any foreign debt
obligations, it may be more difficult for Multi-Sector Fund to obtain or enforce
a judgment against the issuer of such securities. Historically, the amount of
foreign equity securities invested in by Multi-Sector Fund has varied. As of
October 31, 1994 and March 31, 1995, Multi-Sector Fund had 18% and 7%,
respectively, of its total assets invested in foreign equity securities.
Strategist Fund may also invest in securities of foreign companies and countries
and thus is subject to the same types of risks as Multi-Sector Fund described
above.
Hedging and Income Enhancement Activities
Multi-Sector Fund may also engage in various portfolio strategies, including
the purchase and sale of derivatives, to reduce certain risks of its investments
and to attempt to enhance income. These strategies include (1) the purchase and
writing (i.e., sale) of call options and purchase of put options on stocks and
stock indices and (2) the purchase and sale of futures contracts on
interest-bearing securities, interest rate and stock indices and the purchase
and sale of options thereon.
Participation in the options or futures markets involves investment risks
and transaction costs to which Multi-Sector Fund would not be subject absent the
use of these strategies. If the investment adviser's prediction of movements in
the direction of the securities and interest rate markets are inaccurate, the
adverse consequences to Multi-Sector Fund may leave Multi-Sector Fund in a worse
position than if such strategies were not used. Risks inherent in the use of
options and futures contracts and options on futures contracts include (1)
dependence on the investment adviser's ability to predict correctly movements in
the direction of interest rates, securities prices and markets; (2) imperfect
correlation between the price of options and stock index futures and options
thereon and movements in the prices of the securities being hedged; (3) the fact
that skills needed to use these strategies are different from those needed to
select portfolio securities; (4) the possible absence of a liquid secondary
market for any particular instrument at any time; (5) the possible need to defer
closing out certain hedged positions to avoid adverse tax consequences; and (6)
the possible inability of Multi-Sector Fund to purchase or sell a portfolio
security at a time that otherwise would be favorable for it to do so, or the
possible need for Multi-Sector Fund to sell a portfolio security at a
disadvantageous time, due to the need for Multi-Sector Fund to maintain "cover"
or to segregate securities in connection with hedging transactions.
Strategist Fund may also engage in various portfolio strategies, including
the purchase and sale of derivatives. These strategies include the purchase and
writing (i.e., sale) of put and call options on stocks, stock indices, debt
securities and foreign currencies, the use of forward foreign currency exchange
contracts and the purchase and sale of stock index futures and options thereon.
Strategist Fund's participation in the options and futures markets subjects
Strategist Fund to the same types of risks as described above for Multi-Sector
Fund.
Borrowing
Multi-Sector Fund may borrow up to 20% of the value of its total assets
(computed at the time the loan is made) for temporary, extraordinary or
emergency purposes or for the clearance of transactions and to take advantage of
investment opportunities. Multi-Sector Fund may pledge up to 20% of its total
assets to secure such borrowings. If
11
<PAGE>
Multi-Sector Fund's asset coverage for borrowings falls below 300%, Multi-Sector
Fund will take prompt action to reduce its borrowings. If Multi-Sector Fund
borrows to invest in securities, any investment gains made on the securities in
excess of interest paid on the borrowing will cause the net asset value of the
shares to rise faster than would otherwise be the case. On the other hand, if
the investment performance of the additional securities purchased fails to cover
their cost (including any interest paid on the money borrowed) to Multi-Sector
Fund, the net asset value of Multi-Sector Fund's shares will decrease faster
than would otherwise be the case. This is the speculative factor known as
"leverage." Strategist Fund may borrow no more than 20% from banks only for
temporary, extraordinary or emergency purposes or for the clearance of
transactions and may pledge up to 20% of its total assets to secure these
borrowings.
Realignment of Investment Portfolio
The portfolio manager of Multi-Sector Fund anticipates realigning the
investment portfolio of the combined Fund following the consummation of the
transaction. The realignment of assets acquired from Strategist Fund may impact
the amount of brokerage commissions paid by the Fund. In addition, the
realignment of assets may impact the amount of gains recognized for federal
income tax purposes by Multi-Sector Fund and the amount of taxable income to be
recognized by a shareholder of Multi-Sector Fund. Thus, the reorganization may
subject Strategist Fund shareholders to expenses to which they would not have
been subject had the reorganization not occurred.
THE PROPOSED TRANSACTION
Agreement and Plan of Reorganization and Liquidation
The terms and conditions under which the proposed transaction may be
consummated are set forth in the Plan. Significant provisions of the Plan are
summarized below; however, this summary is qualified in its entirety by
reference to the Plan, a copy of which is attached as Appendix B to this
Prospectus and Proxy Statement.
The Plan contemplates (i) Multi-Sector Fund acquiring all of the assets of
Strategist Fund in exchange solely for Class A, Class B and Class C shares of
common stock of Multi-Sector Fund and the assumption by Multi-Sector Fund of
Strategist Fund's liabilities, if any, as of the Closing Date (hereafter
defined) and (ii) the constructive distribution on the date of the exchange,
expected to occur on or about June 23, 1995 (the "Closing Date"), of such Class
A, Class B and Class C shares of Multi-Sector Fund to the Class A, Class B and
Class C shareholders of Strategist Fund, respectively, as provided for by the
Plan.
The assets of Strategist Fund to be acquired by Multi-Sector Fund shall
include, without limitation, all cash, cash equivalents, securities, receivables
(including interest and dividends receivable) and other property of any kind
owned by Strategist Fund and any deferred or prepaid assets shown as assets on
the books of Strategist Fund. Multi-Sector Fund will assume from Strategist Fund
all debts, liabilities, obligations and duties of Strategist Fund of whatever
kind or nature, if any; provided, however, that Strategist Fund will utilize its
best efforts, to the extent practicable, to discharge all of its known debts,
liabilities, obligations and duties prior to the Closing Date. Multi-Sector Fund
will deliver to Strategist Fund Class A, Class B and Class C shares of common
stock in Multi-Sector Fund, which Strategist Fund will then distribute to its
Class A, Class B and Class C shareholders, respectively.
The value of Strategist Fund assets to be acquired and liabilities to be
assumed by Multi-Sector Fund and the net asset value of a share of Multi-Sector
Fund will be determined as of 4:15 P.M., New York time, on the Closing Date.
Securities and other assets and liabilities for which market quotations are not
readily available will be valued at fair value as determined in good faith by or
under the direction of the Board of Directors of Multi-Sector Fund.
As soon as practicable after the Closing Date, Strategist Fund will
liquidate and distribute pro rata to its shareholders of record the shares of
Multi-Sector Fund received by Strategist Fund in exchange for such shareholders'
interests in Strategist Fund evidenced by their shares of common stock of
Strategist Fund. Such liquidation and distribution will be accomplished by
opening accounts on the books of Multi-Sector Fund in the names of Strategist
Fund shareholders and by transferring thereto the shares of Multi-Sector Fund
previously credited to the account of Strategist Fund on those books. Each
shareholder account shall represent the respective pro rata number of
Multi-Sector Fund shares due to such Strategist Fund shareholder. Fractional
shares of Multi-Sector Fund will be rounded to the third decimal place.
12
<PAGE>
Accordingly, every participating shareholder of Strategist Fund will own
Class A, Class B and Class C shares of Multi-Sector Fund immediately after the
reorganization that, except for rounding, will be equal to the value of that
shareholder's Class A, Class B or Class C shares of Strategist Fund immediately
prior to the reorganization. Moreover, because shares of Multi-Sector Fund will
be issued at net asset value in exchange for net assets of Strategist Fund that,
except for rounding, will equal the aggregate value of those shares, the net
asset value per share of Multi-Sector Fund will be unchanged. Thus, the
reorganization will not result in a dilution of the value of any shareholder
account. However, in general, the reorganization will substantially reduce the
percentage of ownership of each Strategist Fund shareholder below such
shareholder's current percentage of ownership of Strategist Fund because, while
such shareholder will have the same dollar amount invested initially in
Multi-Sector Fund that he or she had invested in Strategist Fund, his or her
investment will represent a smaller percentage of the combined net assets of
Multi-Sector Fund and Strategist Fund.
Any transfer taxes payable upon issuance of shares of Multi-Sector Fund in a
name other than that of the registered holder of the shares on the books of
Strategist Fund as of that time shall be paid by the person to whom such shares
are to be issued as a condition of such transfer. Any reporting responsibility
of Strategist Fund will continue to be the responsibility of Strategist Fund up
to and including the Closing Date and such later date on which Strategist Fund
is liquidated.
On the effective date of the reorganization, the name of Multi-Sector Fund
will be unchanged.
The consummation of the proposed transaction is subject to a number of
conditions set forth in the Plan, some of which may be waived by the Boards of
Directors of the Funds. The Plan may be terminated and the proposed transaction
abandoned at any time, before or after approval by the shareholders of
Strategist Fund, prior to the Closing Date. In addition, the Plan may be amended
in any mutually agreeable manner, except that no amendment may be made
subsequent to the meeting of shareholders of Strategist Fund that would
detrimentally affect the value of Multi-Sector Fund shares to be distributed.
Reasons for the Reorganization and Liquidation
The Board of Directors of Strategist Fund, including a majority of the
Independent Directors, has determined that the interests of Strategist Fund
shareholders will not be diluted as a result of the proposed transaction and
that the proposed transaction is in the best interests of the shareholders of
Strategist Fund. In addition, the Board of Directors of Multi-Sector Fund,
including a majority of the Independent Directors, has determined that the
interests of Multi-Sector Fund shareholders will not be diluted as a result of
the proposed transaction and that the proposed transaction is in the best
interests of the shareholders of Multi-Sector Fund.
The reasons for the proposed transactions are described above under
"Synopsis-Reasons for the Proposed Reorganization and Liquidation." The
Directors of both Funds based their decision to approve the Plan on an inquiry
into a number of factors, including the following:
(1) the relative past growth in assets and investment performance and
future prospects of the Funds;
(2) the effect of the proposed transaction on the expense ratios of each
Fund;
(3) the costs of the reorganization, which will be paid for by each Fund
in proportion to their respective asset levels;
(4) the tax-free nature of the reorganization to the Funds and their
shareholders;
(5) the potential benefits to PMF, PMFD and Prudential Securities. See
"Synopsis-Fees and Expenses" above;
(6) the compatibility of the investment objectives, policies and
restrictions of the Funds; and
(7) other options to the reorganization, including a continuance of
Strategist Fund in its present form, a change of Manager or investment
objective or a liquidation of Strategist Fund with the distribution of the
cash proceeds to Strategist Fund shareholders.
If the Plan is not approved by Strategist Fund shareholders, the Strategist
Fund Board of Directors may consider other appropriate action, such as the
liquidation of Strategist Fund or a merger or other business combination with an
investment company other than Multi-Sector Fund.
13
<PAGE>
Description of Securities to be Issued
Multi-Sector Fund shares represent shares of common stock with $.001 par
value. Class A, Class B and Class C shares of Multi-Sector Fund will be issued
to Strategist Fund shareholders on the Closing Date. Each share represents an
equal and proportionate interest in Multi-Sector Fund with each other share of
the same class. Multi-Sector Fund's authorized capital consists of 2,000,000,000
shares of common stock. Shares entitle their holders to one vote per full share
and fractional votes for fractional shares held. Each share of Multi-Sector Fund
has equal voting, dividend and liquidation rights with other shares, except that
each class has exclusive voting rights with respect to its distribution plan,
and except as noted under "Synopsis-Structure of Multi-Sector Fund and
Strategist Fund" above.
Tax Considerations
Strategist Fund has received an opinion from Sullivan & Cromwell to the
effect that (1) the proposed transaction described above will constitute a
reorganization within the meaning of Section 368(a)(1)(C) of the Internal
Revenue Code; (2) no gain or loss will be recognized by shareholders of
Strategist Fund upon liquidation of that Fund and the distribution of shares of
Multi-Sector Fund constructively in exchange for their shares of Strategist Fund
(Internal Revenue Code Section 354(a)(1)); (3) no gain or loss will be
recognized by Strategist Fund upon the transfer of its assets to Multi-Sector
Fund in exchange solely for shares of Multi-Sector Fund and the assumption by
Multi-Sector Fund of Strategist Fund's liabilities, if any, and the subsequent
distribution of those shares to its shareholders in liquidation thereof
(Internal Revenue Code Sections 361(a) and 357(a)); (4) no gain or loss will be
recognized by Multi-Sector Fund upon the receipt of such assets in exchange
solely for Multi-Sector Fund shares and its assumption of Strategist Fund's
liabilities, if any (Internal Revenue Code Section 1032(a)); (5) Multi-Sector
Fund's basis for the assets received pursuant to the reorganization will be the
same as the basis thereof in the hands of Strategist Fund immediately before the
reorganization, and the holding period of those assets in the hands of
Multi-Sector Fund will include the holding period thereof in Strategist Fund
hands (Internal Revenue Code Sections 362(b) and 1223(2)); (6) Strategist Fund
shareholders' basis for the shares of Multi-Sector Fund to be received by them
pursuant to the reorganization will be the same as their basis for the shares of
Strategist Fund to be constructively surrendered in exchange thereof (Internal
Revenue Code Section 358(a)(1)); and (7) the holding period of the shares of
Multi-Sector Fund to be received by the shareholders of Strategist Fund pursuant
to the reorganization will include the period during which the shares of
Strategist Fund to be constructively surrendered in exchange therefor were held,
provided the latter shares were held as capital assets by the shareholders on
the date of the exchange (Internal Revenue Code Section 1223(1)).
Certain Comparative Information About the Funds
Each Fund is a Maryland corporation and the rights of its shareholders are
governed by its Articles of Incorporation, By-Laws and the Maryland General
Corporation Law.
Capitalization. Strategist Fund has issued shares of common stock, par value
$.01 per share. Its Articles of Incorporation authorize Strategist Fund to issue
500,000,000 shares of common stock divided into three classes, consisting of
166,666,666 authorized Class A shares, 166,666,666 authorized Class B shares and
166,666,668 authorized Class C shares. Multi-Sector Fund has issued shares of
common stock, par value $.001 per share. Its Articles of Incorporation authorize
Multi-Sector Fund to issue 2,000,000,000 shares of common stock, divided into
three classes, also designated Class A, Class B and Class C, each of which
consists of 666,666,666-2/3 authorized shares. The Board of Directors of each
Fund may authorize an increase in the number of authorized shares and may
reclassify unissued shares to authorize additional classes of stock having terms
and rights determined by its Board of Directors, all without shareholder
approval.
Shareholder Meetings and Voting Rights. Generally, neither Fund is required
to hold annual meetings of its shareholders. Each Fund is required to call a
meeting of shareholders for the purpose of voting upon the question of removal
of a Director when requested in writing to do so by the holders of at least 10%
of the Fund's outstanding shares. In addition, each Fund is required to call a
meeting of shareholders for the purpose of electing Directors if, at any time,
less than a majority of the Directors holding office at the time were elected by
shareholders.
Shareholders of each Fund are entitled to one vote for each share on all
matters submitted to a vote of its shareholders under Maryland law. Approval of
certain matters, such as an amendment to the charter, a merger,
14
<PAGE>
consolidation or transfer of all or substantially all assets, dissolution and
removal of a director, requires the affirmative vote of a majority of the votes
entitled to be cast. A plurality of votes cast is required to elect directors.
Other matters require the approval of the affirmative vote of a majority of the
votes cast at a meeting at which a quorum is present.
Each Fund's By-Laws provide that a majority of the outstanding shares shall
constitute a quorum for the transaction of business at a shareholders' meeting.
Matters requiring a larger vote by law or under the organizational documents for
each Fund are not affected by such quorum requirements.
Shareholder Liability. Under Maryland law, shareholders have no personal
liability as such for either Fund's acts or obligations.
Liability and Indemnification of Directors. Under the Funds' Articles of
Incorporation and Maryland law, a director or officer of the Fund is not liable
to the Fund or its shareholders for monetary damages for breach of fiduciary
duty as a director or officer except to the extent such exemption from liability
or limitation thereof is not permitted by law, including the Investment Company
Act.
Under the Investment Company Act, a Director may not be protected against
liability to the Fund and its security holders to which he would otherwise be
subject as a result of his willful misfeasance, bad faith or gross negligence in
the performance of his duties, or by reason of reckless disregard of his
obligations and duties. The staff of the SEC interprets the Investment Company
Act to require additional limits on indemnification of directors and officers.
Pro Forma Capitalization and Ratios
The following table shows the capitalization of each Fund as of February 28,
1995 and the pro forma combined capitalization of
both Funds as if the reorganization had occured on that date.
<TABLE>
<CAPTION>
Strategist Fund Multi-Sector Fund Pro Forma Combined
-------------------------------- --------------------------------- --------------------------------------
Class A Class B Class C Class A Class B Class C Class A Class B Class C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Assets ..... $124,873,417 $39,597,330 $63,274 $70,820,606 $173,207,754 $3,041,928 $195,694,023 $212,805,084 $3,105,202
Net Asset Value
per share .... $13.65 $13.43 $13.43 $12.64 $12.51 $12.51 $12.64 $12.51 $12.51
Shares
Outstanding .. 9,148,848 2,948,183 4,713 5,602,759 13,846,411 243,172 15,482,122 17,010,798 248,218
</TABLE>
The following table shows the ratio of expenses to average net assets and
the ratio of net investment income to average net assets of Strategist Fund for
the fiscal year ended February 28, 1995 and of Multi-Sector Fund for the
six-month period ended October 31, 1994 (annualized). The ratios are also shown
on a pro forma combined basis, assuming the reorganization occurred on or about
June 23, 1995.
<TABLE>
<CAPTION>
Strategist Fund Multi-Sector Fund Pro Forma Combined
------------------------- ---------------------------- -------------------------
Class A Class B Class C(D) Class A Class B Class C(D) Class A Class B Class C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of expenses to average net
assets ...................... 1.49% 2.24% 2.24% 1.37% 2.12% 2.12% 1.28% 2.03% 2.03%
Ratio of net investment income
to average net assets ..... .76% .01% .01% .45% (.36)% (.36)% .45% (.36)% (.36)%
(D)Class C shares commenced investment operations on August 1, 1994. The ratios
for Class C shares of Multi-Sector Fund are based upon restated information
for the period August 1, 1994 through October 31, 1994 (annualized).
</TABLE>
15
<PAGE>
INFORMATION ABOUT MULTI-SECTOR FUND
Financial Information
Financial Highlights
(Unaudited)
For additional condensed financial information for Multi-Sector Fund, see
"Financial Highlights" in the Multi-Sector Fund Prospectus, which accompanies
this Prospectus and Proxy Statement. The following financial highlights contain
selected data for a Class A, Class B and Class C share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the period presented.
<TABLE>
<CAPTION>
Class A Class B Class C
---------------- ---------------- ----------------
Six Months Six Months August 1, 1994@
Ended Ended through
October 31, 1994 October 31, 1994 October 31, 1994
---------------- ---------------- ----------------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C>
Net asset value, beginning of period .. $ 13.21 $ 13.16 $ 13.74
--------- -------- --------
Income from investment operations:
Net investment income (loss) .......... .03 (.02) (.01)
Net realized and unrealized gain on
investments and foreign currency
transactions ........................ 1.32 1.31 .72
--------- -------- --------
Total from investment operations ...... 1.35 1.29 .71
--------- -------- --------
Less distributions:
Dividends from net investment income - - -
Distributions from net capital and
currency gains ...................... (.76) (.76) (.76)
--------- -------- --------
Total distributions ................... (.76) (.76) (.76)
--------- -------- --------
Net asset value, end of period ........ $ 13.80 $ 13.69 $ 13.69
========= ======== ========
TOTAL RETURN:# 11.41% 10.55% 5.38%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ....... $ 59,097 $158,317 $ 666
Average net assets (000) .............. $ 53,558 $134,774 $ 236
Ratios to average net assets:##
Expenses, including distribution fees 1.37%* 2.12%* 2.04%*
Expenses, excluding distribution fees 1.12%* 1.12%* 1.04%*
Net investment income (loss) ........ .45%* (.36)%* (.57)%*
Portfolio turnover .................... 42% 42% 42%
<FN>
- ------------
*Annualized.
@Commencement of offering of Class C shares.
#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 reinvestments of dividends and
distributions. Total return for periods of less than a full year are not
annualized.
##Because of the event referred to in @ and the timing of such, the ratios for
Class C shares are not necessarily comparable to those of Class A or Class B
shares and are not necessarily indicative of future ratios.
</FN>
</TABLE>
16
<PAGE>
General
For a discussion of the organization, classification and sub-classification
of Multi-Sector Fund, see "General Information" and "Fund Highlights" in the
Multi-Sector Fund Prospectus.
Investment Objective and Policies
For a discussion of Multi-Sector Fund's investment objective and policies
and risk factors associated with an investment in Multi-Sector Fund, see "How
the Fund Invests" in the Multi-Sector Fund Prospectus.
Directors
For a discussion of the responsibilities of Multi-Sector Fund's Board of
Directors, see "How the Fund is Managed" in the Multi-Sector Fund Prospectus.
Manager and Portfolio Manager
For a discussion of Multi-Sector Fund's Manager, subadviser and portfolio
manager, see "How the Fund is Managed-Manager" in the Multi-Sector Fund
Prospectus.
Performance
For a discussion of Multi-Sector Fund's performance during the fiscal year
ended April 30, 1994, see Appendix A hereto.
Multi-Sector Fund's Shares
For a discussion of Multi-Sector Fund's Class A, Class B and Class C shares,
including voting rights, exchange rights and the conversion feature of Class B
shares, and how the shares may be purchased and redeemed, see "Shareholder
Guide" and "How the Fund is Managed" in the Multi-Sector Fund Prospectus.
Net Asset Value
For a discussion of how the offering price of Multi-Sector Fund's Class A,
Class B and Class C shares is determined, see "How the Fund Values its Shares"
in the Multi-Sector Fund Prospectus.
Taxes, Dividends and Distributions
For a discussion of Multi-Sector Fund's policy with respect to dividends and
distributions and the tax consequences of an investment in Class A, Class B or
Class C shares, see "Taxes, Dividends and Distributions" in the Multi-Sector
Fund Prospectus.
Other Considerations
Multi-Sector Fund is subject to the informational requirements of the
Investment Company Act and in accordance therewith files reports and other
information with the Securities and Exchange Commission. Proxy material, reports
and other information filed by Multi-Sector Fund can be inspected and copied at
the public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices in New
York (7 World Trade Center, Suite 1300, New York, New York 10048) and Chicago
(Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois
60661-2511). Copies of such material can be obtained at prescribed rates from
the Public Reference Branch, Office of Consumer Affairs and Information
Services, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
17
<PAGE>
INFORMATION ABOUT STRATEGIST FUND
Financial Information
For condensed financial information for Strategist Fund, see "Financial
Highlights" in the Strategist Fund Prospectus and the Strategist Fund Annual
Report to Shareholders for the fiscal year ended February 28, 1995, which
accompanies this Prospectus and Proxy Statement.
General
For a discussion of the organization, classification and sub-classification
of Strategist Fund, see "General Information" and "Fund Highlights" in the
Strategist Fund Prospectus.
Investment Objective and Policies
For a discussion of Strategist Fund's investment objective and policies and
risk factors associated with an investment in Strategist Fund, see "How the Fund
Invests" in the Strategist Fund Prospectus.
Directors
For a discussion of the responsibilities of Strategist Fund's Board of
Directors, see "How the Fund is Managed" in the Strategist Fund Prospectus.
Manager and Portfolio Manager
For a discussion of Strategist Fund's Manager, subadviser and portfolio
manager, see "How the Fund is Managed-Manager" in the Strategist Fund
Prospectus.
Performance
For a discussion of Strategist Fund's performance during the fiscal year
ended February 28, 1995, see the Strategist Fund Annual Report to Shareholders
for the fiscal year ended February 28, 1995, which accompanies this Prospectus
and Proxy Statement.
Strategist Fund's Shares
For a discussion of Strategist Fund's Class A, Class B and Class C shares,
including voting rights, exchange rights and the conversion feature of Class B
shares, and how the shares may be purchased and redeemed, see "Shareholder
Guide" and "How the Fund is Managed" in the Strategist Fund Prospectus.
Net Asset Value
For a discussion of how the offering price of Strategist Fund's Class A,
Class B and Class C shares is determined, see "How the Fund Values its Shares"
in the Strategist Fund Prospectus.
Taxes, Dividends and Distributions
For a discussion of Strategist Fund's policy with respect to dividends and
distributions and the tax consequences of an investment in Class A, Class B or
Class C shares, see "Taxes, Dividends and Distributions" in the Strategist Fund
Prospectus.
Additional Information
Additional information concerning Strategist Fund is incorporated herein by
reference from Strategist Fund's current Prospectus dated August 1, 1994,
including January 6, 1995 and March 17, 1995 Supplements thereto, and
18
<PAGE>
Strategist Fund's Annual Report to Shareholders for the fiscal year ended
February 28, 1995. Copies of Strategist Fund's Prospectus and the Annual Report
are available without charge upon oral or written request from Strategist Fund.
To obtain Strategist Fund's Prospectus and Annual Report, call (800) 225-1852 or
write to Prudential Mutual Fund Services, Inc., Raritan Plaza One, Edison, New
Jersey 08837.
Reports and other information filed by Strategist Fund can be inspected and
copied at the public reference facilities maintained by the Securities and
Exchange Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the SEC's regional offices in New York (7 World Trade Center, Suite 1300,
New York, New York 10048) and Chicago (Citicorp Center, Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661-2511). Copies of such material can also
be obtained at prescribed rates from the Public Reference Branch, Office of
Consumer Affairs and Information Services, Securities and Exchange Commission,
450 Fifth Street, N.W., Washington, D.C. 20549.
VOTING INFORMATION
If the accompanying form of Proxy is executed properly and returned, shares
represented by it will be voted at the Meeting in accordance with the
instructions on the Proxy. However, if no instructions are specified, shares
will be voted for the proposal. A Proxy may be revoked at any time prior to the
time it is voted by written notice to the Secretary of Strategist Fund or by
attendance at the Meeting. If sufficient votes to approve the proposal are not
received, the persons named as proxies may propose one or more adjournments of
the Meeting to permit further solicitation of proxies. Any such adjournment will
require the affirmative vote of a majority of those shares present at the
Meeting or represented by proxy. When voting on a proposed adjournment, the
persons named as proxies will vote for the proposed adjournment all shares that
they are entitled to vote, unless directed to disapprove the proposal, in which
case such shares will be voted against the proposed adjournment. Any questions
as to an adjournment of the Meeting will be voted on by the persons named in the
enclosed Proxy in the same manner that the Proxies are instructed to be voted.
In the event that the Meeting is adjourned, the same procedures will apply at a
later Meeting date.
If a Proxy that is properly executed and returned, accompanied by
instructions to withhold authority to vote, represents a broker "non-vote" (that
is, a Proxy from a broker or nominee indicating that such person has not
received instructions from the beneficial owner or other person entitled to vote
shares on a particular matter with respect to which the broker or nominee does
not have discretionary power), the shares represented thereby will be considered
not to be present at the Meeting for purposes of determining the existence of a
quorum for the transaction of business and be deemed not cast with respect to
such proposal. If no instructions are received by the broker or nominee from the
shareholder with reference to routine matters, the shares represented thereby
may be considered for purposes of determining the existence of a quorum for the
transaction of business and will be deemed cast with respect to such proposal.
Also, a properly executed and returned Proxy marked with an abstention will be
considered present at the Meeting for purposes of determining the existence of a
quorum for the transaction of business. However, abstentions and broker
"non-votes" do not constitute a vote "for" or "against" the matter, but have the
effect of a negative vote on matters which require approval by a requisite
percentage of the outstanding shares.
The close of business on April 7, 1995 has been fixed as the record date for
the determination of shareholders entitled to notice of, and to vote at, the
Meeting. On that date, Strategist Fund had 8,924,781 Class A shares, 2,834,039
Class B shares and 4,713 Class C shares outstanding and entitled to vote.
Each share of Strategist Fund will be entitled to one vote at the Meeting.
It is expected that the Notice of Special Meeting, Prospectus and Proxy
Statement and form of Proxy will be mailed to shareholders on or about April 28,
1995.
As of April 7, 1995, the following shareholders owned beneficially 5% or
more of Strategist Fund's outstanding Class A, Class B or Class C shares:
19
<PAGE>
Kathleen M. Ottman, 3616 Robin Way, Lawrenceville, GA 30244-4826, held
1,099 Class C shares of the Fund (23.3%); Prudential Securities Incorporated
(Prudential Securities), FA, Allen C. Bellamy held 1,219 Class C shares of the
Fund (25.9%); Michael J. Oliver and Mary J. Oliver, 12653 SE 162nd Street,
Renton, WA 98058-5505, held 377 Class C shares of the Fund (8.0%); Prudential
Securities, C/F Anthony Dale Becker, 2611 Malibu Drive, Evansville, IN
47711-9602, held 370 Class C shares of the Fund (7.9%); Mark S. Fitzgerald, C/F
Molly E. Fitzgerald, 8845 SW Hillview Terrace, Portland, OR 97225-1345, held 672
Class C shares of the Fund (14.3%); and Mark S. Fitzgerald, C/F Mathew S.
Fitzgerald, 8845 SW Hillview Terrace, Portland, OR 97225-1345, held 675 Class C
shares of the Fund (14.3%).
The expenses of reorganization and solicitation will be borne by Strategist
Fund and Multi-Sector Fund in proportion to their respective assets and will
include reimbursement of brokerage firms and others for expenses in forwarding
proxy solicitation material to shareholders. The Board of Directors of
Strategist Fund has retained Shareholder Communications Corporation, a proxy
solicitation firm, to assist in the solicitation of proxies for the Meeting. The
fees and expenses of Shareholder Communications Corporation are not expected to
exceed $48,000, excluding mailing and printing costs. The solicitation of
Proxies will be largely by mail but may include telephonic, telegraphic or oral
communication by regular employees of Prudential Securities and its affiliates,
including Prudential Mutual Fund Management, Inc. This cost, including specified
expenses, also will be borne by Strategist Fund and Multi-Sector Fund in
proportion to their respective assets.
OTHER MATTERS
No business other than as set forth herein is expected to come before the
Meeting, but should any other matter requiring a vote of shareholders of
Strategist Fund arise, including any question as to an adjournment of the
Meeting, the persons named in the enclosed Proxy will vote thereon according to
their best judgment in the interests of Strategist Fund, taking into account all
relevant circumstances.
SHAREHOLDERS' PROPOSALS
A Strategist Fund shareholder proposal intended to be presented at any
subsequent meeting of the shareholders of Strategist Fund must be received by
Strategist Fund a reasonable time before the Directors' solicitation relating to
such meeting is made in order to be included in Strategist Fund's Proxy
Statement and form of Proxy relating to that meeting. In the event that the Plan
is approved at this Meeting, it is not expected that there will be any future
shareholder meetings of Strategist Fund.
It is the present intent of the Boards of Directors of Strategist Fund and
Multi-Sector Fund not to hold annual meetings of shareholders unless the
election of Directors is required under the Investment Company Act.
S. Jane Rose
Secretary
Dated: April 27, 1995
20
<PAGE>
APPENDIX A
Performance Overview
LETTER TO
SHAREHOLDERS
-----------------------------
May 24, 1994
Dear Shareholder:
Over the past year ended April 30, 1994, the Prudential Multi-Sector Fund
shifted its concentration to stocks that should benefit from an improving global
economy. While the fund felt rising interest rate pressure, this global strategy
produced returns that outperformed the Standard & Poor's 500 and the Lipper
capital appreciation fund average.
As of April 30, 1994, the Fund had a net asset value of $13.21 per Class A
share and $13.16 per Class B share. Shareholders also received dividends and
distributions totaling $1.80 per Class A and $1.69 per Class B share.
Global Recovery Begins
Greg Smith, Chief Investment Strategist for Prudential Securities is a
consultant to the Fund and recommends sector allocations. Despite market
volatility in the first four months of 1994. Greg maintained a positive outlook
for the world's stock markets throughout the past year. Last year, Continental
Europe started to follow the economic turnaround in the U.S., U.K and Australia.
Cautiously optimistic in light of recent U.S. interest rate hikes, Greg believes
the global recovery along with the growing trend toward corporate efficiency
should support higher stock prices worldwide.
Accordingly, the portfolio was heavily weighted in "cyclical" stocks (i.e.,
sectors expected to grow as the economy recovers). These include basic industry
(chemical companies, paper producers), energy, transportation (airlines and
railroads) and automotive manufacturers.
At the end of April, approximately one-third of the portfolio was invested
in foreign companies that should benefit from economic growth in Europe. These
holdings tend to be multinational corporations, though most of their business is
concentrated in Europe. During the Fund's fiscal year, we favored companies that
underwent substantial restructuring during the recent European downturn and are
now positioned to take advantage of increased consumer demand.
Chemical Reactions
We expect well-positioned chemical companies to profit from the global
economic turnaround. In this area we own the Dutch company Akzo, one of our
largest holdings at the end of April (1.8% of the portfolio), the British firm
Imperial Chemical (1.5% of the portfolio) and the German company BASF (1.1%
A-1
<PAGE>
of the portfolio). All three companies significantly redesigned their operations
and restructured labor relations in an effort to cut costs and increase
productivity.
Energy Surge
During the fiscal year, we favored energy companies that have greater
exposure to natural gas and less dependence on oil production. We believe
natural gas prices should continue to remain firm as demand outstrips supply,
despite weakness in worldwide oil prices. For example, we expect Talisman Energy
(1.5% of the portfolio) to benefit from its natural gas fields in Western
Canada.
Driving to Europe
Rising U.S. interest rates may have put a cap on stock prices of U.S. auto
makers. In reaction, we have reduced our holdings in U.S. car companies such as
Ford Motor and General Motors, while shifting to positions in foreign automotive
firms such as Fiat (1.1% of the portfolio). Fiat is also restructuring to cut
costs and redesigned its labor agreements to become more competitive.
Outlook
Despite recent setbacks to the U.S. stock market brought on by rising
interest rates, we believe the U.S. economy should continue its slow yet steady
growth. However, the markets may remain uncertain as investors wait to see what
the longer term impact of higher rates will be.
In the interim, European economic recovery presents some attractive
opportunities, especially in the cyclical sector.
As always, it is a pleasure to have you as a Prudential Multi-Sector Fund
shareholder and to take the opportunity to report our activities to you.
Sincerely,
Lawrence C. McQuade
President
Gregory Goldberg
Portfolio Manager
MANAGEMENT UPDATE
We are pleased to announce
that in February 1994, Gregory
Goldberg a Vice President of
Prudential Investment Advisors,
took over as portfolio manager
of the Prudential Multi-Sector
Fund. Greg was previously a
portfolio Manager of institu-
tional balanced portfolios at
Daiwa International Capital
Management. Before that, he was
employed by Industrial Bank of
Japan.
A-2
<PAGE>
[CHART]
Past performance is not predictive of future performance and an investor's
shares, when redeemed, may be worth more or less than their original cost.
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in Prudential Multi-Sector Fund (Class A and Class
B) with a similar investment in the Standard & Poor's Index (S&P 500) by
portraying the initial account values on June 29, 1990 for Class 'A and Class B
shares and subsequent account values at the end of each fiscal year (April 30),
as measured on a quarterly basis, beginning in 1990. For purposes of the graphs
and, unless otherwise indicated, the accompanying tables, it has been assumed
that (a) the maximum sales charge was deducted from the iniital $10,000
investment in Class A shares; (b) the maximum applicable contingent deferred
sales charge was deducted from the value of the investment in Class B shares
assuming full redemption on April 30, 1994; (c) all rrecurring fees (including
management fees) were deducted; and (d) all dividends and distributions were
reinvested.
The S&P 500 is a capital-weighted index, representing the aggregate market value
of the common equity of 500 stocks primarily traded on the New York Stock
Exchange. The S&P 500 is an unmanaged index and includes the reinvestment of all
dividends, but does not reflect the payment of transaction costs and advisory
fees associated with an investment in the Fund. The securities which comprise
the S&P 500 may differ substantially from the securities in the Fund's
portfolio. The S&P 500 is not the only index which may be used to characterize
performance of multiple sector equity funds and other indexes may portray
different comparative performance.
A-3
<PAGE>
APPENDIX B
Agreement and Plan of Reorganization and Liquidation
Agreement and Plan of Reorganization and Liquidation (Agreement) made as of
the 27th day of April, 1995, by and between Prudential Strategist Fund,
Inc. (Strategist Fund) and Prudential Multi-Sector Fund, Inc. (Multi-Sector
Fund) (collectively, the Funds and each individually, a Fund). Each of the Funds
is a corporation organized under the laws of the State of Maryland and maintains
its principal place of business at One Seaport Plaza, New York, New York
10292. Shares of each Fund are divided into three classes, designated Class A,
Class B and Class C.
This Agreement is intended to be, and is adopted as, a plan of
reorganization pursuant to Section 368(a)(1)(C) of the Internal Revenue Code of
1986, as amended (Internal Revenue Code). The reorganization will comprise the
transfer of substantially all of the assets of Strategist Fund, in exchange
solely for shares of common stock of Multi-Sector Fund, Class A shares for Class
A shares, Class B shares for Class B shares and Class C shares for Class C
shares, and Multi-Sector Fund's assumption of Strategist Fund's liabilities, if
any, incurred in the ordinary course of business and the constructive
distribution, after the Closing Date hereinafter referred to, of such shares of
Multi-Sector Fund to the shareholders of Strategist Fund in liquidation of
Strategist Fund as provided herein, all upon the terms and conditions as
hereinafter set forth.
In consideration of the premises and of the covenants and agreements set
forth herein, the parties covenant and agree as follows:
1. Transfer of Assets of Strategist Fund in Exchange for Shares of Multi-Sector
Fund and Assumption of Liabilities, if any, and Liquidation of Strategist
Fund
1.1 Subject to the terms and conditions herein set forth and on the basis of the
representations and warranties contained herein, Strategist Fund agrees to sell,
assign, transfer and deliver its assets, as set forth in paragraph 1.2, to
Multi-Sector Fund, and Multi-Sector Fund agrees (a) to issue and deliver to
Strategist Fund in exchange therefor (i) the number of shares of Class A Common
Stock in Multi-Sector Fund determined by dividing the net asset value of
Strategist Fund allocable to shares of Class A Common Stock (computed in the
manner and as of the time and date set forth in paragraph 2.2) by the net asset
value allocable to a share of Multi-Sector Class A Common Stock (computed in the
manner and as of the time and date set forth in paragraph 2.2); (ii) the number
of shares of Class B Common Stock in Multi-Sector Fund determined by dividing
the net asset value of Strategist Fund allocable to shares of Class B Common
Stock (computed in the manner and as of the time and date set forth in paragraph
2.2) by the net asset value allocable to a share of Multi-Sector Class B Common
Stock (computed in the manner and as of the time and date set forth in paragraph
2.2); and (iii) the number of shares of Class C Common Stock in Multi-Sector
Fund determined by dividing the net asset value of Strategist Fund allocable to
shares of Class C Common Stock (computed in the manner and as of the time and
date set forth in paragraph 2.2) by the net asset value allocable to a share of
Multi-Sector Class C Common Stock (computed in the manner and as of the time and
date set forth in paragraph 2.2); and (b) to assume all of Strategist Fund's
liabilities, if any, as set forth in paragraph 1.3. Such transactions shall take
place at the closing provided for in paragraph 3 (Closing).
1.2 The assets of Strategist Fund to be acquired by Multi-Sector Fund shall
include without limitation all cash, cash equivalents, securities, receivables
(including interest and dividends receivable) and other property of any kind
owned by Strategist Fund and any deferred or prepaid expenses shown as assets on
the books of Strategist Fund on the closing date provided in paragraph 3
(Closing Date). Multi-Sector Fund has no plan or intent to sell or otherwise
dispose of any assets of Strategist Fund.
1.3 Except as otherwise provided herein, Multi-Sector Fund will assume from
Strategist Fund all debts, liabilities, obligations and duties of Strategist
Fund of whatever kind or nature, whether absolute, accrued, contingent or
B-1
<PAGE>
otherwise, whether or not determinable as of the Closing Date and whether or not
specifically referred to in this Agreement; provided, however, that Strategist
Fund agrees to utilize its best efforts to discharge all of its known debts,
liabilities, obligations and duties prior to the Closing Date.
1.4 On or immediately prior to the Closing Date, Strategist Fund will declare
and pay to its shareholders of record dividends and/or other distributions so
that it will have distributed substantially all (and in any event not less than
ninety-eight percent) of its investment company taxable income (computed without
regard to any deduction for dividends paid), net tax-exempt interest income, if
any, and realized net capital gains, if any, for all taxable years through its
liquidation.
1.5 On a date (Liquidation Date), as soon after the Closing Date as is
conveniently practicable, Strategist Fund will file Articles of Dissolution with
the State Department of Assessment and Taxation of the State of Maryland and
distribute pro rata to its Class A, Class B and Class C shareholders of record,
determined as of the close of business on the Closing Date, the Class A, Class B
and Class C shares of Multi-Sector Fund, respectively, received by Strategist
Fund pursuant to paragraph 1.1 in exchange for their interest in Strategist
Fund. Such distribution will be accomplished by opening accounts on the books of
Multi-Sector Fund in the names of Strategist Fund shareholders and transferring
thereto the shares credited to the account of Strategist Fund on the books of
Multi-Sector Fund. Each account opened shall be credited with the respective pro
rata number of Multi-Sector Fund Class A, Class B and Class C shares due each
Strategist Fund Class A, Class B and Class C shareholder, respectively.
Fractional shares of Multi-Sector Fund shall be rounded to the third decimal
place.
1.6 Multi-Sector Fund shall not issue certificates representing its shares in
connection with such exchange. With respect to any Strategist Fund shareholder
holding Strategist Fund stock certificates as of the Closing Date, until
Multi-Sector Fund is notified by the Strategist Fund transfer agent that such
shareholder has surrendered his or her outstanding Strategist Fund stock
certificates or, in the event of lost, stolen or destroyed stock certificates,
posted adequate bond or submitted a lost certificate form, as the case may be,
Multi-Sector Fund will not permit such shareholder to (1) receive dividends or
other distributions on Multi-Sector Fund shares in cash (although such dividends
and distributions shall be credited to the account of such shareholder
established on Multi-Sector Fund's books pursuant to paragraph 1.5, as provided
in the next sentence), (2) exchange Multi-Sector Fund shares credited to such
shareholder's account for shares of other Prudential Mutual Funds, or (3) pledge
or redeem such shares. In the event that a shareholder is not permitted to
receive dividends or other distributions on Multi-Sector Fund shares in cash as
provided in the preceding sentence, Multi-Sector Fund shall pay such dividends
or other distributions in additional Multi-Sector Fund shares, notwithstanding
any election such shareholder shall have made previously with respect to the
payment of dividends or other distributions on shares of Strategist Fund.
Strategist Fund will, at its expense, request its shareholders to surrender
their outstanding Strategist Fund stock certificates, post adequate bond or
submit a lost certificate form, as the case may be.
1.7 Ownership of Multi-Sector Fund shares will be shown on the books of the
Multi-Sector Fund's transfer agent. Shares of Multi-Sector Fund will be issued
in the manner described in Multi-Sector Fund's then-current prospectus and
statement of additional information.
1.8 Any transfer taxes payable upon issuance of shares of Multi-Sector Fund in a
name other than the registered holder of the shares on the books of Strategist
Fund as of that time shall be paid by the person to whom such shares are to be
issued as a condition to the registration of such transfer.
1.9 Any reporting responsibility with the Securities and Exchange Commission or
any state securities commission of Strategist Fund is and shall remain the
responsibility of Strategist Fund up to and including the Liquidation Date.
1.10 All books and records of Strategist Fund, including all books and records
required to be maintained under the Investment Company Act of 1940 (Investment
Company Act) and the rules and regulations thereunder, shall be available to
Multi-Sector Fund from and after the Closing Date and shall be turned over to
Multi-Sector Fund on or prior to the Liquidation Date.
B-2
<PAGE>
2. Valuation
2.1 The value of Strategist Fund's assets and liabilities to be acquired
and assumed, respectively, by Multi-Sector Fund shall be the net asset value
computed as of 4:15 p.m., New York time, on the Closing Date (such time and date
being hereinafter called the Valuation Time), using the valuation procedures set
forth in Strategist Fund's then-current prospectus and statement of additional
information.
2.2 The net asset value of a share of Multi-Sector Fund shall be the net asset
value per such share computed on a class-by-class basis as of the Valuation
Time, using the valuation procedures set forth in Multi-Sector Fund's
then-current prospectus and statement of additional information.
2.3 The number of Multi-Sector Fund shares to be issued (including fractional
shares, if any) in exchange for Strategist Fund's net assets shall be calculated
as set forth in paragraph 1.1.
2.4 All computations of net asset value shall be made by or under the direction
of Prudential Mutual Fund Management, Inc. (PMF) in accordance with its regular
practice as manager of the Funds.
3. Closing and Closing Date
3.1 The Closing Date shall be June 23, 1995 or such later date as the parties
may agree in writing. All acts taking place at the Closing shall be deemed to
take place simultaneously as of the close of business on the Closing Date unless
otherwise provided. The Closing shall be at the office of Multi-Sector Fund or
at such other place as the parties may agree.
3.2 State Street Bank and Trust Company (State Street), as custodian for
Strategist Fund, shall deliver to Multi-Sector Fund at the Closing a certificate
of an authorized officer of State Street stating that (a) Strategist Fund's
portfolio securities, cash and any other assets have been transferred in proper
form to Multi-Sector Fund on the Closing Date and (b) all necessary taxes, if
any, have been paid, or provision for payment has been made, in conjunction with
the transfer of portfolio securities.
3.3 In the event that immediately prior to the Valuation Time (a) the New York
Stock Exchange (NYSE) or other primary exchange is closed to trading or trading
thereon is restricted or (b) trading or the reporting of trading on the NYSE or
other primary exchange or elsewhere is disrupted so that accurate appraisal of
the value of the net assets of Strategist Fund and of the net asset value per
share of Multi-Sector Fund is impracticable, the Closing Date shall be postponed
until the first business day after the date when such trading shall have been
fully resumed and such reporting shall have been restored.
3.4 Strategist Fund shall deliver to Multi-Sector Fund on or prior to the
Liquidation Date the names and addresses of its shareholders and the number of
outstanding shares owned by each such shareholder, all as of the close of
business on the Closing Date, certified by the Secretary or Assistant Secretary
of Strategist Fund. Multi-Sector Fund shall issue and deliver to Strategist Fund
at the Closing a confirmation or other evidence satisfactory to Strategist Fund
that shares of Multi-Sector Fund have been or will be credited to Strategist
Fund's account on the books of Multi-Sector Fund. At the Closing each party
shall deliver to the other such bills of sale, checks, assignments, share
certificates, receipts and other documents as such other party or its counsel
may reasonably request to effect the transactions contemplated by this
Agreement.
4. Representations and Warranties
4.1 Strategist Fund represents and warrants as follows:
4.1.1 Strategist Fund is a corporation duly organized and validly existing
under the laws of the State of Maryland;
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4.1.2 Strategist Fund is an open-end management investment company duly
registered under the Investment Company Act, and such registration is
in full force and effect;
4.1.3 Strategist Fund is not, and the execution, delivery and performance
of this Agreement will not result, in violation of any provision of
the Articles of Incorporation or By-Laws of Strategist Fund or of any
material agreement, indenture, instrument, contract, lease or other
undertaking to which Strategist Fund is a party or by which
Strategist Fund is bound;
4.1.4 All material contracts or other commitments of Strategist Fund except
this Agreement will be terminated on or prior to the Closing Date
without Strategist Fund or Multi-Sector Fund incurring any liability
or penalty with respect thereto;
4.1.5 No material litigation or administrative proceeding or investigation
of or before any court or governmental body is presently pending or
to its knowledge threatened against Strategist Fund or any of its
properties or assets. Strategist Fund knows of no facts that might
form the basis for the institution of such proceedings, and
Strategist Fund is not a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body that
materially and adversely affects its business or its ability to
consummate the transactions herein contemplated;
4.1.6 The Portfolio of Investments, Statement of Assets and Liabilities,
Statement of Operations, Statement of Changes in Net Assets, and
Financial Highlights of Strategist Fund at February 28, 1995 and for
the year then ended (copies of which have been furnished to
Multi-Sector Fund) have been audited by Price Waterhouse LLP,
independent accountants, in accordance with generally accepted
auditing standards. Such financial statements are prepared in
accordance with generally accepted accounting principles and present
fairly, in all material respects, the financial condition, results of
operations, changes in net assets and financial highlights of
Strategist Fund as of and for the period ended on such date, and
there are no material known liabilities of Strategist Fund
(contingent or otherwise) not disclosed therein;
4.1.7 Since February 28, 1995, there has not been any material adverse
change in Strategist Fund's financial condition, assets, liabilities
or business other than changes occurring in the ordinary course of
business, or any incurrence by Strategist Fund of indebtedness
maturing more than one year from the date such indebtedness was
incurred, except as otherwise disclosed to and accepted by
Multi-Sector Fund. For the purposes of this paragraph 4.1.7, a
decline in net asset value, net asset value per share or change in
the number of shares outstanding shall not constitute a material
adverse change;
4.1.8 At the date hereof and at the Closing Date, all federal and other tax
returns and reports of Strategist Fund required by law to have been
filed on or before such dates shall have been timely filed, and all
federal and other taxes shown as due on said returns and reports
shall have been paid insofar as due, or provision shall have been
made for the payment thereof, and, to the best of Strategist Fund's
knowledge, all federal or other taxes required to be shown on any
such return or report have been shown on such return or report, no
such return is currently under audit and no assessment has been
asserted with respect to such returns;
4.1.9 For each past taxable year since it commenced operations, Strategist
Fund has met the requirements of Subchapter M of the Internal Revenue
Code for qualification and treatment as a regulated investment
company and intends to meet those requirements for the current
taxable year; and, for each past calendar year since it commenced
operations, Strategist Fund has made such distributions as are
necessary to avoid the imposition of federal excise tax or has paid
or provided for the payment of any excise tax imposed;
4.1.10 All issued and outstanding shares of Strategist Fund are, and at the
Closing Date will be, duly and validly authorized, issued and
outstanding, fully paid and non-assessable. All issued and
outstanding shares of Strategist Fund will, at the time of the
Closing, be held in the name of the persons and in the amounts set
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forth in the list of shareholders submitted to Multi-Sector Fund in
accordance with the provisions of paragraph 3.4. Strategist Fund does
not have outstanding any options, warrants or other rights to
subscribe for or purchase any of its shares, nor is there outstanding
any security convertible into any of its shares, except for the Class
B shares which have the conversion feature described in Strategist
Fund's Prospectus dated August 1, 1994;
4.1.11 At the Closing Date, Strategist Fund will have good and marketable
title to its assets to be transferred to Multi-Sector Fund pursuant
to paragraph 1.1, and full right, power and authority to sell,
assign, transfer and deliver such assets hereunder free of any liens,
claims, charges or other encumbrances, and, upon delivery and payment
for such assets, Multi-Sector Fund will acquire good and marketable
title thereto;
4.1.12 The execution, delivery and performance of this Agreement has been
duly authorized by the Board of Directors of Strategist Fund and by
all necessary corporate action, other than shareholder approval, on
the part of Strategist Fund, and this Agreement constitutes a valid
and binding obligation of Strategist Fund, subject to shareholder
approval;
4.1.13 The information furnished and to be furnished by Strategist Fund for
use in applications for orders, registration statements, proxy
materials and other documents that may be necessary in connection
with the transactions contemplated hereby is and shall be accurate
and complete in all material respects and is in compliance and shall
comply in all material respects with applicable federal securities
and other laws and regulations; and
4.1.14 On the effective date of the registration statement filed with the
Securities and Exchange Commission (SEC) by Multi-Sector Fund on Form
N-14 relating to the shares of Multi-Sector Fund issuable hereunder,
and any supplement or amendment thereto (Registration Statement), at
the time of the meeting of the shareholders of Strategist Fund and on
the Closing Date, the Proxy Statement of Strategist Fund, the
Prospectus of Multi-Sector Fund, the Annual Report to shareholders of
Strategist Fund for the fiscal year ended February 28, 1995 and the
Statement of Additional Information of Multi-Sector Fund to be
included in the Registration Statement (collectively, Proxy
Statement) (i) will comply in all material respects with the
provisions and regulations of the Securities Act of 1933 (1933 Act),
Securities Exchange Act of 1934 (1934 Act) and the Investment Company
Act and the rules and regulations thereunder and (ii) will not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein in light of the
circumstances under which they were made or necessary to make the
statements therein not misleading; provided, however, that the
representations and warranties in this paragraph 4.1.14 shall not
apply to statements in or omissions from the Proxy Statement and
Registration Statement made in reliance upon and in conformity with
information furnished by Multi-Sector Fund for use therein.
4.2 Multi-Sector Fund represents and warrants as follows:
4.2.1 Multi-Sector Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland;
4.2.2 Multi-Sector Fund is an open-end management investment company duly
registered under the Investment Company Act, and such registration is
in full force and effect;
4.2.3 Multi-Sector Fund is not, and the execution, delivery and performance
of this Agreement will not result, in violation of any provision of
the Articles of Incorporation or By-Laws of Multi-Sector Fund or of
any material agreement, indenture, instrument, contract, lease or
other undertaking to which Multi-Sector Fund is a party or by which
Multi-Sector Fund is bound;
4.2.4 No material litigation or administrative proceeding or investigation
of or before any court or governmental body is presently pending or
threatened against Multi-Sector Fund or any of its properties or
assets, except as previously disclosed in writing to Strategist Fund.
Multi-Sector Fund knows of no facts that
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might form the basis for the institution of such proceedings, and
Multi-Sector Fund is not a party to or subject to the provisions of
any order, decree or judgment of any court or governmental body that
materially and adversely affects its business or its ability to
consummate the transactions herein contemplated;
4.2.5 The Portfolio of Investments, Statement of Assets and Liabilities,
Statement of Operations, Statement of Changes in Net Assets, and
Financial Highlights of Multi-Sector Fund at April 30, 1994 and for
the fiscal year then ended (copies of which have been furnished to
Strategist Fund) have been audited by Deloitte & Touche LLP,
independent auditors, in accordance with generally accepted auditing
standards. Such financial statements are prepared in accordance with
generally accepted accounting principles and present fairly, in all
material respects, the financial condition, results of operations,
changes in net assets and financial highlights of Multi-Sector Fund
as of and for the period ended on such date, and there are no
material known liabilities of Multi-Sector Fund (contingent or
otherwise) not disclosed therein;
4.2.6 Since April 30, 1994, there has not been any material adverse change
in Multi-Sector Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of
business, or any incurrence by Multi-Sector Fund of indebtedness
maturing more than one year from the date such indebtedness was
incurred, except as otherwise disclosed to and accepted by Strategist
Fund. For the purposes of this paragraph 4.2.6, a decline in net
asset value per share or a decrease in the number of shares
outstanding shall not constitute a material adverse change;
4.2.7 At the date hereof and at the Closing Date, all federal and other tax
returns and reports of Multi-Sector Fund required by law to have been
filed on or before such dates shall have been filed, and all federal
and other taxes shown as due on said returns and reports shall have
been paid insofar as due, or provision shall have been made for the
payment thereof, and, to the best of Multi-Sector Fund's knowledge,
all federal or other taxes required to be shown on any such return or
report are shown on such return or report, no such return is
currently under audit and no assessment has been asserted with
respect to such returns;
4.2.8 For each past taxable year since it commenced operations,
Multi-Sector Fund has met the requirements of Subchapter M of the
Internal Revenue Code for qualification and treatment as a regulated
investment company and intends to meet those requirements for the
current taxable year; and, for each past calendar year since it
commenced operations, Multi-Sector Fund has made such distributions
as are necessary to avoid the imposition of federal excise tax or
has paid or provided for the payment of any excise tax imposed;
4.2.9 All issued and outstanding shares of Multi-Sector Fund are, and at
the Closing Date will be, duly and validly authorized, issued and
outstanding, fully paid and non-assessable. Except as contemplated by
this Agreement, Multi-Sector Fund does not have outstanding any
options, warrants or other rights to subscribe for or purchase any of
its shares nor is there outstanding any security convertible into any
of its shares, except for the Class B shares which have the
conversion feature described in Multi-Sector Fund's Prospectus dated
August 1, 1994;
4.2.10 The execution, delivery and performance of this Agreement has been
duly authorized by the Board of Directors of Multi-Sector Fund and by
all necessary corporate action on the part of Multi-Sector Fund, and
this Agreement constitutes a valid and binding obligation of
Multi-Sector Fund;
4.2.11 The shares of Multi-Sector Fund to be issued and delivered to
Strategist Fund pursuant to this Agreement will, at the Closing Date,
have been duly authorized and, when issued and delivered as provided
in this Agreement, will be duly and validly issued and outstanding
shares of Multi-Sector Fund, fully paid and non-assessable;
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4.2.12 The information furnished and to be furnished by Multi-Sector Fund
for use in applications for orders, registration statements, proxy
materials and other documents which may be necessary in connection
with the transactions contemplated hereby is and shall be accurate
and complete in all material respects and is and shall comply in all
material respects with applicable federal securities and other laws
and regulations; and
4.2.13 On the effective date of the Registration Statement, at the time of
the meeting of the shareholders of Strategist Fund and on the Closing
Date, the Proxy Statement and the Registration Statement (i) will
comply in all material respects with the provisions of the 1933 Act,
the 1934 Act and the Investment Company Act and the rules and
regulations under such Acts, (ii) will not contain any untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading and (iii) with respect to the Registration
Statement, at the time it becomes effective, it will not contain an
untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein in the light of the
circumstances under which they were made, not misleading; provided,
however, that the representations and warranties in this paragraph
4.2.13 shall not apply to statements in or omissions from the Proxy
Statement and the Registration Statement made in reliance upon and in
conformity with information furnished by Strategist Fund for use
therein.
5. Covenants of Multi-Sector Fund and Strategist Fund
5.1 Strategist Fund and Multi-Sector Fund each covenants to operate its
respective business in the ordinary course between the date hereof and the
Closing Date, it being understood that the ordinary course of business will
include declaring and paying customary dividends and other distributions and
such changes in operations as are contemplated by the normal operations of the
Funds, except as may otherwise be required by paragraph 1.4 hereof.
5.2 Strategist Fund covenants to call a shareholders' meeting to consider and
act upon this Agreement and to take all other action necessary to obtain
approval of the transactions contemplated hereby (including the determinations
of its Board of Directors as set forth in Rule 17a-8(a) under the Investment
Company Act).
5.3 Strategist Fund covenants that Multi-Sector Fund shares to be received by
Strategist Fund in accordance herewith are not being acquired for the purpose of
making any distribution thereof other than in accordance with the terms of this
Agreement.
5.4 Strategist Fund covenants that it will assist Multi-Sector Fund in obtaining
such information as Multi-Sector Fund reasonably requests concerning the
beneficial ownership of Strategist Fund's shares.
5.5 Subject to the provisions of this Agreement, each Fund will take, or cause
to be taken, all action, and will do, or cause to be done, all things,
reasonably necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement.
5.6 Strategist Fund covenants to prepare the Proxy Statement in compliance with
the 1934 Act, the Investment Company Act and the rules and regulations under
each Act.
5.7 Strategist Fund covenants that it will, from time to time, as and when
requested by Multi-Sector Fund, execute and deliver or cause to be executed and
delivered all such assignments and other instruments, and will take or cause to
be taken such further action, as Multi-Sector Fund may deem necessary or
desirable in order to vest in and confirm to Multi-Sector Fund title to and
possession of all the assets of Strategist Fund to be sold, assigned,
transferred and delivered hereunder and otherwise to carry out the intent and
purpose of this Agreement.
5.8 Multi-Sector Fund covenants to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the Investment Company
Act (including the determinations of its Board of Directors as set forth in Rule
17a-8(a) thereunder) and such of the state Blue Sky or securities laws as it may
deem appropriate in order to continue its operations after the Closing Date.
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5.9 Multi-Sector Fund covenants that it will, from time to time, as and when
requested by Strategist Fund, execute and deliver or cause to be executed and
delivered all such assignments and other instruments, and will take and cause to
be taken such further action, as Strategist Fund may deem necessary or desirable
in order to (i) vest in and confirm to Strategist Fund title to and possession
of all the shares of Multi-Sector Fund to be transferred to Strategist Fund
pursuant to this Agreement and (ii) assume all of Strategist Fund's liabilities
in accordance with this Agreement.
6. Conditions Precedent to Obligations of Strategist Fund
The obligations of Strategist Fund to consummate the transactions provided
for herein shall be subject to the performance by Multi-Sector Fund of all the
obligations to be performed by it hereunder on or before the Closing Date and
the following further conditions:
6.1 All representations and warranties of Multi-Sector Fund contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date.
6.2 Multi-Sector Fund shall have delivered to Strategist Fund on the Closing
Date a certificate executed in its name by the President or a Vice President of
Multi-Sector Fund, in form and substance satisfactory to Strategist Fund and
dated as of the Closing Date, to the effect that the representations and
warranties of Multi-Sector Fund in this Agreement are true and correct at and as
of the Closing Date, except as they may be affected by the transactions
contemplated by this Agreement, and as to such other matters as Strategist Fund
shall reasonably request.
6.3 Strategist Fund shall have received on the Closing Date a favorable opinion
from Gardner, Carton & Douglas, counsel to Multi-Sector Fund, dated as of the
Closing Date, to the effect that:
6.3.1 Multi-Sector Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland with power under its
Articles of Incorporation to own all of its properties and assets
and, to the knowledge of such counsel, to carry on its business as
presently conducted;
6.3.2 This Agreement has been duly authorized, executed and delivered by
Multi-Sector Fund and, assuming due authorization, execution and
delivery of the Agreement by Strategist Fund, is a valid and binding
obligation of Multi-Sector Fund enforceable in accordance with its
terms, except to the extent that enforcement thereof may be limited
by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or
affecting creditors' rights and to general equity principles
(regardless of whether enforcement is sought in a proceeding at law
or in equity), and further subject to the qualifications set forth in
the next succeeding sentence. Such counsel may state that they
express no opinion as to the validity or enforceability of any
provision regarding choice of New York Law to govern this Agreement;
6.3.3 The shares of Multi-Sector Fund to be distributed to Strategist Fund
shareholders under this Agreement, assuming their due authorization
and delivery as contemplated by this Agreement, will be validly
issued and outstanding and fully paid and non-assessable, and no
shareholder of Multi-Sector Fund has any pre-emptive right to
subscribe therefor or purchase such shares;
6.3.4 The execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, (i)
conflict with Multi-Sector Fund's Articles of Incorporation or
By-Laws or (ii) result in a default or a breach of (a) the Management
Agreement dated June 1, 1990 between Multi-Sector Fund and Prudential
Mutual Fund Management, Inc., (b) the Custodian Contract dated May
17, 1990 between Multi-Sector Fund and State Street Bank and Trust
Company, (c) the Distribution Agreement (Class A shares) dated August
1, 1994 between Multi-Sector Fund and Prudential Mutual Fund
Distributors, Inc., (d) the Distribution Agreement (Class B shares)
dated August 1, 1994 between
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Multi-Sector Fund and Prudential Securities Incorporated, (e) the
Distribution Agreement (Class C shares) dated August 1, 1994 between
Multi-Sector Fund and Prudential Securities Incorporated and (f) the
Transfer Agency and Service Agreement dated June 1, 1990; provided,
however, that such counsel may state that they express no opinion in
their opinion pursuant to this paragraph 6.3.4 with respect to
federal or state securities laws, other antifraud laws and fraudulent
transfer laws; provided further that insofar as performance by
Multi-Sector Fund of its obligations under this Agreement is
concerned, such counsel may state that they express no opinion as to
bankruptcy, insolvency, reorganization, moratorium and similar laws
of general applicability relating to or affecting creditors' rights;
6.3.5 To the knowledge of such counsel, no consent, approval,
authorization, filing or order of any court or governmental authority
is required for the consummation by Multi-Sector Fund of the
transactions contemplated herein, except such as have been obtained
under the 1933 Act, the 1934 Act and the Investment Company Act and
such as may be required under state Blue Sky or securities laws;
6.3.6 Multi-Sector Fund has been registered with the SEC as an investment
company, and, to the knowledge of such counsel, no order has been
issued or proceeding instituted to suspend such registration; and
6.3.7 To the knowledge of such counsel, (a) no litigation or administrative
proceeding or investigation of or before any court or governmental
body is presently pending or threatened against Multi-Sector Fund or
any of its properties or assets, and (b) Multi-Sector Fund is not a
party to or subject to the provision of any order, decree or judgment
of any court or governmental body, which materially and adversely
affects its business, except as otherwise disclosed.
7. Conditions Precedent to Obligations of Multi-Sector Fund
The obligations of Multi-Sector Fund to complete the transactions provided
for herein shall be subject to the performance by Strategist Fund of all the
obligations to be performed by it hereunder on or before the Closing Date and
the following further conditions:
7.1 All representations and warranties of Strategist Fund contained in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date.
7.2 Strategist Fund shall have delivered to Multi-Sector Fund on the Closing
Date a statement of its assets and liabilities, which statement shall be
prepared in accordance with generally accepted accounting principles
consistently applied, together with a list of its portfolio securities showing
the adjusted tax bases of such securities by lot, as of the Closing Date,
certified by the Treasurer of Strategist Fund.
7.3 Strategist Fund shall have delivered to Multi-Sector Fund on the Closing
Date a certificate executed in its name by the President or a Vice President of
Strategist Fund, in form and substance satisfactory to Multi-Sector Fund and
dated as of the Closing Date, to the effect that the representations and
warranties of Strategist Fund made in this Agreement are true and correct at and
as of the Closing Date except as they may be affected by the transactions
contemplated by this Agreement, and as to such other matters as Multi-Sector
Fund shall reasonably request.
7.4 On or immediately prior to the Closing Date, Strategist Fund shall have
declared and paid to its shareholders of record one or more dividends and/or
other distributions so that it will have distributed substantially all (and in
any event not less than ninety-eight percent) of its investment company taxable
income (computed without regard to any deduction for dividends paid), net
tax-exempt interest income, if any, and realized net capital gain, if any, for
all taxable years through its liquidation.
7.5 Multi-Sector Fund shall have received on the Closing Date a favorable
opinion from Sullivan & Cromwell, counsel to Strategist Fund, dated as of the
Closing Date, to the effect that:
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7.5.1 Strategist Fund has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Maryland;
7.5.2 This Agreement has been duly authorized, executed and delivered by
Strategist Fund and constitutes a valid and legally binding
obligation of Strategist Fund enforceable in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles;
7.5.3 The execution and delivery of the Agreement did not, and the
performance by Strategist Fund of its obligations hereunder will not,
(i) violate Strategist Fund's Articles of Incorporation or By-Laws or
(ii) result in a default or a breach of the Management Agreement,
dated January 22, 1990 and amended as of October 24, 1991, between
Strategist Fund and Prudential Mutual Fund Management, Inc., the
Custodian Agreement, dated July 25, 1990, between Strategist Fund and
State Street Bank and Trust Company, the Distribution Agreement
(Class A shares), dated August 1, 1994, between Strategist Fund and
Prudential Mutual Fund Distributors, Inc., the Distribution Agreement
(Class B shares), dated August 1, 1994, between Strategist Fund and
Prudential Securities Incorporated, the Distribution Agreement (Class
C shares), dated August 1, 1994, between Strategist Fund and
Prudential Securities Incorporated and the Transfer Agency and
Service Agreement, dated January 1, 1988 and amended as of January 1,
1989 and January 1, 1990, between Strategist Fund and Prudential
Mutual Fund Services, Inc.; provided, however, that such counsel may
state that they express no opinion in their opinion pursuant to this
paragraph 7.5.3 with respect to federal or state securities laws,
other antifraud laws and fraudulent transfer laws; provided further
that insofar as performance by Strategist Fund of its obligations
under this Agreement is concerned, such counsel may state that they
express no opinion as to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles;
7.5.4 All regulatory consents, authorizations and approvals required to be
obtained by Strategist Fund under the federal laws of the United
States, the laws of the State of New York and the General Corporation
Law of the State of Maryland for the consummation of the transactions
contemplated by this Agreement have been obtained;
7.5.5 Such counsel knows of no litigation or any governmental proceeding
instituted or threatened against Strategist Fund that would be
required to be disclosed in the Registration Statement and is not so
disclosed; and
7.5.6 Strategist Fund has been registered with the SEC as an investment
company, and, to the knowledge of such counsel, no order has been
issued or proceeding instituted to suspend such registration.
8. Further Conditions Precedent to Obligations of Multi-Sector Fund and
Strategist Fund
The obligations of each Fund hereunder are subject to the further conditions
that on or before the Closing Date:
8.1 This Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of (a) the Board of Directors of the Strategist
Fund and Multi-Sector Fund, as to the determinations set forth in Rule 17a-8(a)
under the Investment Company Act, (b) the Board of Directors of Multi-Sector
Fund as to the assumption by the Multi-Sector Fund of the liabilities of
Strategist Fund and (c) the holders of the outstanding shares of Strategist Fund
in accordance with the provisions of Strategist Fund's Articles of
Incorporation, and certified copies of the resolutions evidencing such approvals
shall have been delivered to Multi-Sector Fund and Strategist Fund.
8.2 Any proposed change to Multi-Sector Fund's operations that may be approved
by the Board of Directors of Multi-Sector Fund subsequent to the date of this
Agreement but in connection with and as a condition to implementing
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the transactions contemplated by this Agreement, for which the approval of
Multi-Sector Fund shareholders is required pursuant to the Investment Company
Act or otherwise, shall have been approved by the requisite vote of the holders
of the outstanding shares of Multi-Sector Fund in accordance with the Investment
Company Act and the provisions of the General Corporation Law of the State of
Maryland, and certified copies of the resolution evidencing such approval shall
have been delivered to Strategist Fund.
8.3 On the Closing Date no action, suit or other proceeding shall be pending
before any court or governmental agency in which it is sought to restrain or
prohibit, or obtain damages or other relief in connection with, this Agreement
or the transactions contemplated herein.
8.4 All consents of other parties and all consents, orders and permits of
federal, state and local regulatory authorities (including those of the SEC and
of state Blue Sky or securities authorities, including "no-action" positions of
such authorities) deemed necessary by Multi-Sector Fund or Strategist Fund to
permit consummation, in all material respects, of the transactions contemplated
hereby shall have been obtained, except where failure to obtain any such
consent, order or permit would not involve a risk of a material adverse effect
on the assets or properties of Multi-Sector Fund or Strategist Fund, provided
that either party hereto may for itself waive any part of this condition.
8.5 The Registration Statement shall have become effective under the 1933 Act,
and no stop orders suspending the effectiveness thereof shall have been issued,
and to the best knowledge of the parties hereto, no investigation or proceeding
under the 1933 Act for that purpose shall have been instituted or be pending,
threatened or contemplated.
8.6 Strategist Fund and Multi-Sector Fund shall have received on or before the
Closing Date an opinion of Sullivan & Cromwell satisfactory to Strategist Fund
and to Multi-Sector Fund, substantially to the effect that for federal income
tax purposes:
8.6.1 The acquisition by Multi-Sector Fund of the assets of Strategist Fund
in exchange solely for voting shares of Multi-Sector Fund and the
assumption by Multi-Sector Fund of Strategist Fund's liabilities, if
any, followed by the distribution of Multi-Sector Fund's voting
shares by Strategist Fund pro rata to its shareholders, pursuant to
its liquidation and constructively in exchange for their Strategist
Fund shares, will constitute a reorganization within the meaning of
Section 368(a)(1)(C) of the Internal Revenue Code, and Strategist
Fund and Multi-Sector Fund each will be "a party to a reorganization"
within the meaning of Section 368(b) of the Internal Revenue Code;
8.6.2 Strategist Fund's shareholders will recognize no gain or loss upon
the constructive exchange of all of their shares of Strategist Fund
solely for shares of Multi-Sector Fund in complete liquidation of
Strategist Fund;
8.6.3 No gain or loss will be recognized to Strategist Fund upon the
transfer of its assets to Multi-Sector Fund in exchange solely for
shares of Multi-Sector Fund and the assumption by Multi-Sector Fund
of Strategist Fund's liabilities, if any, and the subsequent
distribution of those shares to Strategist Fund shareholders in
complete liquidation of Strategist Fund;
8.6.4 No gain or loss will be recognized to Multi-Sector Fund upon the
acquisition of Strategist Fund's assets in exchange solely for shares
of Multi-Sector Fund and the assumption of Strategist Fund's
liabilities, if any;
8.6.5 Multi-Sector Fund's basis for those assets will be the same as the
basis thereof when held by Strategist Fund immediately before the
transfer, and the holding period of such assets acquired by
Multi-Sector Fund will include the holding period thereof when held
by Strategist Fund;
8.6.6 The Strategist Fund shareholders' basis for the shares of
Multi-Sector Fund to be received by them pursuant to the
reorganization will be the same as their basis for the shares of
Strategist Fund to be constructively surrendered in exchange thereof;
and
B-11
<PAGE>
8.6.7 The holding period of Multi-Sector Fund shares to be received by
Strategist Fund shareholders will include the period during which
Strategist Fund shares to be constructively surrendered in exchange
therefor were held; provided such Strategist Fund shares were held as
capital assets by those shareholders on the date of the exchange.
9. Finder's Fees and Expenses
9.1 Each Fund represents and warrants to the other that there are no finder's
fees payable in connection with the transactions provided for herein.
9.2 The expenses incurred in connection with the entering into and carrying out
of the provisions of this Agreement shall be allocated to the Funds pro rata in
a fair and equitable manner in proportion to their respective assets.
10. Entire Agreement; Survival of Warranties
10.1 This Agreement constitutes the entire agreement between the Funds.
10.2 The representations, warranties and covenants contained in this Agreement
or in any document delivered pursuant hereto or in connection herewith shall
survive the consummation of the transactions contemplated hereunder.
11. Termination
Either Fund may at its option terminate this Agreement at or prior to the
Closing Date because of:
11.1 A material breach by the other of any representation, warranty or covenant
contained herein to be performed at or prior to the Closing Date; or
11.2 A condition herein expressed to be precedent to the obligations of either
party not having been met and it reasonably appearing that it will not or cannot
be met; or
11.3 A mutual written agreement of Strategist Fund and Multi-Sector Fund.
In the event of any such termination, there shall be no liability for
damages on the part of either Fund (other than the liability of the Funds to pay
their allocated expenses pursuant to paragraph 9.2) or any Director or officer
of Multi-Sector Fund or Strategist Fund.
12. Amendment
This Agreement may be amended, modified or supplemented only in writing by
the parties; provided, however, that following the shareholders' meeting called
by Strategist Fund pursuant to paragraph 5.2, no such amendment may have the
effect of changing the provisions for determining the number of shares of
Multi-Sector Fund to be distributed to Strategist Fund shareholders under this
Agreement to the detriment of such shareholders without their further approval.
13. Notices
Any notice, report, demand or other communication required or permitted by
any provision of this Agreement shall be in writing and shall be given by hand
delivery, or prepaid certified mail or overnight service addressed to Prudential
Mutual Fund Management, Inc., One Seaport Plaza, New York, New York 10292,
Attention: S. Jane Rose.
14. Headings; Counterparts; Governing Law; Assignment
14.1 The paragraph headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
B-12
<PAGE>
14.2 This Agreement may be executed in any number of counterparts, each of which
will be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance with the
laws of the State of New York.
14.4 This Agreement shall bind and inure to the benefit of the parties and their
respective successors and assigns, and no assignment or transfer hereof or of
any rights or obligations hereunder shall be made by either party without the
written consent of the other party. Nothing herein expressed or implied is
intended or shall be construed to confer upon or give any person, firm or
corporation other than the parties and their respective successors and assigns
any rights or remedies under or by reason of this Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by the President or Vice President of each Fund.
Prudential Strategist Fund, Inc.
By /s/ Robert F. Gunia
-----------------------
Vice President
Prudential Multi-Sector Fund, Inc.
By /s/ Robert F. Gunia
-------------------
Vice President
B-13
<PAGE>
TABLE OF CONTENTS
Page
SYNOPSIS ................................................................... 2
General ................................................................ 2
The Proposed Reorganization and Liquidation ............................ 2
Reasons for the Proposed Reorganization and Liquidation ................ 3
Certain Differences Between Multi-Sector Fund and Strategist Fund ...... 4
Structure of Multi-Sector Fund and Strategist Fund ..................... 5
Investment Objectives and Policies ..................................... 6
Fees and Expenses ...................................................... 6
Management Fees ...................................................... 6
Distribution Fees .................................................... 7
Other Expenses ....................................................... 8
Expense Ratios ....................................................... 8
Purchases and Redemptions .............................................. 9
Exchange Privileges .................................................... 9
Dividends and Distributions ............................................ 10
Federal Tax Consequences of Proposed Reorganization .................... 10
PRINCIPAL RISK FACTORS ..................................................... 10
Multi-Sector Fund Has Registered as a Non-Diversified Management
Investment Company ................................................... 10
High Yield Securities .................................................. 10
Foreign Investments .................................................... 11
Hedging and Income Enhancement Activities .............................. 11
Borrowing .............................................................. 11
Realignment of Investment Portfolio .................................... 12
THE PROPOSED TRANSACTION ................................................... 12
Agreement and Plan of Reorganization and Liquidation.................... 12
Reasons for the Reorganization and Liquidation ......................... 13
Description of Securities to be Issued ................................. 14
Tax Considerations ..................................................... 14
Certain Comparative Information About the Funds ........................ 14
Capitalization ....................................................... 14
Shareholder Meetings and Voting Rights ............................... 14
Shareholder Liability ................................................ 15
Liability and Indemnification of Directors ........................... 15
Pro Forma Capitalization and Ratios .................................. 15
INFORMATION ABOUT MULTI-SECTOR FUND ........................................ 16
INFORMATION ABOUT STRATEGIST FUND .......................................... 18
VOTING INFORMATION ......................................................... 19
OTHER MATTERS .............................................................. 20
SHAREHOLDERS' PROPOSALS .................................................... 20
APPENDIX A-Performance Overview ............................................ A-1
APPENDIX B-Agreement and Plan of Reorganization and Liquidation ............ B-1
TABLE OF CONTENTS
ENCLOSURES
Prospectus of Prudential Multi-Sector Fund, Inc. dated August 1, 1994,
including a January 6, 1995 Supplement thereto.
Annual Report of Prudential Strategist Fund, Inc. for the fiscal year ended
February 28, 1995.
<PAGE>
<TABLE>
<S> <C> <C>
Prudential Strategist PROXY This Proxy is Solicited on Behalf of the Board of Directors
Fund, Inc. The undersigned hereby appoints S. Jane Rose, Deborah A. Docs and Eugene S. Stark as
One Seaport Plaza Proxies, each with the power of substitution, and hereby authorizes each of them to
New York, New York 10292 represent and to vote, as designated below, all the shares of common stock of the Pru-
dential Strategist Fund, Inc. held of record by the undersigned on April 7, 1995 at the
Special Meeting of Shareholders to be held on June 9, 1995, or any adjournment thereof.
</TABLE>
1. Approval or disapproval of the Agreement and Plan of Reorganization
and Liquidation
[ ] APPROVE
[ ] DISAPPROVE
[ ] ABSTAIN
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the Meeting.
(over)
(Continued from other side)
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY, USING THE ENCLOSED
ENVELOPE.
This proxy when executed will be voted in the manner described herein by
the undersigned shareholder. If executed and no direction is made, this proxy
will be voted FOR Proposal 1.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign.
When signing as attorney, executor, administrator,
trustee or guardian, please give full title as
such. If a corporation, please sign in full
corporate name by president or other authorized
officer. If a partnership, please sign in
partnership name by authorized person.
Dated ___________________________________________, 1995
-------------------------------------------------------
Signature
-------------------------------------------------------
Signature if held jointly
<PAGE>
<TABLE>
<S> <C>
|
| Many shareholders think their votes are not important.
|
| On the contrary, they are vital.
|
Prudential Strategist | The Special Meeting on June 9, 1995 will have to be adjourned without conducting any busi-
Fund, Inc. | ness if less than a majority of the eligible shares are represented.
Needs |
Your Proxy Vote | And the Fund, at shareholders' expense, will have to continue to solicit votes until
Before | a quorum is obtained.
June 9, 1995 |
| Your vote, then, could be critical in allowing the Fund to hold the meeting as scheduled.
|
| So please return your proxy card as soon as possible.
|
| All shareholders will benefit from your cooperation.
|
| Thank you.
</TABLE>
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
dated April 27, 1995
ACQUISITION OF ASSETS OF
PRUDENTIAL STRATEGIST FUND, INC.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(800) 225-1852
---------------
By and in Exchange for the Shares of
PRUDENTIAL MULTI-SECTOR FUND, INC.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(800) 225-1852
This Statement of Additional Information, relating specifically to the
proposed transfer of all the assets and the assumption of all the liabilities,
if any, of Prudential Strategist Fund, Inc. (the Acquired Fund) by Prudential
Multi-Sector Fund, Inc. (the Acquiring Fund) consists of this cover page, the
following page which supplements Multi-Sector Fund's Statement of Additional
Information dated August 1, 1994, the attached pro forma financial statements
and the following described documents, each of which is attached hereto and
incorporated herein by reference.
1. The Statement of Additional Information of the Acquiring Fund dated
August 1, 1994.
2. The Semi-Annual Report to Shareholders of the Acquiring Fund for the
six-months period ended October 31, 1994.
3. The Annual Report to Shareholders of the Acquired Fund for the fiscal
year ended February 28, 1995.
The Statement of Additional Information is not a prospectus. A Prospectus
and Proxy Statement dated April 27, 1995 relating to the above referenced matter
may be obtained from the Acquiring Fund without charge by writing or calling
Prudential Multi-Sector Fund, Inc. at the address or telephone number listed
above. This Statement of Additional Information relates to, and should be read
in conjunction with, the Prospectus and Proxy Statement.
1
<PAGE>
The following information supplements the Prudential Multi-Sector Fund, Inc.
Statement of Additional Information dated August 1, 1994. It responds to Item 14
of Form N-1A, which was amended effective January 23, 1995.
The following table sets forth the aggregate compensation paid by Prudential
Multi-Sector Fund, Inc. (Multi-Sector Fund) for the fiscal year ended April 30,
1994 to the Directors who are not affiliated with the Manager and the aggregate
compensation paid to such Directors for service on Multi-Sector Fund's Board and
the Board of any other investment companies managed by Prudential Mutual Fund
Management, Inc. (Fund Complex) for the calendar year ended December 31, 1994.
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>
Edward D. Beach, Director $7,500 None N/A $159,000(20)*
Donald D. Lennox, Director $7,500 None N/A $ 90,000(10)*
Douglas H. McCorkindale, Director $7,500 None N/A $ 60,000(7)*
Thomas T. Mooney, Director $7,500 None N/A $126,000(15)*
Louis A. Weill, III, Director $7,500 None N/A $ 97,500(12)*
- -------------
*Indicates number of funds in Fund Complex (including Multi-Sector Fund) to
which aggregate compensation relates.
</TABLE>
2
<PAGE>
FINANCIAL STATEMENTS
The following are pro forma financial statements which give effect to the
proposed transaction whereby all the assets of Prudential Strategist Fund, Inc.
will be exchanged for shares of Prudential Multi-Sector Fund, Inc. and
Prudential Multi-Sector Fund, Inc. will assume the liabilities, if any, of
Prudential Strategist Fund, Inc. Immediately thereafter, the shares of
Prudential Multi-Sector Fund, Inc. will be distributed to the shareholders of
Prudential Strategist Fund, Inc. in a total liquidation of Prudential Strategist
Fund, Inc. which will subsequently be dissolved. The following pro forma
financial statements include a pro forma Portfolio of Investments at October 31,
1994, a pro forma Statement of Assets and Liabilities at October 31, 1994, a pro
forma Statement of Operations for the six months ended October 31, 1994 and a
pro forma Statement of Operations for the year ended April 30, 1994.
Pro-Forma Financial Statements
Pro-Forma Portfolio of Investments
October 31, 1994
(unaudited)
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------- -----------------------------------------------
Prudential Prudential Prudential Prudential
Multi-Sector Strategist Multi-Sector Strategist
Fund Fund Total Fund Fund Total
---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
LONG-TERM INVESTMENTS-90.4%
Common Stocks-86.2%
Auto Sector-1.3%
25,000 25,000 APS Holding Corp. ..................... $ 737,500 $ 737,500
20,000 20,000 Federal-Mogul Corp. ................... 455,000 455,000
485,000 485,000 Fiat Spa (Italy) ...................... $ 1,976,008 1,976,008
29,200 29,200 Ford Motor Co. ........................ 861,400 861,400
56,300 56,300 Hayes Wheels International, Inc. ...... 1,323,050 1,323,050
------------ ------------- ------------
2,837,408 2,515,550 5,352,958
------------ ------------- ------------
Basic Industry Sector-15.9%
55,800 55,800 Akzo N V (ADR) (Netherlands) ........... 3,494,475 3,494,475
10,700 10,700 BASF AG (Germany) ...................... 2,258,869 2,258,869
70,000 70,000 Bowater, Inc. .......................... 1,890,000 1,890,000
40,000 40,000 Burlington Northern, Inc. .............. 1,995,000 1,995,000
80,000 80,000 Caterpillar, Inc. ...................... 4,780,000 4,780,000
35,000 35,000 Cementos Paz Delaware Rio Spa
(ADR) (Luxembourg) .................... 866,250 866,250
40,000 40,000 Clark Equipment Co. .................... 2,805,000 2,805,000
90,000 90,000 Dow Chemical Co. ....................... 6,615,000 6,615,000
40,000 40,000 Du Pont (E.I.) de Nemours & Co. ........ 2,385,000 2,385,000
40,000 40,000 General Electric Co. ................... 1,955,000 1,955,000
40,000 40,000 Georgia Gulf Corp. ..................... 1,550,000 1,550,000
30,000 30,000 Giddings & Lewis, Inc. ................. 465,000 465,000
145,000 145,000 Hanson PLC (ADR)
(United Kingdom) ...................... 2,700,625 2,700,625
150,000 150,000 Hylsamex (ADR) (Mexico) ................ 3,318,750 3,318,750
8,000 8,000 IO Data Device, Inc. (Japan) ........... 338,637 338,637
35,000 35,000 Illinois Tool Works, Inc. .............. 1,570,625 1,570,625
58,200 58,200 Imperial Chemical Ind. (ADR)
(United Kingdom) ...................... 3,026,400 3,026,400
131,100 131,100 Kymmene Oy (Finland) ................... 3,575,067 3,575,067
85,000 85,000 Om Group, Inc. ......................... 1,700,000 1,700,000
77,600 77,600 Praxair, Inc. .......................... 1,794,500 1,794,500
90,000 90,000 Stewart & Stevenson
Services, Inc. ........................ 3,465,000 3,465,000
</TABLE>
3
<PAGE>
Pro-Forma Financial Statements
Pro-Forma Portfolio of Investments
October 31, 1994
(unaudited)
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------- -----------------------------------------------
Prudential Prudential Prudential Prudential
Multi-Sector Strategist Multi-Sector Strategist
Fund Fund Total Fund Fund Total
---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Basic Industry Sector (continued)
80,000 80,000 TJ International, Inc. ................. $ 1,440,000 $ 1,440,000
55,000 55,000 Union Carbide Corp. .................... $ 1,821,875 1,821,875
175,000 175,000 Varity Corp. ........................... 6,693,750 6,693,750
20,000 20,000 York International Corp. ............... 780,000 780,000
------------ ------------ ------------
28,463,573 34,821,250 63,284,823
------------ ------------ ------------
Business Services Sector-0.6%
5,000 5,000 Computer Sciences Corp. ................ 233,425 233,425
20,000 20,000 Xerox Corp. ............................ 2,050,000 2,050,000
------------- ------------
2,283,425 2,283,425
Consumer Goods & Services Sector-5.4%
100,000 100,000 Au Bon Pain Co., Inc. .................. 1,950,000 1,950,000
34,000 34,000 Aviall, Inc. ........................... 340,000 340,000
50,000 50,000 Federal Express Corp. .................. 3,037,500 3,037,500
50,000 50,000 McDonald's Corp. ....................... 1,437,500 1,437,500
47,000 47,000 Nissen Co., Ltd. (Japan) ............... 1,916,886 1,916,886
60,000 60,000 Philip Morris Companies, Inc. .......... 3,675,000 3,675,000
40,000 40,000 Temple Inland, Inc. .................... 1,890,000 1,890,000
50,000 50,000 The Coca-Cola Co. ...................... 2,512,500 2,512,500
65,000 65,000 The Gillette Company ................... 4,834,375 4,834,375
------------ ------------- ------------
9,134,386 12,459,375 21,593,761
------------ ------------- ------------
Defense & Aerospace Sector-0.3%
30,000 30,000 Boeing Co. ............................. 1,316,250 1,316,250
------------- ------------
Energy Sector-19.1%
43,700 43,700 Aquilla Gas Pipeline Corp. ............. 333,213 333,213
205,000 205,000 Baker Hughes, Inc. ..................... 4,202,500 4,202,500
70,000 70,000 British Petroleum Co. .................. 5,950,000 5,950,000
97,000 97,000 Cabre Exploration, Ltd. (Canada) ....... 824,799 824,799
100,000 100,000 Chestar Energy, Inc. ................... 1,229,251 1,229,251
65,000 65,000 Chevron Corp. .......................... 2,925,000 2,925,000
43,700 43,700 Cross Timbers Oil Co. .................. 699,200 699,200
258,500 258,500 Discovery West Corp. (Canada) .......... 1,051,240 1,051,240
184,300 184,300 Ensign Resource Service
Group, Inc. .......................... 640,475 640,475
</TABLE>
4
<PAGE>
Pro-Forma Financial Statements
Pro-Forma Portfolio of Investments
October 31, 1994
(unaudited)
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------- -----------------------------------------------
Prudential Prudential Prudential Prudential
Multi-Sector Strategist Multi-Sector Strategist
Fund Fund Total Fund Fund Total
---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
58,200 58,200 Enterprise Oil PLC (ADR)
(United Kingdom) ..................... $ 1,091,250 $ 1,091,250
79,000 79,000 Exxon Corp. ............................ 4,967,125 4,967,125
250,000 250,000 Global Marine, Inc. .................... 1,187,500 1,187,500
500,000 500,000 Mesa, Inc. ............................. 2,562,500 2,562,500
97,000 97,000 Morrison Petroleum, Ltd. (Canada) ...... 645,495 645,495
83,400 83,400 Oryx Energy Co. ........................ 1,209,300 1,209,300
55,000 90,000 145,000 Phillips Petroleum Co. ................. 2,028,125 $ 3,318,750 5,346,875
145,600 145,600 Rigel Energy Corp. ..................... 2,013,149 2,013,149
225,000 225,000 Rollins Environmental Services,
Inc. ................................. 1,321,875 1,321,875
301,000 301,000 Rowan Cos., Inc. ....................... 2,295,125 2,295,125
45,000 45,000 Royal Dutch Petroleum Co. .............. 5,242,500 5,242,500
150,000 150,000 Santa Fe Pacific Gold Corp. ............ 2,156,250 2,156,250
55,000 55,000 Shell Transport & Trading Co., PLC
(United Kingdom) ..................... 3,925,625 3,925,625
90,000 59,100 149,100 Societe Nationale Elf Aquitaine
(ADR) (France) ....................... 3,296,250 2,164,537 5,460,787
183,000 183,000 Sonat Offshore Drilling, Inc. .......... 3,637,125 3,637,125
121,300 121,300 Talisman Energy, Inc. (Canada) ......... 2,578,561 2,578,561
50,000 50,000 Texaco, Inc. ........................... 3,268,750 3,268,750
75,000 75,000 Total SA (ADR) (France) ................ 2,475,000 2,475,000
53,400 53,400 Trident Holding, Inc. .................. 567,375 567,375
116,500 116,500 USX-Delhi Group ........................ 1,412,563 1,412,563
155,000 155,000 USX-Marathon Group ..................... 2,906,250 2,906,250
100,000 100,000 YPF Sociedad Anonima (ADR)
(Argentina) .......................... 2,412,500 2,412,500
------------ ------------- ------------
47,268,996 29,270,162 76,539,158
------------ ------------- ------------
Financial Services Sector-6.4%
60,000 60,000 Banco Wiese (ADR) (Peru) ............... 1,275,000 1,275,000
110,000 110,000 Citicorp ............................... 5,252,500 5,252,500
28,700 28,700 CCP Insurance, Inc. .................... 444,850 444,850
60,000 60,000 CTL Credit, Inc. ....................... 630,000 630,000
50,000 50,000 Continental Corp. ...................... 756,250 756,250
70,000 70,000 Equitable of Iowa Cos. ................. 2,476,250 2,476,250
145,000 145,000 First Financial Management Corp. ....... 8,120,000 8,120,000
75,000 75,000 MBNA Corp. ............................. 2,006,250 2,006,250
</TABLE>
5
<PAGE>
Pro-Forma Financial Statements
Pro-Forma Portfolio of Investments
October 31, 1994
(unaudited)
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------- -----------------------------------------------
Prudential Prudential Prudential Prudential
Multi-Sector Strategist Multi-Sector Strategist
Fund Fund Total Fund Fund Total
---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Financial Services Sector (continued)
43,650 43,650 Mercantile Bancorp, Inc. ............... $ 1,516,838 $ 1,516,838
5,000 5,000 Post Properties Inc. (REIT) ............ $ 146,875 146,875
15,000 15,000 Price, Inc. (REIT) ..................... 513,750 513,750
55,000 55,000 Sun America, Inc. ...................... 2,138,125 2,138,125
------------ ------------- ------------
5,999,188 19,277,500 25,276,688
------------ ------------- ------------
Health Care Sector-0.7%
85,000 85,000 Patterson Dental Co. ................... 1,615,000 1,615,000
49,300 49,300 Physicians Corp. of America, Inc. ...... 1,189,363 1,189,363
------------ ------------- ------------
1,189,363 1,615,000 2,804,363
------------ ------------- ------------
Leisure Sector-1.2%
20,000 20,000 Hilton Hotels Corp. .................... 1,212,500 1,212,500
135,000 135,000 La Quinta Inns, Inc. ................... 3,391,875 3,391,875
------------- ------------
4,604,375 4,604,375
------------- ------------
Natural Resources Sector-1.4%
29,100 10,000 39,100 International Paper Co. ................ 2,167,950 745,000 2,912,950
40,000 40,000 Scott Paper Co. ........................ 2,645,000 2,645,000
------------ ------------- ------------
2,167,950 3,390,000 5,557,950
------------ ------------- ------------
Precious Metals Sector-2.3%
190,000 65,000 255,000 Potash Corp. of
Saskatchewan Inc. (Canada) ........... 6,721,250 2,299,375 9,020,625
------------ ------------- ------------
Public Utilities Sector-1.1%
68,500 68,500 Entergy Corp. .......................... 1,601,187 1,601,187
50,000 50,000 Telefonos de Mexico
(ADR) (Mexico) ....................... 2,756,250 2,756,250
------------ ------------
4,357,437 4,357,437
------------ ------------
Retailing Sector-1.2%
45,000 45,000 Burlington Coat
Factory Warehouse .................... 585,000 585,000
225,000 225,000 Consolidated Stores Corp. .............. 4,078,125 4,078,125
------------ ------------
4,663,125 4,663,125
------------ ------------
Technology Sector-20.8%
118,000 118,000 Adaptec, Inc. .......................... 2,743,500 2,743,500
46,000 46,000 Aspen Technology, Inc. ................. 782,000 782,000
200,000 200,000 Autodesk, Inc. ......................... 6,900,000 6,900,000
</TABLE>
6
<PAGE>
Pro-Forma Financial Statements
Pro-Forma Portfolio of Investments
October 31, 1994
(unaudited)
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------- -----------------------------------------------
Prudential Prudential Prudential Prudential
Multi-Sector Strategist Multi-Sector Strategist
Fund Fund Total Fund Fund Total
---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Technology Sector (continued)
60,000 60,000 Cheyenne Software, Inc. ................ $ 667,500 $ 667,500
100,000 100,000 Cirrus Logic Corp. ..................... 2,875,000 2,875,000
200,000 200,000 Cisco Systems, Inc. .................... 6,025,000 6,025,000
85,000 5,000 90,000 Compaq Computer Corp. .................. 3,410,625 $ 206,550 3,617,175
150,000 150,000 Computer Associates Int'l, Inc. ........ 7,443,750 7,443,750
90,000 90,000 Cyrix Corp. ............................ 3,735,000 3,735,000
125,000 125,000 Electronic Arts, Inc. .................. 2,812,500 2,812,500
40,000 40,000 Hewlett-Packard Co. .................... 3,910,000 3,910,000
50,000 40,000 90,000 Informix Corp. ......................... 1,375,000 1,100,000 2,475,000
40,000 40,000 International Business Machines
Corp. ................................ 2,980,000 2,980,000
65,000 65,000 Loral Corp. ............................ 2,575,625 2,575,625
20,000 20,000 Lotus Development Corp. ................ 765,000 765,000
20,000 20,000 40,000 Motorola, Inc. ......................... 1,177,500 1,177,500 2,355,000
63,800 63,800 Murata Manufacturing Co., Ltd.
(Japan) .............................. 2,602,070 2,602,070
127,500 127,500 National Semiconductors Corp. .......... 2,247,187 2,247,187
200,000 200,000 Nextel Communications, Inc. ............ 4,187,500 4,187,500
40,700 40,700 Reliance Electric Company .............. 1,210,825 1,210,825
140,000 140,000 Seagate Technology Inc. ................ 3,552,500 3,552,500
20,000 20,000 Sensormatic Electronics Corp. .......... 752,500 752,500
155,000 30,000 185,000 Silicon Graphics, Inc. ................. 4,708,125 911,250 5,619,375
68,500 68,500 Stratus Computer, Inc. ................. 2,551,625 2,551,625
45,500 45,500 Ultimate Electronics, Inc. ............. 511,875 511,875
110,000 110,000 Verifone, Inc. ......................... 2,475,000 2,475,000
60,000 60,000 Vishay Intertechnology, Inc. ........... 2,947,500 2,947,500
50,000 50,000 WMX Technologies, Inc. ................. 1,468,750 1,468,750
------------ ------------- ------------
48,323,507 34,465,250 82,788,757
------------ ------------- ------------
Transportation Sector-8.5%
13,600 13,600 American President Cos., Ltd. .......... 329,800 329,800
40,000 40,000 Anangel--American Shipholdings Ltd.
(ADR) ................................ 625,000 625,000
19,400 19,400 British Airways PLC (ADR)
(United Kingdom) ..................... 1,134,900 1,134,900
230,000 70,000 300,000 Canadian Pacific, Ltd. (Canada) ........ 3,680,000 1,120,000 4,800,000
116,300 116,300 Carolina Freight Corp. ................. 1,177,538 1,177,538
</TABLE>
7
<PAGE>
Pro-Forma Financial Statements
Pro-Forma Portfolio of Investments
October 31, 1994
(unaudited)
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------- -----------------------------------------------
Prudential Prudential Prudential Prudential
Multi-Sector Strategist Multi-Sector Strategist
Fund Fund Total Fund Fund Total
---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Transportation Sector (continued)
40,000 40,000 Celadon Group, Inc. .................... $ 740,000 $ 740,000
110,000 110,000 CSX Corp. .............................. 7,975,000 7,975,000
60,000 60,000 Harper Group, Inc. ..................... 795,000 795,000
50,000 50,000 Kansas City Southern Inds., Inc. ....... $ 1,687,500 1,687,500
72,800 72,800 KLM Royal Dutch Airlines Corp. ......... 2,020,200 2,020,200
238,000 238,000 Methanex Corp. (Canada) ................ 3,563,533 3,563,533
300,000 300,000 OMI Corp. .............................. 1,950,000 1,950,000
78,100 78,100 Overseas Shipholding Group, Inc. ....... 1,845,113 1,845,113
146,000 146,000 Singapore Airlines, Ltd.
(Singapore) .......................... 1,400,075 1,400,075
20,000 20,000 Union Pacific Corp. .................... 977,500 977,500
55,000 55,000 XTRA Corp. ............................. 2,805,000 2,805,000
------------ ------------- ------------
14,663,746 19,162,413 33,826,159
------------ ------------- ------------
Total common stocks
(cost $311,126,355) .................. 175,789,929 167,479,925 343,269,854
------------ ------------- ------------
Convertible Preferred Stocks-2.7%
Basic Industry Sector-1.4%
24,833 24,833 Alumax, Inc. ........................... 3,187,936 3,187,936
25,000 25,000 Bethlehem Steel Corp. .................. 1,343,750 1,343,750
19,067 19,067 Cyprus Amax Minerals Co. ............... 1,194,071 1,194,071
------------ ------------
5,725,757 5,727,757
------------ ------------
Technology Sector-1.3%
34,000 34,000 Nokia Corp. (Finland) .................. 5,114,165 5,114,165
------------ ------------
Total preferred stocks
(cost $5,732,340) .................... 10,839,922 10,839,922
------------ ------------
Warrants
- ------------------------------------------
Warrants-0.2%
Retailing Sector
200 200 Autobacs Seven Co. (Japan)
expiring Mar. '96 @ Y8,231
(cost $739,375) ...................... 807,500 807,500
------------ ------------
</TABLE>
8
<PAGE>
Pro-Forma Financial Statements
Pro-Forma Portfolio of Investments
October 31, 1994
(unaudited)
<TABLE>
<CAPTION>
Principal Amount (000) Value
- --------------------------------------- -----------------------------------------------
Prudential Prudential Prudential Prudential
Multi-Sector Strategist Multi-Sector Strategist
Fund Fund Total Fund Fund Total
---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Foreign Government Bond-0.8%
$ 4,724 $ 4,724 Federal Republic of Germany Bond,
8.00%, 3/20/97
(cost $3,262,585) .................... $ 3,229,936 $ 3,229,936
------------ ------------
Convertible Bond-0.5%
Basic Industry Sector-0.5%
2,000 $ 2,000 IMC Fertilizer Group, Inc.,
Conv. Sub. Deb., 6.25%, 12/1/01
(cost $1,779,135) .................... $ 1,850,000 1,850,000
------------- ------------
Total long-term investments
(cost $322,639,790) .................. 190,667,287 169,329,925 359,997,212
------------ ------------- ------------
SHORT-TERM INVESTMENTS-6.2%
Business Services Center-1.7%
6,800 6,800 Koch Industries, 4.64%, 11/1/94
(cost $6,800,000) .................... 6,800,000 6,800,000
------------- ------------
U.S. Government Securities-1.0%
U.S. Treasury Bills,
1,000 1,000 4.54%, 11/25/94 ...................... 996,973 996,973
2,000 2,000 4.525%, 12/8/94 ...................... 1,990,699 1,990,699
1,000 1,000 4.56%, 12/15/94 ...................... 994,427 994,427
------------ ------------
Total U.S. Government securities
(cost $3,982,099) .................... 3,982,099 3,982,099
------------ ------------
Repurchase Agreement-3.5%
13,892 13,892 Joint Repurchase Agreement
Account, 4.77%, 11/1/94
(cost $13,892,000) ................... 13,892,000 13,892,000
------------ ------------
Total short-term investments
(cost $24,674,099) ................... 17,874,099 6,800,000 24,674,099
------------ ------------- ------------
Total Investments Before Common
Stocks Sold Short-96.6%
(cost $347,313,889) .................. 208,541,386 176,129,925 384,671,311
------------ ------------- ------------
</TABLE>
9
<PAGE>
Pro-Forma Financial Statements
Pro-Forma Portfolio of Investments
October 31, 1994
(unaudited)
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------- -----------------------------------------------
Prudential Prudential Prudential Prudential
Multi-Sector Strategist Multi-Sector Strategist
Fund Fund Total Fund Fund Total
---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCKS SOLD SHORT-(1.7)%
Retailing Sector-(1.2)%
25,000 25,000 Ann Taylor Stores, Inc. ................ $ (1,037,500) $ (1,037,500)
50,000 50,000 Cracker Barrel Old Country, Inc. ....... (1,100,000) (1,100,000)
50,000 50,000 Sports and Recreation, Inc. ............ (1,836,250) (1,836,250)
38,000 38,000 Starbucks Corp. ........................ (1,030,750) (1,030,750)
------------ ------------
(5,004,500) (5,004,500)
------------ ------------
Technology Sector-(0.5)%
40,000 40,000 Biogen, Inc. ........................... (1,960,000) (1,960,000)
------------ ------------
Total common stocks sold short
(proceeds $6,595,189) ................ (6,964,500) (6,964,500)
------------ ------------
Total investments, net of
short sales-94.9% .................... 201,576,886 $176,129,925 377,706,811
Other assets in excess of
other liabilities-5.1% ............... 16,502,566 3,873,230 20,375,796
------------ ------------- ------------
Net Assets-100% ........................ $218,079,452 $180,003,155 $398,082,607
============ ============ ============
<FN>
- -----------
ADR -American Depository Receipt.
REIT-Real Estate Investment Trust.
</FN>
</TABLE>
10
<PAGE>
Pro-Forma Statement of Assets and Liabilities
October 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
Prudential Prudential
Multi-Sector Strategist Pro-Forma
Fund Fund Combined
------------ ------------ ------------
<S> <C> <C> <C>
Assets
Investments, at value (cost $187,754,108; $159,559,781 and
$347,313,889, respectively) .................................. $208,541,386 $176,129,925 $384,671,311
Foreign currency, at value (cost $17,189,280) .................. 17,995,719 17,995,719
Cash ........................................................... 2,696 1,894,537 1,897,233
Deposits with broker for investments sold short ................ 6,595,189 6,595,189
Receivable for Fund shares sold ................................ 2,270,386 58,342 2,328,728
Dividends and interest receivable .............................. 299,871 221,582 521,453
Receivable for investments sold ................................ 98,750 13,829,514 13,928,264
Deferred expenses and other assets ............................. 31,916 106,430 138,346
------------ ------------ ------------
Total assets ................................................. 235,835,913 192,240,330 428,076,243
------------ ------------ ------------
Liabilities
Investments sold short, at value (proceeds $6,595,189) ......... 6,964,500 6,964,500
Payable for investments purchased .............................. 6,055,835 11,253,880 17,309,715
Payable for Fund shares reacquired ............................. 3,532,307 399,183 3,931,490
Forward contracts-amounts payable to counterparties ............ 803,161 803,161
Accrued expenses ............................................... 149,242 342,504 491,746
Distribution fee payable ....................................... 138,280 147,430 285,710
Management fee payable ......................................... 113,136 94,178 207,314
------------ ------------ ------------
Total liabilities ............................................ 17,756,461 12,237,175 29,993,636
------------ ------------ ------------
Net Assets ..................................................... $218,079,452 $180,003,155 $398,082,607
============ ============ ============
Net assets were comprised of:
Common stock, at par ........................................... $ 15,893 $ 130,634 $ 29,038
Paid-in capital in excess of par ............................... 189,051,584 164,298,326 353,467,399
------------ ------------ ------------
189,067,477 164,428,960 353,496,437
Overdistributed net investment income .......................... (494,830) (819,247) (1,314,077)
Accumulated net realized capital and currency gains (losses) ... 9,082,702 (176,708) 8,905,994
Net unrealized appreciation on investments and foreign currencies 20,424,103 16,570,150 36,994,253
------------ ------------ ------------
Net assets, October 31, 1994 ................................... $218,079,452 $180,003,155 $398,082,607
============ ============ ============
Class A:
Net asset value and redemption price per share ............... $13.80 $13.96 $13.80
Maximum sales charge (5.00% of offering price) ............... .73 .73 .73
------ ------ ------
Maximum offering price to public ............................. $14.53 $14.69 $14.53
====== ====== ======
Class B:
Net asset value, offering price and redemption price per share $13.69 $13.77 $13.69
====== ====== ======
Class C:
Net asset value, offering price and redemption price per share $13.69 $13.77 $13.69
====== ====== ======
</TABLE>
11
<PAGE>
Pro-Forma Statement of Operations
Six Months Ended October 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
Prudential Prudential
Multi-Sector Strategist Pro-Forma Pro-Forma
Fund Fund Adjustments Combined
----------- ------------ -------- -----------
<S> <C> <C> <C> <C>
Net Investment Income
Income
Dividends ..................................... $ 1,059,467 $ 1,541,465 $ 2,600,932
Interest ...................................... 399,215 748,743 1,147,958
----------- ------------ -----------
Total income ................................ 1,458,682 2,290,208 3,748,890
----------- ------------ -----------
Expenses
Management fee ................................ 617,489 568,000 $ (23,750)(a) 1,161,739
Distribution fee-Class A ...................... 67,498 5,423 72,921
Distribution fee-Class B ...................... 679,410 887,057 1,566,467
Distribution fee-Class C ...................... 581 51 632
Custodian's fees and expenses ................. 120,000 92,000 (40,000)(b) 172,000
Transfer agent's fees and expenses ............ 115,000 230,000 345,000
Reports to shareholders ....................... 59,000 81,000 (30,000)(b) 110,000
Amortization of organization expense .......... 22,000 22,000
Registration fees ............................. 20,000 1,000 21,000
Directors' fees ............................... 19,000 19,000 (19,000)(b) 19,000
Audit fee ..................................... 15,000 28,000 (23,000)(b) 20,000
Legal fees .................................... 14,000 16,000 (16,000)(b) 14,000
Miscellaneous ................................. 3,177 33,272 (30,000)(b) 6,449
----------- ------------ -------- -----------
Total expenses .............................. 1,752,155 1,960,803 (181,750) 3,531,208
----------- ------------ -------- -----------
Net investment income (loss) .................... (293,473) 329,405 181,750 217,682
----------- ------------ -------- -----------
Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency
Transactions
Net realized gain (loss) ........................ 9,070,992 (33,207,568) (24,136,576)
Net change in unrealized appreciation ........... 9,815,458 8,861,002 18,676,460
----------- ------------ -----------
Net gain (loss) on investments and foreign
currency transactions ......................... 18,886,450 (24,346,566) (5,460,116)
----------- ------------ -----------
Net Increase (Decrease) in Net Assets
Resulting from Operations ....................... $18,592,977 $(24,017,161) $181,750 $(5,242,434)
=========== ============ ======== ===========
<FN>
(a) Adjustment to reflect voluntary reduction in management fees of Prudential Multi-Sector Fund.
(b) Adjustment to reflect elimination of duplicitive expenses.
</FN>
</TABLE>
12
<PAGE>
Pro-Forma Statement of Operations
Year Ended April 30, 1994
(Unaudited)
<TABLE>
<CAPTION>
Prudential Prudential
Multi-Sector Strategist Pro-Forma Pro-Forma
Fund Fund Adjustments Combined
----------- ------------ -------- -----------
<S> <C> <C> <C> <C>
Net Investment Income
Income
Dividends ..................................... $ 3,353,985 $ 2,678,169 $ 6,032,154
Interest....................................... 515,264 468,400 983,664
----------- ------------ -----------
Total income ................................ 3,869,249 3,146,569 7,015,818
----------- ------------ -----------
Expenses
Management fee ................................ 1,032,341 1,342,175 $(39,705)(a) 2,334,811
Distribution fee-Class A ...................... 108,720 8,910 117,630
Distribution fee-Class B ...................... 1,089,811 2,106,385 3,196,196
Transfer agent's fees and expenses ............ 225,000 532,000 757,000
Custodian's fees and expenses ................. 214,000 193,000 (80,000)(b) 327,000
Registration fees ............................. 59,500 102,000 161,500
Amortization of organization expense .......... 45,000 45,000
Reports to shareholders ....................... 45,000 72,000 117,000
Directors' fees ............................... 37,500 51,000 (51,000)(b) 37,500
Audit fee ..................................... 30,000 54,000 (44,000)(b) 40,000
Legal fees and expenses ....................... 16,000 40,000 (40,000)(b) 16,000
Miscellaneous ................................. 9,684 47,859 (40,000)(b) 17,543
----------- ------------ -------- -----------
Total expenses .............................. 2,912,556 4,549,329 (294,705) 7,167,180
----------- ------------ -------- -----------
Net investment income (loss)..................... 956,693 (1,402,760) 294,705 (151,362)
----------- ------------ -------- -----------
Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency
Transactions
Net realized gain ............................... 22,140,711 4,083,096 26,223,807
Net change in unrealized appreciation ........... (5,325,410) (18,201,059) (23,526,469)
----------- ------------ -----------
Net gain (loss) on investments and
foreign currency transactions ................. 16,815,301 (14,117,963) 2,697,338
----------- ------------ -----------
Net Increase (Decrease) in Net Assets
Resulting from Operations ....................... $17,771,994 $(15,520,723) $294,705 $ 2,545,976
=========== ============ ======== ===========
- -----------
(a) Adjustment to reflect voluntary reduction in management fees of Prudential Multi-Sector Fund.
(b) Adustment to reflect elimination of duplicative expenses.
</TABLE>
13
<PAGE>
Notes to Pro-Forma Financial Statements
The Fund is registered under the Investment Company Act of 1940 as a
non-diversified, open-end management investment company. The Fund was
incorporated in Maryland on February 21, 1990 and had no operations until May
11, 1990 when 4,398 shares each of Class A and Class B common stock were sold
for $100,000 to Prudential Mutual Fund Management, Inc. ("PMF"). Investment
operations commenced June 29, 1990. The Fund's investment objective is long-term
growth of capital by primarily investing in equity securities of companies in
various economic sectors.
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements.
Securities Valuation: Investments, including options, traded on a national
securities exchange and NASDAQ national market equity securities are valued at
the last reported sales price on the primary exchange on which they are traded.
Securities traded in the over-the-counter market (including securities listed on
exchanges whose primary market is believed to be over-the-counter) and listed
securities for which no sales were reported on that date are valued at the mean
between the last reported bid and asked prices. Stock, options traded on
national securities exchanges are valued at the closing prices on such
exchanges. 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 which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
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. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults, and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
Foreign Currency Translation: The books and records of the Fund are maintained
in United States dollars. Foreign currency amounts are translated into United
States dollars on the following basis:
(i) market value of investment securities, other assets and liabilities-at
the current rates of exchange.
(ii) purchases and sales of investment securities, income and expenses-at
the rates of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the year, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at year end. Similarly, the Fund does not isolate
the effect of changes in foreign exchange rates from the fluctuations arising
from changes in the market prices of long-term debt securities sold during the
year. Accordingly, realized foreign currency gains (losses) are included in the
reported net realized losses on security transactions.
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange losses from sales and maturities of short-term securities and
forward currency contracts, disposition of foreign currencies, currency gains or
losses realized between the trade and settlement dates on securities
transactions, and the difference between the amounts of interest, U.S. and
foreign taxes recorded on the Fund's books and the U.S. dollar equivalent
amounts actually received or paid. Net currency gains (losses) from valuing
foreign currency denominated assets (excluding investments) and liabilities at
year end exchange rates are reflected as a component of net unrealized
appreciation on investments and foreign currencies.
Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of U.S. companies
as a result of, among other factors, the possibility of political or economic
instability and the level of governmental supervision and regulation of foreign
securities markets.
14
<PAGE>
Forward Currency Contracts: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign portfolio
holdings or on specific receivables and payables denominated in a foreign
currency. The contracts are valued daily at current exchange rates and any
unrealized gain or loss is included in net unrealized appreciation or
depreciation on investments. Gain or loss is realized on the settlement date of
the contract equal to the difference between the settlement value of the
original and renegotiated forward contracts. This gain or loss, if any, is
included in net realized gain (loss) on foreign currency transactions. Risks may
arise upon entering into these contracts from the potential inability of the
counterparties to meet the terms of their contracts.
Options: The Fund may either purchase or write options in order to hedge against
adverse market movements or fluctuations in value caused by changes in
prevailing interest rates or foreign currency exchange rates with respect to
securities or currencies which the Fund currently owns or intends to purchase.
When the Fund purchases an option, it pays a premium and an amount equal to that
premium is recorded as an investment. When the Fund writes an option, it
receives a premium and an amount equal to that premium is recorded as a
liability. The investment or liability is adjusted daily to reflect the current
market value of the option. If an option expires unexercised, the Fund realizes
a gain or loss to the extent of the premium received or paid. If an option is
exercised, the premium received or paid is an adjustment to the proceeds from
the sale or the cost basis of the purchase in determining whether the Fund has
realized a gain or loss. The difference between the premium and the amount
received or paid on effecting a closing purchase or sale transaction is also
treated as a realized gain or loss. Gain or loss on purchased options is
included in net realized gain (loss) on investment transactions. Gain or loss on
written options is presented separately as net realized gain (loss) on written
option transactions.
The Fund, as writer of an option, has no control over whether the
underlying securities or currencies may be sold (called) or purchased (put). As
a result, the Fund bears the market risk of an unfavorable change in the price
of the security or currency underlying the written option. The Fund, as
purchaser of an option, bears the risk of the potential inability of the
counterparties to meet the terms of their contracts.
Financial Futures Contracts: A financial futures contract is an agreement
to purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Fund is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the "initial margin". Subsequent payments, known as "variation margin",
are made or received by the Fund each day, depending on the daily fluctuations
in the value of the underlying security. Such variation margin is recorded for
financial statement purposes on a daily basis as unrealized gain or loss. When
the contract expires or is closed, the gain or loss is realized and is presented
in the statement of operations as net realized gain (loss) on financial futures
contracts.
The Fund invests in financial futures contracts in order to hedge its
existing portfolio securities, or securities the Fund intends to purchase,
against fluctuations in value caused by changes in prevailing interest rates.
Should interest rates move unexpectedly, the Fund may not achieve the
anticipated benefits of the financial futures contracts and may realize a loss.
The use of futures transactions involves the risk of imperfect correlation in
movements in the price of futures contracts, interest rates and the underlying
hedged assets.
Short Sales: The Fund may sell a security it does not own in anticipation of a
decline in the market value of that security (short sale). When the Fund makes a
short sale, it must borrow the security sold short and deliver it to the
brokerdealer through which it made the short sale as collateral for its
obligation to deliver the security upon conclusion of the sale. The Fund may
have to pay a fee to borrow the particular security and may be obligated to pay
over any payments received on such borrowed securities. A gain, limited to the
price at which the Fund sold the security short, or a loss, unlimited in
magnitude, will be recognized upon the termination of a short sale if the market
price at terminaton is less than or greater than, respectively, the proceeds
originally received.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. 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.
15
<PAGE>
Equalization: The Fund follows the accounting practice known as equalization by
which a portion of the proceeds from sales and costs of reacquisitions of Fund
shares, equivalent on a per share basis to the amount of distributable net
investment income on the date of the transaction, is credited or charged to
undistributed net investment income. As a result, undistributed net investment
income per share is unaffected by sales or reacquisitions of the Fund's shares.
Dividends and Distributions: Dividends from net investment income are declared
and paid semi-annually. The Fund will distribute net capital gains, if any, at
least annually. Dividends and distributions are recorded on the ex-dividend
date.
Income distributions and capital gains distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Taxes: It is the Fund's policy to meet the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable net income to its shareholders. Therefore, no federal income tax
provision is required.
Withholding taxes on foreign dividends have been provided for in accordance
with the Fund's understanding of the applicable country's tax rules and rates.
Deferred Organizational Expenses: Approximately $225,000 of expenses were
incurred in connection with the organization and initial registration of the
Fund. This amount is being amortized over a period of 60 months from the date
investment operations commenced.
Note 2. Agreements
The Fund has a management agreement with PMF. Pursuant to this agreement,
PMF has responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PMF has entered into a subadvisory
agreement with The Prudential Investment Corporation ("PIC"). PIC furnishes
investment advisory services in connection with the management of the Fund. PMF
pays for the services of PIC, the cost of compensation of officers of the Fund,
occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears
all other costs and expenses.
The management fee paid to PMF is computed daily and payable monthly, at an
annual rate of .625 of 1% of the average daily net assets up to $500 million,
.55 of 1% of the next $500 million of average daily net assets and .50 of 1% of
such assets in excess of $1 billion.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. ("PMFD"), which acts as the distributor of the Class A shares
of the Fund, and with Prudential Securities Incorporated ("PSI"), which acts as
distributor of the Class B and Class C shares of the Fund (collectively the
"Distributors"). The Fund compensates the Distributors 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.
On July 19, 1994, shareholders of the Fund approved amendments to the Class
A and Class B Plans under which the distribution plans became compensation
plans, effective August 1, 1994. Prior thereto, the distribution plans were
reimbursement plans under which PMFD and PSI were reimbursed for expenses
actually incurred by them up to the amount permitted under the Class A and Class
B Plans, respectively. The Fund is not obligated to pay any prior or future
excess distribution costs (costs incurred by the Distributors in excess of
distribution fees paid by the Fund and contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
Pursuant to the Class A, B and C Plans, the Fund may compensate the
Distributors 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 .25 of 1% of the
average daily net assets of Class A shares and 1% of the average daily net
assets of both the Class B and C shares for the six-month period ended October
31, 1994.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
16
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC.
Statement of Additional Information
dated August 1, 1994
Prudential Multi-Sector Fund, Inc. (the Fund) is an open-end,
non-diversified management investment company whose primary investment
objective is long-term growth of capital. The Fund seeks to achieve this
objective by focusing its investments in domestic and foreign securities,
primarily equity securities, of companies in the economic sectors described in
"Description of Economic Sectors" in the Appendix to the Prospectus. The
investment adviser expects to make significant shifts in the Fund's
investments among those sectors that the investment adviser believes may
benefit from economic, demographic or other changes in the 1990's and into the
21st century. Current income is a secondary objective. There can be no
assurance that the Fund's investment objectives will be achieved. See
"Investment Objective and Policies."
The Fund's address is One Seaport Plaza, New York, New York 10292, and
its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Fund's Prospectus, dated August 1, 1994. A
copy of the Prospectus may be obtained from the Fund upon request.
TABLE OF CONTENTS
Cross-reference
to page in
Page Prospectus
---- -------------
General Information . . . . . . . . . . . . . . . . . B-2 19
Investment Objective and Policies . . . . . . . . . . B-2 6
Investment Restrictions . . . . . . . . . . . . . . . B-10 13
Directors and Officers. . . . . . . . . . . . . . . . B-11 14
Manager . . . . . . . . . . . . . . . . . . . . . . . B-13 14
Distributor . . . . . . . . . . . . . . . . . . . . . B-15 15
Portfolio Transactions and Brokerage. . . . . . . . . B-17 16
Purchase and Redemption of Fund Shares. . . . . . . . B-18 20
Shareholder Investment Account. . . . . . . . . . . . B-21 29
Net Asset Value . . . . . . . . . . . . . . . . . . . B-24 16
Performance Information . . . . . . . . . . . . . . . B-24 17
Dividends and Distributions . . . . . . . . . . . . . B-26 17
Taxes . . . . . . . . . . . . . . . . . . . . . . . . B-26 17
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants. . . . . . . . . . . . . . . B-28 16
Financial Statements. . . . . . . . . . . . . . . . . B-29 --
Independent Auditors' Report. . . . . . . . . . . . . B-40 --
- -----------------------------------------------------------------------------
<PAGE>
GENERAL INFORMATION
At a special meeting held on September 12, 1991, the shareholders of the
Fund approved an amendment to the Articles of Incorporation to change the
Fund's name from Prudential-Bache Multi-Sector Fund, Inc. to Prudential
Multi-Sector Fund, Inc.
INVESTMENT OBJECTIVE AND POLICIES
The primary investment objective of the Fund is long-term growth of
capital. The Fund seeks to achieve this objective by focusing its investments in
domestic and foreign securities, primarily equity securities, of companies in
the economic sectors described in "Description of Economic Sectors" in the
Appendix to the Prospectus. The investment adviser expects to make significant
shifts in the Fund's investments among those sectors that the investment
adviser believes may benefit from economic, demographic or other changes in the
1990's and into the 21st century. Current income is a secondary objective.
There can be no assurance that the Fund's investment objectives will be
achieved.
Options on Equity Securities
The Fund may purchase and write (i.e., sell) call options and purchase
put options on equity securities traded on national securities exchanges or
that are listed on NASDAQ. It may also purchase and write (i.e., sell) options
and purchase put options traded in the over-the-counter market (OTC Options).
The Fund may write call options on stocks only if they are covered, and
such options must remain covered so long as the Fund is obligated as a writer.
A call option written by the Fund is "covered" if the Fund owns the security
underlying the option or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its Custodian) upon conversion
or exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds on a share-for-share basis a call on the same
security as the call written where the exercise price of the call held is
equal to or less than the exercise price of the call written or greater than
the exercise price of the call written if the difference is maintained by the
Fund in cash, Treasury Bills or other high grade, short-term debt obligations
in a segregated account with its Custodian. The premium paid by the purchaser
of an option will reflect, among other things, the relationship of the
exercise price to the market price and volatility of the underlying security,
the remaining term of the option, supply and demand and interest rates.
If the writer of an exchange-traded option wishes to terminate the
obligation, he or she may effect a "closing purchase transaction." This is
accomplished by buying an option of the same series as the option previously
written. The effect of the purchase is that the writer's position will be
cancelled by the clearing corporation. However, a writer may not effect a
closing purchase transaction after he or she has been notified of the exercise
of an option. Similarly, an investor who is the holder of an option may
liquidate his or her position by effecting a "closing sale transaction." This is
accomplished by selling an option of the same series as the option previously
purchased. There is no guarantee that either a closing purchase or a closing
sale transaction can be effected. To secure the obligation to deliver the
underlying security in the case of a call option, the writer of the option
(whether an exchange-traded option or a NASDAQ option) is required to pledge for
the benefit of the broker the underlying security or other assets in accordance
with the rules of The Options Clearing Corporation (OCC), an institution which
interposes itself between buyers and sellers of options. Technically, the OCC
assumes the other side of every purchase and sale transaction on an exchange
and, by doing so, guarantees the transaction.
An exchange-traded option position may be closed out only on an exchange,
board of trade or other trading facility which provides a secondary market for
an option of the same series. Although the Fund will generally purchase or
write only those options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange or
other trading facility will exist for any particular option, or at any
particular time, and for some options no secondary market on an exchange or
otherwise may exist. In such event it might not be possible to effect closing
transactions in particular options, with the result that the Fund would have
to exercise its options in order to realize any profit and would incur
brokerage commissions upon the exercise of call options and upon the
subsequent disposition of underlying securities acquired through the exercise
of call options or upon the purchase of underlying securities for the exercise
of put options. If the Fund as a covered call option writer is unable to
effect a closing purchase transaction in a secondary market, it will not be
able to sell the underlying security until the option expires or it delivers
the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange
include the following: (i) there may be insufficient trading interest in
certain options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange or a clearing corporation may not at all times be
adequate to handle current trading
B-2
<PAGE>
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of
options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on that exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no
assurance that higher than anticipated trading activity or other unforeseen
events might not, at times, render certain of the facilities of any of the
clearing corporations inadequate, and thereby result in the institution by an
exchange of special procedures which may interfere with the timely execution
of customers' orders. However, the OCC, based on forecasts provided by the
U.S. exchanges, believes that its facilities are adequate to handle the volume
of reasonably anticipated options transactions, and such exchanges have
advised such clearing corporation that they believe their facilities will also
be adequate to handle reasonably anticipated volume.
Exchange-traded options in the United States are issued by clearing
organizations affiliated with the exchange on which the option is listed
which, in effect, gives its guarantee to every exchange-traded option
transaction. In contrast, OTC options are contracts between the Fund and its
counterparty with no clearing organization guarantee. Thus when the Fund
purchases an OTC option, it relies on the dealer from which it has purchased
the OTC option to make or take delivery of the securities underlying the
option. Failure by the dealer to do so would result in the loss of the premium
paid by the Fund as well as the loss of the expected benefit of the
transaction. The Board of Directors will evaluate the creditworthiness of any
dealer from which the Fund proposes to purchase OTC options.
Exchange-traded options generally have a continuous liquid market while
OTC options may not. Consequently, the Fund will generally be able to realize
the value of an OTC option it has purchased only by exercising it or reselling
it to the dealer who issued it. Similarly, when the Fund writes an OTC option,
it generally will be able to close out the OTC option prior to its expiration
only by entering into a closing purchase transaction with the dealer to which
the Fund originally wrote the OTC option. While the Fund will enter into OTC
options only with dealers which agree to, and which are expected to be capable
of, entering into closing transactions with the Fund, there can be no
assurance that the Fund will be able to liquidate an OTC option at a favorable
price at any time prior to expiration. Until the Fund is able to effect a
closing purchase transaction in a covered OTC call option the Fund has
written, it will not be able to liquidate securities used as cover until the
option expires or is exercised or different cover is substituted. In the event
of insolvency of the counterparty, the Fund may be unable to liquidate an OTC
option. With respect to options written by the Fund, inability to enter into a
closing purchase transaction may result in material losses to the Fund. For
example, since the Fund must maintain a covered position with respect to any
call option on a security it writes, the Fund may be limited in its ability to
sell the underlying security while the option is outstanding. This may impair
the Fund's ability to sell a portfolio security at a time when such a sale
might be advantageous.
Options on Stock Indices
Options on stock indices are similar to options on stock except that,
rather than the right to take or make delivery of stock at a specified price,
an option on a stock index gives the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of the stock
index upon which the option is based is greater than, in the case of a call,
or less than, in the case of a put, the exercise price of the option. This
amount of cash is equal to such difference between the closing price of the
index and the exercise price of the option expressed in dollars times a
specified multiple (the multiplier). The writer of the option is obligated, in
return for the premium received, to make delivery of this amount. Unlike stock
options, all settlements are in cash.
The multiplier for an index option performs a function similar to the
unit of trading for a stock option. It determines the total dollar value per
contract of each point in the difference between the exercise price of an
option and the current level of the underlying index. A multiplier of 100
means that a one-point difference will yield $100. Options on different
indices may have different multipliers.
Except as described below, the Fund will write call options on indices
only if on such date it holds a portfolio of securities at least equal to the
value of the index times the multiplier times the number of contracts. When
the Fund writes a call option on a broadly-based stock market index, the Fund
will segregate or put into escrow with its Custodian, or pledge to a broker as
collateral for the option, cash, cash equivalents or at least one "qualified
security" with a market value at the time the option is written of not less
than 100% of the current index value times the multiplier times the number of
contracts. The Fund will write call options on broadly-based stock market
indices only if at the time of writing it holds a diversified portfolio of
stocks.
If the Fund has written an option on an industry or market segment index,
it will so segregate or put into escrow with its Custodian, or pledge to a
broker as collateral for the option, at least ten "qualified securities,"
which are stocks of an issuer in such industry or market segment, with a
market value at the time the option is written of not less than 100% of the
current index value times the multiplier times the number of contracts. Such
stocks will include stocks which represent at least 50% of the weighting of
the industry or market segment index and will represent at least 50% of the
Fund's holdings in that industry or market segment.
B-3
<PAGE>
No individual security will represent more than 15% of the amount so
segregated, pledged or escrowed in the case of broadly-based stock market
index options or 25% of such amount in the case of industry or market segment
index options.
If at the close of business on any day the market value of such qualified
securities so segregated, escrowed or pledged falls below 100% of the current
index value times the multiplier times the number of contracts, the Fund will
segregate, escrow or pledge an amount in cash, Treasury Bills or other high
grade short-term debt obligations equal in value to the difference. In
addition, when the Fund writes a call on an index which is in-the-money at the
time the call is written, the Fund will segregate with its Custodian or pledge
to the broker as collateral cash, U.S. Government or other high grade
short-term debt obligations equal in value to the amount by which the call is
in-the-money times the multiplier times the number of contracts. Any amount
segregated pursuant to the foregoing sentence may be applied to the Fund's
obligation to segregate additional amounts in the event that the market value
of the qualified securities falls below 100% of the current index value times
the multiplier times the number of contracts. A "qualified security" is an
equity security which is listed on a national securities exchange or listed on
NASDAQ against which the Fund has not written a stock call option and which
has not been hedged by the Fund by the sale of stock index futures. However,
if the Fund holds a call on the same index as the call written where the
exercise price of the call held is equal to or less than the exercise price of
the call written or greater than the exercise price of the call written if the
difference is maintained by the Fund in cash, Treasury Bills or other high
grade short-term debt obligations in a segregated account with its Custodian,
it will not be subject to the requirements described in this paragraph.
Risks of Options on Stock Indices. Index prices may be distorted if
trading of certain securities included in the index is interrupted. Trading in
the index options also may be interrupted in certain circumstances, such as if
trading were halted in a substantial number of securities included in the
index. If this occurred, the Fund would not be able to close out options which
it had purchased or written and, if restrictions on exercise were imposed, may
be unable to exercise an option it holds, which could result in substantial
losses to the Fund. It is the Fund's policy to purchase or write options only
on indices which include a number of securities sufficient to minimize the
likelihood of a trading halt in the index.
Special Risks of Writing Calls on Stock Indices. Unless the Fund has
other liquid assets which are sufficient to satisfy the exercise of a call,
the Fund will be required to liquidate portfolio securities in order to
satisfy the exercise. Because an exercise must be settled within hours after
receiving the notice of exercise, if the Fund fails to anticipate an exercise,
it may have to borrow from a bank (in amounts not exceeding 20% of the value
of the Fund's total assets) pending settlement of the sale of securities in
its portfolio and would incur interest charges thereon.
When the Fund has written a call, there is also a risk that the market
may decline between the time the Fund has a call exercised against it, at a
price which is fixed as of the closing level of the index on the date of
exercise, and the time the Fund is able to sell securities in its portfolio.
As with stock options, the Fund will not learn that an index option has been
exercised until the day following the exercise date but, unlike a call on
stock where the Fund would be able to deliver the underlying securities in
settlement, the Fund may have to sell part of its portfolio in order to make
settlement in cash, and the price of such securities might decline before they
can be sold. This timing risk makes certain strategies involving more than one
option substantially more risky with index options than with stock options.
For example, even if an index call which the Fund has written is "covered" by
an index call held by the Fund with the same strike price, the Fund will bear
the risk that the level of the index may decline between the close of trading
on the date the exercise notice is filed with the clearing corporation and the
close of trading on the date the Fund exercises the call it holds or the time
the Fund sells the call, which in either case would occur no earlier than the
day following the day the exercise notice was filed.
Futures Contracts and Options Thereon
A futures contract is an agreement in which the writer (i.e., seller) of
the contract agrees to deliver to the buyer an amount of cash or securities
equal to a specific dollar amount times the difference between the value of a
specific fixed-income security or index at the close of the last trading day
of the contract and the price at which the agreement is made. No physical
delivery of the underlying securities is made. When the futures contract is
entered into, each party deposits with a broker or in a segregated custodial
account approximately 5% of the contract amount, called the "initial margin."
Subsequent payments to and from the broker, called "variation margin," will be
made on a daily basis as the price of the underlying security or index
fluctuates, making the long and short positions in the futures contracts more
or less valuable, a process known as "marking to market." In the case of
options on futures contracts, the holder of the option pays a premium and
receives the right, upon exercise of the option at a specified price during
the option period, to assume a position in the futures contract (a long
position if the option is a call and a short position if the option is a put).
If the option is exercised by the holder before the last trading day during
the option period, the option writer delivers the futures position, as well as
any balance in the writer's futures margin account. If it is exercised on the
last trading day, the option writer delivers to the option holder cash in an
amount equal to the difference between the option exercise price and the
closing level of the relevant security or index on the date the option
expires.
B-4
<PAGE>
The Fund intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held by the Fund or which the Fund intends to purchase. The
Fund also intends to engage in such transactions when they are economically
appropriate for the reduction of risks inherent in the ongoing management of the
Fund's portfolio. The Fund may write options on futures contracts to realize
through the receipt of premium income a greater return than would be realized in
the Fund's portfolio securities alone.
Risks of Transactions in Futures Contracts. There are several risks in
connection with the use of futures contracts as a hedging device. Due to the
imperfect correlation between the price of futures contracts and movements in
the price of the underlying securities, the price of a futures contract may
move more or less than the price of the securities being hedged. Therefore, a
correct forecast of interest rate or stock market trends by the investment
adviser may still not result in a successful hedging transaction.
Although the Fund will purchase or sell futures contracts only on
exchanges where there appears to be an adequate secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular contract or at any particular time. Accordingly, there can be no
assurance that it will be possible, at any particular time, to close a futures
position. In the event the Fund could not close a futures position and the
value of such position declined, the Fund would be required to continue to
make daily cash payments of variation margin. However, in the event futures
contracts have been used to hedge portfolio securities, such securities will
not be sold until the futures contracts can be terminated. In such
circumstances, an increase in the price of the securities, if any, may
partially or completely offset losses on the futures contract. However, there
is no guarantee that the price movements of the securities will, in fact,
correlate with the price movements in the futures contract and thus provide an
offset to losses on a futures contract.
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act of 1940, as amended (the Investment
Company Act), are exempt from the definition of "commodity pool operator,"
subject to compliance with certain conditions. The exemption is conditioned upon
the Fund's purchasing and selling futures contracts and options thereon for bona
fide hedging transactions, except that the Fund may purchase and sell futures
contracts and options thereon for any other purpose to the extent that the
aggregate inital margin and option premiums do not exceed 5% of the liquidation
value of the Fund's total assets.
Successful use of futures contracts by the Fund is also subject to the
ability of the Fund's investment adviser to predict correctly movements in the
direction of interest rates and other factors affecting markets for
securities. For example, if the Fund has hedged against the possibility of an
increase in interest rates which would adversely affect the price of
securities in its portfolio and the price of such securities increases
instead, the Fund will lose part or all of the benefit of the increased value
of its securities because it will have offsetting losses in its futures
positions. In addition, in such situations, if the Fund has insufficient cash
to meet daily variation margin requirements, it may need to sell securities to
meet such requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. The Fund
may have to sell securities at a time when it is disadvantageous to do so.
The hours of trading of futures contracts may not conform to the hours
during which the Fund may trade the underlying securities. To the extent that
the futures markets close before the securities markets, significant price and
rate movements can take place in the securities markets that cannot be
reflected in the futures market.
Forward Foreign Currency Exchange Contracts
The Fund's dealings in forward contracts will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward contracts with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency. The Fund will not speculate in forward contracts. The
Fund may not position hedge with respect to a particular currency for an
amount greater than the aggregate market value (determined at the time of
making any sale of a forward contract) of securities held in its portfolio
denominated or quoted in, or currently convertible into, such currency.
When the Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, or when the Fund anticipates the
receipt in a foreign currency of dividends or interest payments on a security
which it holds, the Fund may desire to "lock in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such dividend or interest payment as
the case may be. By entering into a forward contract for a fixed amount of
dollars for the purchase or sale of the amount of foreign currency involved in
the underlying transactions, the Fund will be able to protect itself against a
possible loss resulting from an adverse
B-5
<PAGE>
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date on which the security is purchased
or sold, or on which the dividend or interest payment is declared, and the
date on which such payments are made or received.
Additionally, when the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of
some or all of the portfolio securities of the Fund denominated in such
foreign currency.
Foreign Government Securities
Foreign government securities in which the Fund may invest include debt
securities issued or guaranteed as to payment of principal and interest by
governments, quasi-governmental entities, government agencies, supranational
entities and other governmental entities (collectively, Government Entities)
of the countries specified below and denominated in the currencies of such
countries or in U.S. dollars, including debt securities of a Government Entity
in any such country denominated in the currency of another such country.
North America Pacific Europe
------------- ------- ------
Canada Australia Austria
Hong Kong Belgium
Japan Denmark
New Zealand Finland
Singapore France
Germany
Ireland
Italy
The Netherlands
Norway
Portugal
Spain
Sweden
Switzerland
United Kingdom
A supranational entity is an entity constituted by the national
governments of several countries to promote economic development, such as the
World Bank (International Bank for Reconstruction and Development), the
European Investment Bank and the Asian Development Bank. Debt securities of
quasi-governmental entities are issued by entities owned by either a national,
state or equivalent government or are obligations of a political unit that is
not backed by the national government's full faith and credit and general
taxing powers. These include, among others, the Province of Ontario and the
City of Stockholm. Foreign government securities also include debt securities
denominated in European Currency Units of an issuer in one of the foregoing
countries (including supranational issuers). A European Currency Unit
represents specified amounts of the currencies of certain of the twelve member
states of the European Community.
The Fund will invest in foreign government securities rated "A" or better
by Standard & Poor's Ratings Group (S&P) or Moody's Investors Service
(Moody's) or in non-rated securities of comparable quality in the opinion of
the investment adviser. The Fund will invest only in foreign currency
denominated government debt securities that are freely convertible into U.S.
dollars without legal restriction at the time of purchase.
Investment in foreign government securities involves additional risks and
considerations not typically associated with investing in U.S. Government
securities and domestic issuers. See "How the Fund Invests--Investment
Objective and Policies-- Foreign Government Securities" in the Prospectus.
Corporate Obligations
The Fund does not intend to have more than 5% of its net assets invested
in either asset-backed securities, collateralized mortgage obligations or real
estate mortgage investment conduits.
Asset-Backed Securities. Through the use of trusts and special purpose
subsidiaries, various types of assets, primarily automobile and credit card
receivables, are being securitized in pass-through structures similar to
mortgage pass-through
B-6
<PAGE>
structures or in a pay-through structure similar to the collateralized
mortgage structure. The Fund may invest in these and other types of
asset-backed securities which may be developed in the future. Asset-backed
securities present certain risks that are not presented by mortgage-backed
securities. Primarily, these securities do not have the benefit of the same
security interest in the related collateral. Credit card receivables are
generally unsecured. In connection with automobile receivables, the security
interests in the underlying automobiles are often not transferred when the
pool is created, with the resulting possibility that the collateral could be
resold. In general, these types of loans are of shorter duration than mortgage
loans and are less likely to have substantial prepayments.
Collateralized Mortgage Obligations (CMOs) and Real Estate Mortgage
Investment Conduits (REMICs). A CMO is a debt security that is backed by a
portfolio of mortgages or mortgage-backed securities. The issuer's obligation
to make interest and principal payments is secured by the underlying portfolio
of mortgages or mortgage-backed securities. CMOs generally are partitioned
into several classes with a ranked priority as to the time that principal
payments will be made with respect to each of the classes. The Fund may invest
only in privately-issued CMOs that are collateralized by mortgage-backed
securities issued or guaranteed by GNMA, FHLMC or FNMA and in CMOs issued by
FHLMC.
The Fund may also invest in REMICs. An issuer of REMICs may be a trust,
partnership, corporation, association, or a segregated pool of mortgages, or
may be an agency of the U.S. Government and, in each case, must qualify and
elect treatment as such under the Tax Reform Act of 1986. A REMIC must consist
of one or more classes of "regular interests," some of which may be adjustable
rate, and a single class of "residual interests." To qualify as a REMIC,
substantially all the assets of the entity must be in assets directly or
indirectly secured, principally by real property. The Fund does not intend to
invest in residual interests. REMICs are intended by the U.S. Congress
ultimately to become the exclusive vehicle for the issuance of multi-class
securities backed by real estate mortgages. If a trust or partnership that
issues CMOs does not elect or qualify for REMIC status, it will be taxed at
the entity level as a corporation.
Certain issuers of CMOs and REMICs, including CMOs that have elected to
be treated as REMICs, are not considered investment companies pursuant to a
rule adopted by the Securities and Exchange Commission (SEC) and the Fund may
invest in securities of such issuers without the limitations imposed by the
Investment Company Act on acquiring interests in other investment companies.
In addition, in reliance on an earlier SEC interpretation, the Fund's
investments in certain other qualifying CMOs, which cannot and do not rely on
the rule, are also not subject to the limitation of the Investment Company Act
on acquiring interests in other investment companies. In order to be able to
rely on the SEC's interpretation, the CMOs must be unmanaged, fixed-asset
issuers that (a) invest primarily in mortgage-backed securities, (b) do not
issue redeemable securities, (c) operate under general exemptive orders
exempting them from all provisions of the Investment Company Act and (d) are
not registered or regulated under the Investment Company Act as investment
companies. To the extent that the Fund selects CMOs or REMICs that do not meet
the above requirements, the Fund may not invest more than 10% of its assets in
all such entities and may not acquire more than 3% of the voting securities of
any single such entity.
Money Market Instruments
The Fund may invest in high quality money market instruments, including:
1. Obligations denominated in U.S. dollars (including certificates of
deposit and bankers' acceptances) of (a) banks organized under the laws of the
United States or any state thereof (including foreign branches of such banks)
or (b) U.S. branches of foreign banks or (c) foreign banks and foreign
branches thereof; provided that such banks have, at the time of acquisition by
the Fund of such obligations, total assets of not less than $1 billion or its
equivalent. The term "certificates of deposit" includes both Eurodollar
certificates of deposit, for which there is generally a market, and Eurodollar
time deposits, for which there is generally not a market. "Eurodollars" are
U.S. dollars deposited in banks outside the United States.
2. Commercial paper, variable amount demand master notes, bills, notes
and other obligations issued by a U.S. company, a foreign company or a foreign
government, its agencies, instrumentalities or political subdivisions,
maturing in one year or less, denominated in U.S. dollars, and, at the date of
investment, rated at least "A-2" by S&P or "Prime-2" by Moody's, or, if not
rated, issued by an entity having an outstanding unsecured debt issue rated at
least "A" or "A-2" by S&P or "A" or "Prime-2" by Moody's. If such obligations
are guaranteed or supported by a letter of credit issued by a bank, the bank
(including a foreign bank) must meet the requirements set forth in paragraph 1
above. If such obligations are guaranteed or insured by an insurance company
or other non-bank entity, the insurance company or other non-bank entity must
represent a credit of high quality, as determined by the Fund's Board of
Directors. A description of security ratings is contained in the Appendix.
Risks of Investing in High Yield Securities
Fixed-Income securities are subject to the risk of an issuer's inability
to meet principal and interest payments on the obligations (credit risk) and
may also be subject to price volatility due to such factors as interest rate
sensitivity, market perception
B-7
<PAGE>
of the creditworthiness of the issuer and general market liquidity (market
risk). Lower rated or unrated (i.e., high yield) securities are more likely to
react to developments affecting market and credit risk than are more highly
rated securities, which react primarily to movements in the general level of
interest rates. The investment adviser considers both credit risk and market
risk in making investment decisions for the Fund. Investors should carefully
consider the relative risks of investing in high yield securities and
understand that such securities are not generally meant for short-term
trading.
The amount of high yield securities outstanding proliferated in the
1980's in conjunction with the increase in merger and acquisition and
leveraged buyout activity. Under adverse economic conditions, there is a risk
that highly leveraged issuers may be unable to service their debt obligations
or to repay their obligations upon maturity. In addition, the secondary market
for high yield securities, which is concentrated in relatively few market
makers, may not be as liquid as the secondary market for more highly rated
securities. Under adverse market or economic conditions, the secondary market
for high yield securities could contract further, independent of any specific
adverse changes in the condition of a particular issuer. As a result, the
investment adviser could find it more difficult to sell these securities or
may be able to sell the securities only at prices lower than if such
securities were widely traded. Prices realized upon the sale of such lower
rated or unrated securities, under these circumstances, may be less than the
prices used in calculating the Fund's net asset value.
Federal laws require the divestiture by federally insured savings and
loan associations of their investments in high yield bonds and limit the
deductibility of interest by certain corporate issuers of high yield bonds.
These laws could adversely affect the Fund's net asset value and investment
practices, the secondary market for high yield securities, the financial
condition of issuers of these securities and the value of outstanding high
yield securities.
Lower rated or unrated debt obligations also present risks based on
payment expectations. If an issuer calls the obligation for redemption, the
Fund may have to replace the security with a lower yielding security,
resulting in a decreased return for investors. If the Fund experiences
unexpected net redemptions, it may be forced to sell its higher rated
securities, resulting in a decline in the overall credit quality of the Fund's
portfolio and increasing the exposure of the Fund to the risks of high yield
securities.
Repurchase Agreements
The Fund's repurchase agreements will be collateralized by U.S.
Government obligations. The Fund will enter into repurchase transactions only
with parties meeting creditworthiness standards approved by the Fund's Board
of Directors. The Fund's investment adviser will monitor the creditworthiness
of such parties, under the general supervision of the Board of Directors. In
the event of a default or bankruptcy by a seller, the Fund will promptly seek
to liquidate the collateral. To the extent that the proceeds from any sale of
such collateral upon a default in the obligation to repurchase are less than
the repurchase price, the Fund will suffer a loss.
The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Mutual Fund Management, Inc. (PMF) pursuant to
an order of the SEC. On a daily basis, any uninvested cash balances of the
Fund may be aggregated with those of such investment companies and invested in
one or more repurchase agreements. Each fund participates in the income earned
or accrued in the joint account based on the percentage of its investment.
Short Sales Against-the-Box
In addition to short-selling as described in the Prospectus, the Fund may
make short sales of securities or maintain a short position, provided that at
all times when a short position is open the Fund owns an equal amount of such
securities or securities convertible into or exchangeable for, without payment
of any further consideration, such securities (a short sale against-the-box).
Short sales will be made primarily to defer realization of gain or loss for
federal tax purposes.
Lending of Portfolio Securities
In order to generate additional income, the Fund may lend its portfolio
securities in a proportion of up to 10% of its total assets to broker-dealers,
banks or other recognized institutional borrowers of securities, provided that
the borrower at all times maintains cash or equivalent collateral or secures
in favor of the Fund an irrevocable letter of credit equal in value to at
least 100% of the value of the securities loaned. During the time portfolio
securities are on loan, the borrower pays the Fund an amount equivalent to any
dividends or interest paid on such securities, and the Fund may invest the
cash collateral and earn additional income, or it may receive an agreed-upon
amount of interest income from the borrower who has delivered equivalent
collateral or secured a letter of credit. Loans are subject to termination at
the option of the Fund or the borrower. The Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash or equivalent collateral
to the borrower or placing broker. The Fund does not have the right to vote
securities on loan, but would terminate the loan and regain the right to vote
if that were considered important with respect to the investment.
B-8
<PAGE>
Portfolio Turnover
Although the Fund does not intend to engage in substantial short-term
trading, it may sell portfolio securities without regard to the length of time
that they have been held in order to take advantage of new investment
opportunities or yield differentials, or because the Fund desires to preserve
gains or limit losses due to changing economic conditions or the financial
condition of the issuer. It is not anticipated that the Fund's portfolio
turnover rate will exceed 200%. A portfolio turnover rate of 200% may exceed
that of other investment companies with similar objectives. The portfolio
turnover rate is computed by dividing the lesser of the amount of the
securities purchased or securities sold (excluding securities whose maturities
at acquisition were one year or less) by the average monthly value of
securities owned during the year. A 100% turnover rate would occur, for
example, if all of the securities held in the Fund's portfolio were sold and
replaced within one year. However, when portfolio changes are deemed
appropriate due to market or other conditions, such turnover rate may be
greater than anticipated. A higher rate of turnover results in increased
transaction costs to the Fund. In addition, high portfolio turnover may result
in increased short-term capital gains which, when distributed to shareholders,
are treated as ordinary income. For the fiscal years ended April 30, 1993 and
April 30, 1994, the Fund's portfolio turnover rate was 209% and 110%,
respectively. The 1993 portfolio turnover rate was due to market volatility.
Illiquid Securities
The Fund may not invest more than 5% of its net 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 (either within or outside of the United
States) or legal or contractual restrictions on resale. Historically, illiquid
securities have included securities subject to contractual or legal
restrictions on resale because they have not been registered under the
Securities Act of 1933, as amended (Securities Act), securities which are
otherwise not readily marketable and repurchase agreements having a maturity
of longer than seven days. Securities which have not been registered under the
Securities Act are referred to as private placements or restricted securities
and are purchased directly from the issuer or in the secondary market. Mutual
funds do not typically hold a significant amount of these restricted or other
illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted
securities in order to dispose of them resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes.
Institutional investors depend on an efficient institutional market in which
the unregistered security can be readily resold or on an issuer's ability to
honor a demand for repayment. The fact that there are contractual or legal
restrictions on resale to the general public or to certain institutions may
not be indicative of the liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to
the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the Securities Act for resales of certain
securities to qualified institutional buyers. The investment adviser
anticipates that the market for certain restricted securities such as
institutional commercial paper and foreign securities will expand further as a
result of this regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Board of Directors. In reaching liquidity decisions, the investment adviser
will consider, inter alia, the following factors: (1) the frequency of trades
and quotes for the security; (2) the number of dealers wishing to purchase or
sell the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer). In addition, in order for commercial paper that is issued in
reliance on Section 4(2) of the Securities Act to be considered liquid, (i) it
must be rated in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations (NRSRO), or if only one
NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable
quality in the view of the investment adviser; and (ii) it must not be "traded
flat" (i.e., without accrued interest) or in default as to principal or
interest. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
B-9
<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 (i) 67% of the voting shares represented at a
meeting at which more than 50% of the outstanding voting shares are present in
person or represented by proxy or (ii) more than 50% of the outstanding voting
shares.
The Fund may not:
1. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); provided that
the deposit or payment by the Fund of initial or maintenance margin in
connection with futures or options is not considered the purchase of a
security on margin.
2. Make short sales of securities (other than short sales
against-the-box) or maintain a short position if, when added together, more
than 25% of the value of the Fund's net assets would be (i) deposited as
collateral for the obligation to replace securities borrowed to effect short
sales and (ii) allocated to segregated accounts in connection with short
sales.
3. Issue senior securities, borrow money or pledge its assets, except
that the Fund may borrow up to 20% of the value of its total assets
(calculated when the loan is made) from banks and from entities other than
banks if so permitted pursuant to an order of the SEC for temporary,
extraordinary or emergency purposes or for the clearance of transactions and
to take advantage of investment opportunities. The Fund may pledge up to 20%
of the value of its total assets to secure such borrowings. For purposes of
this restriction, the purchase or sale of securities on a when-issued or
delayed delivery basis, forward foreign currency exchange contracts and
collateral and collateral arrangements relating thereto, and collateral
arrangements with respect to futures contracts and options thereon and with
respect to the writing of options and obligations of the Fund to Directors
pursuant to deferred compensation arrangements are not deemed to be a pledge
of assets or the issuance of a senior security.
4. Purchase any security (other than obligations of the U.S. Government,
its agencies or instrumentalities) if as a result 25% or more of the value of
the Fund's total assets (determined at the time of investment) would be
invested in the securities of one or more issuers conducting their principal
business activities in the same industry or group of industries.
5. Purchase any security if as a result the Fund would then hold more
than 10% of the outstanding voting securities of an issuer.
6. Purchase any security if as a result the Fund would then have more
than 5% of its total assets (determined at the time of investment) invested in
securities of companies (including predecessors) less than three years old,
provided that there is no limit on the Fund's ability to invest in the
securities of any U.S. Government agency or instrumentality, and in any
security guaranteed by such an agency or instrumentality.
7. Buy or sell real estate or interests in real estate, except that the
Fund may purchase and sell securities which are secured by real estate,
securities of companies which invest or deal in real estate and publicly
traded securities of real estate investment trusts. The Fund may not purchase
interests in real estate limited partnerships which are not readily
marketable.
8. Buy or sell commodities or commodity contracts. (For purposes of this
restriction, futures contracts and forward foreign currency exchange contracts
are not deemed to be commodities or commodity contracts.)
9. Act as an underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.
10. Make investments for the purpose of exercising control or management.
11. Invest in securities of other registered investment companies, except
by purchases in the open market involving only customary brokerage commissions
and as a result of which not more than 10% of its total assets (determined at
the time of investment) would be invested in such securities, or except as
part of a merger, consolidation or other acquisition.
12. Invest in interests in oil, gas or other mineral exploration or
development programs, except that the Fund may invest in the securities of
companies which invest in or sponsor such programs.
13. Make loans, except through (i) repurchase agreements and (ii) loans
of portfolio securities (limited to 10% of the Fund's total assets).
B-10
<PAGE>
Whenever any fundamental investment policy or investment restriction
states a maximum percentage of the Fund's assets, it is intended that if the
percentage limitation is met at the time the investment is made, a later
change in percentage resulting from changing total or net asset values will not
be considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt
action to reduce its borrowings, as required by applicable law.
In order to comply with certain state "blue sky" restrictions, the Fund
will not as a matter of operating policy:
1. purchase securities of companies which invest in real estate which are
not readily marketable;
2. purchase interests in real estate limited partnerships which are not
traded on the New York Stock Exchange, the American Stock Exchange or the
NASDAQ National Market System;
3. invest more than 15% of its average net assets in securities of
foreign issuers which are not listed on a recognized domestic or foreign
securities exchange;
4. purchase warrants if as a result the Fund would then have more than 5%
of its net assets (determined at the time of investment) invested in warrants.
Warrants will be valued at the lower of cost or market and investment in
warrants which are not listed on the New York Stock Exchange or American Stock
Exchange will be limited to 2% of the Fund's net assets (determined at the
time of investment). For the purpose of this limitation, warrants acquired in
units or attached to securities are deemed to be without value;
5. in addition to the requirements set forth at investment restriction
number 2 above, the Fund may not make short sales (except short sales
against-the-box) if the value of the securities of any one issuer in which the
Fund is short exceeds the lesser of 2% of the value of the Fund's net assets
or 2% of the securities of any class of any issuer;
6. invest in securities of any issuer if, to the knowledge of the Fund,
any officer or Director of the Fund or the Fund's Manager or Subadviser owns
more than 1/2 of 1% of the outstanding securities of such issuer, and such
officers and Directors who own more than 1/2 of 1% own in the aggregate more
than 5% of the outstanding securities of such issuer;
7. invest in securities of companies having a record, together with
predecessors, of less than three years of continuous operation, or securities
of issuers which are restricted as to disposition, if more than 15% of its
total assets would be invested in such securities. This restriction shall not
apply to mortgage-backed securities, asset-backed securities or obligations
insured or guaranteed by the U.S. Government, its agencies or instrumentalities;
8. invest more than 5% of its total assets in securities of unseasoned
issuers, including their predecessors, which have been in operation for less
than three years, and in equity securities of issuers which are not readily
marketable; and
9. invest in oil, gas and mineral leases.
<TABLE>
<CAPTION>
DIRECTORS AND OFFICERS
Position with Principal Occupations
Name and Address Fund During Past Five Years
- ---------------- ------------- ----------------------
<S> <C> <C>
Edward D. Beach Director President and Director of BMC Fund, Inc., a
c/o Prudential Mutual closed-end investment company; prior
Fund Management, Inc. thereto Vice Chairman of Broyhill Furniture
One Seaport Plaza Industries, Inc.; Certified Public
New York, NY Accountant; Secretary and Treasurer of
Broyhill Family Foundation, Inc.;
President, Treasurer and Director of First
Financial Fund, Inc. and The High Yield
Plus Fund, Inc.; Director of The Global
Government Plus Fund, Inc. and The Global
Yield Fund, Inc.
Donald D. Lennox Director Chairman (since February 1990) and Director
c/o Prudential Mutual (since April 1989) of International Imaging
Fund Management, Inc. Materials, Inc.; Retired Chairman, Chief
One Seaport Plaza Executive Officer and Director of Schlegel
New York, NY Corporation (industrial manufacturing)
(March 1987-February 1989); Director of
Gleason Corporation, Navistar International
Corporation, Personal Sound Technologies,
Inc., The Global Government Plus Fund, Inc.
and The High Yield Income Fund, Inc.
</TABLE>
B-11
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupations
Name and Address Fund During Past Five Years
- ---------------- ------------- ----------------------
<S> <C> <C>
Douglas H. McCorkindale Director Vice Chairman, Gannett Co. Inc. (publishing
c/o Prudential Mutual and media) (since March 1984); Director,
Fund Management, Inc. Continental Airlines, Inc., Gannett Co.
One Seaport Plaza Inc., Rochester Telephone Corporation and
New York, NY The Global Government Plus Fund, Inc.
*Lawrence C. McQuade President and Vice Chairman of Prudential Mutual Fund
One Seaport Plaza Director Management, Inc. (PMF) (since 1988);
New York, NY Managing Director, Investment Banking,
Prudential Securities Incorporated
(Prudential Securities) (1988-1991);
Director of Quixote Corporation (since
February 1992) and BUNZL, P.L.C. (since
June 1991); formerly Director of Crazy
Eddie Inc. (1987-1990) and Kaiser Tech.
Ltd. and Kaiser Aluminum and Chemical
Corp. (March 1987-November 1988); formerly
Executive Vice President and Director of
W.R. Grace & Company; President and Director
of The Global Government Plus Fund, Inc.,
The Global Yield Fund, Inc. and The High
Yield Income Fund, Inc.
Thomas T. Mooney Director President of the Greater Rochester Metro
c/o Prudential Mutual Chamber of Commerce; formerly Rochester
Fund Management, Inc. City Manager; Trustee of Center for
One Seaport Plaza Governmental Research, Inc.; Director of
New York, NY Blue Cross of Rochester, Monroe County
Water Authority, Rochester Jobs, Inc.,
Executive Service Corps of Rochester,
Monroe County Industrial Development
Corporation, Northeast Midwest Institute,
First Financial Fund, Inc., The Global
Government Plus Fund, Inc., The Global
Yield Fund, Inc. and The High Yield Plus
Fund, Inc.
*Richard A. Redeker Director President, Chief Executive Officer and
One Seaport Plaza Director (since October 1993), PMF;
New York, NY Executive Vice President, Director and
Member of Operating Committee (since
October 1993), Prudential Securities;
Director (since October 1993) of
Prudential Securities Group, Inc.;
formerly Senior Executive Vice President
and Director of Kemper Financial Services,
Inc. (September 1978--September 1993);
Director of The Global Yield Fund, Inc.,
The Global Government Plus Fund, Inc. and
The High Yield Income Fund, Inc.
Louis A. Weil, III Director Publisher and Chief Executive Officer,
c/o Prudential Mutual Phoenix Newspapers Inc. (since August
Fund Management, Inc. 1991); Director of Central Newspapers, Inc.
One Seaport Plaza (since September 1991); prior thereto,
New York, NY Publisher of Time Magazine (May 1989-March
1991); formerly President, Publisher and
CEO of The Detroit News (February
1986-August 1989); formerly, member of the
Advisory Board, Chase Manhattan
Bank-Westchester; Director of The Global
Government Plus Fund, Inc.
Robert F. Gunia Vice President Chief Administrative Officer (since July
One Seaport Plaza 1990), Director (since January 1989) and
New York, NY Executive Vice President, Treasurer and
Chief Financial Officer (since June
1987) of PMF; Senior Vice President
(since March 1987) of Prudential
Securities; Vice President and Director
(since May 1989) of The Asia Pacific
Fund, Inc.
- ------------
<FN>
* "Interested" Director, as defined in the Investment Company Act, by reason
of his affiliation with Prudential Securities or PMF.
</FN>
</TABLE>
B-12
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupations
Name and Address Fund During Past Five Years
- ---------------- -------------- -------------------------
<S> <C> <C>
Susan C. Cote Treasurer and Senior Vice President (since January 1989)
One Seaport Plaza Principal and First Vice President (June 1987-
New York, NY Financial and December 1988) of PMF; Senior Vice President
Accounting (since January 1992) and Vice President
Officer (January 1986-December 1991) of
Prudential Securities.
S. Jane Rose Secretary Senior Vice President (since January
One Seaport Plaza 1991), Senior Counsel (since June 1987)
New York, NY and First Vice President (June
1987-December 1990) of PMF; Senior Vice
President and Senior Counsel of
Prudential Securities (since July 1992);
formerly, Vice President and Associate
General Counsel of Prudential
Securities.
Marguerite E.H. Morrison Assistant Vice President and Associate General
One Seaport Plaza Secretary Counsel (since June 1991) of PMF; Vice
New York, NY President and Associate General Counsel
of Prudential Securities.
</TABLE>
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 or Prudential Mutual Fund Distributors, Inc. (PMFD).
The officers conduct and supervise the daily business operations of the
Fund, while the Directors, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
Pursuant to the Management Agreement with the Fund, the Manager pays
compensation of officers and employees of the Fund as well as the fees and
expenses of all Directors of the Fund who are affiliated persons of the
Manager.
The Fund pays each of its Directors who is not an affiliated person of
PMF annual compensation of $7,500 in addition to certain out-of-pocket
expenses.
Directors may receive their Directors' fee pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of Directors' fees which accrue interest at a rate equivalent
to the prevailing rate applicable to 90-day U.S. Treasury Bills at the
beginning of each calendar quarter or, pursuant to receipt of an SEC exemptive
order, at the daily rate of return of the Fund. Payment of the interest so
accrued is also deferred and accruals become payable at the option of the
Director. The Fund's obligation to make payments of deferred Directors' fees,
together with interest thereon, is a general obligation of the Fund.
As of June 17, 1994, the Directors and officers of the Fund, as a group,
owned beneficially less than 1% of the outstanding common stock of the Fund.
As of June 17, 1994, Prudential Securities was record holder of 2,683,283
Class A shares (or 67.7% of the outstanding Class A shares) and 8,783,684 Class
B shares (or 89.6% of the outstanding Class B 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 the
record holder.
MANAGER
The manager of the Fund is Prudential Mutual Fund Management, Inc. (PMF
or the Manager), One Seaport Plaza, New York, New York 10292. PMF serves as
manager to all of the other investment companies that, together with the Fund,
comprise the Prudential Mutual Funds. See "How the Fund is Managed--Manager"
in the Prospectus. As of June 30, 1994, PMF managed and/or administered
open-end and closed-end management investment companies with assets of
approximately $47 billion and, according to the Investment Company
Institute, as of April 30, 1994, the Prudential Mutual Funds were the 12th
largest family of mutual funds in the United States.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Board of Directors
and in conformity with the stated policies of the Fund, manages both the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention, disposition and loan of securities. In
connection therewith, PMF is obligated to keep certain books and records of
the Fund. PMF also administers the Fund's corporate affairs
B-13
<PAGE>
and, in connection therewith, furnishes the Fund with office facilities,
together with those ordinary clerical and bookkeeping services which are not
being furnished by State Street Bank and Trust Company (the "Custodian"), the
Fund's custodian, and Prudential Mutual Fund Services, Inc. (PMFS or the
Transfer Agent), the Fund's transfer and dividend disbursing agent. The
management services of PMF for the Fund are not exclusive under the terms of
the Management Agreement and PMF is free to, and does, render management
services to others.
For its services, PMF receives, pursuant to the Management Agreement, a
fee at an annual rate of .65 of 1% of the Fund's average daily net assets. The
fee is computed daily and payable monthly. The Management Agreement also
provides that, in the event the expenses of the Fund (including the fees of
PMF, but excluding interest, taxes, brokerage commissions, distribution fees
and litigation and indemnification expenses and other extraordinary expenses
not incurred in the ordinary course of the Fund's business) for any fiscal
year exceed the lowest applicable annual expense limitation established and
enforced pursuant to the statutes or regulations of any jurisdiction in which
the Fund's shares are qualified for offer and sale, the compensation due to
PMF will be reduced by the amount of such excess. Reductions in excess of the
total compensation payable to PMF will be paid by PMF to the Fund. No such
reductions were required during the fiscal year ended April 30, 1994.
Currently, the Fund believes that the most restrictive expense limitation of
state securities commissions is 2 1/2% of a fund's average daily net assets up
to $30 million, 2% of the next $70 million of such assets and 1 1/2% of such
assets in excess of $100 million.
In connection with its management of the corporate affairs of the Fund,
PMF bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel
except the fees and expenses of Directors who are not affiliated persons of
PMF or the Fund's investment adviser;
(b) all expenses incurred by PMF or by the Fund in connection with
managing the ordinary course of the Fund's business, other than those assumed
by the Fund as described below; and
(c) the costs and expenses payable to The Prudential Investment
Corporation (PIC) pursuant to the subadvisory agreement between PMF and PIC
(the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for
the payment of the following expenses: (a) the fees payable to the Manager,
(b) the fees and expenses of Directors who are not affiliated persons of the
Manager or the Fund's investment adviser, (c) the fees and certain expenses of
the Custodian and Transfer Agent, including the cost of providing records to
the Manager in connection with its obligation of maintaining required records
of the Fund and of pricing the Fund's shares, (d) the charges and expenses of
legal counsel and independent accountants for the Fund, (e) brokerage
commissions and any issue or transfer taxes chargeable to the Fund in
connection with its securities transactions, (f) all taxes and corporate fees
payable by the Fund to governmental agencies, (g) the fees of any trade
associations of which the Fund may be a member, (h) the cost of stock
certificates representing shares of the Fund, (i) the cost of fidelity and
liability insurance, (j) the fees and expenses involved in registering and
maintaining registration of the Fund and of its shares with the SEC,
registering the Fund and qualifying its shares under state securities laws,
including the preparation and printing of the Fund's registration statements
and prospectuses for such purposes, (k) allocable communications expenses with
respect to investor services and all expenses of shareholders' and Directors'
meetings and of preparing, printing and mailing reports, proxy statements and
prospectuses to shareholders in the amount necessary for distribution to the
shareholders, (l) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the Fund's
business and (m) distribution fees.
The Management Agreement provides that PMF will not be liable for any
error of judgment or for any loss suffered by the Fund in connection with the
matters to which the Management Agreement relates, except a loss resulting
from willful misfeasance, bad faith, gross negligence or reckless disregard of
duty. The Management Agreement provides that it will terminate automatically
if assigned, and that it may be terminated without penalty by either party
upon not more than 60 days' nor less than 30 days' written notice. The
Management Agreement will continue in effect for a period of more than two
years from the date of execution only so long as such continuance is
specifically approved at least annually in conformity with the Investment
Company Act. The Management Agreement was last approved by the Board of
Directors of the Fund, including a majority of the Directors who are not
parties to the contract or interested persons of any such party as defined in
the Investment Company Act, on May 3, 1994, and by the shareholders of the
Fund on September 12, 1991.
For the fiscal years ended April 30, 1994, April 30, 1993 and April 30,
1992, PMF received a management fee of $1,032,341, $948,752 and $1,078,435,
respectively.
PMF has entered into the Subadvisory Agreement with PIC (the Subadviser).
The Subadvisory Agreement provides that PIC will furnish investment advisory
services in connection with the management of the Fund. In connection
therewith, PIC is obligated to keep certain books and records of the Fund. PMF
continues to have responsibility for all investment advisory services
B-14
<PAGE>
pursuant to the Management Agreement and supervises PIC's performance of such
services. PIC is reimbursed by PMF for the reasonable costs and expenses
incurred by PIC in furnishing those services.
The Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the Directors who are not parties to the contract or
interested persons of any such party as defined in the Investment Company Act,
on May 3, 1994 and by the shareholders of the Fund on September 12, 1991.
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 Fund, PMF or PIC upon not more than 60 days', nor less than
30 days', written notice. 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
accordance with the requirements of the Investment Company Act.
The Manager and the Subadviser are subsidiaries of The Prudential
Insurance Company of America (Prudential) which, as of December 31, 1993, is
one of the largest financial institutions in the world and the largest
insurance company in North America. Prudential has been engaged in the
insurance business since 1875. In July 1993, Institutional Investor ranked
Prudential the third largest institutional money manager of the 300 largest
money management organizations in the United States as of December 31, 1992.
DISTRIBUTOR
Prudential Mutual Fund Distributors, Inc. (PMFD), One Seaport Plaza, New
York, New York 10292, acts as the distributor of the Class A shares of the
Fund. Prudential Securities, One Seaport Plaza, New York, New York 10292, acts
as the distributor of the Class B and Class C shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan,
the Class B Plan and the Class C Plan, collectively, the Plans) adopted by the
Fund under Rule 12b-1 under the Investment Company Act and separate
distribution agreements (the Distribution Agreements), PMFD and Prudential
Securities (collectively, the Distributor) incur the expenses of distributing
the Fund's Class A, Class B and Class C shares. See "How the Fund is
Managed--Distributor" in the Prospectus.
The Fund's Plans were approved by the shareholders of the Fund on
September 12, 1991. Pursuant to Rule 12b-1 under the Investment Company Act,
the Board of Directors, including a majority of the Directors who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the operation of the Plans or in any agreement related to the
Plans (the Rule 12b-1 Directors), last approved the Plans on May 3, 1994.
On February 9, 1993, the Board of Directors, including a majority of the
Rule 12b-1 Directors, at a meeting called for the purpose of voting on each
Plan, approved modifications of the Fund's Class A and Class B Plans and
Distribution Agreements to conform them with recent amendments to the National
Association of Securities Dealers, Inc. (NASD) maximum sales charge rule
described below. As so modified, the Class A Plan provides that (i) up to .25
of 1% of the average daily net assets of the Class A shares may be used to pay
for personal service and the maintenance of shareholder accounts (service fee)
and (ii) total distribution fees (including the service fee of .25 of 1%) may
not exceed .30 of 1%. As so modified, the Class B Plan provides that (i) up to
.25 of 1% of the average daily net assets of the Class B shares may be paid as
a service fee and (ii) up to .75 of 1% (not including the service fee) may be
used as reimbursement for distribution-related expenses with respect to the
Class B shares (asset-based sales charge). On May 4, 1993, the Board of
Directors, including a majority of the Rule 12b-1 Directors, at a meeting
called for the purpose of voting on each Plan, adopted a plan of distribution
for the Class C shares of the Fund and approved further amendments to the plans
of distribution for the Fund's Class A and Class B shares changing them from
reimbursement type plans to compensation type plans. The Plans were last
approved by the Board of Directors, including a majority of the Rule 12b-1
Directors, on May 3, 1994. The Class A Plan, as amended, was approved by Class
A and Class B shareholders, and the Class B Plan, as amended, was approved by
Class B shareholders on July 19, 1994. The Class C Plan was approved by the
sole shareholder of Class C shares on August 1, 1994.
Class A Plan. For the fiscal year ended April 30, 1994, PMFD received
payments of $108,720 under the Class A Plan. This amount was primarily
expended for payment of account servicing fees to financial advisers and other
persons who sell Class A shares. For the fiscal year ended April 30, 1994, PMFD
also received approximately $229,600 in initial sales charges.
Class B Plan. For the fiscal year ended April 30, 1994, the Distributor
received $1,089,811 from the Fund under the Class B Plan and spent approximately
$1,746,600 in distributing the Class B shares of the Fund. It is estimated that
of the latter amount approximately 2.7% ($47,800) was spent on printing and
mailing prospectuses to other than current shareholders; 3.9% ($68,300) was
spent in commissions paid to or on account of representatives of Prusec; 3.7%
($64,200) in interest and/or carrying charges; and 89.7% ($1,566,300) on the
aggregate of (i) payments of commissions to financial advisers (43.9% or
$765,900) and (ii) an allocation of overhead and other branch office
distribution-related expenses (45.8% or $800,400). The term
B-15
<PAGE>
"overhead and other branch office distribution-related expenses" represents (a)
the expenses of operating branch offices of Prudential Securities 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.
Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by investors upon certain redemptions of Class B shares.
See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges" in the Prospectus. For the fiscal year ended April 30, 1994,
Prudential Securities received approximately $283,400 in contingent deferred
sales charges.
Class C Plan. Prudential Securities receives the proceeds of contingent
deferred sales charges paid by investors upon certain redemptions of Class C
shares. See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred
Sales Charges" in the Prospectus. Prior to the date of this Statement of
Additional Information, no distribution expenses were incurred under the Class
C Plan.
The Class A, Class B and Class C Plans continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority vote of the Rule 12b-1
Directors, cast in person at a meeting called for the purpose of voting on
such continuance. The Plans may each be terminated at any time, without
penalty, by the vote of a majority of the Rule 12b-1 Directors or by the vote
of the holders of a majority of the outstanding shares of the applicable class
on not more than 30 days' written notice to any other party to the Plans. The
Plans may not be amended to increase materially the amounts to be spent for
the services described therein without approval by the shareholders of the
applicable class (by both Class A and Class B shareholders, voting separately,
in the case of material amendments to the Class A Plan), and all material
amendments are required to be approved by the Board of Directors in the manner
described above. Each Plan will automatically terminate in the event of its
assignment. The Fund will not be contractually obligated to pay expenses
incurred under any Plan if it is terminated or not continued.
Pursuant to each Plan, the Board of Directors will review at least
quarterly a written report of the distribution expenses incurred on behalf of
each class of 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 Rule 12b-1 Directors shall be committed to the
Rule 12b-1 Directors.
Pursuant to each Distribution Agreement, the Fund has agreed to indemnify
PMFD and Prudential Securities to the extent permitted by applicable law
against certain liabilities under the Securities Act. Each Distribution
Agreement was last approved by the Board of Directors, including a majority of
the Rule 12b-1 Directors, on May 3, 1994.
NASD Maximum Sales Charge Rule. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred
sales charges and asset-based sales charges to 6.25% of total gross sales of
each class of shares. Interest charges on unreimbursed distribution expenses
equal to the prime rate plus one percent per annum may be added to the 6.25%
limitation. Sales from the reinvestment of dividends and distributions are not
included in the calculation of the 6.25% limitation. The annual asset-based
sales charge on shares of the Fund may not exceed .75 of 1% per class. The
6.25% limitation applies to each class of the Fund rather than on a per
shareholder basis. If aggregate sales charges were to exceed 6.25% of the
total gross sales of any class, all sales charges on shares of that class
would be suspended.
B-16
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities,
options on securities and futures contracts for the Fund, the selection of
brokers, dealers and futures commission merchants to effect the transactions
and the negotiation of brokerage commissions, if any. For purposes of this
section, the term "Manager" includes the Subadviser. Purchases and sales of
securities or futures contracts on a securities exchange or board of trade are
effected through brokers or futures commission merchants who charge a commis-
sion for their services. Orders may be directed to any broker or futures
commission merchant, including, to the extent and in the manner permitted by
applicable law, Prudential Securities and its affiliates. Brokerage commis-
sions on U. S. securities, options and futures exchanges or boards of trade
are subject to negotiation between the Manager and the broker or futures
commission merchant. On foreign securities exchanges, commissions may be
fixed.
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 may be purchased directly from an
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 maker, and it will not
execute a negotiated trade with Prudential Securities if execution involves
Prudential Securities' acting as principal with respect to any part of the
Fund's order.
In placing orders for portfolio securities or futures contracts for the
Fund, the Manager is required to give primary consideration to obtaining the
most favorable price and efficient execution. Within the framework of this
policy, the Manager will consider the research and investment services
provided by brokers, dealers or futures commission merchants who effect or are
parties to portfolio transactions of the Fund, the Manager or the Manager's
other clients. Such research and investment services are those which brokerage
houses customarily provide to institutional investors and include statistical
and economic data and research reports on particular companies and industries.
Such services are used by the Manager in connection with all of its investment
activities, and some of such services obtained in connection with the execu-
tion of transactions for the Fund may be used in managing other investment
accounts. Conversely, brokers, dealers or futures commission merchants
furnishing such services may be selected for the execution of transactions of
such other accounts, whose aggregate assets are far larger than the Fund, and
the services furnished by such brokers, dealers or futures commission mer-
chants may be used by the Manager in providing investment management for the
Fund. Commission rates are established pursuant to negotiations with the
broker, dealer or futures commission merchant based on the quality and
quantity of execution services provided by the broker, dealer or futures
commission merchant in the light of generally prevailing rates. The Manager's
policy is to pay higher commissions to brokers, other than Prudential Securi-
ties, for particular transactions than might be charged if a different broker
had been selected, on occasions when, in the Manager's opinion, this policy
furthers the objective of obtaining best price and execution. In addition, the
Manager is authorized to pay higher commissions on brokerage transactions for
the Fund to brokers, dealers or futures commission merchants other than
Prudential Securities in order to secure research and investment services
described above, subject to review by the Fund's Board of Directors from time
to time as to the extent and continuation of this practice. The allocation of
orders among brokers, dealers and futures commission merchants and the
commission rates paid are reviewed periodically by the Fund's Board of
Directors. Portfolio securities may not be purchased from any underwriting or
selling syndicate of which Prudential Securities (or any affiliate), during
the existence of the syndicate, is a principal underwriter (as defined in the
Investment Company Act), except in accordance with rules of the SEC. This
limitation, in the opinion of the 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 limitations.
Subject to the above considerations, the Manager may use Prudential
Securities as a broker or futures commission merchant for the Fund. In order
for Prudential Securities (or any affiliate) to effect any portfolio
transactions for the Fund, the commissions, fees or other remuneration
received by Prudential Securities (or any affiliate) must be reasonable and
fair compared to the commissions, fees or other remuneration paid to other
brokers or futures commission merchants in connection with comparable
transactions involving similar securities or futures being purchased or sold
on a securities or commodities exchange during a comparable period of time.
This standard would allow Prudential Securities (or any affiliate) to receive
no more than the remuneration which would be expected to be received by an
unaffiliated broker or futures commission merchant in a commensurate
arm's-length transaction. Furthermore, the Board of Directors of the Fund,
including a majority of the non-interested Directors, has adopted procedures
which are reasonably designed to provide that any commissions, fees or other
remuneration paid to Prudential Securities (or any affiliate) are consistent
with the foregoing standard. In accordance with Section 11(a) of the
Securities Exchange Act of 1934, Prudential Securities may not retain
compensation for effecting transactions on a national securities exchange for
the Fund unless the Fund has expressly authorized the retention of such
compensation. Prudential Securities must furnish to the Fund at least annually
a statement setting forth the total amount of all
B-17
<PAGE>
compensation retained by Prudential Securities from transactions effected for
the Fund during the applicable period. Brokerage and futures transactions with
Prudential Securities (or any affiliate) are also subject to such fiduciary
standards as may be imposed upon Prudential Securities (or such affiliate) by
applicable law.
Transactions in options by the Fund will be subject to limitations
established by each of the exchanges governing the maximum number of options
which may be written or held by a single investor or group of investors acting
in concert, regardless of whether the options are written or held on the same
or different exchanges or are written or held in one or more accounts or
through one or more brokers. Thus, the number of options which the Fund may
write or hold may be affected by options written or held by the Manager and
other investment advisory clients of the Manager. An exchange may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions.
The table below sets forth information concerning the payment of
commissions by the Fund, including the commissions paid to Prudential
Securities, for the three-year period ended April 30, 1994.
<TABLE>
<CAPTION>
Year ended Year ended Year ended
April 30, April 30, April 30,
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund ........................................ $640,908 $641,156 $507,037
Total brokerage commissions paid to Prudential
Securities and its foreign affiliates .............................................. 62,385 $ 84,496 $155,200
Percentage of total brokerage commissions paid
to Prudential Securities and its foreign
affiliates ......................................................................... 9.7% 13.2% 30.6%
</TABLE>
The Fund effected approximately 11.3% of the total dollar amount of its
transactions involving the payment of commissions through Prudential
Securities during the fiscal year ended April 30, 1994. Of the total brokerage
commissions paid during that period, $582,231 (or 90%) were paid to firms
which provide research, statistical or other services to PMF. PMF has not
seperately identified a portion of such brokerage commissions as applicable to
the provision of such research, statistical or other services.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next
determined net asset value per share plus a sales charge which, at the
election of the investor, may be imposed either (i) at the time of purchase
(Class A shares) or (ii) on a deferred basis (Class B or Class C shares). See
"Shareholder Guide--How to Buy Shares of the Fund" in the Prospectus.
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except
that the Fund has agreed with the SEC in connection with the offering of a
conversion feature on Class B shares to submit any amendment of the Class A
distribution and service plan to both Class A and Class B shareholders) and
(iii) only Class B shares have a conversion feature. See "Distributor." Each
class also has separate exchange privileges. See "Shareholder Investment
Account--Exchange Privilege."
Specimen Price Make-up
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 5% and Class
B* and Class C* shares are sold at net asset value. Using the Fund's net asset
value at April 30, 1994, the maximum offering price of the Fund's shares is as
follows:
Class A
Net asset value and redemption price per Class A share . . . $13.21
Maximum sales charge (5% of offering price). . . . . . . . . .70
------
Offering price to public . . . . . . . . . . . . . . . . . . $13.91
======
Class B
Net asset value, offering price and redemption price to
public per Class B share* . . . . . . . . . . . . . . . . $13.16
======
Class C
Net asset value, offering price and redemption price to
public per Class C share* . . . . . . . . . . . . . . . . $13.16
======
_________
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus. Class C shares
did not exist on April 30, 1994.
B-18
<PAGE>
Reduction and Waiver of Initial Sales Charges--Class A Shares
Combined Purchase and Cumulative Purchase Privilege. If an investor or an
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the
purchases may be combined to take advantage of the reduced sales charges
applicable to larger purchases. See the table of breakpoints under "Share-
holder Guide--Alternative Purchase Plan" in the Prospectus.
An eligible group of related Fund investors includes any combination of
the following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group
that holds 25% or more of the outstanding voting securities of a
corporation will be deemed to control the corporation, and a
partnership will be deemed to be controlled by each of its general
partners);
(e) a trust created by the individual, the beneficiaries of which are
the individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act
account created by the individual or the individual's spouse; and
(g) one or more employee benefits plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that
employer).
The Distributor must be notified at the time of purchase that the
investor is entitled to a reduced sales charge. The reduced sales charge will
be granted subject to confirmation of the investor's holdings. The Combined
Purchase and Cumulative Purchase Privilege does not apply to individual
participants in any retirement or group plans.
Rights of Accumulation. Reduced sales charges 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 privi-
lege) to determine the reduced sales charge. However, the value of shares held
directly with the Transfer Agent and through Prudential Securities will not be
aggregated to determine the reduced sales charge. All shares must be held
either directly with the Transfer Agent or through Prudential Securities. The
value of existing holdings for purposes of determining the reduced sales
charge is calculated using the maximum offering price (net asset value plus
maximum sales charge) as of the previous business day. See "How the Fund
Values its Shares" in the Prospectus. The Distributor must be notified at the
time of purchase that the shareholder is entitled to a reduced sales charge.
The reduced sales charge will be granted subject to confirmation of the
investor's holdings. Rights of Accumulation are not available to individual
participants in any retirement or group plans.
Letter of Intent. Reduced sales charges are available to investors (or an
eligible group of related investors) 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. All shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other
than those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the
Transfer Agent or through Prudential Securities. The Distributor must be
notified at the time of purchase that the investor is entitled to a reduced
sales charge. The reduced sales charge will be granted subject to confirmation
of the investor's holdings. Letters of Intent are not available to individual
participants in any retirement or group plan.
A Letter of Intent permits a purchaser to establish a total investment
goal to be achieved by any number of investments over a thirteen-month period.
Each investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Escrowed Class A shares totaling 5% of the dollar amount of the
Letter of Intent will be held by the Transfer Agent in the name of the
purchaser. The effective date of a Letter of Intent 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 Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the purchaser is required to
pay the difference between the
B-19
<PAGE>
sales charge otherwise applicable to the purchases made during this period and
the sales charge 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 Class A
shares of the Fund pursuant to a Letter of Intent should carefully read such
Letter of Intent.
Waiver of the Contingent Deferred Sales Charge--Class B Shares.
The contingent deferred sales charge is waived under circumstances
described in the Prospectus. See "Shareholder Guide--How to Sell Your Shares
- --Waiver of the Contingent Deferred Sales Charges--Class B Shares" in the
Prospectus. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.
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 letter
unable to engage in any substantial from a physician on the physician's
gainful activity by reason of any letterhead stating that the shareholder
medically determinable physical or (or, in the case of a trust, the
mental impairment which can be grantor) is permanently disabled. The
expected to result in death or to be letter must also indicate the date of
of long-continued and indefinite disability.
duration.
Distribution from an IRA or 403(b) A copy of the distribution form from the
Custodial Account custodial firm indicating (i) the date
of birth of the shareholder and (ii) that
the shareholder is over age 59 1/2 and
is taking a normal distribution--
signed by the shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the
reason for the distribution.
Excess Contributions A letter from the shareholder (for an
IRA) or the plan administrator/trustee
on company letterhead indicating the
amount of the excess and whether or not
taxes have been paid.
The Transfer Agent reserves the right to request such additional
documents as it may deem appropriate.
Quantity Discount--Class B Shares Purchased Prior to August 1, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund
purchased prior to August 1, 1994 if immediately after a purchase of such
shares, the aggregate cost of all Class B shares of the Fund owned by you in a
single account exceeded $500,000. For example, if you purchased $100,000 of
Class B shares of the Fund and the following year purchase an additional
$450,000 of Class B shares with the result that the aggregate cost of your
Class B shares of the Fund following the second purchase was $550,000, the
quantity discount would be available for the second purchase of $450,000 but
not for the first purchase of $100,000. The quantity discount will be imposed
at the following rates depending on whether the aggregate value exceeded
$500,000 or $1 million:
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
------------------- ---------------------- ---------------
First . . . . . . . . . . . . 3.0% 2.0%
Second. . . . . . . . . . . . 2.0% 1.0%
Third . . . . . . . . . . . . 1.0% 0%
Fourth and thereafter . . . . 0% 0%
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
B-20
<PAGE>
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a stock certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for
full shares and may be redeposited in the Account at any time. There is no
charge to the investor for issuance of a certificate. The Fund makes available
to the shareholders the following privileges and plans.
Automatic Reinvestment of Dividends and/or Distributions
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund. An
investor may direct the Transfer Agent in writing not less than five full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. In the case of recently
purchased shares for which registration instructions have not been received on
the record date, cash payment will be made directly to the dealer. Any
shareholder who receives a cash payment representing a dividend or
distribution may reinvest such distribution at net asset value by returning
the check or the proceeds to the Transfer Agent within 30 days after the
payment date. Such investment will be made at the net asset value per share
next determined after receipt of the check or proceeds by the Transfer Agent.
Such shareholder will receive credit for any contingent deferred sales charge
paid in connection with the amount of proceeds being reinvested.
Exchange Privilege
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to
the minimum investment requirements of such funds. Shares of such other
Prudential Mutual Funds may also be exchanged for shares of the Fund. All
exchanges are made on the basis of relative net asset value next determined
after receipt of an order in proper form. An exchange will be treated as a
redemption and purchase for tax purposes. Shares may be exchanged for shares
of another fund only if shares of such fund may legally be sold under applica-
ble 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 whose shares may be distributed by the Distributor.
Class A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential Mutual Funds, shares of Prudential
Government Securities Trust (Intermediate Term Series) and shares of the money
market funds specified below. No fee or sales load will be imposed upon the
exchange. Shareholders of money market funds who acquired such shares upon
exchange of Class A shares may use the Exchange Privilege only to acquire
Class A shares of the Prudential Mutual Funds participating in the Exchange
Privilege.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets
Prudential Tax-Free Money Fund
Class B and Class C. Shareholders of the Fund may exchange their Class B
and Class C shares for Class B and Class C shares, respectively, of certain
other Prudential Mutual Funds and shares of Prudential Special Money Market
Fund, a money market fund. No CDSC will be payable upon such exchange, but a
CDSC may be payable upon the redemption of the Class B and Class C shares
acquired as a result of an exchange. The applicable sales charge will be that
imposed by the fund in which shares were initially purchased and the purchase
date will be deemed to be the first day of the month after the initial
purchase, rather than the date of the exchange.
B-21
<PAGE>
Class B and Class C shares of the Fund may also be exchanged for shares of
Prudential Special 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 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 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, respectively, without subjecting such shares to
any CDSC. Shares of any fund participating in the Class B and Class C Exchange
Privilege that were acquired through reinvestment of dividends or
distributions may be exchanged for Class B or Class C shares of other funds,
respectively, without being subject to any CDSC.
Additional details about the Exchange Privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on 60 days' notice, and any fund, including the Fund,
or the Distributor, has the right to reject any exchange application relating
to such fund's shares.
Dollar Cost Averaging
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more
shares when the price is low and fewer shares when the price is high. The
average cost per share is lower than it would be if a constant number of
shares were bought at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement,
to save for a major expenditure, such as the purchase of a home, or to finance
a college education. The cost of a year's education at a four-year college
today averages around $14,000 at a private college and around $4,800 at a
public university. Assuming these costs increase at a rate of 7% a year, as
has been projected, for the freshman class of 2007, the cost of four years at
a private college could reach $163,000 and $97,000 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
Period of
Monthly investments: $100,000 $150,000 $200,000 $250,000
-------------------- -------- -------- -------- --------
25 Years . . . . . . . . . . . $ 110 $ 165 $ 220 $ 275
20 Years . . . . . . . . . . . 176 264 352 440
15 Years . . . . . . . . . . . 296 444 592 740
10 Years . . . . . . . . . . . 555 833 1,110 1,388
5 Years. . . . . . . . . . . . 1,371 2,057 2,742 3,428
See "Automatic Savings Accumulation Plan."
- -----------
1 Source information concerning the costs of education at public
universities is available from The College Board Annual Survey of
Colleges, 1992. Information about the costs of private colleges is from
the Digest of Education Statistics, 1992; The National Center for
Education Statistics; and the U.S. Department of Education. Average costs
for private institutions include tuition, fees, room and board.
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 an investment will
fluctuate so that an investor's shares when redeemed may be worth more or
less than their original cost.
Automatic Savings Accumulation Plan (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account or
Prudential Securities account (including a Command Account) to be debited to
invest
B-22
<PAGE>
specified dollar amounts in shares of the Fund. The investor's bank
must be a member of the Automatic Clearing House System. Stock certificates
are not issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
Systematic Withdrawal Plan
A systematic withdrawal plan is available to shareholders through
Prudential Securities or the Transfer Agent. Such withdrawal plan provides for
monthly or quarterly checks in any amount, except as provided below, up to the
value of the shares in the shareholder's account. Withdrawals of Class B or
Class C shares may be subject to a CDSC. See "Shareholder Guide--How to Sell
Your Shares--Contingent Deferred Sales Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment
Account-Automatic Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must generally be recognized for federal income tax
purposes. In addition, withdrawals made concurrently with purchases of
additional shares are inadvisable because of the sales charge applicable to (i)
the purchase of Class A shares and (ii) the withdrawal of Class B and Class C
shares. Each shareholder should consult his or her own tax adviser with regard
to the tax consequences of the systematic withdrawal plan, particularly if used
in connection with a retirement plan.
Tax-Deferred Retirement Plans
Various 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, the administration, custodial fees and other
details is available from Prudential Securities or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
Tax-Deferred Retirement Accounts
Individual Retirement Accounts. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, an 8% rate of return and a 39.6% federal income tax bracket
and shows how much more retirement income can accumulate within an IRA as
opposed to a taxable individual savings account.
Tax-Deferred Compounding 1
Contributions Personal
Made Over: Savings IRA
------------- -------- --------
10 years $ 26,265 $ 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
- ------------
1 The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings
in the IRA account will be subject to tax when withdrawn from the account.
B-23
<PAGE>
NET ASSET VALUE
The net asset value per share is the net worth of the Fund (assets,
including securities at value, minus liabilities) divided by the number of
shares outstanding. Net asset value is calculated separately for each class.
The value of securities, other than options listed on national securities
exchanges, is based on the last sale prices on national securities exchanges
as of the close of the New York Stock Exchange (which is currently 4:00 P.M.,
or later for certain trading, New York time), or, in the absence of recorded
sales, at the average of readily available closing bid and asked prices on
such exchanges or over-the-counter. If no quotations are available, securities
will be valued at fair value as determined in good faith by the Board of
Directors. Options on stocks and stock indices traded on national securities
exchanges are valued as of the close of options trading on such exchanges
(which is currently 4:10 P.M., New York time), and stock index futures and
options thereon, which are traded on commodities exchanges or boards of trade,
are valued at their last sale price as of the close of such commodities
exchanges (which is currently 4:15 P.M., New York time) or, if there was no
sale on the applicable securities exchange, commodities exchange or board of
trade on such day, at the average of quoted bid and asked prices as of the
close of such exchange or board of trade. Short-term investments which mature
in 60 days or less are valued at amortized cost, if their original maturity
was 60 days or less, or by amortizing their value on the 61st day prior to
maturity if their maturity when acquired by the Fund was more than 60 days,
unless this is determined not to represent fair value by the Board of
Directors. Securities or other assets for which reliable market quotations are
not readily available are valued by the Manager in good faith at fair value in
accordance with procedures adopted by the Fund's Board of Directors on the
basis of the following factors: cost of the security, transactions in
comparable securities, relationship among various securities and such other
factors as may be determined by the Manager to materially affect the value of
the security.
Because the New York Stock Exchange or the national securities exchanges
on which stock options are traded have adopted different trading hours on
either a permanent or temporary basis, the Board of Directors of the Fund may
reconsider the time at which net asset value is computed. In addition, the
Fund may compute its net asset value as of any time permitted pursuant to any
exemption, order or statement of the SEC or its staff.
The net asset value of Class B and Class C shares will generally be lower
than the net asset value of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. It
is expected, however, that the net asset value per share of each class will
tend to converge immediately after the recording of dividends which will
differ by approximately the amount of the distribution-related expense accrual
differential among the classes.
PERFORMANCE INFORMATION
Average Annual Total Return. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B and Class C shares. See "How the Fund Calcu-
lates Performance" in the Prospectus.
Average annual total return is computed according to the following
formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or
10 year periods (or fractional portion thereof) of a
hypothetical $1,000 payment made at the beginning of
the 1, 5 or 10 year periods.
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal
or state income taxes that may be payable upon redemption.
B-24
<PAGE>
The average annual total return for Class A shares for the one
year and since inception periods ended April 30, 1994 was 8.17% and 9.96%,
respectively. The average annual total return for Class B shares for the one
year and since inception periods ended on April 30, 1994 was 8.22%
and 10.24%, respectively. During these periods, no Class C shares were
outstanding.
Aggregate Total Return. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B
and Class C shares. See "How the Fund Calculates Performance" in the Prospec-
tus.
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
-------
P
Where: P = a hypothetical initial payment of $1000.
ERV = Ending Redeemable Value at the end of the 1, 5 or
10 year periods (or fractional portion thereof) of a
hypothetical $1,000 payment made at the beginning of
the 1, 5 or 10 year periods.
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The aggregate total return for Class A shares for the one year
and since inception periods ended on April 30, 1994 was 14.16% and 51.97%,
respectively. The aggregate total return for Class B shares for the one year
and since inception periods ended on April 30, 1994 was 13.22% and 47.38%,
respectively. During these periods, no Class C shares were outstanding.
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 and
Class C shares. This 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 )6
YIELD = 2 [( ------- +1 ) -1 ]
( cd )
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
Yield fluctuates and an annualized yield quotation is not a
representation by the 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 April 30, 1994 were .52% and
0% for the Class A and Class B shares, respectively. During this period, no
Class C shares were outstanding.
B-25
<PAGE>
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.1
CHART
1 Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1993
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). 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.
DIVIDENDS AND DISTRIBUTIONS
The Fund expects to pay dividends of net investment income semi-annually.
Net capital gains, if any, will be distributed at least annually. In
determining amounts of capital gains to be distributed, any capital loss
carryforwards from prior years will offset capital gains. Dividends and
distributions will be paid in additional Fund shares based on the net asset
value at the close of business on the record date, unless the shareholder
elects in writing not less than five full business days prior to the record
date to receive such distributions in cash.
The per share dividends on Class B and Class C shares will be lower than
the per share dividends on Class A shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share distributions of capital gains, if any, will be in the same amount for
Class A, Class B and Class C shares. See "Net Asset Value."
TAXES
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code.
This relieves the Fund (but not its shareholders) from paying federal income
tax on income which is distributed to shareholders, provided that it
distributes at least 90% of its net investment income and short-term capital
gains, and permits net capital gains of the Fund (i.e., the excess of net
long-term capital gains over net short-term capital losses) to be treated as
long-term capital gains of the shareholders, regardless of how long
shareholders have held their shares in the Fund. Dividends declared in October,
November and December payable to shareholders of record on a specified date in
October, November and December and paid in the following January will be
treated as having been paid by the Fund and received by each shareholder in
such prior year. Under this rule, therefore, a shareholder may be taxed in one
year on dividends or distributions actually received in January of the
following year.
Qualification as a regulated investment company under the Internal Revenue
Code requires, among other things, that (a) at least 90% of the Fund's annual
gross income, without offset for losses from the sale or other disposition of
securities, be derived from interest, dividends, payments with respect to
securities loans, and gains from the sale or other disposition of securities or
options thereon or foreign currencies, or other income (including but not
limited to gains from options, futures or forward contracts) derived with
respect to its business of investing in such securities or currencies; (b) the
Fund derives less than 30% of its gross income from gains (without offset for
losses) from the sale or other disposition of securities, options thereon,
futures
B-26
<PAGE>
contracts, options thereon, forward contracts and foreign currencies
held for less than three months (except for foreign currencies directly related
to the Fund's business of investing in foreign securities), and (c) the Fund
must diversify its holdings so that, at the end of each quarter of the taxable
year, (i) at least 50% of the market value of the Fund's assets is represented
by cash, U.S. Government securities and other securities limited in respect of
any one issuer to an amount not greater than 5% 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).
The Fund is required under the Internal Revenue Code to distribute 98% of
its ordinary income in the same calendar year in which it is earned. The Fund
is also required to distribute during the calendar year 98% of the capital
gain net income it earned during the twelve months ending on October 31 of
such calendar year. In addition, the Fund must distribute during the calendar
year any undistributed ordinary income and undistributed capital gain net
income from the prior year or the twelve-month period ending on October 31 of
such prior calendar year, respectively. To the extent it does not meet these
distribution requirements, the Fund will be subject to a non-deductible 4%
excise tax on the undistributed amount. For purpose of this excise tax, income
on which the Fund pays income tax is treated as distributed.
Gains or losses on sales of securities by the Fund will be long-term
capital gains or losses if the securities have been held by it for more than
one year, except in certain cases where the Fund acquires a put or a call
thereon or makes a short sale against-the-box. Other gains or losses on the
sale of securities will be short-term capital gains or losses. If an option
written by the Fund lapses or is terminated through a closing transaction,
such as a repurchase by the Fund of the option from its holder, the Fund will
realize a short-term capital gain or loss, depending on whether the premium
income is greater or less than the amount paid by the Fund in the closing
transaction. If securities are sold by the Fund pursuant to the exercise of a
call option written by it, the Fund will add the premium received to the sale
price of the securities delivered in determining the amount of gain or loss on
the sale. If securities are purchased by the Fund pursuant to the exercise of
a put option written by it, the Fund will subtract the premium received from
its cost basis in the securities purchased. Certain transactions of the Fund
may be subject to wash sale, short sale and straddle provisions of the
Internal Revenue Code. In addition, debt securities acquired by the Fund may
be subject to original issue discount and market discount rules.
Special rules will apply to most options on stock indices, futures
contracts and options thereon, and forward foreign currency exchange contracts
in which the Fund may invest. See "Investment Objective and Policies." These
investments will generally constitute "Section 1256 contracts" and will be
required to be "marked to market" for federal income tax purposes at the end
of the Fund's taxable year; that is, treated as having been sold at market
value. Except with respect to forward foreign currency exchange contracts, 60%
of any gain or loss recognized on such "deemed sales" and on actual disposi-
tions will be treated as long-term capital gain or loss, and the remainder
will be treated as short-term capital gain or loss. The Fund's ability to
invest in forward foreign currency exchange contracts, options on equity
securities and on stock indices, futures contracts and options thereon may be
affected by the 30% limitation on gains derived from securities held less than
three months, discussed above.
Gains or losses attributable to fluctuations in exchange rates which
occur between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities are treated as
ordinary income or ordinary loss. Similarly, gains or losses on dispositions of
debt securities denominated in a foreign currency attributable to fluctuations
in the value of the foreign currency between the date of acquisition of the
security and the date of disposition also are treated as ordinary gain or loss.
These gains or losses, referred to under the Internal Revenue Code as "Section
988" gains or losses, increase or decrease the amount of the Fund's investment
company taxable income available to be distributed to its shareholders as
ordinary income, rather than increasing or decreasing the amount of the Fund's
net capital gain. If Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any taxable
ordinary dividend distributions, or distributions made before the losses were
realized would be recharacterized as a return of capital to shareholders, rather
than as an ordinary dividend, reducing each shareholder's basis in his or her
shares.
Shareholders electing to receive dividends and distributions in the form
of additional shares will have a cost basis for federal income tax purposes in
each share so received equal to the net asset value of a share of the Fund on
the reinvestment date.
Any loss realized on a sale, redemption or exchange of shares of the Fund
by a shareholder will be disallowed to the extent the shares are replaced
within a 61-day period (beginning 30 days before the disposition of shares).
Shares purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes
of calculating gain or loss realized upon a sale or exchange of shares of the
Fund.
B-27
<PAGE>
Any dividends or distributions paid shortly after a purchase by an
investor may have the effect of reducing the per share net asset value of the
investor's shares by the per share amount of the dividends or distributions.
Furthermore, such dividends or distributions, although in effect a return of
capital, are subject to federal income taxes. Prior to purchasing shares of
the Fund, therefore, the investor should carefully consider the impact of
dividends or capital gains distributions which are expected to be or have been
announced.
Dividends and distributions may also be subject to state and local
taxes.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine in advance the effective
rate of foreign tax to which the Fund will be subject, since the amount of the
Fund's assets to be invested in various countries is not known.
Each shareholder will be notified within 60 days after the close of the
Fund's taxable year whether the foreign taxes, if any, paid by the Fund will
"pass through" for that year and, if so, such notification will designate (a)
the shareholder's portion of the foreign taxes paid by the Fund and (b) the
portion of the dividend which represents income derived from foreign sources.
The Fund does not expect to meet the requirements necessary to "pass through"
foreign taxes.
CUSTODIAN, TRANSFER AND DIVIDEND
DISBURSING AGENT AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting
books and records pursuant to an agreement with the Fund. Subcustodians
provide custodial services for the Fund's foreign assets held outside the
United States. See "How the Fund is Managed--Custodian and Transfer and
Dividend Disbursing Agent" in the Prospectus.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison,
New Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the
Fund. It is a wholly-owned subsidiary of PMF. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder communica-
tions, the processing of shareholder transactions, the maintenance of share-
holder account records, payment of dividends and distributions, and related
functions. For these services, PMFS receives an annual fee per shareholder
account, a new account set-up fee for each manually-established account and a
monthly inactive zero balance account fee per shareholder account. PMFS is
also reimbursed for its out-of-pocket expenses, including, but not limited to,
postage, stationery, printing, allocable communications expenses and other
costs. For the fiscal year ended April 30, 1994, the Fund incurred fees of
approximately $225,000 for the service of PMFS.
Deloitte & Touche, 1633 Broadway, New York, New York 10019,
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.
B-28
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC. Portfolio of Investments
April 30, 1994
- -----------------------------------------------------
Value
Shares Description (Note 1)
- -----------------------------------------------------
LONG-TERM INVESTMENTS--89.6%
COMMON STOCKS--81.7%
Auto Sector--4.6%
43,700 APS Holding Corp.*......... $ 876,731
3,400 Bayerisch Motoren Werks
(Germany) ................. 1,857,732
485,000 Fiat Spa* (Italy).......... 2,114,311
14,600 Ford Motor Co.............. 852,275
45,600 General Motors Corp........ 2,587,800
----------
8,288,849
----------
Basic Industry Sector--19.6%
55,800 Akzo N V (ADR)
(Netherlands) ............. 3,379,387
72,800 Alaska Steel Holding
Corporation ............... 1,665,300
29,100 Aluminum Co. of America.... 1,978,800
10,700 BASF AG.................... 2,136,756
65,000 Champion Int'l. Corp....... 1,982,500
34,000 Enplas Corp. (Japan)....... 1,216,560
485,000 Fletcher Forestry, Ltd..... 698,400
93,000 Hanson PLC (ADR) (United
Kingdom) .................. 1,918,125
4,000 I O Data Device, Inc.
(Japan)* .................. 713,652
48,500 IMC Fertilizer Group,
Inc.* ..................... 1,794,500
58,200 Imperial Chemical Ind. (ADR)
(United Kingdom) .......... 2,895,450
29,100 International Paper Co..... 1,898,775
131,100 Kymmene Corp. (Finland).... 2,700,001
19,400 Monsanto Co................ 1,595,650
85,000 Om Group, Inc.............. 1,700,000
106,000 Potash Corp................ 2,703,000
77,600 Praxair, Inc............... 1,484,100
8,450 Rayonier, Inc.............. 238,712
23,000 Unidanmark (ADR)
(Denmark)* ................ 810,750
53,400 USX Corp................... 1,815,600
19,400 Westinghouse Electric
Corp. ..................... 225,525
----------
35,551,543
----------
Consumer Goods & Services Sector--4.0%
58,200 Archer-Daniels-Midland
Co. ....................... 1,338,600
50,000 Au Bon Pain Co., Inc....... 962,500
34,000 Aviall, Inc................ $ 510,000
97,000 Interco, Inc.*............. 1,297,375
14,600 ITT Corp................... 1,310,350
47,000 Nissen Co., Ltd. (Japan)... 1,853,130
----------
7,271,955
----------
Energy Sector--18.1%
43,700 Aquila Gas Pipeline
Corp.* .................... 393,300
143,000 Baker Hughes, Inc.......... 2,627,625
97,000 Cabre Exploration, Ltd.*
(Canada) .................. 963,971
77,600 Canadian Occidental
Petroleum, Ltd ............ 1,570,396
100,000 Crestar Energy Inc.*....... 1,174,472
43,700 Cross Timbers Oil Co....... 633,650
128,500 Discovery West Corp.*
(Canada) .................. 455,081
184,300 Ensign Resource Service
Group, Inc.* .............. 915,772
58,200 Enterprise Oil PLC., (ADR)
(United Kingdom) .......... 1,091,250
55,000 Exxon Corp................. 3,458,125
250,000 Global Marine, Inc.*....... 1,000,000
400,000 Mesa, Inc.*................ 2,450,000
97,000 Morrison Petroleum, Ltd.
(Canada) .................. 797,466
83,400 Oryx Energy Co............. 1,407,375
77,600 Rigei Energy Corp.*........ 1,134,900
180,100 Rowan Cos., Inc.*.......... 1,305,725
54,000 Societe Nationale Elf
Aquitaine, (ADR)
(France) .................. 1,964,250
105,200 Sonat Offshore Drilling,
Inc. ...................... 1,867,300
121,300 Talisman Energy, Inc.*
(Canada) .................. 2,794,476
53,400 Trident Holding, Inc....... 480,600
116,500 USX - Delhi Group.......... 1,660,125
155,000 USX - Marathon Group....... 2,615,625
----------
32,761,484
----------
Financial Services Sector--6.5%
28,700 CCP Insurance, Inc......... 591,938
11,600 Credit Lyonnais Group
(France) .................. 1,135,363
40,000 First Eastern Corp.*....... 1,055,000
See Notes to Financial Statements.
B-29
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC.
- -----------------------------------------------------
Value
Shares Description (Note 1)
- -----------------------------------------------------
Financial Services Sector (cont'd.)
30,100 Integra Financial Corp..... $1,410,937
43,650 Mercantile Bancorp, Inc.... 1,571,400
29,100 Midlantic Corp.*........... 854,812
43,700 SunAmerica, Inc............ 1,600,512
72,800 Toronto-Dominion Bank
(Canada) .................. 1,111,521
29,100 Union Planters Corp........ 771,150
72,800 Whitney Holdings Corp...... 1,656,200
----------
11,758,833
----------
Health Care Sector--2.0%
61,100 FHP International Corp.*... 1,496,950
19,400 Intergroup Healthcare
Corp.* .................... 875,425
49,300 Physicians Corp. of
America, Inc.* ............ 1,189,363
----------
3,561,738
----------
Housing Sector--2.1%
45,200 Ethan Allen Interiors,
Inc.* ..................... 1,107,400
14,600 Lapeyre (France)........... 863,080
38,800 Owens Corning
Fiberglass* ............... 1,348,300
29,100 Ryland Group, Inc.......... 582,000
----------
3,900,780
----------
Public Utilities Sector--3.4%
38,800 Allgon AB (Sweden)*........ 1,159,110
48,500 Entergy Corp............... 1,485,313
43,700 Telefonica de Espana, S.A.
(ADR) (Spain) ............. 1,780,775
30,000 Telefonos de Mexico (ADR)
(Mexico) .................. 1,766,250
----------
6,191,448
----------
Retailing Sector--1.2%
14,000 Aoyama Trading Co.
(Japan) ................... 648,595
19,400 Lowes Companies, Inc....... 683,850
30,000 Men's Wearhouse, Inc.*..... 851,250
----------
2,183,695
----------
Technology Sector--8.7%
118,000 Adaptec, Inc.*............. 1,873,250
55,000 Cisco Systems, Inc.*....... 1,670,625
75,000 Cyrix Corp................. $1,884,375
75,000 Electronic Arts, Inc....... 1,612,500
65,000 Electronics for Imaging,
Inc. ...................... 991,250
100,000 Informix Corp.............. 1,637,500
38,800 Motorola, Inc.............. 1,731,450
58,000 Murata Manufacturing Co.,
Ltd. (Japan) .............. 2,515,525
110,000 Verifone, Inc.*............ 1,925,000
----------
15,841,475
----------
Transportation Sector--11.5%
19,400 British Airways (ADR)
(United Kingdom) .......... 1,263,425
230,000 Canadian Pacific, Ltd...... 3,737,500
48,500 Continental Airlines,
Inc.* ..................... 830,563
63,100 Illinois Central Corp...... 2,169,062
48,500 Kansas City Southern
Industries, Inc. .......... 1,891,500
72,800 KLM Royal Dutch Airlines
Corp.* .................... 2,074,800
150,000 Methanex Corp.* (Canada)... 1,612,641
97,000 Northwest Airlines
Corp.* .................... 1,491,375
67,900 Ryder System, Inc.......... 1,697,500
146,000 Singapore Airlines, Ltd.
(Singapore) ............... 1,145,687
135,800 Southern Pacific Rail
Corp.* .................... 2,987,600
-----------
20,901,653
-----------
Total common stocks
(cost $140,599,670) 148,213,453
-----------
Convertible Preferred
Stocks--5.8%
Auto Sector--1.2%
16,200 Chrysler Corp.............. 2,176,875
-----------
Basic Industry Sector--3.0%
24,833 Alumax, Inc................ 2,685,068
25,000 Bethleham Steel Corp....... 1,409,375
19,067 Cyprus Amax Minerals Co.... 1,248,889
-----------
5,343,332
-----------
Technology Sector--1.6%
34,000 Nokia Corp................. 2,902,767
-----------
Total preferred stocks
(cost $7,595,016) 10,422,974
-----------
See Notes to Financial Statements.
B-30
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC.
- -----------------------------------------------------
Value
Warrants Description (Note 1)
- -----------------------------------------------------
Warrants*--0.5%
Retailing Sector
Autobacs Seven Co. (Japan)
expiring Mar. '96 @
(YEN)8,231
200 (cost $739,375)............ $ 920,000
----------
Principal
Amount Corporate Bonds--1.6%
(000) Basic Industry Sector
- ---------
Treuhandanstalt (Germany)
7.75%, 10/1/02
$ 2,888 (cost $2,956,461)......... 2,957,780
-----------
Total long-term investments
(cost $151,890,522)....... 162,514,207
-----------
SHORT-TERM INVESTMENT--14.0%
GOVERNMENT ISSUES--0.5%
U.S.Treasury Bills,
3.52%, 6/16/94
1,000# (cost $995,509)........... 995,509
------------
- -----------------------------------------------------
Principal
Amount Value
(000) Description (Note 1)
- -----------------------------------------------------
REPURCHASE AGREEMENT--13.5%
Joint Repurchase Agreement
Account,
3.54%, 5/2/94, (Note 5)
$ 24,413 (cost $24,413,000)........ $ 24,413,000
------------
Total short-term investment
(cost $25,408,509)........ 25,408,509
------------
Total Investments--103.6%
(cost $177,299,031;
Note 4)................... 187,922,716
COMMON STOCK SOLD
Shares SHORT--(0.1)%
Retailing Sector
25,000 Jan Bell Marketing, Inc.*
(proceeds $341,976)...... (137,500)
------------
Total investments, net of
short sales--103.5%...... 187,785,216
Liabilities in excess of
other assets--(3.5%)..... (6,449,569)
------------
Net Assets--100%......... $181,335,647
============
- ---------------
* Non-income producing security.
ADR--American Depository Receipt.
# Pledged as collateral on short sale.
See Notes to Financial Statements.
B-31
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC.
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets April 30, 1994
--------------
<S> <C>
Investments, at value (cost $177,299,031) ................................ $ 187,922,716
Foreign currency, at value (cost $9,546,466) ............................. 9,770,822
Cash ..................................................................... 2,297
Deposits with broker for investment sold short ........................... 341,976
Receivable for investments sold .......................................... 2,640,088
Receivable for Fund shares sold .......................................... 572,243
Interest and dividends receivable ........................................ 459,727
Deferred expenses and other assets ....................................... 57,880
-------------
Total assets ............................................................ 201,767,749
-------------
Liabilities
Payable for investments purchased ........................................ 19,084,668
Forward contracts-net amount payable to counterparties ................... 446,513
Payable for Fund shares reacquired ....................................... 390,062
Accrued expenses and other liabilities ................................... 161,597
Investments sold short, at value (proceeds $341,976) ..................... 137,500
Distribution fee payable ................................................. 115,286
Management fee payable ................................................... 96,476
-------------
Total liabilities ....................................................... 20,432,102
-------------
Net Assets ............................................................... $ 181,335,647
=============
Net assets were comprised of:
Common stock, at par .................................................... $ 13,763
Paid-in capital in excess of par ........................................ 160,556,164
-------------
160,569,927
Overdistributed net investment income .................................... (511,077)
Accumulated net realized capital and currency gains ...................... 10,668,152
Net unrealized appreciation on investments and foreign currencies ........ 10,608,645
-------------
Net assets, April 30, 1994 ............................................... $ 181,335,647
=============
Class A:
Net asset value and redemption price per share
($53,237,492 / 4,030,623 shares of common stock issued and outstanding). $ 13.21
Maximum sales charge (5.25% of offering price) .......................... .73
------
Maximum offering price to public ........................................ $ 13.94
======
Class B:
Net asset value, offering price and redemption price per share
($128,098,155 / 9,732,466 shares of common stock issued and outstanding) $ 13.16
======
</TABLE>
See Notes to Financial Statements.
B-32
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC.
Statement of Operations
Year Ended
Net Investment Income April 30, 1994
--------------
Income
Dividends (net of foreign withholding
taxes of $108,903) ................. $ 3,353,985
Interest and discount earned ........ 515,264
------------
Total income ....................... 3,869,249
------------
Expenses
Management fee ...................... 1,032,341
Distribution fee--Class A ........... 108,720
Distribution fee--Class B ........... 1,089,811
Transfer agent's fees and expenses .. 225,000
Custodian's fees and expenses ....... 214,000
Registration fees ................... 59,500
Amortization of organization
expense ............................. 45,000
Reports to shareholders ............. 45,000
Directors' fees ..................... 37,500
Audit fee ........................... 30,000
Legal fees and expenses ............. 16,000
Miscellaneous ....................... 9,684
------------
Total expenses ..................... 2,912,556
------------
Net investment income ................ 956,693
------------
Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency
Transactions
Net realized gain (loss) on:
Security transactions ............... 21,864,808
Short sale transactions ............. 692,140
Financial futures contracts ......... (30,960)
Foreign currency transactions ....... (385,277)
------------
22,140,711
------------
Net change in unrealized appreciation
on:
Securities .......................... (5,310,456)
Short sales ......................... (26,371)
Foreign currencies .................. 11,417
------------
(5,325,410)
------------
Net gain on investments and foreign
currency transactions ............... 16,815,301
------------
Net Increase in Net Assets
Resulting from Operations ............ $ 17,771,994
============
See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC.
Statement of Changes in Net Assets
Year Ended April 30,
Increase (Decrease) ----------------------------
in Net Assets 1994 1993
------------ ------------
Operations
Net investment
income ............... $ 956,693 $ 2,779,322
Net realized gain on
investments and
foreign currency
transactions ......... 22,140,711 11,595,984
Net change in
unrealized
appreciation of
investments .......... (5,325,410) 4,606,869
------------- -------------
Net increase in net
assets resulting from
operations ........... 17,771,994 18,982,175
------------- -------------
Net equalization credits
(debits) .............. 152,418 (245,681)
------------- -------------
Dividends and
distributions (Note 1)
Dividends from net
investment income
Class A ............. (724,102) (1,037,706)
Class B ............. (736,046) (1,396,681)
------------- -------------
(1,460,148) (2,434,387)
------------- -------------
Distributions from net
capital and currency
gains
Class A ............. (5,543,404) (2,957,844)
Class B ............. (12,086,917) (6,314,531)
------------- -------------
(17,630,321) (9,272,375)
------------- -------------
Fund share transactions
(Note 6)
Net proceeds from Fund
shares subscribed .... 81,243,634 21,369,671
Net asset value of Fund
shares issued in
reinvestment of
dividends and
distributions ........ 17,794,396 10,984,287
Cost of shares
reacquired ............ (52,846,996) (63,974,340)
------------- -------------
Net increase (decrease)
in net assets from
Fund share
transactions ......... 46,191,034 (31,620,382)
------------- -------------
Total increase
(decrease) ............ 45,024,977 (24,590,650)
Net Assets
Beginning of year ...... 136,310,670 160,901,320
------------- -------------
End of year ............ $ 181,335,647 $ 136,310,670
============= =============
See Notes to Financial Statements.
B-33
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC.
Notes to Financial Statements
Prudential Multi-Sector Fund, Inc. (the ``Fund''), is registered under the
Investment Company Act of 1940 as a non-diversified, open-end management
investment company. The Fund was incorporated in Maryland on February 21, 1990
and had no operations until May 11, 1990 when 4,398 shares each of Class A and
Class B common stock were sold for $100,000 to Prudential Mutual Fund
Management, Inc. (``PMF''). Investment operations commenced June 29, 1990. The
Fund's investment objective is long-term growth of capital by primarily
investing in equity securities of companies in various economic sectors.
Note 1. Accounting Policies The following is a summary of significant
accounting policies followed by the Fund
in the preparation of its financial statements.
Securities Valuation: Investments, including options, traded on a national
securities exchange and NASDAQ national market equity securities are valued at
the last reported sales price on the primary exchange on which they are traded.
Securities traded in the over-the-counter market (including securities listed on
exchanges whose primary market is believed to be over-the-counter) and listed
securities for which no sales were reported on that date are valued at the mean
between the last reported bid and asked prices. Stock options traded on national
securities exchanges are valued at the closing prices on such exchanges.
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 which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less 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. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults, and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at
the closing rates of exchange.
(ii) purchases and sales of investment securities, income and expenses--at
the rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the fiscal year, the Fund does not
isolate that portion of the results of operations arising as a result of changes
in the foreign exchange rates from the fluctuations arising from changes in the
market prices of securities held at the end of the fiscal year. Similarly, the
Fund does not isolate the effect of changes in foreign exchange rates from the
fluctuations arising from changes in the market prices of long-term portfolio
securities sold during the fiscal year. Accordingly, these realized foreign
currency gains (losses) are included in the reported net realized losses on
security transactions.
Net realized losses on foreign currency transactions of $385,277 represents
net foreign exchange losses from sales and maturities of short-term securities,
holding of foreign currencies, currency gains or losses realized between the
trade and settlement dates of security transactions, and the difference between
the amounts of dividends and foreign taxes recorded on the Fund's books and the
U.S. dollar equivalent amounts actually received or paid. Net currency gains and
losses from valuing foreign currency denominated assets and liabilities at year
end exchange rates are reflected as a component of net unrealized appreciation
on investments and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the level of governmental supervision and regulation of
foreign securities markets and the possibility of political or economic
instability.
Forward Currency Contracts: The Fund enters into forward currency contracts in
order to hedge its exposure to changes in currency exchange rates on its
portfolio holdings. A forward contract is a commitment to purchase or sell a
foreign currency at a future date (usually the security transaction settlement
date) at a negotiated forward rate. In the
B-34
<PAGE>
event that a security fails to settle within the normal settlement period, the
forward currency contract is renegotiated at a new rate. The gain or loss
arising from the difference between the settlement value of the original and
renegotiated forward contracts is isolated and is included in net realized
losses from foreign currency transactions. Risks may arise upon entering into
these contracts from the potential inability of the counterparties to meet the
terms of their contracts.
Short Sales: The Fund may sell a security it does not own in anticipation of a
decline in the market value of that security (short sale). When the Fund makes a
short sale, it must borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale as collateral for its
obligation to deliver the security upon conclusion of the sale. The Fund may
have to pay a fee to borrow the particular security and may be obligated to pay
over any payments received on such borrowed securities. A gain, limited to the
price at which the Fund sold the security short, or a loss, unlimited in
magnitude, will be recognized upon the termination of a short sale if the market
price at termination is less than or greater than, respectively, the proceeds
originally received.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Fund is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This is known as
the ``initial margin''. Subsequent payments, known as ``variation margin'', are
made or received by the Fund each day, depending on the daily fluctuations in
the value of the underlying security. Such variation margin is recorded for
financial statement purposes on a daily basis as unrealized gain or loss until
the contracts expire or are closed, at which time the gain or loss is
reclassified to realized gain or loss. The Fund invests in financial futures
contracts solely for the purpose of hedging its existing portfolio securities or
securities the Fund intends to purchase against fluctuations in value caused by
changes in prevailing market conditions. Should market conditions move
unexpectedly, the Fund may not achieve the anticipated benefits of the financial
futures contracts and may realize a loss. The use of futures transactions
involves the risk of imperfect correlation in movements in the price of futures
contracts, interest rates and the underlying hedged assets. There were no
financial futures contracts outstanding at April 30, 1994.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. Net
investment income, other than distribution fees, and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Equalization: The Fund follows the accounting practice known as equalization by
which a portion of the proceeds from sales and costs of reacquisitions of Fund
shares, equivalent on a per share basis to the amount of distributable net
investment income on the date of the transaction, is credited or charged to
undistributed net investment income. As a result, undistributed net investment
income per share is unaffected by sales or reacquisitions of the Fund's shares.
Dividends and Distributions: Dividends from net investment income are declared
and paid semi-annually. The Fund will distribute net capital gains, if any, at
least annually. Dividends and distributions are recorded on the ex-dividend
date.
Income distributions and capital gains distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Reclassification of Capital Accounts: Effective May 1, 1993 the Fund began
accounting and reporting for distributions to shareholders in accordance with
Statement of Position 93-2; Determination, Disclosure, and Financial Statement
Presentation of Income, Capital Gain, and Return of Capital Distributions by
Investment Companies. As a result of this statement, the Fund changed the
classification of distributions to shareholders to better disclose the
differences between financial statement amounts and distributions determined in
accordance with income tax regulations. The effect caused by adopting this
statement was to decrease undistributed net investment income by $86,242, and
increase accumulated net realized gains by $86,242 compared to amounts
previously reported through April 30, 1993. During the year ended April 30,
1994, the Fund reclassified $652,086 of foreign currency losses to undistributed
net investment income from accumulated net realized gains on investment
transactions. Net investment income, net realized gains, and net assets were not
affected by this change.
Taxes: It is the Fund's policy to meet the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable net income to its shareholders. Therefore, no federal income tax
provision is required.
Withholding taxes on foreign dividends have been provided for in accordance
with the Fund's understanding of the applicable country's tax rules and rates.
Deferred Organizational Expenses: Approximately $225,000 of expenses were
incurred in connection with the
B-35
<PAGE>
organization and initial registration of the Fund. This amount is being
amortized over a period of 60 months from the date investment operations
commenced.
Note 2. Agreements The Fund has a management agreement with
PMF. Pursuant to this agreement, PMF has
responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PMF has entered into a subadvisory
agreement with The Prudential Investment Corporation (``PIC''). PIC furnishes
investment advisory services in connection with the management of the Fund.
PMF pays for the services of PIC, the cost of compensation of officers of the
Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The
Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .65 of 1% of the Fund's average daily net assets.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), who acts as the distributor of the Class A shares
of the Fund, and Prudential Securities Incorporated (``PSI''), who acts as
distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing the Fund's Class A and Class B shares, the Fund, pursuant to plans
of distribution, pays the Distributors a reimbursement, accrued daily and
payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its
distribution-related expenses with respect to the Class A shares at an annual
rate of up to .30 of 1% of the average daily net assets of the Class A shares.
Such expenses under the Class A Plan were .20 of 1% of the average daily net
assets of the Class A shares for the eight months ended December 31, 1993.
Effective January 1, 1994, the Class A Plan distribution expenses were increased
to .25 of 1% of the average daily net assets. PMFD pays various broker-dealers
including PSI & Pruco Securities Corporation (``Prusec''), affiliated
broker-dealers, for account servicing fees and other expenses incurred by such
broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payments of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Fund under the plans and
the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Fund that it has received approximately $229,600 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended April 30, 1994. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons and
incurred other distribution costs.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Fund's shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total reimbursement made by the Fund
pursuant to the Class B Plan. For the fiscal year ended April 30, 1994, PSI
advised the Fund that it received approximately $283,400 in contingent deferred
sales charges imposed upon redemptions by certain shareholders. PSI, as
distributor, has also advised the Fund that at April 30, 1994, the amount of
distribution expenses incurred by PSI and not yet reimbursed by the Fund or
recovered through contingent deferred sales charges approximated $2,093,300.
This amount may be recovered through future payments under the Class B Plan or
contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Services, Inc. ("PMFS"),
Transactions a wholly-owned subsidiary of PMF, serves as the
with Affiliates Fund's transfer agent. During the fiscal year
ended April 30, 1994, the Fund incurred fees of
approximately $206,000 for the services of PMFS. As of April 30, 1994,
approximately $22,000 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations include certain out-of-pocket expenses
paid to non-affiliates.
B-36
<PAGE>
For the fiscal year ended April 30, 1994, PSI earned approximately $62,400 in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
Note 4. Portfolio Purchases and sales of investment securities,
Securities other than short-term investments, for the fiscal
year ended April 30, 1994 aggregated $177,353,193
and $165,135,386, respectively.
The federal income tax basis of the Fund's investment at April 30, 1994 was
$177,349,184 and, accordingly, net unrealized appreciation for federal income
tax purposes was $10,573,532 (gross unrealized appreciation--$17,666,497, gross
unrealized depreciation--$7,092,965).
At April 30, 1994, the Fund had outstanding forward currency contracts to
purchase and sell foreign currency as follows:
Value at
Foreign Currency Settlement Date Current Appreciation/
Purchase Contracts Payable Value (Depreciation)
- ---------------------- ---------------- ---------- --------------
Finnish Markka,
expiring 6/7/94 $ 276,727 $ 280,557 $ 3,830
Swedish Krona,
expiring 6/1/94 1,760,121 1,836,766 76,645
---------- ---------- -------
$2,036,848 $2,117,323 $80,475
========== ========== =======
Value at
Foreign Currency Settlement Date Current Appreciation/
Sale Contracts Receivable Value (Depreciation)
- ---------------------- ---------------- ---------- --------------
British Pounds,
expiring 6/9/94 $ 5,932,000 $ 6,078,535 $(146,535)
Finnish Markka,
expiring 6/7/94 5,479,718 5,672,674 (192,956)
German Deutschemarks,
expiring 5/24/94-
6/20/94 2,503,240 2,584,346 (81,106)
Swedish Krona,
expiring 6/1/94 2,698,612 2,805,003 (106,391)
----------- ----------- ----------
$16,613,570 $17,140,558 $(526,988)
=========== =========== ==========
Note 5. Joint Repurchase The Fund, along with other affiliated registered
Agreement Account investment companies, transfers uninvested cash
balances into a single joint account, the daily
aggregate balance of which is invested in one or more repurchase agreements
collateralized by U.S. Treasury or federal agency obligations. At April 30,
1994, the Fund had a 2.50% undivided interest in the repurchase agreements in
the joint account. The undivided interest for the Fund represented $24,413,000
in principal amount. As of such date, each repurchase agreement in the joint
account and the value of the collateral therefor was as follows:
Barclays de Zoete Wedd, Inc., 3.55%, in the principal amount of $53,000,000,
repurchase price $53,015,679, due 5/2/94. The value of the collateral including
accrued interest is $54,060,428.
Goldman Sachs & Co., 3.50%, in the principal amount of $315,000,000,
repurchase price $315,091,875, due 5/2/94. The value of the collateral including
accrued interest is $321,300,231.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 3.55%, in the principal amount of
$315,000,000, repurchase price $315,093,188, due 5/2/94. The value of the
collateral including accrued interest is $321,300,584.
Morgan (J.P.) Securities, Inc., 3.58%, in the principal amount of
$295,000,000, repurchase price $295,088,008, due 5/2/94. The value of the
collateral including accrued interest is $300,901,625.
Note 6. Capital The Fund offers both Class A and Class B shares.
Class A shares are sold with a front-end sales
charge of up to 5.25%. Class B shares are sold with a contingent deferred
sales charge which declines from 5% to zero depending on the period of time
the shares are held. Both classes of shares have equal rights as to earnings,
assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
There are 2 billion shares of common stock, $.001 par value per share,
divided into two classes, designated Class A and B common stock, each of which
consists of 1 billion authorized shares.
Transactions in shares of common stock were as follows:
Class A Shares Amount
- -------- ---------------- ------------
Year ended April 30, 1994:
Shares sold .................... 2,294,758 $ 31,099,578
Shares issued in reinvestment of
dividends and distributions ... 451,690 5,953,064
Shares reacquired .............. (2,004,567) (26,983,820)
------------- -------------
Net increase in shares
outstanding ................... 741,881 $ 10,068,822
============= =============
Year ended April 30, 1993:
Shares sold .................... 938,716 $ 11,757,387
Shares issued in reinvestment of
dividends and distributions ... 313,201 3,776,474
Shares reacquired .............. (2,169,604) (26,909,889)
------------- -------------
Net decrease in shares
outstanding ................... (917,687) $ (11,376,028)
============= =============
B-37
<PAGE>
Class B Shares Amount
- -------- ---------------- ------------
Year ended April 30, 1994:
Shares sold .................... 3,671,115 $ 50,144,056
Shares issued in reinvestment of
dividends and distributions ... 900,324 11,841,332
Shares reacquired .............. (1,905,508) (25,863,176)
------------- -------------
Net increase in shares
outstanding ................... 2,665,931 $ 36,122,212
============= =============
Year ended April 30, 1993:
Shares sold .................... 775,060 $ 9,612,284
Shares issued in reinvestment of
dividends and distributions ... 597,615 7,207,813
Shares reacquired .............. (2,992,163) (37,064,451)
------------- -------------
Net decrease in shares
outstanding ................... (1,619,488) $ (20,244,354)
============= =============
B-38
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC.
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B
-------------------------------------- -----------------------------------------
June 29, June 29,
1990(D) 1990(D)
Through Through
Years Ended April 30, April Years Ended April 30, April
PER SHARE OPERATING --------------------------- 30, ------------------------------ 30,
PERFORMANCE: 1994 1993 1992 1991 1994 1993 1992 1991
------- ------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period......... $ 13.19 $ 12.51 $ 12.10 $ 11.37 $ 13.15 $ 12.47 $ 12.06 $ 11.37
------ ------ ------ -------- -------- -------- ------- -------
Income from investment operations:
- ----------------------------------
Net investment income........................ .18 .30 .23 .40 .07 .19 .13 .32
Net realized and unrealized gain on
investments and foreign currency
transactions............................... 1.64 1.47 .50 .59 1.63 1.47 .51 .59
------ ------ ------ -------- -------- -------- ------- -------
Total from investment operations........... 1.82 1.77 .73 .99 1.70 1.66 .64 .91
------ ------ ------ -------- -------- -------- ------- -------
Less distributions:
- -------------------
Dividends from net investment income......... (.21) (.30) (.30) (.26) (.10) (.19) (.21) (.22)
Distributions from net capital and currency
gains...................................... (1.59) (.79) (.02) -- (1.59) (.79) (.02) --
------ ------ ------ -------- -------- -------- -------- -------
Total distributions........................ (1.80) (1.09) (.32) (.26) (1.69) (.98) .23) (.22)
------ ------ ------ -------- -------- -------- -------- -------
Net asset value, end of period............... $ 13.21 $ 13.19 $ 12.51 $ 12.10 $ 13.16 $ 13.15 $ 12.47 12.06
====== ====== ====== ======== ======== ======== ======== ========
TOTAL RETURN#................................ 14.16% 15.14% 6.16% 17.64% 13.22% 14.13% 5.39% 16.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............. $53,237 $43,390 $52,625 $ 59,085 $128,098 $ 92,921 $108,276 $ 99,537
Average net assets (000)..................... $49,840 $46,890 $57,403 $ 55,545 $108,981 $ 99,072 $108,510 $ 82,890
Ratios to average net assets:
Expenses, including distribution fees...... 1.30% 1.28% 1.29% 1.35%* 2.08% 2.08% 2.09% 2.15%*
Expenses, excluding distribution fees...... 1.08% 1.08% 1.09% 1.15%* 1.08% 1.08% 1.09% 1.15%*
Net investment income...................... 1.15% 2.44% 1.83% 4.28%* .35% 1.64% 1.03% 3.39%*
Portfolio turnover........................... 110% 209% 147% 253% 110% 209% 147% 253%
- ---------------
<FN>
* Annualized.
(D) Commencement of investment operations.
# 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 return for periods of less than a full year are not
annualized.
</FN>
</TABLE>
See Notes to Financial Statements.
B-39
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors of
Prudential Multi-Sector Fund, Inc.
We have audited the accompanying statement of assets and liabilities of
Prudential Multi-Sector Fund, Inc., including the portfolio of investments, as
of April 30, 1994, the related statements of operations for the year then ended
and of changes in net assets for each of the two years in the period then ended
and the financial highlights for each of the three years in the period then
ended and the period June 29, 1990 (commencement of investment operations) to
April 30, 1991. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
April 30, 1994, by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential
Multi-Sector Fund, Inc. at April 30, 1994, the results of its operations, the
changes in its net assets and the financial highlights for the respective stated
periods, in conformity with generally accepted accounting principles.
Deloitte & Touche
New York, New York
June 16, 1994
B-40
<PAGE>
Prudential Mutual Funds
Supplement dated November 1, 1994
The following information supplements the Statement of Additional
Information of each of the Funds listed below effective November 1, 1994. For
those Funds having only one class of shares, all references herein to "Class A
shares" shall be deemed to refer to "shares."
PURCHASE AND REDEMPTION OF FUND SHARES
The minimum initial investment requirement is waived for purchases of Class
A shares of each of the Funds listed below effected through an exchange of Class
B shares of The BlackRock Government Income Trust.
Listed below are the names of the Prudential Mutual Funds and the dates of
the Statement of Additional Information to which this supplement relates.
Name of Fund Prospectus Date
- ------------------------------------------------------ ---------------------
Prudential Adjustable Rate Securities Fund, Inc. May 1, 1994
Prudential Allocation Fund September 29, 1994
Prudential California Municipal Fund
California Series August 1, 1994
California Income Series August 1, 1994
Prudential Equity Fund, Inc. August 1, 1994
Prudential Equity Income Fund, Inc. August 1, 1994
Prudential Europe Growth Fund, Inc. July 11, 1994
Prudential Global Fund, Inc. August 1, 1994
Prudential Global Genesis Fund, Inc. August 1, 1994
Prudential Global Natural Resources Fund, Inc. August 1, 1994
Prudential GNMA Fund, Inc. August 1, 1994
Prudential Government Income Fund, Inc. August 1, 1994
Prudential Growth Opportunity Fund, Inc. August 1, 1994
Prudential High Yield Fund, Inc. August 1, 1994
Prudential IncomeVertible(R) Fund, Inc. August 1, 1994
Prudential Intermediate Global Income Fund, Inc. August 1, 1994
Prudential Multi-Sector Fund, Inc. August 1, 1994
Prudential Municipal Bond Fund August 1, 1994
High Yield Series
Insured Series
Modified Term Series
<PAGE>
Prudential Municipal Series Fund
Arizona Series August 1, 1994
Florida Series August 1, 1994
Hawaii Income Series September 19, 1994
Georgia Series August 1, 1994
Maryland Series August 1, 1994
Massachusetts Series August 1, 1994
Michigan Series August 1, 1994
Minnesota Series August 1, 1994
New Jersey Series August 1, 1994
New York Series August 1, 1994
North Carolina Series August 1, 1994
Ohio Series August 1, 1994
Pennsylvania Series August 1, 1994
Prudential Pacific Growth Fund, Inc. August 1, 1994
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio August 1, 1994
Short-Term Global Income Portfolio August 1, 1994
Prudential Strategist Fund, Inc. August 1, 1994
Prudential Structured Maturity Fund, Inc.
Income Portfolio August 1, 1994
Prudential U.S. Government Fund August 1, 1994
Prudential Utility Fund, Inc. August 1, 1994
Global Utility Fund, Inc. August 1, 1994
Nicholas-Applegate Fund, Inc. August 1, 1994
MF940C-4
<PAGE>
SEMI-ANNUAL
REPORT
SEMI-ANNUAL REPORT OCTOBER 31, 1994
Letter to Shareholders
December 19, 1994
Dear Shareholder:
In the past year, the stock market has provided both good and bad times for
mutual fund investors. Stock market returns slowed at the end of 1993, and
despite a short summer rally, they have been modest all during 1994. We are
pleased to announce that despite the ups and downs of this difficult stock
market, the Prudential Multi-Sector Fund earned above-average returns.
Prudential Multi-Sector Fund At A Glance
CUMULATIVE TOTAL RETURNS1
As of October 31, 1994
<TABLE>
<CAPTION>
Six months Since Inception2
<S> <C> <C>
Class A 11.4% 67.9%
Class B 10.6 62.2
Class C N/A 5.4
Lipper Capital 00.0 54.1(D)
Appreciation Fund Avg.*
S&P 500** 3.9 53.1(D)
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS3
Period Ended September 30, 1994
<TABLE>
<CAPTION>
One Year Since Inception2
<S> <C> <C>
Class A 4.7% 11.2%
Class B 4.3 11.5
Class C N/A N/A
</TABLE>
1Source: Lipper Analytical Services, Inc. Past performance is not a
guarantee of future results. Investment return and principal value will
fluctutate so that an investor's shares, when redeemed, may be worth more or
less than their original cost. These figures do not take into account sales
charges. The fund charges a maximum front end sales load of 5.0% for Class A
shares. Class B shares are subject to a declining contingent deferred sales
charge of 5%, 4%, 3%, 2%, 1% and 1% during these six years. Beginning in
February 1995, the Fund's Class B shares will convert to Class A shares
approximately seven years after purchase.
2 Inception dates: 6/29/90 Class A and Class B, 8/1/94 Class C.
3 Source: Prudential Mutual Fund Management Inc. These averages take into
account applicable sales charges. Class C average annual total returns are not
reported since the share class has only been in existence since August.
*These are the average returns of 13 funds for the capital appreciation fund
category for one year and 87 since inception of the Class A and B shares, as
determined by Lipper Analytical Services, Inc.
**The S&P 500 Index is a capital-weighted index of 500 stocks primarily
traded on the New York Stock Exchange, which represents a broad indication of
stock price movements. The securities that comprise the S&P may differ
substantially from the securities in the Fund.
(D)Since 6/29/90.
-1-
<PAGE>
The Goal
The Fund seeks long-term capital growth by investing primarily in domestic
and foreign stocks of companies in specific economic sectors, and makes
significant shifts among these sectors based on world economic changes and
other investment trends. The Fund may use derivatives like foreign currency
futures, forward contracts and stock options to hedge risk.
Benefitting from the "New World Economic Order"
Greg Smith, chief investment strategist for Prudential Securities
Incorporated and a consultant to the Fund's subadvisor, recommends stock market
sector allocations. He anticipates that the economic recovery underway in the
U.S., Canada, Western Europe and Australia will continue to gather steam. He
also believes developing countries in Latin America, Central Europe and Asia
may be gearing up for economic growth, as well.
Consistent with this forecast, sector allocation recommendations continue to
be translated to stocks expected to benefit from the improving global economy.
We are currently heavily weighted in "cyclical" stocks (i.e., sectors expected
to benefit from economic recovery). These include technology, basic industry
and energy. As of October 31, 1994, these three sectors comprised approximately
62% of the Fund's net assets. The strong performance of these sectors so far
this year has contributed to the Fund's above-average returns relative to its
peers and the broader market.
"Portfolio manager
Greg Goldberg selects the
individual securities for
the Fund."
Crossing the Border for Opportunities
As Europe, Asia and Latin America join the global recovery, we have sought
comparable cyclical opportunities outside the U.S for the stock portion of the
portfolio. Currently, approximately one-third of the portfolio is invested in
foreign companies. These holdings tend to be multinational corporations doing
business around the world, and while most are concentrated in Europe, the Fund
also buys stocks of companies in Asia and Latin America. In investigating
opportunities abroad, we have focused on manufacturers and producers expected
to benefit early in the recovery cycle.
Technological Advances
We expect the strong growth potential in many emerging markets to make the
technology sector a major benefactor of the global recovery. As many
lesser-developed countries invest in the newest and best technology products
available, more-established nations will be forced to follow suit to maintain
comparable levels of technology. This signals growth opportunities for
well-positioned technology firms. Some of the Fund's largest holdings can be
found in this sector, including software firm Silicon Graphics, PC-networking
firm Cisco Systems and computer hardware manufacturers Seagate Technology.
-2-
<PAGE>
Industrial Strength
In the industrial sector, the Fund's holdings are concentrated in the
chemical, fertilizer and forest products industries. We expect companies in
these industries to benefit early in the recovery cycle as economic activity
increases worldwide.
Chemical holdings include Dutch firm Akzo, which has undergone a
restructuring that we believe makes it well-positioned for global recovery.
Canadian fertilizer firm Potash Corp. of Saskatchewan, positioned for
increasing prices and demand in the industry, was the Fund's largest holding
as of October 31, 1994. In forest products, we maintain positions in
International Paper and Finnish low-cost paper producer Kymmene Oy.
Energy Surge
In the energy sector, we are concentrated in oil exploration and production
and oil services firms that should benefit from price increases as demand
outstrips supply. Exxon and recently-privatized French oil firm Elf Aquitaine
are oil exploration and production holdings we expect to benefit from
production increases. Well-positioned oil services holdings include U.S.
driller Sonat Offshore.
Outlook
Despite the uneven performance of the U.S. stock market this year, we believe
the continuing improvement of the U.S. economy - when combined with a similar
recovery overseas - may help U.S. stocks achieve returns in line with
historical averages. At the same time, the uncertainty of inflationary
pressures and their effect on U.S. interest rates and of shifting economic
conditions in global markets makes individual stock selection more important
than ever. Consequently, we will continue to explore opportunities across a
wide range of sectors and geographic regions.
As always, we are pleased you have selected the Prudential Multi-Sector Fund
for the portion of your portfolio devoted to long-term growth.
Sincerely,
Lawrence C. McQuade
President
Gregory Goldberg
Portfolio Manager
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC. Portfolio of Investments
October 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--87.4%
Common Stocks--80.5%
Auto Sector--1.3%
485,000 Fiat Spa (Italy)............. $ 1,976,008
29,200 Ford Motor Co................ 861,400
------------
2,837,408
------------
Basic Industry Sector--19.6%
55,800 Akzo N V (ADR)
(Netherlands).............. 3,494,475
10,700 BASF AG (Germany)............ 2,258,869
40,000 Burlington Northern, Inc..... 1,995,000
116,300 Carolina Freight Corp........ 1,177,538
35,000 Cementos Paz Delaware Rio Sa*
(ADR) (Luxembourg)......... 866,250
40,000 General Electric Co.......... 1,955,000
145,000 Hanson PLC (ADR) (United
Kingdom)................... 2,700,625
Hylsamex (ADR) (Mexico)...... 3,318,750
150,000
8,000 I O Data Device, Inc.
(Japan).................... 338,637
3,026,400
58,200 Imperial Chemical Ind. (ADR)
(United Kingdom)...........
29,100 International Paper Co....... 2,167,950
131,100 Kymmene Oy (Finland)......... 3,575,067
200,000 Nextel Communications,
Inc........................ 4,187,500
85,000 Om Group, Inc................ 1,700,000
190,000 Potash Corp. (Canada)........ 6,721,250
77,600 Praxair, Inc................. 1,794,500
80,000 TJ International, Inc........ 1,440,000
------------
42,717,811
------------
Consumer Goods & Services Sector--4.2%
100,000 Au Bon Pain Co., Inc.*....... 1,950,000
34,000 Aviall, Inc.................. 340,000
50,000 Federal Express Corp.*....... 3,037,500
47,000 Nissen Co., Ltd. (Japan)..... 1,916,886
40,000 Temple Inland, Inc........... 1,890,000
------------
9,134,386
------------
Energy Sector--21.7%
43,700 Aquila Gas Pipeline Corp..... 333,213
205,000 Baker Hughes, Inc............ $ 4,202,500
97,000 Cabre Exploration, Ltd.*
(Canada)................... 824,799
100,000 Crestar Energy, Inc.*........ 1,229,251
43,700 Cross Timbers Oil Co......... 699,200
258,500 Discovery West Corp.*
(Canada)................... 1,051,240
184,300 Ensign Resource Service
Group, Inc.*............... 640,475
58,200 Enterprise Oil PLC. (ADR)
(United Kingdom)........... 1,091,250
79,000 Exxon Corp................... 4,967,125
250,000 Global Marine, Inc.*......... 1,187,500
500,000 Mesa, Inc.*.................. 2,562,500
97,000 Morrison Petroleum, Ltd.*
(Canada)................... 645,495
83,400 Oryx Energy Co............... 1,209,300
55,000 Phillips Petroleum Co........ 2,028,125
145,600 Rigel Energy Corp.*.......... 2,013,149
225,000 Rollins Environmental
Services, Inc.............. 1,321,875
301,000 Rowan Cos., Inc.*............ 2,295,125
150,000 Santa Fe Pacific Gold
Corp.*..................... 2,156,250
3,296,250
90,000 Societe Nationale Elf
Aquitaine (ADR) (France)...
183,000 Sonat Offshore Drilling,
Inc........................ 3,637,125
121,300 Talisman Energy, Inc.*
(Canada)................... 2,578,561
53,400 Trident Holding, Inc......... 567,375
116,500 USX--Delhi Group............. 1,412,563
155,000 USX--Marathon Group.......... 2,906,250
2,412,500
100,000 YPF Sociedad Anonima* (ADR)
(Argentina)................
------------
47,268,996
------------
Financial Services Sector--2.7%
Banco Wiese* (ADR) (Peru).... 1,275,000
60,000
28,700 CCP Insurance, Inc........... 444,850
50,000 Continental Corp............. 756,250
75,000 MBNA Corp.................... 2,006,250
43,650 Mercantile Bancorp, Inc...... 1,516,838
------------
5,999,188
------------
</TABLE>
-4- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC.
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
Health Care Sector--0.5%
49,300 Physicians Corp. of America,
Inc.*...................... $ 1,189,363
------------
Public Utilities Sector--2.0%
68,500 Entergy Corp................. 1,601,187
50,000 Telefonos de Mexico (ADR)
(Mexico)................... 2,756,250
------------
4,357,437
------------
Retailing Sector--2.1%
45,000 Burlington Coat Factory
Warehouse*................. 585,000
225,000 Consolidated Stores Corp.*... 4,078,125
------------
4,663,125
------------
Technology Sector--20.2%
118,000 Adaptec, Inc.*............... 2,743,500
46,000 Aspen Technology, Inc.*...... 782,000
60,000 Cheyenne Software, Inc.*..... 667,500
100,000 Cirrus Logic Corp.*.......... 2,875,000
200,000 Cisco Systems, Inc.*......... 6,025,000
85,000 Compaq Computer Corp.*....... 3,410,625
90,000 Cyrix Corp.*................. 3,735,000
125,000 Electronic Arts, Inc.*....... 2,812,500
50,000 Informix Corp.*.............. 1,375,000
20,000 Motorola, Inc................ 1,177,500
63,800 Murata Manufacturing Co.,
Ltd.
(Japan).................... 2,602,070
127,500 National Semiconductors
Corp.*..................... 2,247,187
140,000 Seagate Technology Inc.*..... 3,552,500
155,000 Silicon Graphics, Inc.*...... 4,708,125
110,000 Verifone, Inc.*.............. 2,475,000
60,000 Vishay Intertechnology,
Inc........................ 2,947,500
------------
44,136,007
------------
Transportation Sector--6.2%
19,400 British Airways PLC (ADR)
(United Kingdom)........... 1,134,900
230,000 Canadian Pacific, Ltd.
(Canada)................... $ 3,680,000
50,000 Kansas City Southern Inds.,
Inc........................ 1,687,500
72,800 KLM Royal Dutch Airlines
Corp.*..................... 2,020,200
238,000 Methanex Corp.* (Canada)..... 3,563,533
146,000 Singapore Airlines, Ltd.
(Singapore)................ 1,400,075
------------
13,486,208
------------
Total common stocks
(cost $160,145,709).......... 175,789,929
------------
Convertible Preferred Stocks--5.0%
Basic Industry Sector--2.7%
24,833 Alumax, Inc.................. 3,187,936
25,000 Bethleham Steel Corp.*....... 1,343,750
19,067 Cyprus Amax Minerals Co.*.... 1,194,071
------------
5,725,757
------------
Technology Sector--2.3%
34,000 Nokia Corp. (Finland)........ 5,114,165
------------
Total preferred stocks
(cost $5,732,340).......... 10,839,922
------------
<CAPTION>
Warrants Warrants*--0.4%
- ---------
<C> <S> <C>
Retailing Sector
Autobacs Seven Co. (Japan)
expiring Mar. '96 @
(YEN)8,231
200 (cost $739,375).............. 807,500
------------
<CAPTION>
Principal
Amount Foreign Government
(000) Bonds--1.5%
- ---------
<C> <S> <C>
Federal Republic of Germany
Bonds,
8.00%, 3/20/97
$ 4,724 (cost $3,262,585)............ 3,229,936
------------
Total long-term investments
(cost $169,880,009)........ 190,667,287
------------
</TABLE>
-5- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC.
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
SHORT-TERM INVESTMENTS--8.2%
U.S. Government Securities--1.8%
U.S. Treasury Bills,
$ 1,000 # 4.54%, 11/25/94.............. $ 996,973
2,000 # 4.525%, 12/8/94.............. 1,990,699
1,000 # 4.56%, 12/15/94.............. 994,427
------------
Total U.S. Government
securities
(cost $3,982,099).......... 3,982,099
------------
Repurchase Agreement--6.4%
Joint Repurchase Agreement
Account,
13,892 4.77%, 11/1/94, (Note 5)
(cost $13,892,000)......... 13,892,000
------------
Total short-term investments
(cost $17,874,099)......... 17,874,099
------------
Total Investments--95.6%
(cost $187,754,108; Note
4)......................... 208,541,386
------------
<CAPTION>
COMMON STOCKS SOLD
Shares SHORT*--(3.2)%
- ---------
<C> <S> <C>
Retailing Sector--(2.3)%
25,000 Ann Taylor Stores, Inc....... $ (1,037,500)
50,000 Cracker Barrel Old Country,
Inc........................ (1,100,000)
50,000 Sports and Recreation,
Inc........................ (1,836,250)
38,000 Starbucks Corp............... (1,030,750)
------------
(5,004,500)
------------
Technology Sector--(0.9)%
40,000 Biogen, Inc.................. (1,960,000)
------------
Total common stocks sold
short
(proceeds $6,595,189)...... (6,964,500)
------------
Total investments, net of
short sales--92.4%......... 201,576,886
Other assets in excess of
other
liabilities--7.6%.......... 16,502,566
------------
Net Assets--100%............. $218,079,452
------------
------------
</TABLE>
- ---------------
* Non-income producing security.
ADR--American Depository Receipt.
# Pledged as collateral on short sale.
-6- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC.
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
Assets October 31, 1994
----------------
<S> <C>
Investments, at value (cost $187,754,108)............................................... $208,541,386
Foreign currency, at value (cost $17,189,280)........................................... 17,995,719
Cash.................................................................................... 2,696
Deposits with broker for investments sold short......................................... 6,595,189
Receivable for Fund shares sold......................................................... 2,270,386
Dividends and interest receivable....................................................... 299,871
Receivable for investments sold......................................................... 98,750
Deferred expenses and other assets...................................................... 31,916
----------------
Total assets.......................................................................... 235,835,913
----------------
Liabilities
Investments sold short, at value (proceeds $6,595,189).................................. 6,964,500
Payable for investments purchased....................................................... 6,055,835
Payable for Fund shares reacquired...................................................... 3,532,307
Forward contracts--amount payable to counterparties..................................... 803,161
Accrued expenses........................................................................ 149,242
Distribution fee payable................................................................ 138,280
Management fee payable.................................................................. 113,136
----------------
Total liabilities..................................................................... 17,756,461
----------------
Net Assets.............................................................................. $218,079,452
----------------
----------------
Net assets were comprised of:
Common stock, at par.................................................................... $ 15,893
Paid-in capital in excess of par........................................................ 189,051,584
----------------
189,067,477
Overdistributed net investment income................................................... (494,830)
Accumulated net realized capital and currency gains..................................... 9,082,702
Net unrealized appreciation on investments and foreign currencies....................... 20,424,103
----------------
Net assets, October 31, 1994............................................................ $218,079,452
----------------
----------------
Class A:
Net asset value and redemption price per share
($59,096,976 / 4,283,235 shares of common stock issued and outstanding)............. $13.80
Maximum sales charge (5.00% of offering price)........................................ .73
----------------
Maximum offering price to public...................................................... $14.53
----------------
----------------
Class B:
Net asset value, offering price and redemption price per share
($158,316,885 / 11,561,317 shares of common stock issued and outstanding)........... $13.69
----------------
----------------
Class C:
Net asset value, offering price and redemption price per share
($665,591 / 48,603 shares of common stock issued and outstanding)................... $13.69
----------------
----------------
</TABLE>
See Notes to Financial Statements.
-7-
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC.
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
Net Investment Income October 31, 1994
----------------
<S> <C>
Income
Dividends (net of foreign withholding
taxes of
$59,383)........................... $ 1,059,467
Interest............................. 399,215
----------------
Total income....................... 1,458,682
----------------
Expenses
Management fee....................... 617,489
Distribution fee--Class A............ 67,498
Distribution fee--Class B............ 679,410
Distribution fee--Class C............ 581
Custodian's fees and expenses........ 120,000
Transfer agent's fees and expenses... 115,000
Reports to shareholders.............. 59,000
Amortization of organization
expense.............................. 22,000
Registration fees.................... 20,000
Directors' fees...................... 19,000
Audit fee............................ 15,000
Legal fees........................... 14,000
Miscellaneous........................ 3,177
----------------
Total expenses..................... 1,752,155
----------------
Net investment loss.................... (293,473)
----------------
Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency
Transactions
Net realized gain (loss) on:
Security transactions................ 9,516,514
Foreign currency transactions........ 401,503
Short sale transactions.............. 193,601
Financial futures contracts.......... (1,040,626)
----------------
9,070,992
----------------
Net change in unrealized appreciation
on:
Securities........................... 10,163,593
Short sales.......................... (164,835)
Foreign currencies................... (183,300)
----------------
9,815,458
----------------
Net gain on investments and foreign
currency transactions................ 18,886,450
----------------
Net Increase in Net Assets
Resulting from Operations.............. $ 18,592,977
----------------
----------------
</TABLE>
PRUDENTIAL MULTI-SECTOR FUND, INC.
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) October 31, April 30,
in Net Assets 1994 1994
------------ ------------
<S> <C> <C>
Operations
Net investment income
(loss)................. $ (293,473) $ 956,693
Net realized gain on
investments and
foreign currency
transactions......... 9,070,992 22,140,711
Net change in
unrealized
appreciation of
investments.......... 9,815,458 (5,325,410)
------------ ------------
Net increase in net
assets resulting from
operations........... 18,592,977 17,771,994
------------ ------------
Net equalization
credits................ 16,247 152,418
------------ ------------
Dividends and
distributions (Note 1)
Dividends from net
investment income
Class A.............. -- (724,102)
Class B.............. -- (736,046)
------------ ------------
-- (1,460,148)
------------ ------------
Distributions from net
capital and currency
gains
Class A.............. (2,921,317) (5,543,404)
Class B.............. (7,437,397) (12,086,917)
Class C.............. (4,255) --
------------ ------------
(10,362,969) (17,630,321)
------------ ------------
Fund share transactions
(Note 6)
Proceeds from Fund
shares subscribed.... 55,922,413 81,243,634
Net asset value of
shares issued in
reinvestment of
dividends and
distributions........ 9,613,750 17,794,396
Cost of shares
reacquired............. (37,038,613) (52,846,996)
------------ ------------
Net increase in net
assets from Fund
share transactions... 28,497,550 46,191,034
------------ ------------
Total increase........... 36,743,805 45,024,977
Net Assets
Beginning of period...... 181,335,647 136,310,670
------------ ------------
End of period............ $218,079,452 $181,335,647
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
-8-
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC.
Notes to Financial Statements
(Unaudited)
Prudential Multi-Sector Fund, Inc. (the ``Fund''), is registered under the
Investment Company Act of 1940 as a non-diversified, open-end management
investment company. The Fund was incorporated in Maryland on February 21, 1990
and had no operations until May 11, 1990 when 4,398 shares each of Class A and
Class B common stock were sold for $100,000 to Prudential Mutual Fund
Management, Inc. (``PMF''). Investment operations commenced June 29, 1990. The
Fund's investment objective is long-term growth of capital by primarily
investing in equity securities of companies in various economic sectors.
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.
Securities Valuation: Investments, including options, traded on a national
securities exchange and NASDAQ national market equity securities are valued at
the last reported sales price on the primary exchange on which they are traded.
Securities traded in the over-the-counter market (including securities listed on
exchanges whose primary market is believed to be over-the-counter) and listed
securities for which no sales were reported on that date are valued at the mean
between the last reported bid and asked prices. Stock options traded on national
securities exchanges are valued at the closing prices on such exchanges.
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 which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less 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. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults, and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at
the closing rates of exchange.
(ii) purchases and sales of investment securities, income and expenses--at
the rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the fiscal period, the Fund does not
isolate that portion of the results of operations arising as a result of changes
in the foreign exchange rates from the fluctuations arising from changes in the
market prices of securities held at the end of the fiscal period. Similarly, the
Fund does not isolate the effect of changes in foreign exchange rates from the
fluctuations arising from changes in the market prices of long-term portfolio
securities sold during the fiscal period. Accordingly, these realized foreign
currency gains (losses) are included in the reported net realized gains on
security transactions.
Net realized gain on foreign currency transactions of $401,503 represents net
foreign exchange gains from sales and maturities of short-term securities,
holding of foreign currencies, currency gains or losses realized between the
trade and settlement dates of security transactions, and the difference between
the amounts of dividends, interest and foreign taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid. Net
currency gains and losses from valuing foreign currency denominated assets and
liabilities at period end exchange rates are reflected as a component of net
unrealized appreciation on investments and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the level of governmental supervision and regulation of
foreign securities markets and the possibility of political or economic
instability.
Forward Currency Contracts: The Fund enters into forward currency contracts in
order to hedge its exposure to changes in currency exchange rates on its
portfolio holdings.
-9-
<PAGE>
A forward contract is a commitment to purchase or sell a foreign currency at a
future date (usually the security transaction settlement date) at a negotiated
forward rate. In the event that a security fails to settle within the normal
settlement period, the forward currency contract is renegotiated at a new rate.
The gain or loss arising from the difference between the settlement value of the
original and renegotiated forward contracts is isolated and is included in net
realized losses from foreign currency transactions. Risks may arise upon
entering into these contracts from the potential inability of the counterparties
to meet the terms of their contracts.
Short Sales: The Fund may sell a security it does not own in anticipation of a
decline in the market value of that security (short sale). When the Fund makes
a short sale, it must borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale as collateral for its
obligation to deliver the security upon conclusion of the sale. The Fund may
have to pay a fee to borrow the particular security and may be obligated to pay
over any payments received on such borrowed securities. A gain, limited to the
price at which the Fund sold the security short, or a loss, unlimited in
magnitude, will be recognized upon the termination of a short sale if the
market price at termination is less than or greater than, respectively, the
proceeds originally received.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Fund is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This is known as
the ``initial margin''. Subsequent payments, known as ``variation margin'', are
made or received by the Fund each day, depending on the daily fluctuations in
the value of the underlying security. Such variation margin is recorded for
financial statement purposes on a daily basis as unrealized gain or loss until
the contracts expire or are closed, at which time the gain or loss is
reclassified to realized gain or loss. The Fund invests in financial futures
contracts solely for the purpose of hedging its existing portfolio securities or
securities the Fund intends to purchase against fluctuations in value caused by
changes in prevailing market conditions. Should market conditions move
unexpectedly, the Fund may not achieve the anticipated benefits of the financial
futures contracts and may realize a loss. The use of futures transactions
involves the risk of imperfect correlation in movements in the price of futures
contracts, interest rates and the underlying hedged assets. There were no
financial futures contracts outstanding at October 31, 1994.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. Net
investment income, other than distribution fees, and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Equalization: The Fund follows the accounting practice known as equalization by
which a portion of the proceeds from sales and costs of reacquisitions of Fund
shares, equivalent on a per share basis to the amount of distributable net
investment income on the date of the transaction, is credited or charged to
undistributed net investment income. As a result, undistributed net investment
income per share is unaffected by sales or reacquisitions of the Fund's shares.
Dividends and Distributions: Dividends from net investment income are declared
and paid semi-annually. The Fund will distribute net capital gains, if any, at
least annually. Dividends and distributions are recorded on the ex-dividend
date.
Income distributions and capital gains distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with the A.I.C.P.A.'s Statement of
Position 93-2: Determination, Disclosure, and Financial Statement Presentation
of Income, Capital Gain, and Return of Capital Distributions by Investment
Companies. As a result of this statement, the Fund changed the classification of
distributions to shareholders to better disclose the differences between
financial statement amounts and distributions determined in accordance with
income tax regulations. During the six months ended October 31, 1994, the Fund
reclassified $293,473 net operating losses to accumulated net realized gains on
investment transactions from overdistributed net investment income. Net
investment income, net realized gains, and net assets were not affected by this
change.
Taxes: It is the Fund's policy to meet the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable net income to its shareholders. Therefore, no federal income tax
provision is required.
Withholding taxes on foreign dividends have been provided for in accordance
with the Fund's understanding of the applicable country's tax rules and rates.
Deferred Organizational Expenses: Approximately $225,000 of expenses were
incurred in connection with the
-10-
<PAGE>
organization and initial registration of the Fund. This amount is being
amortized over a period of 60 months from the date investment operations
commenced.
Note 2. Agreements The Fund has a management
agreement with PMF. Pursuant to this agreement,
PMF has responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PMF has entered into a subadvisory
agreement with The Prudential Investment Corporation (``PIC''). PIC furnishes
investment advisory services in connection with the management of the Fund. PMF
pays for the services of PIC, the cost of compensation of officers of the Fund,
occupancy and certain clerical and bookkeeping costs of the Fund. The Fund
bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .65 of 1% of the Fund's average daily net assets.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI''), which
acts as distributor of the Class B and Class C shares of the Fund (collectively
the ``Distributors''). The Fund compensates the Distributors 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.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
and Class B Plans under which the distribution plans became compensation plans,
effective August 1, 1994. Prior thereto, the distribution plans were
reimbursement plans under which PMFD and PSI were reimbursed for expenses
actually incurred by them up to the amount permitted under the Class A and Class
B Plans, respectively. The Fund is not obligated to pay any prior or future
excess distribution costs (costs incurred by the Distributors in excess of
distribution fees paid by the Fund and contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
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 .25 of 1% of the average daily
net assets of Class A shares and 1% of the average daily net assets of both the
Class B and C shares for the period ended October 31, 1994.
PMFD has advised the Fund that it has received approximately $60,100 in
front-end sales charges resulting from sales of Class A shares during the six
months ended October 31, 1994. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons and
incurred other distribution costs.
PSI has advised the Fund that for the six months ended October 31, 1994, it
received approximately $170,500 in contingent deferred sales charges imposed
upon redemptions by certain Class B shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the six months ended October 31, 1994, the Fund incurred fees of approximately
$110,000 for the services of PMFS. As of October 31, 1994, approximately $21,500
of such fees were due to PMFS. Transfer agent fees and expenses in the Statement
of Operations include certain out-of-pocket expenses paid to non-affiliates.
For the six months ended October 31, 1994, PSI earned approximately $1,700 in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
Note 4. Portfolio Purchases and sales of invest-
Securities ment securities, other than
short-term investments, for the six months ended
October 31, 1994 aggregated $82,582,174 and $74,770,121, respectively.
The federal income tax basis of the Fund's investments at October 31, 1994
was $187,793,162 and, accordingly, net unrealized appreciation for federal
income tax purposes was $20,748,224 (gross unrealized appreciation--$27,611,429,
gross unrealized depreciation--$6,863,205).
-11-
<PAGE>
At October 31, 1994, the Fund had outstanding forward currency contracts to
purchase and sell foreign currency as follows:
<TABLE>
<CAPTION>
Value at
Foreign Currency Settlement Date Current Appreciation/
Purchase Contract Payable Value (Depreciation)
<S> <C> <C> <C>
- -------------------------- ---------------- ---------- ---------------
Swedish Krona,
expiring 12/01/94 $ 1,042,741 $1,021,050 $ (21,691)
---------------- ---------- ---------------
---------------- ---------- ---------------
</TABLE>
<TABLE>
<CAPTION>
Value at
Foreign Currency Settlement Date Current Appreciation/
Sale Contracts Receivable Value (Depreciation)
<S> <C> <C> <C>
- ----------------------- ---------------- ----------- ---------------
Finnish Markka,
expiring 12/01/94 $ 5,653,407 $ 6,239,727 $ (586,320)
Japanese Yen,
expiring 11/08/94 4,672,972 4,796,085 (123,113)
Swedish Krona,
expiring 12/01/94 949,013 1,021,050 (72,037)
---------------- ----------- ---------------
$ 11,275,392 $12,056,862 $ (781,470)
---------------- ----------- ---------------
---------------- ----------- ---------------
</TABLE>
Note 5. Joint The Fund, along with other
Repurchase affiliated registered invest-
Agreement Account ment companies, transfers
uninvested cash balances into a single joint
account, the daily aggregate balance of which is invested in one or more
repurchase agreements collateralized by U.S. Treasury or federal agency
obligations. At October 31, 1994, the Fund had a 1.5% undivided interest in the
repurchase agreements in the joint account. The undivided interest for the Fund
represented $13,892,000 in principal amount. As of such date, each repurchase
agreement in the joint account and the value of the collateral therefor were as
follows:
Smith Barney, Inc., 4.80%, in the principal amount of $260,000,000,
repurchase price $260,034,667, due 11/1/94. The value of the collateral
including accrued interest is $265,200,122.
Nomura Securities International, Inc., 4.77%, in the principal amount of
$100,000,000, repurchase price $100,013,250, due 11/1/94. The value of the
collateral including accrued interest is $102,000,391.
Goldman Sachs & Co., 4.75%, in the principal amount of $275,000,000,
repurchase price $275,036,285, due 11/1/94. The value of the collateral
including accrued interest is $280,500,611.
CS First Boston Corp., 4.75%, in the principal amount of $265,000,000,
repurchase price $265,034,965, due 11/1/94. The value of the collateral
including accrued interest is $271,053,272.
Note 6. Capital The Fund offers Class A,
Class B and Class C shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase commencing in or about February 1995.
The Fund has authorized 2 billion shares of common stock, $.001 par value per
share, equally divided into three classes, designated Class A, B and Class C
common stock.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- --------------------------------- ---------------- ------------
<S> <C> <C>
Six months ended
October 31, 1994:
Shares sold...................... 1,790,510 $ 23,943,694
Shares issued in reinvestment of
distributions.................. 210,776 2,784,357
Shares reacquired................ (1,748,674) (23,335,654)
---------------- ------------
Net increase in shares
outstanding.................... 252,612 $ 3,392,397
---------------- ------------
---------------- ------------
Year ended April 30, 1994:
Shares sold...................... 2,294,758 $ 31,099,578
Shares issued in reinvestment of
dividends and distributions.... 451,690 5,953,064
Shares reacquired................ (2,004,567) (26,983,820)
---------------- ------------
Net increase in shares
outstanding.................... 741,881 $ 10,068,822
---------------- ------------
---------------- ------------
<CAPTION>
Class B
<S> <C> <C>
Six months ended
October 31, 1994:
Shares sold...................... 2,339,002 $ 31,328,953
Shares issued in reinvestment of
distributions.................. 517,448 6,825,143
Shares reacquired................ (1,027,599) (13,702,930)
---------------- ------------
Net increase in shares
outstanding.................... 1,828,851 $ 24,451,166
---------------- ------------
---------------- ------------
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
Class B Shares Amount
- --------------------------------- ---------------- ------------
<S> <C> <C>
Year ended April 30, 1994:
Shares sold...................... 3,671,115 $ 50,144,056
Shares issued in reinvestment of
dividends and distributions.... 900,324 11,841,332
Shares reacquired................ (1,905,508) (25,863,176)
---------------- ------------
Net increase in shares
outstanding.................... 2,665,931 $ 36,122,212
---------------- ------------
---------------- ------------
<CAPTION>
Class C
- ---------------------------------
August 1, 1994* through
October 31, 1994:
<S> <C> <C>
Shares sold...................... 48,283 $ 649,766
Shares issued in reinvestment of
distributions.................. 322 4,250
Shares reacquired................ (2) (29)
---------------- ------------
Net increase in shares
outstanding.................... 48,603 $ 653,987
---------------- ------------
---------------- ------------
</TABLE>
- ---------------
* Commencement of offering of Class C shares.
Note 7. Distributions On November 15, 1994 the
Board of Directors of the Fund announced a
distribution from net capital and currency gains to Class A, B and C
shareholders of $.525 per share, payable on November 29, 1994 to shareholders
of record on November 22, 1994.
-13-
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC.
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A Class B Class C
------------------------------------------------ ---------------------------------------------------- --------
August
Six June 29, Six June 29, 1,
Months 1990(D) Months 1990(D) 1994@
Ended Through Ended Through Through
PER SHARE October Years Ended April 30, April October Years Ended April 30, April October
OPERATING 31, --------------------------- 30, 31, ------------------------------ 30, 31,
PERFORMANCE: 1994 1994 1993 1992 1991 1994 1994 1993 1992 1991 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------- ------- ------- ------- -------- -------- -------- -------- -------- -------- --------
Net asset
value,
beginning
of
period..... $ 13.21 $ 13.19 $ 12.51 $ 12.10 $ 11.37 $ 13.16 $ 13.15 $ 12.47 $ 12.06 $ 11.37 $ 13.74
------- ------- ------- ------- -------- -------- -------- -------- -------- -------- --------
Income from
investment
operations:
Net
investment
income
(loss)..... .03 .18 .30 .23 .40 (.02) .07 .19 .13 .32 (.01)
Net realized
and
unrealized
gain on
investments
and
foreign
currency
transactions... 1.32 1.64 1.47 .50 .59 1.31 1.63 1.47 .51 .59 .72
------- ------- ------- ------- -------- -------- -------- -------- -------- -------- --------
Total from
investment
operations... 1.35 1.82 1.77 .73 .99 1.29 1.70 1.66 .64 .91 .71
------- ------- ------- ------- -------- -------- -------- -------- -------- -------- --------
Less
distributions:
Dividends
from net
investment
income..... -- (.21) (.30) (.30) (.26) -- (.10) (.19) (.21) (.22) --
Distributions
from net
capital and
currency
gains...... (.76) (1.59) (.79) (.02) -- (.76) (1.59) (.79) (.02) -- (.76)
------- ------- ------- ------- -------- -------- -------- -------- -------- -------- --------
Total
distributions... (.76) (1.80) (1.09) (.32) (.26) (.76) (1.69) (.98) (.23) (.22) (.76)
------- ------- ------- ------- -------- -------- -------- -------- -------- -------- --------
Net asset
value, end
of
period..... $ 13.80 $ 13.21 $ 13.19 $ 12.51 $ 12.10 $ 13.69 $ 13.16 $ 13.15 $ 12.47 $ 12.06 $ 13.69
------- ------- ------- ------- -------- -------- -------- -------- -------- -------- --------
------- ------- ------- ------- -------- -------- -------- -------- -------- -------- --------
TOTAL
RETURN#.... 11.41% 14.16% 15.14% 6.16% 17.64% 10.55% 13.22% 14.13% 5.39% 16.14% 5.38%
RATIOS/SUPPLEMENTAL
DATA:
Net assets,
end of
period
(000)...... $59,097 $53,237 $43,390 $52,625 $ 59,085 $158,317 $128,098 $ 92,921 $108,276 $ 99,537 $ 666
Average net
assets
(000)...... $53,558 $49,840 $46,890 $57,403 $ 55,545 $134,774 $108,981 $ 99,072 $108,510 $ 82,890 $ 236
Ratios to
average net
assets:##
Expenses,
including
distribution
fees..... 1.37%* 1.30% 1.28% 1.29% 1.35%* 2.12%* 2.08% 2.08% 2.09% 2.15%* 2.04%*
Expenses,
excluding
distribution
fees..... 1.12%* 1.08% 1.08% 1.09% 1.15%* 1.12%* 1.08% 1.08% 1.09% 1.15%* 1.04%*
Net
investment
income
(loss)..... .45%* 1.15% 2.44% 1.83% 4.28%* (.36)%* .35% 1.64% 1.03% 3.39%* (.57)%*
Portfolio
turnover... 42% 110% 209% 147% 253% 42% 110% 209% 147% 253% 42%
</TABLE>
- ---------------
* Annualized.
(D) Commencement of investment operations.
@ Commencement of offering of Class C shares.
# 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 return for periods of less than a full
year are not annualized.
## Because of the event referred to in @ and the timing of such, the ratios
for Class C shares are not necessarily comparable to that of Class A or B
shares and are not necessarily indicative of future ratios.
See Notes to Financial Statements.
-14-
<PAGE>
Letter to Shareholders
April 10, 1995
Dear Shareholder:
The past 12 months have been difficult for most financial markets and for
the Prudential Strategist Fund, Inc. The 1994 calendar year proved to be
a challenging year to pick stocks. For the New York Stock Exchange, there
were 2,000 stocks down and only 800 up. The bond market spent most of 1994
going straight down, although in the last few months there has been a
fairly strong rally. Your Fund was directly hurt by the bond market due
to company sensitivity to rising interest rates, as well as indirectly
because of the impact on corporate earnings.
<TABLE>
<CAPTION>
Five Largest Equity Holdings*
As of February 28, 1995
<S> <C>
1. First Financial 6.1%
Management Corp.
Financial data processing
2. Computer Associates Int.'l, Inc 4.9%
Systems software packages
3. Autodesk, Inc. 4.5%
Computer-aided design &
drafting
4. Federal National Mortgage Corp. 3.7%
Residential mortgage provider
5. CSX Corp. 3.0%
Railroad holding company
* Percent of net assets
</TABLE>
A Tough Year
The Federal Reserve was extremely tough last year on U.S. financial markets
by virtually doubling interest rates. In February 1995, Federal Reserve
Chairman Alan Greenspan made some encouraging remarks, as he effectively
declared that inflation will be contained in this particular business cycle.
However, just as we were starting to believe we could have clear sailing with
low inflation, stable interest rates and improving profits, the dollar took
a major nosedive. Currently, the dollar situation is unsettling the
credit market with some spillover into the equity market.
Portfolio Summary And Activity
Out of all the market volatility, the Fund is positioning itself to take
advantage of several long-term trends. We are focusing on U.S. companies
that are doing business around the world, as opposed to simply in the United
States or any other single market. They appear to be gaining greater
credibility among investors about their ability to grow future profits
even in uncertain financial markets and political and economic times.
The Fund demonstrated its commitment to global companies by maintaining
and/or increasing positions in high quality consumer companies like Gillette
(2.9% of net assets), Coca-Cola (1.3%) and Philip Morris (1.5%). In the
banking and financial services sectors, the Fund has exposure to firms
that should maintain good growth from foreign expansion like First Financial
Management (6.1% of net assets) and Citicorp (2.7%). Also, the Fund will
continue to focus on globally competitive technology companies with relatively
unique products and services.
-1-
<PAGE>
<TABLE>
HISTORICAL TOTAL RETURNS1
As of February 28, 1995
<CAPTION>
One Year Five Years Ten Years Since Inception2
<S> <C> <C> <C> <C>
Class A -5.0% 30.3% N/A 30.5%
Class B -5.7% 25.4% 146.7% 137.2%
Class C N/A N/A N/A 1.6%
Lipper
Growth Average3 0.9% 68.1% 221.6% 232.0%
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS1
As of March 31, 1995
<CAPTION>
One Year Five Years Ten Years Since Inception2
<S> <C> <C> <C> <C>
Class A 1.2% 5.0% N/A 5.1%
Class B 0.7% 5.1% 10.2% 8.0%
Class C N/A N/A N/A 5.2%
</TABLE>
Past performance is not indicative of future results. Principal and
investment return will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
1Source: Prudential Mutual Fund Management, Inc. and Lipper Analytical
Services, Inc. The cumulative total returns do not take into account
sales charges. The average annual returns do take into account applicable
sales charges. The Fund charges a maximum front-end sales load of 5% for
Class A shares and a contingent deferred sales charge (CDSC) of 5%, 4%, 3%,
2%, 1% and 1% for six years, for Class B shares. Class C shares have a 1%
CDSC for one year. Beginning in February 1995, Class B shares automatically
convert to Class A shares on a quarterly basis, after shareholders hold
their shares approximately seven years.
2Inception dates: 1/22/90 Class A; 6/13/83 Class B; 8/1/94 Class C.
3Lipper growth fund averages include 489 funds for one year, 231 funds for
five years, 134 funds for 10 years and 112 funds since inception of the
Class B shares on 6/13/83.
N/A -- Performance data with respect to Class A and Class C is not available
as operations commenced 1/22/90 and 8/1/94, respectively.
With a weaker currency, increased exports and stronger U.S. industry, we
expect transportation sectors to show attractive growth and profit
potential. This belief is represented by Fund positions in CSX (3.0%
of net assets), XTRA (1.4%) and OMI (0.8%).
Investment Outlook
It looks as though 1995 is going to have its fair share of volatility.
Hopefully it will be an environment which creates more opportunity to make
money, whereas last year created more opportunity to lose money. Equities,
especially your Fund's positions, should benefit from a period of low
inflation and growth for the U.S., as well as global business expansion.
While slower than the strong pace of 1994, corporate profits should continue
to improve.
-2-
<PAGE>
Important Proxy On Proposed Fund Merger
The Board of Directors of your Fund has recommended a merger with the
Prudential Multi-Sector Fund, Inc. Proxy materials describing the proposed
merger of your Fund into the Prudential Multi-Sector Fund, Inc. are included
with your Annual Report mailing. Please read the proxy carefully for full
details.
As always, it has been a pleasure having you as a shareholder in the
Prudential Strategist Fund. We look forward to being able to serve your
investment needs in the future.
Sincerely,
Lawrence C. McQuade
President
Greg A. Smith
Portfolio Manager
-3-
<PAGE>
PRUDENTIAL STRATEGIST FUND, INC. Portfolio of Investments
February 28, 1995
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--80.7%
Common Stock--79.6%
Automotive--2.5%
60,000 Ford Motor Co................ $ 1,567,500
60,000 General Motors Corp.......... 2,557,500
------------
4,125,000
------------
Automotive Parts--0.4%
43,200 Hayes Wheels International,
Inc........................ 734,400
------------
Banking--2.7%
100,000 Citicorp..................... 4,500,000
------------
Chemicals--0.1%
15,000 Methanex Corp.*.............. 157,500
------------
Computer & Related Equipment--6.2%
20,000 Applied Materials, Inc.*..... 922,500
10,000 International Business
Machines Corp.............. 750,600
10,000 Micron Technology, Inc....... 613,720
55,000 Motorola, Inc................ 3,162,500
30,000 Novell, Inc.*................ 609,844
45,000 Silicon Graphics, Inc.*...... 1,558,125
100,000 Stratus Computer, Inc.*...... 2,637,500
------------
10,254,789
------------
Computer Software & Services--12.1%
190,000 Autodesk, Inc................ 7,457,500
140,000 Computer Associates
International, Inc......... 7,980,000
95,000 Informix Corp.*.............. 3,586,250
20,000 Lotus Development Corp.*..... 835,000
------------
19,858,750
------------
Conglomerates--0.6%
70,000 Canadian Pacific, Ltd........ 980,000
------------
Consumer Products--2.9%
60,000 Gillette Co.................. 4,747,500
------------
Electronics--1.9%
75,000 Loral Corp................... 3,065,625
------------
Exploration & Production--1.1%
50,000 Potash Corp. of Saskatchewan,
Inc. (Canada).............. $ 1,787,500
------------
Financial Services--12.5%
75,000 Federal Home Loan Mortgage
Corp....................... 4,350,000
80,000 Federal National Mortgage
Association................ 6,170,000
145,000 First Financial Management
Corp....................... 10,023,125
------------
20,543,125
------------
Food & Beverage--4.2%
70,000 McDonald's Corp.............. 2,327,500
40,000 Philip Morris Cos., Inc...... 2,430,000
40,000 The Coca-Cola Co............. 2,200,000
------------
6,957,500
------------
Health Care Services--0.6%
22,500 U.S. HealthCare, Inc......... 967,500
------------
Hotel/Motel--2.5%
130,000 La Quinta Inns, Inc.......... 3,233,750
25,000 Promuse Companies, Inc. *.... 893,750
------------
4,127,500
------------
Machinery & Equipment--9.1%
85,000 Caterpillar, Inc............. 4,388,125
70,000 Clark Equipment Co.*......... 3,745,000
45,000 Stewart & Stevenson Services,
Inc........................ 1,485,000
94,000 Varity Corp.*................ 3,431,000
50,000 York International Corp...... 1,925,000
------------
14,974,125
------------
Oil & Gas - International--5.9%
30,000 British Petroleum PLC (ADR)
(United Kingdom)........... 2,295,000
25,000 Chevron Corp................. 1,187,500
44,100 Societe Nationale Elf
Aquitaine (ADR) (France)... 1,582,087
35,000 Texaco, Inc.................. 2,231,250
15,000 YPF Sociedad Anonima (ADR)
(Argentina)................ 285,000
75,000 Total SA (ADR) (France)...... 2,081,250
------------
9,662,087
------------
</TABLE>
-4- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL STRATEGIST FUND, INC.
<TABLE>
<CAPTION>
Value
Shares Description (Note 1)
<C> <S> <C>
Paper & Forest Products--5.9%
5,000 Boise Cascade Corp........... $ 160,625
75,000 Bowater, Inc................. 2,493,750
40,000 International Paper Co....... 3,055,000
50,000 Scott Paper Co............... 3,962,500
------------
9,671,875
------------
Pharmaceuticals--1.1%
10,000 Bristol Myers Squibb Co...... 620,000
20,000 Johnson & Johnson Co......... 1,135,000
------------
1,755,000
------------
Railroads--2.9%
62,500 CSX Corp..................... 4,859,375
------------
Telecommunications--0.5%
70,000 Nextel Communications,
Inc.*...................... 848,750
------------
Transportation--2.0%
60,000 Harper Group, Inc............ 1,005,000
45,000 XTRA Corp.................... 2,261,250
------------
3,266,250
------------
Trucking & Shipping--1.9%
40,000 Anangel - American
Shipholdings, Ltd. (ADR)
(Cayman Islands)........... 590,000
255,000 OMI Corp.*................... 1,338,750
48,400 Overseas Shipholding Group,
Inc........................ 1,119,250
------------
3,048,000
------------
Total common stock
(cost $118,495,645)........ 130,892,151
------------
Convertible Bond--1.1%
<CAPTION>
Principal
Amount
(000) Chemicals
- -------
<C> <S> <C>
IMC Fertilizer Group, Inc.
Conv. Sub. Deb.,
$ 2,000 6.25%, 12/1/01 (cost
$1,786,849)................ 1,880,000
------------
Total long-term investments
(cost $120,282,494)........ 132,772,151
------------
SHORT-TERM INVESTMENTS--19.8%
Commercial Paper
Atlantic Asset Securitization
Corp.,
$ 7,000 5.85%, 3/3/95................ $ 6,997,725
Bridgestone/Firestone, Inc.,
9,000 5.95%, 3/1/95................ 9,000,000
Ciesco, L.P.,
7,000 5.80%, 3/1/95................ 7,000,000
Koch Industries, Inc.,
9,600 5.95%, 3/1/95................ 9,600,000
------------
Total short-term investments
(cost $32,597,725)......... 32,597,725
------------
Total investments before
short sales and outstanding
call options
written--100.5%
(cost $152,880,219; Note
4)......................... 165,369,876
------------
<CAPTION>
Shares COMMON STOCK SOLD SHORT*--(2.9%)
- -------
<C> <S> <C>
10,000 Cummins Engine Co., Inc...... (455,000)
10,000 Inco Ltd. (Canada)........... (268,750)
20,000 LSI Logic Corp............... (1,090,000)
27,500 Oxford Health Plans, Inc..... (2,502,500)
15,000 Starbucks Corp............... (358,125)
------------
Total common stock sold short
(proceeds $4,123,792)...... (4,674,375)
------------
<CAPTION>
ContractsD OUTSTANDING CALL OPTION WRITTEN*
- -------
<C> <S> <C>
Motorola, Inc.
135 Expiring April '95 @ $55
(premium received
$44,319)................... (55,688)
------------
Total investments net of
short sales and call
options
written--97.6%............. 160,639,813
Other assets in excess of
liabilities--2.4%.......... 3,894,208
------------
Net Assets--100%............. $164,534,021
------------
------------
</TABLE>
- ------------------
* Non-income producing security.
D One contract relates to 100 shares.
ADR--American Depository Receipt.
-5- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL STRATEGIST FUND, INC.
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets February 28, 1995
-----------------
<S> <C>
Investments, at value (cost $152,880,219).............................................. $ 165,369,876
Cash................................................................................... 99,681
Deposits with brokers for securities sold short........................................ 6,290,108
Receivable for investments sold........................................................ 5,794,705
Dividends and interest receivable...................................................... 410,264
Receivable for Fund shares sold........................................................ 100,268
Other assets........................................................................... 1,778
-----------------
Total assets....................................................................... 178,066,680
-----------------
Liabilities
Payable for investments purchased...................................................... 5,646,670
Investments sold short, at value (proceeds $4,123,792)................................. 4,674,375
Due to broker.......................................................................... 2,077,956
Payable for Fund shares reacquired..................................................... 642,164
Accrued expenses....................................................................... 288,259
Management fee payable................................................................. 78,755
Distribution fee payable............................................................... 68,792
Outstanding option written, at value (premium received $44,319)........................ 55,688
-----------------
Total liabilities.................................................................. 13,532,659
-----------------
Net Assets............................................................................. $ 164,534,021
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................. $ 121,017
Paid-in capital in excess of par..................................................... 152,479,393
-----------------
152,600,410
Undistributed net investment income.................................................. 235,878
Accumulated net realized loss on investments......................................... (229,972)
Net unrealized appreciation on investments........................................... 11,927,705
-----------------
Net assets, February 28, 1995.......................................................... $ 164,534,021
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($124,873,417 / 9,148,848 shares of common stock issued and outstanding)........... $13.65
Maximum sales charge (5% of offering price).......................................... .72
-----------------
Maximum offering price to public..................................................... $14.37
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($39,597,330 / 2,948,183 shares of common stock issued and outstanding)............ $13.43
-----------------
-----------------
Class C:
Net asset value, offering price and redemption price per share
($63,274 / 4,713 shares of common stock issued and outstanding).................... $13.43
-----------------
-----------------
</TABLE>
See Notes to Financial Statements.
-6-
<PAGE>
PRUDENTIAL STRATEGIST FUND, INC.
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
February 28,
Net Investment Income 1995
------------
<S> <C>
Income
Dividends (net of foreign
withholding taxes of $71,427).... $ 2,388,993
Interest........................... 1,638,316
------------
Total income..................... 4,027,309
------------
Expenses
Distribution fee--Class A.......... 29,580
Distribution fee--Class B.......... 1,669,441
Distribution fee--Class C.......... 247
Management fee..................... 1,117,504
Transfer agent's fees and
expenses........................... 461,000
Reports to shareholders............ 215,000
Custodian's fees and expenses...... 184,000
Audit fee.......................... 55,000
Legal fees......................... 50,000
Registration fees.................. 45,000
Directors' fees.................... 39,375
Franchise taxes.................... 22,500
Miscellaneous...................... 34,583
------------
Total expenses................... 3,923,230
------------
Net investment income................ 104,079
------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain (loss) on:
Investment transactions............ 1,858,769
Investments sold short............. (1,175,167)
Written options.................... (789,092)
------------
(105,490)
------------
Net change in unrealized appreciation
on:
Investments........................ (11,378,290)
Investments sold short............. (549,886)
Written options.................... (11,369)
------------
(11,939,545)
------------
Net loss on investments.............. (12,045,035)
------------
Net Decrease in Net Assets Resulting
from Operations...................... $(11,940,956)
------------
------------
</TABLE>
PRUDENTIAL STRATEGIST FUND, INC.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended February 28,
Increase (Decrease) in ----------------------------
Net Assets 1995 1994
------------ ------------
<S> <C> <C>
Operations
Net investment income
(loss)................. $ 104,079 $ (1,273,013)
Net realized gain
(loss) on
investments.......... (105,490) 30,887,914
Net change in
unrealized
appreciation of
investments.......... (11,939,545) (12,404,253)
------------ ------------
Net increase (decrease)
in net assets
resulting from
operations........... (11,940,956) 17,210,648
------------ ------------
Net equalization debits
(credits).............. 877,014 (76,178)
------------ ------------
Distributions to
shareholders from net
realized capital gains
(Note 1)
Class A................ (195,077) (488,857)
Class B................ (8,877,022) (25,505,673)
Class C................ (43) --
------------ ------------
(9,072,142) (25,994,530)
------------ ------------
Distributions to
shareholders in excess
of net realized capital
gains
Class A................ (2,677) --
Class B................ (121,804) --
Class C................ (1) --
------------ ------------
(124,482) --
------------ ------------
Fund share transactions
(net of share
conversions) (Note 5)
Proceeds from shares
sold................. 20,987,711 33,043,389
Net asset value of
shares issued in
reinvestment of
distributions........ 8,672,176 24,494,400
Cost of shares
reacquired........... (53,449,860) (80,947,271)
------------ ------------
Net decrease in net
assets
from Fund share
transactions......... (23,789,973) (23,409,482)
------------ ------------
Total decrease........... (44,050,539) (32,269,542)
Net Assets
Beginning of year........ 208,584,560 240,854,102
------------ ------------
End of year.............. $164,534,021 $208,584,560
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
-7-
<PAGE>
PRUDENTIAL STRATEGIST FUND, INC.
Notes to Financial Statements
Prudential Strategist Fund, Inc., formerly known as Prudential Growth Fund,
Inc. (the ``Fund''), is registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company. The Fund's investment
objective is to seek a high total return consistent with reasonable risk through
allocating assets among equity securities, fixed-income securities and cash
based on an evaluation of current market and economic conditions.
Note 1. Accounting The following is a summary of
Policies significant accounting policies
followed by the Fund in the preparation of its
financial statements.
Security Valuation: Investments, including options, traded on an exchange and
NASDAQ National Market Equity Securities are valued at the last reported sales
price on the primary exchange on which they are traded. Securities traded in the
over-the-counter market (including securities listed on exchanges whose primary
market is believed to be over-the-counter) and listed securities for which no
sales were reported on that date are valued at the mean between the last
reported bid and asked prices. 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 which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains or losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date; interest income is recorded on the accrual basis. Net
investment income/loss (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares of the Fund
based upon the relative proportion of net assets of each class at the beginning
of the day.
Options: The Fund may either purchase or write options in order to hedge against
adverse market movements or fluctuations in value caused by changes in
prevailing interest rates or foreign currency exchange rates with respect to
securities or currencies which the Fund currently owns or intends to purchase.
When the Fund purchases an option, it pays a premium and an amount equal to that
premium is recorded as an investment. When the Fund writes an option, it
receives a premium and an amount equal to that premium is recorded as a
liability. The investment or liability is adjusted daily to reflect the current
market value of the option. If an option expires unexercised, the Fund realizes
a gain or loss to the extent of the premium received or paid. If an option is
exercised, the premium received or paid is an adjustment to the proceeds from
the sale or the cost basis of the purchase in determining whether the Fund has
realized a gain or loss. The difference between the premium and the amount
received or paid on effecting a closing purchase or sale transaction is also
treated as a realized gain or loss. Gain or loss on purchased options is
included in net realized gain (loss) on investment transactions. Gain or loss on
written options is presented separately as net realized gain (loss) on written
option transactions.
The Fund, as writer of an option, has no control over whether the underlying
securities or currencies may be sold (called) or purchased (put). As a result,
the Fund bears the market risk of an unfavorable change in the price of the
security or currency underlying the written option. The Fund, as purchaser of an
option, bears the risk of the potential inability of the counterparties to meet
the terms of their contracts.
Short Sales: The Fund may sell a security it does not own in anticipation of a
decline in the market value of that security (short sale). When the Fund makes a
short sale, it must borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale as collateral for its
obligation to deliver the security upon conclusion of the sale. The Fund may
have to pay a fee to borrow the particular security and may be obligated to pay
over any payments received on such borrowed securities. A gain, limited to the
price at which the Fund sold the security short, or a loss, unlimited in
magnitude, will be recognized upon the termination of a short sale if the market
price at termination is less than or greater than, respectively, the proceeds
originally received.
Equalization: The Fund follows the accounting practice known as equalization, by
which a portion of the proceeds from sales and costs of reacquisitions of Fund
shares, equivalent on a per share basis to the amount of distributable net
investment income on the date of the transaction, is credited or charged to
undistributed net investment income. As a result, undistributed net investment
income per share is unaffected by sales or reacquisitions of the Fund's shares.
-8-
<PAGE>
Dividends and Distributions: The Fund expects to pay dividends of net investment
income, if any, semi-annually and make distributions at least annually of any
net capital gains. 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 net income to its shareholders.
Therefore, no federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance
with the Fund's understanding of the applicable country's tax rates.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with Greg A. Smith Asset
Management Corporation (``GSAM''); GSAM furnishes investment advisory services
in connection with the management of the Fund. PMF pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid to PMF is computed daily and payable monthly, at an
annual rate of .625 of 1% of the average daily net assets up to $500 million,
.55 of 1% of the next $500 million of average daily net assets and .50 of 1% of
such assets in excess of $1 billion. Pursuant to the subadvisory agreement, PMF
compensates the subadviser for its services in connection with the management of
the Fund at an annual rate of .375 of 1% of the Fund's average daily net assets
up to $500 million, .35 of 1% of the next $500 million of average daily net
assets and .30 of 1% of such average daily net assets in excess of $1 billion.
During the year ended February 28, 1995, PMF earned $1,117,504 in management
fees of which it paid $670,503 to GSAM under the foregoing agreements.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI''), which
acts as distributor of the Class B and Class C shares of the Fund (collectively
the ``Distributors''). The Fund compensates the Distributors 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.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
and Class B distribution plans under which the distribution plans became
compensation plans, effective August 1, 1994. Prior thereto, the distribution
plans were reimbursement plans, under which PMFD and PSI were reimbursed for
expenses actually incurred by them up to the amount permitted under the Class A
and Class B Plans, respectively. The Fund is not obligated to pay any prior or
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund or contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
Pursuant to the Class A, B and C Plans, the Fund contractually compensates
the Distributors 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. However, actual expenses under the Plans were .25 of 1%,
1% and 1% of the average daily net assets of the Class A, B and C shares,
respectively, for the year ended February 28, 1995.
PMFD has advised the Fund that it has received approximately $24,800 in
front-end sales charges resulting from sales of Class A shares during the year
ended February 28, 1995. From these fees, PMFD paid such sales charges to PSI
and Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the year ended February 28, 1995, it
received approximately $190,300 in contingent deferred sales charges imposed
upon certain redemptions by Class B shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI and PMF are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. For the
year ended February 28, 1995, the Fund incurred fees of approximately $364,000
for the services of PMFS. As of February 28, 1995, approximately
-9-
<PAGE>
$30,000 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
non-affiliates.
For the year ended February 28, 1995, PSI earned approximately $34,000 in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
Note 4. Portfolio Purchases and sales of invest-
Securities ment securities, other than
short-term investments, for the year ended
February 28, 1995 were $277,741,586 and $314,388,059, respectively.
The federal income tax basis of the Fund's investments at February 28, 1995
was $153,346,726, and accordingly, net unrealized appreciation for federal
income tax purposes was $12,023,150 (gross unrealized appreciation--$16,677,465;
gross unrealized depreciation--$4,654,315).
Transactions in options written during the year ended February 28, 1995, were
as follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
--------- -----------
<S> <C> <C>
Options written.................... 1,290 $ 1,993,802
Options terminated in closing
purchase transactions............ (1,135) (1,937,543)
Options expired.................... (20) (11,940)
--------- -----------
Options outstanding at February 28,
1995............................. 135 $ 44,319
--------- -----------
--------- -----------
</TABLE>
Note 5. Capital The Fund currently offers
Class A, Class B and Class C shares. Class A
shares are sold with a front-end sales charge of up to 5%. Class B shares are
sold with a contingent deferred sales charge which declines from 5% to zero
depending on the period of time the shares are held. Class C shares are sold
with a contingent deferred sales charge of 1% during the first year. Commencing
in February 1995, Class B shares automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. Classes of shares have
equal rights as to earnings, assets and voting privileges except that each class
bears different distribution expenses and has exclusive voting rights with
respect to its distribution plan.
There are 500 million shares of common stock, $.01 par value per share,
divided into three classes, designated Class A, Class B and Class C common
stock, which consists of 166,666,666 authorized Class A shares, 166,666,666
authorized Class B shares and 166,666,668 authorized Class C shares.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
<S> <C> <C>
--------- ------------
Year ended February 28, 1995:
Shares sold................... 824,869 $ 10,274,989
Shares issued in reinvestment
of distributions............ 14,401 190,908
Shares reacquired............. (971,898) (13,275,664)
--------- ------------
Net decrease in shares
outstanding before
conversion.................. (132,628) (2,809,767)
Shares issued upon conversion
from Class B................ 8,919,597 119,076,584
--------- ------------
Net increase in shares
outstanding................. 8,786,969 $116,266,817
--------- ------------
--------- ------------
Year ended February 28, 1994:
Shares sold................... 574,337 $ 9,064,280
Shares issued in reinvestment
of distributions............ 31,195 464,547
Shares reacquired............. (514,635) (8,182,012)
--------- ------------
Net increase in shares
outstanding................. 90,897 $ 1,346,815
--------- ------------
--------- ------------
<CAPTION>
Class B
<S> <C> <C>
Year ended February 28,
1995:
Shares sold................. 780,941 $ 10,649,527
Shares issued in
reinvestment of
distributions............. 645,569 8,481,224
Shares reacquired........... (2,971,667) (40,174,196)
----------- -------------
Net decrease in shares out-
standing before
conversion................ (1,545,157) (21,043,445)
Shares reacquired upon
conversion into Class A... (9,055,248) (119,076,584)
----------- -------------
Net decrease in shares
outstanding............... (10,600,405) $(140,120,029)
----------- -------------
----------- -------------
Year ended February 28,
1994:
Shares sold................. 1,528,319 $ 23,979,109
Shares issued in
reinvestment of
distributions............. 1,620,447 24,029,853
Shares reacquired........... (4,630,005) (72,765,259)
----------- -------------
Net decrease in shares
outstanding............... (1,481,239) $ (24,756,297)
----------- -------------
----------- -------------
<CAPTION>
Class C
<S> <C> <C>
August 1, 1994* through
February 28, 1995
Shares sold................... 4,710 $ 63,195
Shares issued in reinvestment
of distributions............ 3 44
--------- ------------
Net increase in shares
outstanding................. 4,713 $ 63,239
--------- ------------
--------- ------------
</TABLE>
- ---------------
* Commencement of offering of Class C Shares.
-10-
<PAGE>
Note 6. Proposed On March 16, 1995, the
Reorganization Board of Directors of the
Fund approved an Agreement and Plan of
Reorganization and Liquidation (the ``Plan'') which provides for the transfer of
substantially all of the assets and liabilities of the Fund to Prudential
Multi-Sector Fund, Inc. (``Multi-Sector''). Class A, Class B and Class C shares
of the Fund would be exchanged at net asset value for Class A, Class B and Class
C shares, respectively, of equivalent value of Multi-Sector. The Fund would then
cease operations.
The Plan requires the approval of shareholders of the Fund to become
effective and a proxy/prospectus will be mailed to shareholders in late April
1995. If the Plan is approved, it is expected that the reorganization will take
place in or about June 1995. The Fund and Multi-Sector will each bear their
pro-rata share of the costs of the reorganization, including costs of proxy
solicitation.
-11-
<PAGE>
PRUDENTIAL STRATEGIST FUND, INC.
Financial Highlights
<TABLE>
<CAPTION>
Class A
------------------------------------------------------
Year Ended February 28/29,
------------------------------------------------------
PER SHARE OPERATING PERFORMANCE: 1995** 1994 1993 1992** 1991
---------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year............. $ 15.11 $15.74 $15.84 $14.91 $14.47
---------- ------ ------ ------ ------
Income from investment operations
Net investment income.......................... .11 .03 .19 .21 .27
Net realized and unrealized gain (loss) on
investment transactions...................... (.88) 1.29 .37 1.75 .64
---------- ------ ------ ------ ------
Total from investment operations............. (.77) 1.32 .56 1.96 .91
---------- ------ ------ ------ ------
Less distributions
- -----------------------------------------------
Dividends from net investment income........... -- -- (.18) (.29) (.26)
Distributions from net realized gains.......... (.68) (1.95) (.48) (.74) (.21)
Distributions in excess of net realized
gains........................................ (.01) -- -- -- --
---------- ------ ------ ------ ------
Total distributions.......................... (.69) (1.95) (.66) (1.03) (.47)
---------- ------ ------ ------ ------
Net asset value, end of year................... $ 13.65 $15.11 $15.74 $15.84 $14.91
---------- ------ ------ ------ ------
---------- ------ ------ ------ ------
TOTAL RETURN#.................................. (4.96)% 8.81% 3.74% 13.76% 6.74%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).................. $ 124,873 $5,469 $4,264 $5,202 $1,105
Average net assets (000)....................... $ 11,832 $4,172 $4,177 $2,126 $ 705
Ratios to average net assets:
Expenses, including distribution fees........ 1.49% 1.34% 1.29% 1.35% 1.46%
Expenses, excluding distribution fees........ 1.24% 1.13% 1.09% 1.15% 1.26%
Net investment income........................ .76% .20% 1.13% 1.37% 1.94%
Portfolio turnover............................. 188% 178% 99% 146% 77%
</TABLE>
- ---------------
** Calculated based upon weighted average shares outstanding during the year.
# 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.
See Notes to Financial Statements.
-12-
<PAGE>
PRUDENTIAL STRATEGIST FUND, INC.
Financial Highlights
<TABLE>
<CAPTION>
Class C
Class B ------------
-------------------------------------------------------------- August 1,
1994@
Year Ended February 28/29, Through
-------------------------------------------------------------- February 28,
PER SHARE OPERATING PERFORMANCE: 1995** 1994 1993 1992** 1991 1995**
<S> <C> <C> <C> <C> <C> <C>
---------- -------- -------- -------- -------- ------------
Net asset value, beginning of period........... $ 14.99 $ 15.74 $ 15.86 $ 14.92 $ 14.46 $13.23
---------- -------- -------- -------- -------- ------
Income from investment operations
Net investment income (loss)................... -- (.09) .06 .11 .17 .04
Net realized and unrealized gain (loss) on
investment transactions...................... (.87) 1.29 .37 1.73 .65 .17
---------- -------- -------- -------- -------- ------
Total from investment operations............. (.87) 1.20 .43 1.84 .82 .21
---------- -------- -------- -------- -------- ------
Less distributions
- -----------------------------------------------
Dividends from net investment income........... -- -- (.07) (.16) (.16) --
Distributions from net realized gains.......... (.68) (1.95) (.48) (.74) (.20) (.01)
Distributions in excess of net realized
gains........................................ (.01) -- -- -- -- --
---------- -------- -------- -------- -------- ------
Total distributions.......................... (.69) (1.95) (.55) (.90) (.36) (.01)
---------- -------- -------- -------- -------- ------
Net asset value, end of period................. $ 13.43 $ 14.99 $ 15.74 $ 15.86 $ 14.92 $13.43
---------- -------- -------- -------- -------- ------
---------- -------- -------- -------- -------- ------
TOTAL RETURN#.................................. (5.70)% 8.02% 2.91% 12.80% 6.03% 1.59%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................ $ 39,597 $203,115 $236,590 $275,826 $277,282 $ 63
Average net assets (000)....................... $ 166,944 $218,040 $246,195 $270,211 $291,028 $ 43
Ratios to average net assets:
Expenses, including distribution fees........ 2.24% 2.13% 2.09% 2.15% 2.26% 2.24%*
Expenses, excluding distribution fees........ 1.24% 1.13% 1.09% 1.15% 1.26% 1.24%*
Net investment income (loss)................. .01% (.59)% 0.37% 0.74% 1.14% .01%*
Portfolio turnover............................. 188% 178% 99% 146% 77% 188%
</TABLE>
- ---------------
* Annualized.
** Calculated based upon weighted average shares outstanding during the
period.
@ Commencement of offering of Class C shares.
# 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 of less than
one full year are not annualized.
See Notes to Financial Statements.
-13-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Prudential Strategist Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Strategist Fund, Inc.
(the ``Fund'') at February 28, 1995, the results of its operations for the year
then ended, 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 five years in the
period then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
``financial statements'') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
February 28, 1995 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
April 21, 1995
TAX INFORMATION
We are required by the Internal Revenue Code to advise you within 60 days of
the Fund's fiscal year end (February 28, 1995) as to certain tax benefits
inherent in the Fund's distributions. Accordingly, we wish to advise you that
during its fiscal year ended February 28, 1995, the Fund paid distributions to
both Class A and B shareholders from net realized short-term capital gains of
$.155 per share, which are fully taxable as ordinary income, and $.535 per Class
A and B share and $.01 per Class C share from net realized long-term capital
gains, which are taxable as such. Further, we wish to advise you that 100% of
the ordinary dividends paid in the fiscal year ended February 28, 1995 qualified
for the corporate dividends received deduction available to corporate taxpayers.
In January 1996, you will be advised on IRS Form 1099 DIV or substitute Form
1099 as to the federal tax status of the distributions received by you in
calendar 1995. The amounts that will be reported on such Form 1099 DIV or
substitute Form 1099 will be the amounts to use on your 1995 federal income tax
return and probably will differ from the amounts which we must report for the
Fund's fiscal year ended February 28, 1995.
-14-
<PAGE>
Past performance is not predictive of future performance and an investor's
shares, when redeemed, may be worth more or less than their original cost.
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in the Prudential Strategist Fund (Class A, Class
B, and Class C) with a similar investment in the Standard & Poor's 500 Index (S
& P 500) portraying the initial account values on January 22, 1990 for Class A
shares, March 1, 1985 for Class B shares and August 1, 1994 for Class C shares
and subsequent account values at the end of each fiscal year (February 28), as
measured on a quarterly basis, beginning in 1990 for Class A, in 1985 for Class
B shares and in 1994 for Class C shares. For purposes of the graphs and, unless
otherwise indicated in the accompanying tables, it has been assumed that (a) the
maximum sales charge was deducted from the initial $10,000 investment in Class A
shares; (b) The maximum applicable contingent deferred sales charge was deducted
from the value of the investment in Class B and Class C shares assuming full
redemption on February 28, 1995; (c) all recurring fees (including management
fees) were deducted; and (d) all dividends and distributions were reinvested.
Class B shares automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase. This conversion feature was
implemented in February 1995.
The S & P 500 is a capital-weighted index, representing the aggregate market
value of the common equity of 500 stocks primarily traded on the New York Stock
Exchange. The S & P 500 is an unmanaged index and includes the reinvestment of
all dividends, but does not reflect the payment of transaction costs and
advisory fees associated with an investment in the Fund. The securities which
comprise the S & P 500 may differ substantially from the securities in the
Fund's portfolio. The S & P 500 is not the only index which may be used to
characterize performance of growth funds and other indexes may portray different
comparative performance.
-15-
