As filed with the Securities and Exchange Commission on June 27, 1996
Securities Act Registration No. 33-33477
Investment Company Act Registration No. 811-6047
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 11 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 12 [X]
(CHECK APPROPRIATE BOX OR BOXES)
----------------
PRUDENTIAL MULTI-SECTOR FUND, INC.
(Exact name of registrant as specified in charter)
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(Address of Principal Executive Offices) (Zip Code)
----------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 214-1250
S. JANE ROSE, ESQ.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(Name and Address of Agent for Service)
----------------
COPY TO:
PAUL H. DYKSTRA, ESQ.
GARDNER, CARTON & DOUGLAS
QUAKER TOWER
321 NORTH CLARK STREET
CHICAGO, ILLINOIS 60610-4795
----------------
APPROXIMATE DATE OF PUBLIC OFFERING: As soon as practicable after the effective
date of this Registration Statement.
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[X] on June 28, 1996 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940, REGISTRANT
HAS PREVIOUSLY REGISTERED AN INDEFINITE NUMBER OF SHARES OF COMMON STOCK, PAR
VALUE $.001 PER SHARE. THE REGISTRANT FILED A NOTICE UNDER SUCH RULE FOR ITS
FISCAL YEAR ENDED APRIL 30, 1996 ON OR ABOUT JUNE 27, 1996.
================================================================================
<PAGE>
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
N-1A ITEM NO. LOCATION
- ------------- --------
<S> <C>
PART A
Item 1. Cover Page ..................................................... Cover Page
Item 2. Synopsis ....................................................... Fund Expenses
Item 3. Condensed Financial Information ................................ Fund Expenses; Financial Highlights;
How the Fund Calculates Performance
Item 4. General Description of Registrant .............................. Cover Page; Fund Highlights; How the
Fund Invests; General Information
Item 5. Management of Fund ............................................. Financial Highlights; How the Fund is
Managed; General Information
Item 6. Capital Stock and Other Securities ............................. Taxes, Dividends and Distributions;
General Information
Item 7. Purchase of Securities Being Offered ........................... Shareholder Guide; How the Fund
Values Its Shares
Item 8. Redemption or Repurchase ....................................... Shareholder Guide; How the Fund
Values its Shares; General Information
Item 9. Pending Legal Proceedings ...................................... Not Applicable
PART B
Item 10. Cover Page ..................................................... Cover Page
Item 11. Table of Contents .............................................. Table of Contents
Item 12. General Information and History ................................ General Information
Item 13. Investment Objectives and Policies ............................. Investment Objective and Policies;
Investment Restrictions
Item 14. Management of the Fund ......................................... Directors and Officers; Manager; Distributor
Item 15. Control Persons and Principal Holders of Securities ............ Not Applicable
Item 16. Investment Advisory and Other Services ......................... Manager; Distributor; Custodian,
Transfer and Dividend Disbursing
Agent and Independent Accountants
Item 17. Brokerage Allocation and Other Practices ....................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities ............................. Not Applicable
Item 19. Purchase, Redemption and Pricing of Securities Being Offered ... Purchase and Redemption of Fund
Shares; Shareholder Investment Account
Item 20. Tax Status ..................................................... Taxes
Item 21. Underwriters ................................................... Distributor
Item 22. Calculation of Performance Data ................................ Performance Information
Item 23. Financial Statements ........................................... Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Post-Effective Amendment
to the Registration Statement.
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC.
(CLASS Z SHARES)
- --------------------------------------------------------------------------------
PROSPECTUS DATED JUNE 28, 1996
- --------------------------------------------------------------------------------
Prudential Multi-Sector Fund, Inc. (the Fund) is an open-end, 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 the Appendix to the attached
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. The Fund's portfolio is
aggressively managed and therefore an investment in the Fund should not be
considered to be a complete investment program. The Fund may engage in
short-selling and short-term trading and may utilize derivatives. These
techniques may be considered speculative and may result in higher risks and
costs to the Fund. There can be no assurance that the Fund's investment
objective will be achieved. See "How the Fund Invests--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.
- --------------------------------------------------------------------------------
Class Z shares are offered exclusively for sale to participants in the PSI
401(k) Plan, an employee benefit plan sponsored by Prudential Securities
Incorporated (the PSI 401(k) Plan or the Plan). Only Class Z shares are offered
through this Prospectus. The Fund also offers Class A, Class B and Class C
shares through the attached Prospectus dated June 28, 1996 (the Retail Class
Prospectus), which is a part hereof.
- --------------------------------------------------------------------------------
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated June 28, 1996, which information is
incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.
- --------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
<TABLE>
FUND EXPENSES
<CAPTION>
Shareholder Transaction Expenses Class Z Shares
--------------
<S> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) ............................................. None
Maximum Sales Load or Deferred Sales Load Imposed on Reinvested Dividends......... None
Deferred Sales Load (as a percentage of original purchase price
or redemption proceeds, whichever is lower) ..................................... None
Redemption Fees................................................................... None
Exchange Fee...................................................................... None
Class Z Shares
Annual Fund Operating Expenses --------------
(as a percentage of average net assets)
Management Fees................................................................... .63%
12b-1 Fees ....................................................................... None
Other Expenses.................................................................... .35%
----
Total Fund Operating Expenses..................................................... .98%
====
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
Example year years years 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 Z ............................................................... $10 $31 $54 $122
</TABLE>
The above example is based on restated data for the fiscal year ended April 30,
1996. The example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in Class Z shares of the Fund will bear,
whether directly or indirectly. For more complete descriptions of the various
costs and expenses, see "How the Fund is Managed." "Other Expenses" includes
operating expenses of the Fund, such as Directors' and professional fees,
registration fees, reports to shareholders, transfer agency and custodian fees
and franchise taxes.
2
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the indicated period)
(Class Z Shares)
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and the
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class Z share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the period indicated. The information is based on data contained in the
financial statements. Further performance information is contained in the annual
report, which may be obtained without charge. See "ShareholderGuide--
Shareholder Services--Reports to Shareholders" in the Retail Class
Prospectus.
Class Z
----------------
March 1, 1996(a)
Through
April 30, 1996
----------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ................ $13.91
------
Income from investment operations
Net investment income ............................... .01
Net realized and unrealized gain on investments
and foreign currency transactions ................. .49
------
Total from investment operations ................ .50
------
Less distributions
Dividends from net investment income ................ --
Distributions from net capital and currency gains ... --
Total distributions ............................. --
------
Net asset value, end of period ...................... $14.41
======
TOTAL RETURN(c): .................................... 3.59%
RATIOS/SUPPLEMENTAL DATA:(d)
Net assets, end of period (000) ..................... $20,616
Average net assets (000) ............................ $20,298
Ratios to average net assets:
Expenses .......................................... .98%(b)
Net investment income ............................. .54%(b)
Portfolio turnover rate ............................. 136%
Average commission rate paid per share .............. $.0537
- ------------
(a) Commencement of offering of Class Z shares.
(b) Annualized.
(c) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of the period reported and includes reinvestment
of dividends and distributions. Total returns are not annualized.
(d) Because of the event referred to in (a) and the timing of such, the ratios
of Class Z shares are not necessarily comparable to those of Class A, B or
C shares and are not necessarily indicative of future ratios.
3
<PAGE>
THE FOLLOWING INFORMATION SUPPLEMENTS "HOW THE FUND IS MANAGED-MANAGER" IN THE
RETAIL CLASS PROSPECTUS.
For the period from March 1, 1996 through April 30, 1996, the Fund's expenses
as a percentage of average net assets for Class Z shares were .98% (annualized).
THE FOLLOWING INFORMATION SUPPLEMENTS "HOW THE FUND IS MANAGED--DISTRIBUTOR" IN
THE RETAIL CLASS PROSPECTUS:
Prudential Securities serves as the Distributor of Class Z shares and incurs
the expenses of distributing the Fund's Class Z shares under a Distribution
Agreement with the Fund, none of which is reimbursed by or paid for by the
Fund.
THE FOLLOWING INFORMATION SUPPLEMENTS "HOW THE FUND VALUES ITS SHARES" IN THE
RETAIL CLASS PROSPECTUS:
The NAV of Class Z shares will generally be higher than the NAV of Class A,
Class B or Class C shares as a result of the fact that the Class Z shares are
not subject to any distribution and/or service fee. It is expected, however,
that the NAV of the four classes 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.
THE FOLLOWING INFORMATION SUPPLEMENTS "TAXES, DIVIDENDS AND
DISTRIBUTIONS--TAXATION OF SHAREHOLDERS" IN THE RETAIL CLASS PROSPECTUS:
As a qualified plan, the PSI 401(k) Plan generally pays no federal income tax.
Individual participants in the Plan should consult Plan documents and their own
tax advisers for information on the tax consequences associated with
participating in the PSI 401(k) Plan.
The per share dividends on Class Z shares will generally be higher than the
per share dividends on Class A, Class B or Class C shares as a result of the
fact that Class Z shares are not subject to any distribution or service fee.
THE FOLLOWING INFORMATION REPLACES THE INFORMATION UNDER "SHAREHOLDER
GUIDE--HOW TO BUY SHARES OF THE FUND" AND "SHAREHOLDER GUIDE--HOW TO SELL YOUR
SHARES" IN THE RETAIL CLASS PROSPECTUS:
Class Z shares of the Fund are offered exclusively for sale to participants in
the PSI 401(k) Plan. Such shares may be purchased or redeemed only by the Plan
on behalf of individual Plan participants at NAV without any sales or
redemption charge. Class Z shares are not subject to any minimum investment
requirements. The Plan purchases and redeems shares to implement the investment
choices of individual Plan participants with respect to contributions in the
Plan. All purchases through the Plan will be for Class Z shares. Effective as
of March 1, 1996, Class A shares held through the PSI 401(k) Plan on behalf of
participants were automatically exchanged at relative net asset value for Class
Z shares. Individual Plan participants should contact the Prudential Securities
Benefits Department for information on making or changing investment choices.
The Prudential Securities Benefits Department is located at One Seaport Plaza,
33rd Floor, New York, New York 10292 and may be reached by calling (212)
214-7194.
The average net asset value per share at which shares of the Fund are
purchased or redeemed by the Plan for the accounts of individual Plan
participants might be more or less than the net asset value per share
prevailing at the time that such participants made their investment choices or
made their contributions to the Plan.
THE FOLLOWING INFORMATION SUPPLEMENTS "SHAREHOLDER GUIDE--HOW TO EXCHANGE YOUR
SHARES" IN THE RETAIL CLASS PROSPECTUS:
Class Z shareholders of the Fund may exchange their Class Z shares for Class Z
shares of certain other Prudential Mutual Funds on the basis of the relative
net asset value. You should contact the Prudential Securities Benefits
Department about how to exchange your Class Z shares. See "How to Buy Shares of
the Fund" above. Participants who wish to transfer their Class Z shares out of
the PSI 401(k) Plan following separation from service (i.e., voluntary or
involuntary termination of employment or retirement) will have their Class Z
shares exchanged for Class A shares at net asset value.
4
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC.
- --------------------------------------------------------------------------------
PROSPECTUS DATED JUNE 28, 1996
- --------------------------------------------------------------------------------
Prudential Multi-Sector Fund, Inc. (the Fund) is an open-end, 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 the Appendix to this 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. The Fund's portfolio is
aggressively managed and therefore an investment in the Fund should not be
considered to be a complete investment program. The Fund may engage in
short-selling and short-term trading and may utilize derivatives. These
techniques may be considered speculative and may result in higher risks and
costs to the Fund. There can be no assurance that the Fund's investment
objective will be achieved. See "How the Fund Invests--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 Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated June 28, 1996, which information is
incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.
- --------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
WHAT IS PRUDENTIAL MULTI-SECTOR FUND, INC.?
Prudential Multi-Sector Fund, Inc. is a mutual fund. A mutual fund pools
the resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, diversified
management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's primary investment objective is long-term growth of capital. It
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 the Appendix to this Prospectus. Current income is a
secondary objective. There can be no assurance that the Fund's objectives will
be achieved. See "How the Fund Invests--Investment Objective and Policies" at
page 8.
RISK FACTORS AND SPECIAL CHARACTERISTICS
The Fund may focus its investments in certain economic sectors, thereby
increasing its vulnerability to single economic, political or regulatory
developments. The 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. See "How the Fund Invests--Investment Objective and
Policies" at page 8. The Fund may also engage in various hedging and income
enhancement strategies, including utilizing derivatives. See "How the Fund
Invests--Hedging Strategies--Risks of Hedging Strategies" at page 13.
The Fund may invest in foreign securities without limit. Investing in
securities of foreign companies and countries involves certain considerations
and risks not typically associated with investing in securities of domestic
companies. See "How the Fund Invests--Investment Objective and Policies--Risks
of Investing in Foreign Securities" at page 10.
The Fund is permitted to invest up to 30% of its total assets in
fixed-income securities rated Baa or lower by Moody's Investors Service or BBB
or lower by Standard & Poor's Ratings Group or in non-rated fixed-income
securities of comparable quality. Securities rated lower than Baa or BBB,
commonly known as "junk bonds," may be considered speculative and are subject to
the risk of the issuer's inability to meet principal and interest payments on
the obligations as well as price volatility. See "How the Fund
Invests--Investment Objective and Policies--Risks of Investing in High Yield
Securities" at page 9.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager
of the Fund and is compensated for its services at an annual rate of .65 of 1%
of the Fund's average daily net assets. For the fiscal year ending April 30,
1997, the Manager has agreed to limit its fee to .625 of 1% of the first $500
million of the Fund's average daily net assets, .55 of 1% of the next $500
million of the Fund's average daily net assets and .50 of 1% of the Fund's
average daily net assets in excess of $1 billion. As of May 31, 1996, PMF served
as manager or administrator to 60 investment companies, including 38 mutual
funds, with aggregate assets of approximately $52 billion. The Prudential
Investment Corporation (PIC or the Subadviser) furnishes investment advisory
services in connection with the management of the Fund under a Subadvisory
Agreement with PMF. PIC has entered into a consulting arrangement with Greg A.
Smith, pursuant to which Mr. Smith makes recommendations to PIC with respect to
the Fund's allocation of assets. See "How the Fund is Managed--Manager" at page
16.
2
<PAGE>
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's Class A, Class B and Class C shares. PSI is paid a
distribution and service fee which is currently being charged at the annual rate
of .25 of 1% of the average daily net assets of the Class A shares and is paid a
distribution and service fee with respect to Class B and Class C shares at an
annual rate of 1% of the average daily net assets of each of the Class B and
Class C shares. See "How the Fund is Managed-Distributor" at page 17.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. There is no minimum investment requirement for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases made through the Automatic Savings Accumulation Plan, the
minimum initial and subsequent investment is $50. See "Shareholder Guide-How to
Buy Shares of the Fund" at page 24 and "Shareholder Guide-Shareholder Services"
at page 33.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), at
the net asset value per share (NAV) next determined after receipt of your
purchase order by the Transfer Agent or Prudential Securities plus a sales
charge which may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). See "How the Fund
Values its Shares" at page 19 and "Shareholder Guide-How to Buy Shares of the
Fund" at page 24.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers three classes of shares through this Prospectus:
o Class A Shares: Sold with an initial sales charge of up to 5% of
the offering price.
o Class B Shares: Sold without an initial sales charge but are
subject to a contingent deferred sales charge or CDSC (declining
from 5% to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain redemptions
made within six years of purchase. Although Class B shares are
subject to higher ongoing distribution-related expenses than
Class A shares, Class B shares will automatically convert to
Class A shares (which are subject to lower ongoing
distribution-related expenses) approximately seven years after
purchase.
o Class C Shares: Sold without an initial sales charge and, for one
year after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to higher ongoing
distribution-related expenses than Class A shares but do not
convert to another class.
See "Shareholder Guide-Alternative Purchase Plan" at page 25.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide-How to Sell Your Shares" at page 28.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to pay dividends of net investment income, if any,
semi-annually and make distributions of any net capital gains at least annually.
Dividends and distributions will be automatically reinvested in additional
shares of the Fund at NAV without a sales charge unless you request that they be
paid to you in cash. See "Taxes, Dividends and Distributions" at page 21.
3
<PAGE>
<TABLE>
<CAPTION>
FUND EXPENSES
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- ---------------
<S> <C> <C> <C>
Shareholder Transaction Expenses+
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) ............................. 5% None None
Maximum Sales Load or Deferred Sales Load Imposed on
Reinvested Dividends ........................................... None None None
Deferred Sales Load (as a percentage of original purchase
price or redemption proceeds, whichever is lower) ............. None 5% during the first year, 1% on
decreasing by 1% annually to redemptions
1% in the fifth and sixth made within one
years and 0% the seventh year of purchase
year*
Redemption Fees .................................................. None None None
Exchange Fee ..................................................... None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
Management Fees++ ................................................ .63% .63% .63%
12b-1 Fees (After Reduction) ..................................... .25+++ 1.00 1.00
Other Expenses ................................................... .35 .35 .35
----- ----- -----
Total Fund Operating Expenses (After Reduction) .................. 1.23% 1.98% 1.98%
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
Example YEAR YEARS YEARS 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 $87 $114 $191
Class B .......................................................................... $70 $92 $117 $202
Class C .......................................................................... $30 $62 $107 $231
You would pay the following expenses on the same investment, assuming no
redemption:
Class A .......................................................................... $62 $87 $114 $191
Class B .......................................................................... $20 $62 $107 $202
Class C .......................................................................... $30 $62 $107 $231
</TABLE>
The above example is based on data for the Fund's fiscal year ended April 30,
1996. The example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Fund will bear, whether directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "How the Fund is Managed." "Other Expenses" includes operating expenses of
the Fund, such as Directors' and professional fees, registration fees, reports
to shareholders, transfer agency and custodian fees and franchise taxes.
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Fund may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
each class of the Fund rather than on a per shareholder basis. Therefore,
long-term shareholders of the Fund may pay more in total sales charges than
the economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Fund is Managed--Distributor."
++ Although the Management Agreement provides that the Fund will pay a
management fee of .65 of 1% per annum of the average daily net assets of
the Fund, the Manager has agreed to limit its management fee to no more
than .625 of 1% of the first $500 million of the average daily net assets
of the Fund, .55 of 1% of the next $500 million and .50 of 1% thereafter
for the fiscal year ending April 30, 1997.
+++ Although the Class A Distribution and Service Plan provides that the Fund
may pay a distribution fee of up to .30 of 1% per annum of the average
daily net assets of the Class A shares, the Distributor has agreed to limit
its distribution fees with respect to the Class A shares of the Fund to no
more than .25 of 1% of the average daily net asset value of the Class A
shares for the fiscal year ending April 30, 1997. Total Fund Operating
Expenses of Class A shares without such limitation would be 1.28%. See "How
the Fund is Managed--Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the indicated periods)
(Class A Shares)
The following financial highlights for the five years ended April 30, 1996
have been audited by Deloitte & Touche LLP, independent accountants, whose
report thereon was unqualified. This information should be read in conjunction
with the financial statements and the notes thereto, which appear in the
Statement of Additional Information. The financial highlights contain selected
data for a Class A share of common stock outstanding, total return, ratios to
average net assets and other supplemental data for each of the periods
indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide -- Shareholder
Services -- Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------
JUNE 29,
1990(a)
THROUGH
YEAR ENDED APRIL 30, APRIL 30,
1996 1995(b) 1994 1993 1992 1991
--------- -------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ... $ 13.45 $ 13.21 $ 13.19 $ 12.51 $ 12.10 $ 11.37
------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .................. .09 .09 .18 .30 .23 .40
Net realized and unrealized gain on
investments and foreign currency
transactions ......................... 2.52 1.44 1.64 1.47 .50 .59
------- ------- ------- ------- ------- -------
Total from investment operations ..... 2.61 1.53 1.82 1.77 .73 .99
------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income ... (.04) -- (.21) (.30) (.30) (.26)
Distributions from net capital and
currency gains ....................... (1.62) (1.29) (1.59) (.79) (.02) --
------- ------- ------- ------- ------- -------
Total distributions .............. (1.66) (1.29) (1.80) (1.09) (.32) (.26)
------- ------- ------- ------- ------- -------
Net asset value, end of period ......... $ 14.40 $ 13.45 $ 13.21 $ 13.19 $ 12.51 $ 12.10
======= ======= ======= ======= ======= =======
TOTAL RETURN(d): ....................... 20.69% 12.15% 14.16% 15.14% 6.16% 17.64%
RATIOS/SUPPLEMENTAL DATA:
------- ------- ------- ------- ------- -------
Net assets, end of period (000) ........ $211,920 $76,035 $53,237 $43,390 $52,625 $59,085
Average net assets (000) ............... $201,315 $59,316 $49,840 $46,890 $57,403 $55,545
Ratios to average net assets:
Expenses, including distribution
fees ............................... 1.23% 1.44% 1.30% 1.28% 1.29% 1.35%(c)
Expenses, excluding distribution
fees ............................... .98% 1.19% 1.08% 1.08% 1.09% 1.15%(c)
Net investment income ................. .47% .68% 1.15% 2.44% 1.83% 4.28%(c)
Portfolio turnover rate ................ 136% 122% 110% 209% 147% 253%
Average commission rate paid per share . $ .0537 N/A N/A N/A N/A N/A
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Calculated based upon weighted average shares outstanding during the year.
(c) Annualized.
(d) Total return does not consider the effect 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 a full
year are not annualized.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the indicated periods)
(Class B Shares)
The following financial highlights for the five years ended April 30, 1996
have been audited by Deloitte & Touche LLP, independent accountants, whose
report thereon was unqualified. This information should be read in conjunction
with the financial statements and the notes thereto, which appear in the
Statement of Additional Information. The financial highlights contain selected
data for a Class B share of common stock outstanding, total return, ratios to
average net assets and other supplemental data for each of the periods
indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide -- Shareholder
Services -- Reports to Shareholders."
<TABLE>
<CAPTION>
Class B
-------------------------------------------------------------------
June 29,
1990(a)
Year Ended April 30, Through
------------------------------------------------------- April 30,
1996 1995(b) 1994 1993 1992 1991
-------- -------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ................. $ 13.29 $ 13.16 $ 13.15 $ 12.47 $ 12.06 $ 11.37
-------- -------- -------- ------- -------- -------
Income from investment operations
Net investment income ................................ .02 (.01) .07 .19 .13 .32
Net realized and unrealized gain (loss) on investments
and foreign currency transactions .................. 2.45 1.43 1.63 1.47 .51 .59
-------- -------- -------- ------- -------- -------
Total from investment operations ................. 2.47 1.42 1.70 1.66 .64 .91
-------- -------- -------- ------- -------- -------
Less distributions
Dividends from net investment income ................. (.01) -- (.10) (.19) (.21) (.22)
Distributions from net capital and currency gains .... (1.62) (1.29) (1.59) (.79) (.02) --
-------- -------- -------- ------- -------- -------
Total Distributions .............................. (1.63) (1.29) (1.69) (.98) (.23) (.22)
-------- -------- -------- ------- -------- -------
Net asset value, end of period ....................... $ 14.13 $ 13.29 $ 13.16 $ 13.15 $ 12.47 $ 12.06
======== ======== ======== ======= ======== =======
TOTAL RETURN(d): ..................................... 19.84% 11.31% 13.22% 14.13% 5.39% 16.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ...................... $239,739 $185,474 $128,098 $92,921 $108,276 $99,537
Average net assets (000) ............................. $236,580 $153,209 $108,981 $99,072 $108,510 $82,890
Ratios to average net assets:
Expenses, including distribution fees .............. 1.98% 2.19% 2.08% 2.08% 2.09% 2.15%(c)
Expenses, excluding distribution fees .............. .98% 1.19% 1.08% 1.08% 1.09% 1.15%(c)
Net investment income (loss) ....................... (.22)% (.07)% .35% 1.64% 1.03% 3.39%(c)
Portfolio turnover rate .............................. 136% 122% 110% 209% 147% 253%
Average commission rate paid per share ............... $ .0537 N/A N/A N/A N/A N/A
</TABLE>
- ------------
(a) Commencement of investment operations.
(b) Calculated based upon weighted average shares outstanding during the year.
(c) Annualized.
(d) 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 a
full year are not annualized.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the indicated periods)
(Class C Shares)
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and the
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class C share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for each of the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide -- Shareholder Services -- Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------
YEAR ENDED AUGUST 1, 1994(a)
APRIL 30, THROUGH
1996 APRIL 30, 1995(b)
------------ -----------------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C>
Net asset value, beginning of period .......................................... $13.29 $13.74
------ ------
Income from investment operations
Net investment income ......................................................... .03 --
Net realized and unrealized gain on investments
and foreign currency transactions ............................................ 2.44 .84
------ ------
Total from investment operations ...................................... 2.47 .84
------ ------
LESS DISTRIBUTIONS
Dividends from net investment income .......................................... (.01) --
Distributions from net capital and currency gains ............................. (1.62) (1.29)
------ ------
Total distributions ................................................... (1.63) (1.29)
------ ------
Net asset value, end of period .............................................. $14.13 $13.29
====== ======
TOTAL RETURN(d): .............................................................. 19.84% 6.62%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ............................................... $5,125 $3,587
Average net assets (000) ...................................................... $5,056 $1,653
Ratios to average net assets:
Expenses, including distribution fees ........................................ 1.98% 2.37%(c)
Expenses, excluding distribution fees ........................................ .98% 1.37%(c)
Net investment income ........................................................ (.21)% .03%(c)
Portfolio turnover rate ...................................................... 136% 122%
Average commission rate paid per share ....................................... $.0537 N/A
</TABLE>
- --------------
(a) Commencement of offering of Class C shares.
(b) Calculated based upon weighted average shares outstanding during the period.
(c) Annualized.
(d) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of the period reported and includes
reinvestment of dividends and distributions. Total returns for periods
of less than a full year are not annualized.
7
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE 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 THIS 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 THESE OBJECTIVES WILL BE ACHIEVED. See "Investment Objective
and Policies" in the Statement of Additional Information.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE FUND'S
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). FUND POLICIES THAT ARE NOT FUNDAMENTAL
MAY BE MODIFIED BY THE BOARD OF DIRECTORS.
Through analyzing economic, demographic and other trends, such as the aging
of the general population, shifts in population growth that may enhance the
economic potential of regions such as the Pacific Northwest, the globalization
of American businesses and increased foreign competition, the investment adviser
will identify companies whose products and services appear to respond to the
changing environment of the 1990's and beyond. In making portfolio selections,
the investment adviser will place particular emphasis on companies that it
believes have internal strengths, such as good financial resources, a
satisfactory rate of return on capital, a favorable industry position and
superior management. Companies with these characteristics are considered to have
favorable prospects of achieving consistent earnings growth, which in turn may
result in long-term capital appreciation.
IN PURSUING ITS INVESTMENT STRATEGY AND IN RESPONSE TO CHANGES IN THE GENERAL
ECONOMY OR WITHIN PARTICULAR SECTORS, THE FUND MAY INCREASE, DECREASE OR
ELIMINATE ENTIRELY A PARTICULAR SECTOR'S REPRESENTATION IN THE FUND'S PORTFOLIO.
EQUITY SECURITIES
UNDER NORMAL CIRCUMSTANCES, AT LEAST 65% OF THE FUND'S TOTAL ASSETS WILL BE
INVESTED IN EQUITY SECURITIES (INCLUDING DOMESTIC AND FOREIGN COMMON STOCKS,
CONVERTIBLE DEBT SECURITIES AND WARRANTS) OF COMPANIES IN UP TO SEVEN ECONOMIC
SECTORS. At no time will any one sector comprise more than 50% of the Fund's
total assets nor will 25% or more of the Fund's total assets be concentrated in
the securities of companies falling into any one industry or group of
industries. Nonetheless, the Fund may be affected to a greater extent by any
single economic, political or regulatory development than a mutual fund that
does not focus its investments.
The economic sectors in which the Fund will invest are described in
"Description of Economic Sectors" in the Appendix and include autos and housing,
basic industry, business services, consumer goods and services, defense and
aerospace, energy, environmental, financial services, health care, natural
resources, precious metals, public utilities, retailing, technology, and
transportation. Each of these sectors consists of several related industries,
and a single industry, or a company within an industry, may fall into more than
one sector. The Fund's investment adviser will determine the sectors in which
particular industries and companies belong on the basis of relevant market and
business considerations. Companies will be assigned to sectors based on their
principal business activity as reflected by gross revenues. Companies will not
be reassigned to other sectors unless their principal business activity changes.
WHILE THE PRINCIPAL INVESTMENT EMPHASIS WILL BE ON COMMON STOCKS, THE FUND
ALSO MAY SEEK APPRECIATION IN OTHER TYPES OF EQUITY SECURITIES, SUCH AS
CONVERTIBLE BONDS, CONVERTIBLE PREFERRED STOCKS AND WARRANTS TO PURCHASE
8
<PAGE>
COMMON STOCK, WHEN RELATIVE VALUES MAKE THESE INVESTMENTS APPEAR ATTRACTIVE
EITHER AS INDIVIDUAL ISSUES OR AS TYPES OF SECURITIES IN CERTAIN ECONOMIC
ENVIRONMENTS.
DEBT OBLIGATIONS
UNDER NORMAL CIRCUMSTANCES, THE FUND MAY INVEST UP TO 35% OF ITS TOTAL ASSETS
IN U.S. GOVERNMENT SECURITIES, FOREIGN GOVERNMENT SECURITIES AND U.S. AND
FOREIGN CORPORATE DEBT OBLIGATIONS. The Fund anticipates that, of this total, it
will primarily invest in fixed-income securities rated A or better by Moody's
Investors Service (Moody's) or Standard & Poor's Ratings Group (S&P). The Fund
may also 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 the 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 investment adviser will consider such an event in determining whether
the 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 corporate bond ratings is
contained in "Description of Security Ratings" in the Appendix to this
Prospectus. The Fund may also invest in unrated fixed-income securities which,
in the opinion of the investment adviser, are of a quality comparable to rated
securities in which the Fund may invest.
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 AND THE MARKET PERCEPTION OF THE CREDITWORTHINESS OF THE ISSUER
(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. See "Investment Objective and
Policies--Risks of Investing in High Yield Securities" in the Statement of
Additional Information.
U.S. GOVERNMENT SECURITIES
THE FUND MAY INVEST IN U.S. TREASURY OBLIGATIONS, INCLUDING BILLS, NOTES,
BONDS AND OTHER DEBT OBLIGATIONS ISSUED BY THE U.S. TREASURY. These instruments
are direct obligations of the U.S. Government and, as such, are backed by the
"full faith and credit" of the United States. They differ primarily in their
interest rates, the lengths of their maturities and the dates of their
issuances.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES
THE FUND WILL ALSO INVEST IN OBLIGATIONS WHICH ARE ISSUED OR GUARANTEED BY
AGENCIES OF THE U.S. GOVERNMENT OR INSTRUMENTALITIES ESTABLISHED OR SPONSORED BY
THE U.S. GOVERNMENT. These obligations, including those which are guaranteed by
federal agencies or instrumentalities, may or may not be backed by the "full
faith and credit" of the United States. Obligations of the Government National
Mortgage Association (GNMA), the Farmers Home Administration and the Small
Business Administration are backed by the "full faith and credit" of the United
States. In the case of securities not backed by the "full faith and credit" of
the United States, the Fund must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the United States if the agency or instrumentality does not meet
its commitments. Instruments in which the Fund may invest which are not backed
by the "full faith and credit" of the United States include obligations issued
by the Federal Home Loan Banks, the
9
<PAGE>
Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage
Association (FNMA), the Resolution Funding Corporation, the Student Loan
Marketing Association and the Tennessee Valley Authority, each of which under
certain conditions has the right to borrow from the U.S. Treasury to meet its
obligations, and obligations of the Farm Credit System, the obligations of which
may be satisfied only by the individual credit of the issuing agency.
Obligations of FHLMC may include collateralized mortgage obligations (CMOs). The
Fund will invest in mortgage-backed securities (e.g., GNMA, FNMA and FHLMC
certificates) only to the extent such securities are used as collateral for
repurchase agreements entered into by the Fund.
FOREIGN GOVERNMENT SECURITIES
THE FUND MAY INVEST IN FOREIGN GOVERNMENT SECURITIES, INCLUDING 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 DENOMINATED IN THE CURRENCY OF A
FOREIGN COUNTRY OR IN U.S. DOLLARS.
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. Foreign
government securities also include debt securities denominated in European
Currency Units. 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
S&P or 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.
RISKS OF INVESTING IN FOREIGN SECURITIES
INVESTMENT IN FOREIGN SECURITIES INVOLVES 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 imposition 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 the Fund to obtain or enforce a judgment against the issuer of such
securities. There is no limitation on the amount of the Fund's assets that may
be invested in foreign securities.
MONEY MARKET INSTRUMENTS
WHEN CONDITIONS DICTATE A TEMPORARY DEFENSIVE STRATEGY OR DURING TEMPORARY
PERIODS OF PORTFOLIO STRUCTURING AND RESTRUCTURING, THE FUND MAY INVEST IN MONEY
MARKET INSTRUMENTS WITHOUT LIMIT. The Fund may invest in high quality money
market instruments, including commercial paper of a U.S. or foreign company or
foreign government; certificates of deposit, bankers' acceptances and time
deposits of domestic and foreign banks; and obligations issued or guaranteed by
the U.S. Government, its agencies and instrumentalities. Commercial paper will
be rated, at the time of investment, 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.
10
<PAGE>
HEDGING STRATEGIES
THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING
PURCHASING AND SELLING DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS
AND TO ATTEMPT TO ENHANCE RETURN. 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 INDICES AND STOCK INDICES AND THE
PURCHASE AND SALE OF OPTIONS THEREON. THE FUND MAY ENGAGE IN THESE TRANSACTIONS
ON NATIONAL SECURITIES EXCHANGES OR, IN THE CASE OF FUTURES, ON COMMODITIES
EXCHANGES OR, IN THE CASE OF EQUITY AND STOCK INDEX OPTIONS, IN THE
OVER-THE-COUNTER MARKET. The Fund's ability to use these strategies may be
limited by market conditions, regulatory limits and tax considerations and there
can be no assurance that any of these strategies will succeed. New financial
products and risk management techniques continue to be developed and the Fund
may use these new investments and techniques to the extent consistent with its
investment objectives and policies. See "Investment Objective and Policies" in
the Statement of Additional Information.
OPTION TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) CALL OPTIONS AND PURCHASE PUT
OPTIONS ON STOCKS AND STOCK INDICES THAT ARE TRADED ON NATIONAL SECURITIES
EXCHANGES OR THAT ARE LISTED ON NASDAQ OR IN THE OVER-THE-COUNTER MARKET TO
ATTEMPT TO ENHANCE RETURN OR HEDGE ITS PORTFOLIO INVESTMENTS.
A CALL OPTION IS A SHORT-TERM CONTRACT (HAVING A DURATION OF NINE MONTHS OR
LESS) WHICH GIVES THE PURCHASER, IN RETURN FOR A PREMIUM PAID, THE RIGHT TO BUY
THE SECURITY SUBJECT TO THE OPTION AT A SPECIFIED EXERCISE PRICE AT ANY TIME
DURING THE TERM OF THE OPTION. The writer of the call option, in return for the
premium, has the obligation, upon exercise of the option, to deliver, depending
on the terms of the option contract, the underlying security to the purchaser
upon receipt of the exercise price. When the Fund writes a call option, the Fund
gives up the potential for gain on the underlying securities in excess of the
exercise price of the option during the period that the option is open.
A PUT OPTION IS A SIMILAR CONTRACT WHICH GIVES THE PURCHASER, IN RETURN FOR
A PREMIUM, THE RIGHT, FOR A SPECIFIED PERIOD OF TIME, TO SELL THE SECURITY
SUBJECT TO THE OPTION TO THE WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE.
The writer of the put, in return for the premium, has the obligation upon
exercise of the option, to acquire the security underlying the option at the
exercise price. Successful use of stock and index options requires skills
different from those needed to select portfolio securities. The investment
adviser manages other portfolios that use these techniques.
The Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; the Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
The Fund may also purchase a "protective put," i.e., a put option acquired
for the purpose of protecting a portfolio security from a decline in market
value. In exchange for the premium paid for the put option, the Fund acquires
the right to sell the underlying security at the exercise price of the put
regardless of the extent to which the underlying security declines in value. The
loss to the Fund is limited to the premium paid for, and transaction costs
incurred in connection with, the put plus the initial excess, if any, of the
market price of the underlying security over the exercise price. However, if the
market price of the security underlying the put rises, the profit the Fund
realizes on the sale of the security will be reduced by the premium paid for the
put option less any amount (net of transaction costs) for which the put may be
sold. Similar principles apply to the purchase of puts on stock indices, as
described below. 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
11
<PAGE>
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 may exist.
OPTIONS ON STOCK INDICES. OPTIONS ON STOCK INDICES ARE SIMILAR TO OPTIONS
ON EQUITY SECURITIES 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, in return for a premium paid, 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. The writer of an index option, in return
for a premium, is obligated to pay the amount of cash due upon exercise of the
option.
Because exercises of index options are settled in cash, a call writer
cannot determine the amount of its settlement obligations in advance and, unlike
call writing on specific stocks, cannot provide in advance for, or cover, its
potential settlement obligations by acquiring and holding the underlying
securities. In addition, unless the Fund has other liquid assets which are
sufficient to satisfy the exercise of a call, the Fund would be required to
liquidate portfolio securities or borrow in order to satisfy the exercise.
Because the value of an index option depends upon movements in the level of
the index rather than the price of a particular stock, whether the Fund will
realize a gain or loss on the purchase or sale of an option on an index depends
upon movements in the level of stock prices in the stock market generally or in
an industry or market segment rather than movements in the price of a particular
stock. Accordingly, successful use by the Fund of options on indices would be
subject to the investment adviser's ability to predict correctly movements in
the direction of the stock market generally or of a particular industry. This
requires different skills and techniques than predicting changes in the price of
individual stocks. The investment adviser manages other portfolios that use
options on stock indices.
So long as shares of the Fund are registered in certain states, the Fund
will not purchase (i) put options on stocks not held by the Fund, (ii) put
options on indices and (iii) call options on stock or stock indices if, after
any such purchase, the total premiums paid for such options would exceed 10% of
the Fund's total assets; provided, however, that the Fund may purchase put
options on stock held by the Fund if after such purchase the aggregate premiums
paid for such options do not exceed 20% of the Fund's total net assets. In
addition, the aggregate value of the securities that are the subject of the put
options will not exceed 50% of the Fund's net assets. Except for certain
limitations under the Internal Revenue Code of 1986 (the Internal Revenue Code),
there are no other limitations on the Fund's ability to purchase and write
options. See "Taxes" in the Statement of Additional Information.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
THE FUND MAY ENTER INTO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS FOR
HEDGING PURPOSES. A forward contract involves an obligation to purchase or sell
a specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
directly between currency traders (typically large commercial banks) and their
customers. A forward contract generally has no deposit requirements, and no
commissions are charged for such trades. See "Investment Objective and
Policies-Forward Foreign Currency Exchange Contracts" in the Statement of
Additional Information.
When the Fund invests in foreign securities, the Fund may enter into
forward foreign currency exchange contracts in several circumstances to protect
the value of its portfolio. The Fund may not use forward contracts to generate
income, although the use of such contracts may incidentally generate income.
There is no limitation on the value of forward contracts into which the Fund may
enter.
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FUTURES TRANSACTIONS
THE FUND MAY BUY AND SELL FUTURES CONTRACTS ON INTEREST-BEARING SECURITIES,
INTEREST RATE INDICES AND STOCK INDICES (FUTURES CONTRACTS) AND MAY BUY AND
WRITE (I.E., SELL) OPTIONS THEREON TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS
AND, WITH RESPECT TO WRITING CALL OPTIONS ON FUTURES CONTRACTS, TO ATTEMPT TO
ENHANCE RETURN. The Fund will engage in transactions in only those futures
contracts and options thereon that are traded on a commodities exchange or a
board of trade. Exchanges and boards of trade may impose daily market price
limits for certain futures contracts.
Under regulations of the Commodity Exchange Act, investment companies
registered under 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 initial margin and option
premiums do not exceed 5% of the liquidation value of the Fund's total assets.
There are no limitations on the percentage of the Fund which may be hedged, and
there are no limitations on the use of assets to cover futures contracts and
options thereon, except that the aggregate value of the securities that are the
subject of put options will not exceed 50% of the Fund's net assets. See "Taxes"
in the Statement of Additional Information.
THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET AND
OF INTEREST RATES AND REQUIRES SKILLS AND TECHNIQUES DIFFERENT FROM THOSE USED
IN SELECTING PORTFOLIO SECURITIES. The correlation between movements in the
price of the futures contract and the price of the securities being hedged is
imperfect, particularly when the composition of the Fund's portfolio diverges
from the composition of the relevant index. With respect to interest rate
futures contracts, there is a risk that the futures contracts will not correlate
with interest rates. In addition, if the Fund purchases futures contracts to
hedge against market advances before it can invest in common stock or
fixed-income securities in an advantageous manner and the market declines, the
Fund might incur a loss on the futures contract. The Fund's ability to establish
and maintain positions will depend on market liquidity. In addition, the ability
of the Fund to close out a futures position or an option depends upon a liquid
secondary market. There is no assurance that liquid secondary markets will exist
for any particular futures contract or option at any particular time. The
investment adviser manages other portfolios that use futures contracts and
options thereon.
THE FUND'S ABILITY TO ENTER INTO FUTURES CONTRACTS AND OPTIONS THEREON MAY
ALSO BE LIMITED BY THE REQUIREMENTS OF THE INTERNAL REVENUE CODE FOR
QUALIFICATION AS A REGULATED INVESTMENT COMPANY.
RISKS OF HEDGING STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS INVOLVES INVESTMENT RISKS
AND TRANSACTION COSTS TO WHICH THE 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 the Fund may leave the 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 the 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 the Fund
to sell a portfolio security at a disadvantageous time, due to the need for the
Fund to maintain "cover" or to
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segregate securities in connection with hedging transactions. See "Investment
Objective and Policies" and "Taxes" in the Statement of Additional Information.
OTHER INVESTMENTS AND POLICIES
WHEN-ISSUED OR DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place as much as a month or more in the future in order to secure what is
considered to be an advantageous price and yield to the Fund at the time of
entering into the transaction. The Fund's Custodian will maintain, in a
segregated account of the Fund, cash, U.S. Government securities or other liquid
high-grade debt obligations having a value equal to or greater than the Fund's
purchase commitments. The securities so purchased are subject to market
fluctuation and no interest accrues to the purchaser during the period between
purchase and settlement. At the time of delivery of the securities the value may
be more or less than the purchase price and an increase in the percentage of the
Fund's assets committed to the purchase of securities on a when-issued or
delayed delivery basis may increase the volatility of the Fund's net asset
value.
REPURCHASE AGREEMENTS
The Fund may on occasion enter into repurchase agreements whereby the
seller of a security agrees to repurchase that security from the Fund at a
mutually agreed-upon time and price. The repurchase date is usually within a day
or two of the original purchase, although it may not be for a number of months.
The resale price is in excess of the purchase price, reflecting an agreed-upon
rate of return effective for the period of time the Fund's money is invested in
the repurchase agreement. The Fund's repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily, and if the value of the
instruments declines, the Fund will require additional collateral. If the seller
defaults and the value of the collateral securing the repurchase agreement
declines, the Fund may incur a loss. The Fund participates in a joint repurchase
account with other investment companies managed by Prudential Mutual Fund
Management, Inc. pursuant to an order of the Securities and Exchange Commission
(SEC).
ILLIQUID SECURITIES
The Fund may hold up to 10% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities markets
either within or outside of the United States. Restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933, as amended
(the Securities Act), and privately placed commercial paper that have a readily
available market are not considered illiquid for purposes of this limitation.
The investment adviser will monitor the liquidity of such restricted securities
under the supervision of the Board of Directors. The Fund's investment in Rule
144A securities could have the effect of increasing illiquidity to the extent
that qualified institutional buyers become, for a limited time, uninterested in
purchasing Rule 144A securities. The Fund intends to comply with any applicable
state blue sky laws restricting the Fund's investments in illiquid securities.
See "Investment Restrictions" in the Statement of Additional Information.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the applicable notice period.
The staff of the SEC has taken the position that purchased over-the-counter
options and the assets used as "cover" for written over-the-counter options are
illiquid securities unless the Fund and the counterparty have provided for the
Fund,
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at the Fund's election, to unwind the over-the-counter option. The exercise of
such an option ordinarily would involve the payment by the Fund of an amount
designed to reflect the counterparty's economic loss from an early termination,
but does allow the Fund to treat the assets used as "cover" as "liquid."
SHORT SELLING
The Fund may sell a security it does not own in anticipation of a decline
in the market value of that security (short sales). To complete such a
transaction, the Fund must borrow the security to make delivery to the buyer.
The Fund then is obligated to replace the security borrowed by purchasing it at
market price at the time of replacement. The price at such time may be more or
less than the price at which the security was sold by the Fund. Until the
security is replaced, the Fund is required to pay to the lender any dividends or
interest which accrue during the period of the loan. To borrow the security, the
Fund also may be required to pay a premium, which would increase the cost of the
security sold. The proceeds of the short sale will be retained by the broker, to
the extent necessary to meet margin requirements, until the short position is
closed out. Until the Fund replaces a borrowed security, the Fund will maintain
daily a segregated account, containing cash or U.S. Government securities, at
such a level that (i) the amount deposited in the account plus the amount
deposited with the broker as collateral will equal the current value of the
security sold short and (ii) the amount deposited in the segregated account plus
the amount deposited with the broker as collateral will not be less than the
market value of the security at the time it was sold short. The Fund will incur
a loss as a result of the short sale if the price of the security increases
between the date of the short sale and the date on which the Fund replaces the
borrowed security. The Fund will realize a gain if the security declines in
price between those dates. This result is the opposite of what one would expect
from a cash purchase of a long position in a security. The amount of any gain
will be decreased, and the amount of any loss increased, by the amount of any
premium, dividends or interest the Fund may be required to pay in connection
with a short sale. No more than 25% of the Fund's net assets will be, when added
together: (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.
The Fund also may make short sales "against-the-box," in which the Fund
enters into a short sale of a security which the Fund owns or has the right to
obtain at no added cost. Not more than 25% of the Fund's net assets (determined
at the time of the short sale against-the-box) may be subject to such sales. See
"Investment Objective and Policies-Short Sales Against-the-Box" in the Statement
of Additional Information.
BORROWING
The 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. Such borrowings shall be made only from banks, unless the Fund
receives an order from the SEC to permit borrowings from entities other than
banks. The Fund may pledge up to 20% of its total assets to secure such
borrowings. If the Fund's asset coverage for borrowings falls below 300%, the
Fund will take prompt action to reduce its borrowings. If the 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 the Fund, the
net asset value of the Fund's shares will decrease faster than would otherwise
be the case. This is the speculative factor known as "leverage." See "Investment
Restrictions" in the Statement of Additional Information.
SECURITIES LENDING
The Fund is permitted to lend its portfolio securities. See "Investment
Objective and Policies-Lending of Portfolio Securities" in the Statement of
Additional Information.
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Subject to shareholder approval, the Board of Directors has approved a
change in the Fund's investment restrictions and policies which would permit the
Fund to make loans of portfolio securities in an amount up to 30% of the Fund's
total assets. This change will be submitted to shareholders for their approval
at a special meeting scheduled to be held on or about October 8, 1996.
PORTFOLIO TURNOVER
The portfolio turnover rate for the Fund is not expected to exceed 200%
under normal circumstances. The portfolio turnover rate is calculated by
dividing the lesser of sales or purchases of portfolio securities by the average
monthly value of the Fund's portfolio securities, excluding securities having a
maturity at the date of purchase of one year or less. High portfolio turnover
may involve correspondingly greater brokerage commissions and other transaction
costs, which will be borne directly by the Fund. See "Portfolio Transactions and
Brokerage" in the Statement of Additional Information.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objectives, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW,
DECIDES UPON MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND
SUPERVISES THE DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER
FURNISHES DAILY INVESTMENT ADVISORY SERVICES.
For the fiscal year ended April 30, 1996, the Fund's expenses as a
percentage of average net assets for Class A, Class B and Class C shares, were
1.23%, 1.98% and 1.98%, respectively. See "Financial Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .65 OF 1% OF THE FUND'S AVERAGE DAILY NET
ASSETS. It was incorporated in May 1987 under the laws of the State of Delaware.
For the fiscal year ended April 30, 1996, the Fund paid management fees to PMF
of .628% of the Fund's average net assets. For the fiscal year ending April 30,
1997, the Manager has agreed to limit its management fee to .625 of 1% of the
first $500 million of the Fund's average net assets, .55 of 1% of the next $500
million and .50 of 1% of the Fund's average daily net assets in excess of $1
billion. See "Manager" in the Statement of Additional Information.
As of May 31, 1996, PMF served as the manager to 37 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $52 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. See
"Manager" in the Statement of Additional Information.
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<PAGE>
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
The current portfolio manager of the Fund is Gregory Goldberg, a Managing
Director of Prudential Mutual Fund Investment Management, a unit of PIC. Mr.
Goldberg has responsibility for the day-to-day management of the Fund's
portfolio. Mr. Goldberg has managed the Fund's portfolio since March 1994. Mr.
Goldberg was previously employed by Daiwa International Capital Management
(January 1988-December 1993) as a portfolio manager for institutional clients.
Prior thereto, he was employed by Industrial Bank of Japan (October 1986-January
1988). Mr. Goldberg joined PIC on January 11, 1994.
THE FUND'S SUBADVISER HAS ENTERED INTO A CONSULTING ARRANGEMENT WITH GREG
A. SMITH, PURSUANT TO WHICH MR. SMITH MAKES RECOMMENDATIONS TO PIC WITH RESPECT
TO THE FUND'S ALLOCATION OF ASSETS. Mr. Smith is a consultant to Prudential
Securities Incorporated, an affiliate of both the Subadviser and the Fund, and
the President of Greg A. Smith Asset Management Corporation, a registered
investment adviser. Mr. Smith is a consultant to PIC with respect to the
allocation of assets for Prudential Allocation Fund (Strategy Portfolio). Mr.
Smith is recognized in the financial community as a leading asset allocation
strategist. Since 1983, he has been named by Institutional Investor magazine as
a member of its All-America Research Team.
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance
Company of America (Prudential), a major diversified insurance and financial
services company.
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE
SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE
LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE SHARES OF THE
FUND. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (THE DISTRIBUTOR) INCURS THE
EXPENSES OF DISTRIBUTING THE FUND'S CLASS A, CLASS B AND CLASS C SHARES. These
expenses include commissions and account servicing fees paid to, or on account
of, financial advisers of Prudential Securities and representatives of Pruco
Securities Corporation (Prusec), an affiliated broker-dealer, commissions and
account servicing fees paid to, or on account of, other broker-dealers or
financial institutions (other than national banks) which have entered into
agreements with the Distributor, advertising expenses, the cost of printing and
mailing prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses. The State
of Texas requires that shares of the Fund may be sold in that state only by
dealers or other financial institutions which are registered there as
broker-dealers.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE FUND MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The
Class A
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Plan provides that (i) up to .25 of 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and/or the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1% of the average daily net
assets of the Class A shares. Prudential Securities has agreed to limit its
distribution-related fees payable under the Class A Plan to .25 of 1% of the
average daily net assets of the Class A shares for the fiscal year ending April
30, 1997.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF
THE CLASS B AND CLASS C SHARES. The Class B and Class C Plans provide for the
payment to Prudential Securities of (i) an asset-based sales charge of .75 of 1%
of the average daily net assets of each of the Class B and Class C shares, and
(ii) a service fee of .25 of 1% of the average daily net assets of each of the
Class B and Class C shares. The service fee is used to pay for personal service
and/or the maintenance of shareholder accounts. Prudential Securities also
receives contingent deferred sales charges from certain redeeming shareholders.
See "Shareholder Guide-How to Sell Your Shares-Contingent Deferred Sales
Charges."
For the fiscal year ended April 30, 1996, the Fund paid distribution
expenses of .25 of 1%, 1.00% and 1.00% of the average daily net assets of the
Class A, Class B and Class C shares, respectively. The Fund records all payments
made under the Plans as expenses in the calculation of net investment income.
See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of shares of the Fund will
be allocated to each class based upon the ratio of sales of each class to the
sales of all shares of the Fund other than expenses allocated to a particular
class. The distribution fee and sales charge of one class will not be used to
subsidize the sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Fund, including a
majority of the Directors who are not "interested persons" of the Fund (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to the
Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each Plan
may be terminated at any time by vote of a majority of the Rule 12b-1 Directors
or a majority of the outstanding shares of the applicable class of the Fund. The
Fund will not be obligated to pay distribution and service fees incurred under
any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers and other persons who
distribute shares of the Fund. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
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Pursuant to the terms of the SEC settlement, PSI agreed to the imposition
of a $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant
for the Fund, provided that the commissions, fees or other remuneration it
receives are fair and reasonable. See "Portfolio Transactions and Brokerage" in
the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Its mailing address is P.O. Box
1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison,
New Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING
ITS LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
BOARD OF DIRECTORS HAS FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE
FUND'S NET ASSET VALUE TO BE AS OF 4:15 P.M., NEW YORK TIME.
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Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Board of Directors. See "Net Asset Value" in the Statement of
Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Fund or days on which changes in the
value of the Fund's portfolio securities do not materially affect the NAV. The
New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
net asset values and dividends. The NAV of Class B and Class C shares will
generally be lower than the NAV of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. It is
expected, however, that the NAV of the three classes will tend to converge
immediately after the recording of dividends, if any, which will differ by
approximately the amount of the distribution-related expense accrual
differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS TOTAL RETURN (INCLUDING
"AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) AND YIELD IN
ADVERTISEMENTS OR SALES LITERATURE. TOTAL RETURN AND YIELD ARE CALCULATED
SEPARATELY FOR CLASS A, CLASS B AND CLASS C SHARES. These figures are based on
historical earnings and are not intended to indicate future performance. The
"total return" shows how much an investment in the Fund would have increased
(decreased) over a specified period of time (i.e., one, five or ten years or
since inception of the Fund) assuming that all distributions and dividends by
the Fund were reinvested on the reinvestment dates during the period and less
all recurring fees. The "aggregate" total return reflects actual performance
over a stated period of time. "Average annual" total return is a hypothetical
rate of return that, if achieved annually, would have produced the same
aggregate total return if performance had been constant over the entire period.
"Average annual" total return smooths out variations in performance and takes
into account any applicable initial or contingent deferred sales charges.
Neither "average annual" total return nor "aggregate" total return takes into
account any federal or state income taxes which may be payable upon redemption.
The "yield" refers to the income generated by an investment in the Fund over a
one-month or 30-day period. This income is then "annualized;" that is, the
amount of income generated by the investment during that 30-day period is
assumed to be generated each 30-day period for twelve periods and is shown as a
percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. The Fund also
may include comparative performance information in advertising or marketing the
Fund's shares. Such performance information may include data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. Further performance
information is contained in the Fund's annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder
Guide-Shareholder Services-Reports to Shareholders."
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TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
FUND WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. See "Taxes"
in the Statement of Additional Information.
Under the Internal Revenue Code, special rules apply to the treatment of
certain options and futures contracts (Section 1256 contracts). At the end of
each year, such investments held by the Fund will be required to be "marked to
market" for federal income tax purposes; that is, treated as having been sold at
market value. Sixty percent of any gain or loss recognized on these "deemed
sales" and on actual dispositions will be treated as long-term capital gain or
loss, and the remainder will be treated as short-term capital gain or loss. See
"Taxes" in the Statement of Additional Information.
The Fund may incur foreign income taxes in connection with some of its
foreign investments. Certain of these taxes may be credited to shareholders. See
"Taxes" in the Statement of Additional Information. The Fund may, from time to
time, invest in Passive Foreign Investment Companies (PFICs). PFICs are foreign
corporations which derive a majority of their income from passive sources. For
tax purposes, the Fund's investments in PFICs may subject the Fund to federal
income taxes on certain income and gains realized by the Fund.
Certain gains or losses from fluctuations in foreign currency exchange
rates (Section 988 gains and losses) will affect the amount of ordinary income
the Fund will be able to pay as dividends. See "Taxes" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
Any dividends out of net investment income, together with distributions of
any net short-term gains (i.e., the excess of net short-term capital gains over
net long-term capital losses) distributed to shareholders, will be taxable as
ordinary income to the shareholder whether or not reinvested. Any net capital
gains (i.e., the excess of net long-term capital gains over net short-term
capital losses) distributed to shareholders will be taxable as long-term capital
gains to the shareholders, whether or not reinvested and regardless of the
length of time a shareholder has owned his or her shares. The maximum long-term
capital gains rate for individuals is 28%. The maximum long-term capital gains
rate for corporate shareholders is the same as the maximum tax rate for ordinary
income.
Dividends received by corporate shareholders are eligible for a dividends
received deduction of 70% to the extent the Fund's income is derived from
qualified dividends received by the Fund from domestic corporations. Dividends
attributable to interest income, capital and currency gain net income, gain or
loss from Section 1256 contracts and from some other sources will not be
eligible for the corporate dividends received deduction. See "Taxes" in the
Statement of Additional Information. Corporate shareholders should consult their
tax advisers regarding other requirements applicable to the dividends received
deduction.
Any gain or loss realized upon a sale or redemption of Fund shares by a
shareholder who is not a dealer in securities will generally be treated as
long-term capital gain or loss if the shares have been held more than one year
and otherwise as short-term capital gain or loss. Any such loss with respect to
shares that are held for six months or less, however, will be treated as a
long-term capital loss to the extent of any capital gain distributions received
by the shareholder.
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<PAGE>
The Fund has obtained opinions of counsel to the effect that neither (i)
the conversion of Class B shares into Class A shares nor (ii) the exchange of
Class B or Class C shares for Class A shares constitutes a taxable event for
federal income tax purposes. However, such opinions are not binding on the
Internal Revenue Service.
Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes. See "Taxes" in the
Statement of Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Fund generally is required to withhold
and remit to the U.S. Treasury 31% of dividend, capital gain income and
redemption proceeds on the accounts of those shareholders who fail to furnish
their tax identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of
certain foreign shareholders) with the required certifications regarding the
shareholder's status under the federal income tax law. Withholding at this rate
is also required from dividends and capital gains distributions (but not
redemption proceeds) payable to shareholders who are otherwise subject to backup
withholding. Dividends of net investment income and short-term capital gains
paid to a foreign shareholder will generally be subject to U.S. withholding tax
at the rate of 30% (or lower treaty rate).
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO PAY SEMI-ANNUAL DIVIDENDS OF NET INVESTMENT INCOME, IF
ANY, AND MAKE ANNUAL DISTRIBUTIONS OF ANY CAPITAL GAINS IN EXCESS OF NET
LONG-TERM CAPITAL LOSSES. Dividends paid by the Fund with respect to each class
of shares, to the extent any dividends are paid, will be calculated in the same
manner, at the same time, on the same day and will be in the same amount except
that each class will bear its own distribution charges, generally resulting in
lower dividends for Class B and Class C shares. Distributions of net capital
gains, if any, will be paid in the same amount for each class of shares. See
"How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES BASED ON
THE NAV OF EACH CLASS ON THE RECORD DATE, OR SUCH OTHER DATE AS THE BOARD OF
DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN
FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential Mutual
Fund Services, Inc., Attention: Account Maintenance, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. If you hold shares through Prudential
Securities, you should contact your financial adviser to elect to receive
dividends and distributions in cash. The Fund will notify each shareholder after
the close of the Fund's taxable year both of the dollar amount and the taxable
status of that year's dividends and distributions on a per share basis.
Certain dividends declared by the Fund will be treated as received by
shareholders on December 31 of the year the dividends are declared. This rule
applies to the dividends declared by the Fund in October, November or December
of a calendar year, payable to shareholders of record on a date in any such
month, if such dividends are paid by January 31 of the following calendar year.
WHEN THE FUND GOES "EX-DIVIDEND," THE NAV OF EACH CLASS IS REDUCED BY THE
AMOUNT OF THE DIVIDEND OR DISTRIBUTION ALLOCABLE TO EACH CLASS. IF YOU BUY
SHARES JUST PRIOR TO THE EX-DIVIDEND DATE (WHICH GENERALLY OCCURS FOUR BUSINESS
DAYS PRIOR TO THE RECORD DATE), THE PRICE YOU PAY WILL INCLUDE THE DIVIDEND OR
DISTRIBUTION AND A PORTION OF YOUR INVESTMENT WILL BE RETURNED TO YOU AS A
TAXABLE DIVIDEND OR DISTRIBUTION. YOU SHOULD, THEREFORE, CONSIDER THE TIMING OF
DIVIDENDS AND DISTRIBUTIONS WHEN MAKING YOUR PURCHASES.
22
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON FEBRUARY 21, 1990. THE FUND IS
AUTHORIZED TO ISSUE TWO BILLION SHARES OF COMMON STOCK, $.001 PAR VALUE PER
SHARE, DIVIDED EQUALLY INTO FOUR CLASSES, DESIGNATED CLASS A, CLASS B, CLASS C
AND CLASS Z SHARES, EACH OF WHICH CONSISTS OF 500,000,000 AUTHORIZED SHARES.
Each class of common stock represents an interest in the same assets of the Fund
and is identical in all respects except that (i) each class is subject to
different sales charges and distribution and/or service fees which may affect
performance, (ii) each class has exclusive voting rights on any matter submitted
to shareholders that relates solely to its arrangement and has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of any other class, (iii) each class has a
different exchange privilege, (iv) only Class B shares have a conversion feature
and (v) Class Z shares are offered exclusively for sale to participants in the
PSI 401(k) Plan, an employee benefit plan sponsored by Prudential Securities.
Since Class B and Class C shares generally bear higher distribution expenses
than Class A shares, the liquidation proceeds to shareholders of those classes
are likely to be lower than to Class A shareholders and to Class Z shareholders,
whose shares are not subject to any distribution or service fee. In accordance
with the Fund's Articles of Incorporation, the Board of Directors may authorize
the creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Directors may determine. Currently, the Fund is offering four classes,
designated Class A, Class B, Class C and Class Z shares.
The Board of Directors may increase or decrease the number of authorized
shares without approval by the shareholders. Shares of the 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 the Fund under
certain circumstances as described under "Shareholder Guide-How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except as noted above, and each class bears the
expenses related to the distribution of its shares. 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 the Fund is entitled to its portion of all of the Fund's assets after
all debts and expenses of the Fund have been paid. The Fund's shares do not have
cumulative voting rights for the election of Directors.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS THE ELECTION OF DIRECTORS IS REQUIRED TO BE ACTED ON BY THE
SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE CERTAIN RIGHTS,
INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE FUND'S
OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR MORE
DIRECTORS OR TO TRANSACT ANY OTHER BUSINESS.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which
has been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
23
<PAGE>
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC
OR DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The purchase price is the
NAV next determined following receipt of an order by the Transfer Agent or
Prudential Securities plus a sales charge which, at your option, may be imposed
either (i) at the time of purchase (Class A shares) or (ii) on a deferred basis
(Class B or Class C shares). See "Alternative Purchase Plan" below. See also
"How the Fund Values its Shares."
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. All minimum investment requirements are waived for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases made through the Automatic Savings Accumulation Plan, the
minimum initial and subsequent investment is $50. See "Shareholder Services"
below.
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a stock certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders who
hold their shares through Prudential Securities will not receive stock
certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire,
you must first telephone PMFS at (800) 225-1852 (toll-free) to receive an
account number. The following information will be requested: your name, address,
tax identification number, class election, dividend distribution election,
amount being wired and wiring bank. Instructions should then be given by you to
your bank to transfer funds by wire to State Street Bank and Trust Company
(State Street), Boston, Massachusetts, Custody and Shareholder Services
Division, Attention: Prudential Multi-Sector Fund, Inc., specifying on the wire
the account number assigned by PMFS and your name and identifying the sales
charge alternative (Class A, Class B or Class C shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Multi-Sector
Fund, Inc., Class A, Class B or Class C shares and your name and individual
account number. It is not necessary to call PMFS to make subsequent purchase
orders utilizing Federal Funds. The minimum amount which may be invested by wire
is $1,000.
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<PAGE>
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THROUGH THIS PROSPECTUS THREE CLASSES OF SHARES (CLASS A,
CLASS B AND CLASS C SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES
CHARGE STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES, GIVEN THE AMOUNT OF THE
PURCHASE, THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT
CIRCUMSTANCES (ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------------------------------- ------------------------ ------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 5% of .30 of 1% (Currently Initial sales charge waived or
the public offering price being charged at a rate reduced for certain purchases
of .25 of 1%)
CLASS B Maximum contingent deferred sales 1% Shares convert to Class A shares approximately seven
charge or CDSC of 5% of the lesser of years after purchase
the amount invested or the redemption
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% Shares do not convert to another class
the amount invested or the redemption
proceeds on redemptions made within
one year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
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 as
noted under the heading "General Information--Description of Common Stock"), and
(iii) only Class B shares have a conversion feature. The three classes also
have separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 5% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
25
<PAGE>
If you intend to hold your investment for 7 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and Class C shares for the
higher cumulative annual distribution-related fee on those shares to exceed the
initial sales charge plus cumulative annual distribution-related fees on Class A
shares. This does not take into account the time value of money, which further
reduces the impact of the higher Class B or Class C distribution-related fee on
the investment, fluctuations in net asset value, the effect of the return on the
investment over this period of time or redemptions when the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------ -------------- --------------- -----------------
Less than $25,000 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50 4.71 4.25
$50,000 to $99,999 4.00 4.17 3.75
$100,000 to $249,999 3.25 3.36 3.00
$250,000 to $499,999 2.50 2.56 2.40
$500,000 to $999,999 2.00 2.04 1.90
$1,000,000 and above None None None
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (Benefit Plans), provided that the plan has existing assets of at
least $1 million invested in shares of Prudential Mutual Funds (excluding
26
<PAGE>
money market funds other than those acquired pursuant to the exchange privilege)
or 250 eligible employees or participants. In the case of Benefit Plans whose
accounts are held directly with the Transfer Agent or Prudential Securities and
for which the Transfer Agent or Prudential Securities does individual account
recordkeeping (Direct Account Benefit Plans) and Benefit Plans sponsored by PSI
or its subsidiaries (PSI or Subsidiary Prototype Benefit Plans), Class A shares
may be purchased at NAV by participants who are repaying loans made from such
plans to the participant.
PruArray and SmartPath Plans. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or
non-qualified under the Internal Revenue Code, including pension,
profit-sharing, stock-bonus or other employee benefit plans under Section 401 of
the Internal Revenue Code and deferred compensation and annuity plans under
Sections 457 and 403(b)(7) of the Internal Revenue Code that participate in
Prudential's PruArray or SmartPath Programs (benefit plan recordkeeping
services) (hereafter referred to as a PruArray or SmartPath Plan); provided that
the plan has at least $1 million in existing assets or 250 eligible employees or
participants. The term "existing assets" for this purpose includes stock issued
by a PruArray or SmartPath Plan sponsor and shares of non-money market
Prudential Mutual Funds and shares of certain unaffiliated non-money market
mutual funds that participate in the PruArray or SmartPath Program
(Participating Funds). "Existing assets" also include shares of money market
funds acquired by exchange from a Participating Fund.
Special Rules Applicable to Retirement Plans. After a Benefit Plan or
PruArray or SmartPath Plan qualifies to purchase Class A shares at NAV, all
subsequent purchases will be made at NAV.
Other Waivers. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers and current and former Directors/Trustees of the Prudential Mutual
Funds (including the Fund), (b) employees of Prudential Securities and PMF and
their subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees and special agents of Prudential and its subsidiaries and all persons
who have retired directly from active service with Prudential or one of its
subsidiaries, (d) registered representatives and employees of dealers who have
entered into a selected dealer agreement with Prudential Securities provided
that purchases at NAV are permitted by such person's employer and (e) investors
who have a business relationship with a financial adviser who joined Prudential
Securities from another investment firm, provided that (i) the purchase is made
within 180 days of the commencement of the financial adviser's employment at
Prudential Securities, or within one year in the case of Benefit Plans, (ii) the
purchase is made with proceeds of a redemption of shares of any open-end fund
sponsored by the financial adviser's previous employer (other than a money
market or other no-load fund which imposes a distribution or service fee of .25
of 1% or less) and (iii) the financial adviser served as the client's broker on
the previous purchase.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class
A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
shares and Class C may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
27
<PAGE>
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES AT ANY TIME FOR CASH AT THE NAV PER SHARE NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST REDEEM
YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST, EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during any other period when the SEC, by
order, so permits; provided that applicable rules and regulations of the SEC
shall govern as to whether the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and the redeemed securities will
be valued in the same manner as a regular redemption. See "How the Fund Values
its Shares." If your shares are redeemed in kind, you would incur transaction
costs in converting the assets into cash. The Fund, however, has elected to be
governed by Rule 18f-1 under the Investment Company Act, under which the Fund is
obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of
the net asset value of the Fund during any 90-day period for any one
shareholder.
28
<PAGE>
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board of
Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. (If less than a full repurchase is made,
the credit will be on a pro rata basis.) You must notify the Fund's Transfer
Agent, either directly or through Prudential Securities, at the time the
repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege will generally not affect
the federal tax treatment of any gain realized upon redemption. However, if the
redemption was made within a 30 day period of the repurchase and if the
redemption resulted in a loss, some or all of the loss, depending on the amount
reinvested, may not be allowed for federal income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any CDSC will be paid to and retained by the Distributor. See "How
the Fund is Managed--Distributor" and "Waiver of the Contingent Deferred Sales
Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
YEAR SINCE PURCHASE DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------- --------------------------
First ...................... 5.0%
Second ..................... 4.0%
Third ...................... 3.0%
Fourth ..................... 2.0%
Fifth ...................... 1.0%
Sixth ...................... 1.0%
Seventh .................... None
29
<PAGE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Fund shares made during the preceding six years;
then of amounts representing the cost of shares held beyond the applicable CDSC
period; and finally, of amounts representing the cost of shares held for the
longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the net
asset value had appreciated to $12 per share, the value of your Class B shares
would be $1,260 (105 shares at $12 per share). The CDSC would not be applied to
the value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500 minus
$260) would be charged at a rate of 4% (the applicable rate in the second year
after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC
will be waived in the case of a redemption following the death or disability of
a shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (i.e.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.
In addition, the CDSC will be waived on redemptions of shares held by a
Director of the Fund.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec, at the time of redemption, that you are entitled to waiver
of the CDSC and provide the Transfer Agent with such supporting documentation as
it may deem appropriate. The waiver will be granted subject to confirmation of
your entitlement. See "Purchase and Redemption of Fund Shares--Waiver of the
Contingent Deferred Sales Charge--Class B Shares" in the Statement of Additional
Information.
A quantity discount may apply to redemptions of Class B shares purchased
prior to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
30
<PAGE>
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
The first conversion of Class B shares occurred in February 1995, when the
conversion feature was first implemented.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share net asset value of the Class A shares may be
higher than that of the Class B shares at the time of conversion. Thus, although
the aggregate dollar value will be the same, you may receive fewer Class A
shares than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange or
a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year will not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase of
such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
31
<PAGE>
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND YOU HAVE AN EXCHANGE PRIVILEGE (THE 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 MAY BE EXCHANGED FOR CLASS A,
CLASS B AND CLASS C SHARES, RESPECTIVELY, OF ANOTHER FUND ON THE BASIS OF THE
RELATIVE NAV. No sales charge will be imposed at the time of the exchange. Any
applicable CDSC payable upon the redemption of shares exchanged will be
calculated from the first day of the month after the initial purchase, excluding
the time the shares were held in a money market fund. Class B and Class C shares
may not be exchanged into money market funds other than Prudential Special Money
Market Fund. For purposes of calculating the holding period applicable to the
Class B conversion feature, the time period during which Class B and Class C
shares were held in a money market fund will be excluded. See "Conversion
Feature--Class B Shares" above. An exchange will be treated as a redemption and
purchase for tax purposes. See "Shareholder Investment Account--Exchange
Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE THE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. (THE FUND OR ITS AGENTS COULD BE SUBJECT TO LIABILITY
IF THEY FAIL TO EMPLOY REASONABLE PROCEDURES.) All exchanges will be made on the
basis of the relative NAV of the two funds next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV. See "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above. Under this exchange privilege, amounts representing any Class B and Class
C shares (which are not subject to a CDSC) held in such a shareholder's account
will be automatically exchanged for Class A shares on a quarterly basis, unless
the shareholder elects otherwise. Eligibility for this exchange privilege will
be calculated on the business day prior to the date of the exchange. Amounts
representing Class B or Class C shares which are not subject to a CDSC include
the following: (1) amounts representing Class B or Class C shares acquired
pursuant to the automatic reinvestment of dividends and distributions, (2)
amounts representing the increase in the net asset value above the total amount
of payments for the purchase of Class B or Class C shares and (3) amounts
representing Class B or Class C shares held beyond the applicable CDSC period.
Class B and Class C shareholders must notify the Transfer Agent either directly
or through Prudential Securities or Prusec that they are eligible for this
special exchange privilege.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
32
<PAGE>
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Fund, you can
take advantage of the following services and privileges:
o AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than five full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
o AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP, you may make
regular purchases of the Fund's shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account (including a
Command Account). For additional information about this service, you may contact
your Prudential Securities financial adviser, Prusec representative or the
Transfer Agent directly.
o TAX DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or the
Transfer Agent. If you are considering adopting such a plan, you should consult
with your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.
o SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" above.
o REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at One Seaport
Plaza, New York, New York 10292. In addition, monthly unaudited financial data
is available upon request from the Fund.
o SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
33
<PAGE>
APPENDIX A
DESCRIPTION OF ECONOMIC SECTORS
The Fund will seek to achieve its investment objective by investing among the
following economic sectors:
AUTOS AND HOUSING SECTOR--Companies engaged in the design, production and
sale of automobiles, automobile parts, tires and other rubber products, building
materials, mobile homes and related products, and in the design, construction,
renovation and refurbishing of residential dwellings. The value of automobile
industry securities is affected by foreign competition, consumer confidence,
consumer debt and installment loan rates. The housing construction industry is
affected by the level of consumer confidence, consumer debt, mortgage rates and
the inflation outlook.
BASIC INDUSTRY SECTOR--Companies engaged in the research, development or
manufacture of products, processes or services relating to electrical equipment,
machinery, chemicals, containers, pollution control and construction services,
such as transformers, motors, turbines, hand tools, earth-moving equipment and
waste disposal services. The profitability of most companies in this group may
fluctuate significantly in response to capital spending and general economic
conditions. Since some of the materials and processes used by these companies
involve hazardous components, there are risks associated with their production,
handling and disposal. The risk of product obsolescence also is present.
BUSINESS SERVICES SECTOR--Companies providing office supplies such as paper
and pens, furnishings and computer equipment; advertising agencies; data
processing and other technical services; employment and temporary help agencies;
uniform supply and service companies; training companies; engineering and
construction companies; and other service providers to businesses. Companies in
this sector may be adversely affected by increases in unemployment and economic
slowdowns.
CONSUMER GOODS AND SERVICES SECTOR--Companies engaged in providing consumer
goods and services such as the design, processing, production and storage of
packaged, canned, bottled and frozen foods, beverages and tobacco, and the
design, production and sale of home furnishings, textiles, appliances, other
household products, clothing, accessories, cosmetics and perfumes. Certain of
these companies are subject to government regulation affecting the
permissibility of using various food additives and production methods, which
regulations could affect company profitability. The success of food and
fashion-related products may be strongly affected by fads, marketing campaigns
and other factors affecting supply and demand.
DEFENSE AND AEROSPACE SECTOR--Companies engaged in the research, manufacture
or sale of products or services such as air transport, data processing or
computer-related services; communications systems; military weapons and
transportation; general aviation equipment, missiles, space launch vehicles and
spacecraft; units for guidance, propulsion and control of flight vehicles; and
airborne and ground-based equipment essential to the testing, operation and
maintenance of flight vehicles. Since these companies rely largely on U.S. (and
other) governmental demand for their products and services, their financial
conditions are heavily influenced by federal (and other governmental) defense
spending policies. Companies in this sector may be affected by the success or
failure of their products and government investigations into defense contract
procurement practices.
ENERGY SECTOR--Oil, gas, electricity and coal as well as nuclear, geothermal,
oil shale and solar energy companies. The business of these companies may
include production, generation, transmission, marketing, control or measurement
of energy or energy fuels; provision of component parts or services to companies
engaged in such activities; energy research or experimentation; environmental
activities related to the solution of energy problems; and activities resulting
from technological advances or research discoveries in the energy field. The
value of securities of these companies varies based on the price and supply of
energy fuels and may be affected by events relating to
A-1
<PAGE>
international politics, energy conservation, the success of exploration
projects, environmental considerations and the tax and other regulatory policies
of various governments. Utilities involved in nuclear power generation are
particularly susceptible to regulatory and environmental policies and have
extremely high construction costs as well.
ENVIRONMENTAL SECTOR--Companies involved in environmental concerns of every
type, from pretreatment programs for air, noise and water pollution to waste
management, solid waste disposal and hazardous waste clean-up, including
asbestos removal. Products and services in this sector could quickly become
obsolete and since the processes used by these companies often are used in
hazardous situations, there are special risks involved.
FINANCIAL SERVICES SECTOR--Commercial banks and savings and loan
associations; consumer and industrial finance companies; securities brokerage
companies; leasing companies; investment management companies; and firms in all
segments of the insurance field. These kinds of companies are subject to
extensive governmental regulations, some of which are currently being studied by
Congress. The profitability of these groups may fluctuate significantly as a
result of volatile interest rates, current concerns about the savings and loan
industry and the value of their assets and concerns about the viability of
certain securities brokerage companies and general economic conditions.
HEALTH CARE SECTOR--Companies engaged in the design, manufacture,
distribution or sale of products or services used in connection with health care
or medicine include pharmaceutical companies and providers of medical, dental
and optical products, hardware or services; companies involved in biotechnology,
medical diagnostic and biochemical research and development; and companies
involved in the operation of health care facilities. Many of these companies are
subject to government regulation, which could affect the price and availability
of their products and services. Products and services in this sector could
quickly become obsolete.
LEISURE SECTOR--Companies engaged in the design, production or distribution
of goods or services in the leisure industry, such as television and radio
broadcasting or manufacture, motion pictures and photography, recordings and
musical instruments; publishing; sporting goods, camping and recreational
equipment; sports arenas; toys and games; amusement and theme parks;
travel-related services; hotels and motels; fast food and other restaurants; and
gaming casinos. Many products produced by companies in this sector may quickly
become obsolete. Companies engaged in broadcasting and gambling are subject to
government regulation.
NATURAL RESOURCES SECTOR--Companies engaged in the research, development,
manufacture or marketing of products, processes or services related to the
agriculture, forest products, ferrous and non-ferrous metals, strategic metals,
hydrocarbons and steel industries, such as synthetic and natural materials;
paper; wood products; steel and cement. Certain companies in this sector are
subject to regulation by state and federal authorities which could require
alteration or cessation of production of a product, payment of fines or cleaning
of a disposal site. Since some of the materials and processes used by these
companies involve hazardous components, there are risks associated with their
production, handling and disposal. The risk of product obsolescence is also
present.
PRECIOUS METALS SECTOR--Companies engaged in exploration, mining, processing
or dealing in gold, platinum, silver, diamonds or other precious metals and
companies which invest in companies engaged in these activities. A significant
portion of this sector may be represented by securities of foreign companies and
investors should understand the special risks related thereto. These securities
also depend heavily on prices in metals, some of which may experience extreme
price volatility based on international economic and political developments.
PUBLIC UTILITIES SECTOR--Companies deriving a substantial portion of their
revenues from the manufacture, production, generation, transmission,
distribution and sale of gas and electric energy, and companies engaged in the
communications field, such as telephone, telegraph, satellite and microwave and
the provision of other communication facilities to the public. The gas and
electric utilities industries are subject to various uncertainties, including
government regulation policies, the outcome of political issues concerning the
environment, prices of fuel for electric generation, availability of natural gas
and risks associated with the construction and operation of nuclear power
facilities.
A-2
<PAGE>
RETAILING SECTOR--Companies engaged in the retail distribution of home
furnishings, food products, clothing, pharmaceuticals, leisure products and
other consumer goods and companies that provide services and supplies to these
companies. The value of securities in this sector will fluctuate based on
consumer spending patterns, which depend on inflation and interest rates, level
of consumer debt and seasonal shopping habits. The success or failure of a
particular company in this highly competitive sector will depend on the
company's ability to predict rapidly changing consumer tastes.
TECHNOLOGY SECTOR--Companies which have or are expected to develop products,
processes or services which will provide or will benefit significantly from
technological advances and improvements or future automation trends in the
office and factory, such as semiconductors; computers and peripheral equipment;
scientific instruments; computer software; telecommunications; and electronic
components, instruments and systems. These companies are sensitive to foreign
competition and import tariffs and many products produced by these companies may
quickly become obsolete.
TRANSPORTATION SECTOR--Companies involved in the provision of transportation
of people and products, such as airlines, railroads and trucking firms,
transportation equipment and leasing companies. Revenues of companies in this
sector will be affected by fluctuations in fuel prices resulting from domestic
and international events, and government regulation of fares.
A-3
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured.) Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
P-1: Issuers rated Prime-1 or P-1 (or supporting institutions) have a
superior ability for repayment of senior short~term debt obligations.
P-2: Issuers rated Prime-2 or P-2 (or supporting institutions) have a
strong ability for repayment of senior short term debt obligations.
B-1
<PAGE>
STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC, CC AND C: Debt rated BB, B, CCC, CC and C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
COMMERCIAL PAPER RATINGS
S&P's commercial paper ratings are current assessments of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: The A-1 designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely stong
safety characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
B-2
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Fund at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
Taxable Bond Funds
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
Tax-Exempt Bond Funds
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
Global Funds
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
The Global Government Plus Fund, Inc.
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
Equity Funds
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Distressed Securities Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Small Companies Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Money Market Funds
o Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
o Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
o Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
o Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
C-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
PAGE
----
FUND HIGHLIGHTS ....................................................... 2
Risk Factors and Special Characteristics ............................. 2
FUND EXPENSES ......................................................... 4
FINANCIAL HIGHLIGHTS .................................................. 5
HOW THE FUND INVESTS .................................................. 8
Investment Objective and Policies .................................... 8
Hedging Strategies ................................................... 11
Other Investments and Policies ....................................... 14
Investment Restrictions .............................................. 16
HOW THE FUND IS MANAGED ............................................... 16
Manager .............................................................. 16
Distributor .......................................................... 17
Portfolio Transactions ............................................... 19
Custodian and Transfer and Dividend Disbursing Agent ................. 19
HOW THE FUND VALUES ITS SHARES ........................................ 19
HOW THE FUND CALCULATES PERFORMANCE ................................... 20
TAXES, DIVIDENDS AND DISTRIBUTIONS .................................... 21
GENERAL INFORMATION ................................................... 23
Description of Common Stock .......................................... 23
Additional Information ............................................... 23
SHAREHOLDER GUIDE ..................................................... 24
How to Buy Shares of the Fund ........................................ 24
Alternative Purchase Plan ............................................ 25
How to Sell Your Shares .............................................. 28
Conversion Feature - Class B Shares .................................. 31
How to Exchange Your Shares .......................................... 32
Shareholder Services ................................................. 33
DESCRIPTION OF ECONOMIC SECTORS ....................................... A-1
DESCRIPTION OF SECURITY RATINGS ....................................... B-1
THE PRUDENTIAL MUTUAL FUND FAMILY ..................................... C-1
- -------------------------------------------------------------------------------
MF142A 444123A
--------------------------------
CUSIP Nos.: Class A: 74435J108
Class B: 74435J207
Class C: 74435J306
--------------------------------
Prudential
Multi-Sector
Fund, Inc.
------------
P R O S P E C T U S
June 28, 1996
------------
Prudential Mutual Funds
Building Your Future {LOGO)
On Our Strength (SM)
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC.
Statement of Additional Information
dated June 28, 1996
Prudential Multi-Sector Fund, Inc. (the Fund) is an open-end, 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 June 28, 1996. 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 23
Investment Objective and Policies .................. B-2 8
Investment Restrictions ............................ B-10 16
Directors and Officers ............................. B-12 16
Manager ............................................ B-14 16
Distributor ........................................ B-16 17
Portfolio Transactions and Brokerage ............... B-18 19
Purchase and Redemption of Fund Shares ............. B-20 24
Shareholder Investment Account ..................... B-23 33
Net Asset Value .................................... B-27 19
Performance Information ............................ B-27 20
Dividends and Distributions ........................ B-29 22
Taxes .............................................. B-29 21
Custodian, Transfer and Dividend Disbursing
Agent and Independent Accountants ................ B-31 19
Financial Statements ............................... B-32 --
Independent Auditors' Report ....................... B-43 --
Appendix I--Historical Performance Data ............ I-1 --
Appendix II--General Investment Information ........ II-1 --
Appendix III--Information relating to
the Prudential ................................... III-1 --
<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. See "How
the Fund Invests--Investment Objective and Policies" in the Prospectus.
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
B-2
<PAGE>
exchange; (v) the facilities of an exchange or a clearing corporation may not
at all times be adequate to handle current trading 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
B-3
<PAGE>
of the industry or market segment index and will represent at least 50% of the
Fund's holdings in that industry or market segment. 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 initial 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. If the Fund enters into
a position hedging transaction, the transaction will be "covered" by the
position being hedged or the Fund's Custodian or subcustodian will place cash or
U.S. Government securities or other high-grade debt obligations in a segregated
account of the Fund (less the value of the "covering" positions, if any) in an
amount equal to the value of the Fund's total assets committed to the
consummation of the given forward contract. If the value of the securities
placed in the segregated account declines, additional cash or securities will be
placed in the account so that the value of the account will, at all times, equal
the amount of the Fund's net commitment with respect to the forward contract.
B-5
<PAGE>
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 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.
B-6
<PAGE>
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 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 an Appendix to the Prospectus.
B-7
<PAGE>
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 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
B-8
<PAGE>
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.
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, 1995 and April 30, 1996, the Fund's
portfolio turnover rate was 122% and 136%, respectively.
ILLIQUID SECURITIES
The Fund may not hold more that 10% 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 advisor 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
B-9
<PAGE>
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.
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.
B-10
<PAGE>
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).
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;
9. invest in oil, gas and mineral leases; and
10.(a) write puts having aggregate exercise prices greater than 25% of
total net assets, or (b) purchase (i) put options on stocks not held in the
Fund's portfolio, (ii) put options on stock indices or foreign currencies or
(iii) call options on stock, stock indices or foreign currencies if, after any
such purchase, the aggregate premiums paid for such options would exceed 10% of
the Fund's total assets; provided, however, that the Fund may purchase put
options on stocks held by the Fund if after such purchase the aggregate premiums
paid for such options do not exceed 20% of the Fund's total assets.
The Fund's Board of Directors has approved a change in the Fund's
subclassification from a non-diversified to a diversified investment company. As
a diversified investment company, the Fund may not purchase any security if, as
a result, with respect to 75% of its total assets, more than 5% of the Fund's
total assets would be invested in the securities of any one issuer (provided
that this restriction does not apply to U.S. Government securities).
B-11
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS AND OFFICERS
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE FUND DURING PAST FIVE YEARS
- --------------------- ------------- ----------------------
<S> <C> <C>
Edward D. Beach (71) Director President and Director of BMC Fund, Inc., a closed-end investment
c/o Prudential Mutual company; prior thereto Vice Chairman of Broyhill Furniture
Fund Management, Inc. Industries, Inc.; Certified Public Accountant; Secretary and
One Seaport Plaza Treasurer of Broyhill Family Foundation, Inc.; Member of the
New York, NY Board of Trustees of Mars Hill College; President, Treasurer and
Director of First Financial Fund, Inc. and The High Yield Plus
Fund, Inc.; President and Director of Global Utility Fund, Inc.
Donald D. Lennox (77) Director Chairman (since February 1990) and Director (since April 1989) of
c/o Prudential Mutual International Imaging Materials, Inc.; Retired Chairman, Chief
Fund Management, Inc. Executive Officer and Director of Schlegel Corporation
One Seaport Plaza (industrial manufacturing) (March 1987-February 1989); Director
New York, NY of Gleason Corporation, Personal Sound Technologies, Inc. and The
High Yield Income Fund, Inc.
Douglas H. McCorkindale (57) Director Vice Chairman, Gannett Co. Inc. (publishing and media) (since March
c/o Prudential Mutual 1984); Director, Continental Airlines, Inc., Gannett Co. Inc. and
Fund Management, Inc. Frontier Corporation.
One Seaport Plaza
New York, NY
Thomas T. Mooney (54) Director President of the Greater Rochester Metro Chamber of Commerce; former
c/o Prudential Mutual Rochester City Manager; Trustee of Center for Governmental
Fund Management, Inc. Research, Inc.; Director of Blue Cross of Rochester, The Business
One Seaport Plaza Council of New York State, Monroe County Water Authority,
New York, NY Rochester Jobs, Inc., Executive Service Corps of Rochester,
Monroe County Industrial Development Corporation,
Northeast-Midwest Institute, First Financial Fund, Inc. and The
High Yield Plus Fund, Inc.
*Richard A. Redeker (52) President and President, Chief Executive Officer and Director (since October 1993), PMF;
One Seaport Plaza Director Executive Vice President, Director and Member of Operating Committee (since
New York, NY October 1993), Prudential Securities; Director (since October 1993) of
Prudential Securities Group, Inc. (PSG); Executive Vice President (since
January 1994), The Prudential Investment Corporation; Director (since
January 1994), Prudential Mutual Fund Distributors, Inc. (PMFD) and
Prudential Mutual Fund Services, Inc. (PMFS); formerly Senior Executive
Vice President and Director of Kemper Financial Services, Inc. (September
1978-September 1993); President and Director of The High Yield Income Fund,
Inc.
Louis A. Weil, III (55) Director Publisher and Chief Executive Officer (since January 1996) and
c/o Prudential Mutual Director (since September 1991) of Central Newspapers, Inc.;
Fund Management, Inc. Chairman of the Board (since January 1996), Publisher and Chief
One Seaport Plaza Executive Officer (August 1991-December 1995), Phoenix
New York, NY Newspapers, Inc.; Director of Central Newspapers, Inc. (since
September 1991); prior thereto, 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.
</TABLE>
- --------------
* "Interested" Director, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities or PMF.
B-12
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE FUND DURING PAST FIVE YEARS
- --------------------- -------------- -----------------------
<S> <C> <C>
Robert F. Gunia (49) Vice President Chief Administrative Officer (since July 1990), Director (since
One Seaport Plaza January 1989) and Executive Vice President, Treasurer and Chief
New York, NY Financial Officer (since June 1987) of PMF; Senior Vice President
(since March 1987) of Prudential Securities; Executive Vice President,
Treasurer, Comptroller and Director (since March 1991), PMFD; Director
(since June 1987), PMFS: Vice President and Director (since May 1989)
of The Asia Pacific Fund, Inc.
Susan C. Cote (41) Treasurer and Managing Director, Prudential Investment Advisors, and Vice
751 Broad Street Principal President, The Prudential Investment Corporation (since February
Newark, NJ Financial and 1995); Senior Vice President (January 1989-January 1995) and
Accounting First Vice President (June 1987-December 1988) of PMF; Senior
Officer Vice President (January 1992-January 1995) and Vice President
(January 1986-December 1991) of Prudential Securities.
Stephen M. Ungerman (43) Assistant First Vice President of Prudential Mutual Fund Management, Inc.
One Seaport Plaza Treasurer (since February 1993); prior thereto, Senior Tax Manager of Price
New York, NY Waterhouse LLP (1981-January 1993).
S. Jane Rose (50) Secretary Senior Vice President (since January 1991) and Senior Counsel (since
One Seaport Plaza June 1987) of PMF; Senior Vice President and Senior Counsel of
New York, NY Prudential Securities (since July 1992); formerly Vice President
and Associate General Counsel of Prudential Securities.
Marguerite E.H. Morrison (40) Assistant Vice President and Associate General Counsel (since June 1991) of
One Seaport Plaza Secretary PMF; Vice President and Associate General Counsel of Prudential
New York, NY 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.
The officers conduct and supervise the daily business operations of the
Fund, while the Directors, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
The Directors have adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 72, except that retirement is being phased in for Directors who were age 68
or older as of December 31, 1993. Under this phase-in provision, Messrs. Beach
and Lennox are scheduled to retire on December 31, 1999 and 1997, respectively.
The Board of Directors has nominated a new slate of Directors of the Fund
which will be submitted to shareholders at a special meeting scheduled to be
held in or about October 1996.
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.
Pursuant to the terms of the Management Agreement with the Fund, the
Manager pays all compensation of officers and employees of the Fund as well as
the fees and expenses of all Directors of the Fund who are affiliated persons of
the Manager.
B-13
<PAGE>
The following table sets forth the aggregate compensation paid by the Fund
to the Directors who are not affiliated with the Manager for the fiscal year
ended April 30, 1996 and the aggregate compensation paid to such Directors for
service on the Fund's Board and the Boards of any other investment companies
managed by Prudential Mutual Fund Management, Inc. (Fund Complex) for the
calendar year ended December 31, 1995.
<TABLE>
<CAPTION>
COMPENSATION TABLE
TOTAL
PENSION OR COMPENSATION
RETIREMENT ESTIMATED FROM FUND
AGGREGATE BENEFITS ACCRUED 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 -- Trustee ................................ $7,500 None N/A $183,500(22/43)*
Donald D. Lennox -- Trustee ............................... 7,500 None N/A 86,250(10/22)*
Douglas H. McCorkindale -- Trustee ........................ 7,500 None N/A 63,750(7/10)*
Thomas T. Mooney -- Trustee ............................... 7,500 None N/A 125,625(14/19)*
Louis A. Weil, III -- Trustee ............................. 7,500 None N/A 93,750(11/16)*
</TABLE>
- --------------
* Indicates number of funds/portfolios in Fund Complex to which aggregate
compensation relates.
As of June 7, 1996, 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 7, 1996, Prudential Securities was record holder of 8,292,338
Class A shares (or 56% of the outstanding Class A shares), 13,598,786 Class B
shares (or 81% of the outstanding Class B shares), 306,063 Class C shares (or
87.8% of the outstanding Class C shares) and 1,410,216 Class Z shares (or 100%
of the outstanding Class Z shares) of the Fund. In the event of any meetings of
shareholders, Prudential Securities will forward, or cause the forwarding of,
proxy materials to the beneficial owners for which it is 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 May 31, 1996, PMF managed and/or administered open-end and
closed-end management investment companies with assets of approximately $52
billion and, according to the Investment Company Institute, as of December 31,
1995, the Prudential Mutual Funds were the 13th largest family of mutual funds
in the United States.
PMF is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). PMF has three wholly-owned subsidiaries:
Prudential Mutual Fund Distributors, Inc., Prudential Mutual Fund Services, Inc.
(PMFS or the Transfer Agent) and Prudential Mutual Fund Investment Management.
PMFS serves as the transfer agent for the Prudential Mutual Funds and, in
addition, provides customer service, recordkeeping and management and
administration services to qualified plans.
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 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 PMFS, 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. For the
fiscal year ended April 30, 1996, the Manager received a reduced fee as
described below. 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
B-14
<PAGE>
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, 1996. 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 8, 1996, and by the
shareholders of the Fund on September 12, 1991.
For the fiscal years ended April 30, 1996, 1995 and 1994, the Fund paid
management fees to PMF of $2,800,143, $1,389,386 and $1,032,341, respectively.
For the fiscal year ended April 30, 1996, PMF agreed to waive a portion of its
management fee, so that it was paid at the annual rate of .625 of 1% of the
first $500 million of the Fund's average daily net assets, .55 of 1% of the next
$500 million of average daily net assets and .50 of 1% of the average daily net
assets in excess of $1 billion.
PMF has entered into the Subadvisory Agreement with PIC (the Subadviser), a
wholly-owned subsidiary of Prudential. 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 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. Investment advisory
services are provided to the Fund by a unit of the Subadviser, known as
Prudential Mutual Fund Investment Management.
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 8, 1996 and by the shareholders of the Fund on September 12, 1991.
B-15
<PAGE>
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.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, acts as the distributor of the shares
of the Fund. Prior to January 2, 1996, Prudential Mutual Fund Distributors, Inc.
(PMFD), One Seaport Plaza, New York, New York 10292, served as the distributor
of the Class A shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and a distribution agreement
(the Distribution Agreement), Prudential Securities (the Distributor) incurs the
expenses of distributing the Fund's Class A, Class B and Class C shares.
Prudential Securities serves as the Distributor of Class Z shares and incurs the
expenses of distributing the Fund's Class Z shares under a Distribution
Agreement with the Fund, none of which are reimbursed by or paid for by the
Fund. See "How the Fund is Managed--Distributor" in the Prospectus.
On February 9, 1993, 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 operations of the Plans or in any agreement
related to the Plans (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 8, 1996. The Class A Plan, as amended, was approved by Class A
and Class B shareholders, and the Class B Plan, as amended, was approved by
Class B shareholders on July 19, 1994. The Class C Plan was approved by the sole
shareholder of Class C shares on August 1, 1994.
CLASS A PLAN. For the fiscal year ended April 30, 1996, PMFD and PSI
received payments of approximately $503,000 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, 1996, PMFD and PSI also received approximately $172,000 in initial
sales charges.
CLASS B PLAN. For the fiscal year ended April 30, 1995, the Distributor
received approximately $2,366,000 from the Fund under the Class B Plan and spent
approximately $1,237,000 in distributing the Fund's Class B shares. It is
estimated that of the latter amount approximately 5.5% ($68,000) was spent on
printing and mailing prospectuses to other than current shareholders; 12.0%
($148,000) was spent in commissions paid to or on account of representatives of
Prusec; and 82.5% ($1,021,000) on the aggregate of (i) payments of commissions
to financial advisers (45.6% or $564,000) and (ii) an allocation of overhead and
other branch office distribution-related expenses (36.9% or $457,000). The term
"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, 1996, Prudential Securities
received approximately $526,000 in contingent deferred sales charges
attributable to Class B shares.
B-16
<PAGE>
Class C Plan. For the fiscal year ended April 30, 1996, Prudential
Securities received approximately $51,000 under the Class C Plan and spent
approximately $47,600 in distributing Class C shares. It is estimated that of
the latter amount approximately 22.1% ($10,500) was spent on printing and
mailing of prospectuses to other than current shareholders; and 77.9% ($37,100)
on the aggregate of (i) payments of commissions and account servicing fees to
financial advisers (46.0% or $21,900) and (ii) an allocation of overhead and
other branch office distribution-related expenses for payments of related
expenses (31.9% or $15,200). Prudential Securities also receives the proceeds of
contingent deferred sales charges paid by investors upon certain redemptions of
Class C shares. See "Shareholder Guide-How to Sell Your Shares-Contingent
Deferred Sales Charges" in the Prospectus. For the fiscal year ended April 30,
1996, Prudential Securities received approximately $2,500 in contingent deferred
sales charges attributable to Class C shares.
The Class A, Class B and Class C Plans continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority vote of the Rule 12b-1
Directors, cast in person at a meeting called for the purpose of voting on such
continuance. The 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 the Distribution Agreement, the Fund has agreed to indemnify
Prudential Securities to the extent permitted by applicable law against certain
liabilities under the Securities Act. The restated Distribution Agreement was
approved by the Board of Directors, including a majority of the Rule 12b-1
Directors, on May 8, 1996. On November 3, 1995, the Board of Directors approved
the transfer of the Distribution Agreement for Class A shares with PMFD to
Prudential Securities.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the safety, potential returns
and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSI's
conduct violated the federal securities laws and that an order issued by the SEC
in 1986 requiring PSI to adopt, implement and maintain certain supervisory
procedures had not been complied with; (ii) directed PSI to cease and desist
from violating the federal securities laws and imposed a $10 million civil
penalty; and (iii) required PSI to adopt certain remedial measures including the
establishment of a Compliance Committee of its Board of Directors. Pursuant to
the terms of the SEC settlement, PSI established a settlement fund in the amount
of $330,000,000 and procedures, overseen by a court approved Claims
Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend the creation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Dallas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.
B-17
<PAGE>
On October 27, 1994, Prudential Securities Group, Inc. (PSG) and PSI
entered into agreements with the United States Attorney deferring prosecution
(provided PSI complies with the terms of the agreement for three years) for any
alleged criminal activity related to the sale of certain limited partnership
programs from 1983 to 1990. In connection with these agreements, PSI agreed to
add the sum of $330,000,000 to the fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director will also serve as an independent "ombudsman" whom PSI
employees can call anonymously with complaints about ethics and compliance.
Prudential Securities shall report any allegations or instances of criminal
conduct and material improprieties to the new director. The new director will
submit compliance reports which shall identify all such allegations or instances
of criminal conduct and material improprieties every three months for a
three-year period.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, 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.
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 commission 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 commissions 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 execution
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 merchants 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 Securities, 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,
B-18
<PAGE>
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 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, 1996.
<TABLE>
<CAPTION>
Year ended Year ended Year ended
April 30, April 30, April 30,
1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
Total brokerage commissions paid by the Fund .............................. $1,372,224 $862,863 $640,908
Total brokerage commissions paid to Prudential Securities and its
foreign affiliates ....................................................... $ 75,700 $ 27,959 $ 62,385
Percentage of total brokerage commissions paid to Prudential
Securities and its foreign affiliates .................................... 5.5% 3.2% 9.7%
</TABLE>
The Fund effected approximately 5.8% of the total dollar amount of its
transactions involving the payment of commissions through Prudential Securities
during the fiscal year ended April 30, 1996. Of the total brokerage commissions
paid during that period, $1,055,907 (or 77.6%) were paid to firms which provide
research, statistical or other services to PMF. PMF has not separately
identified a portion of such brokerage commissions as applicable to the
provision of such research, statistical or other services.
B-19
<PAGE>
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis (Class B or Class C shares). Class Z shares of the Fund
are not subject to any sales or redemption charge and are offered exclusively
for sale to participants in the Prudential Securities 401(k) Plan, an employee
benefit plan sponsored by Prudential Securities (the PSI 401(k) Plan). See
"Shareholder Guide-How to Buy Shares of the Fund" in the Prospectus.
Each class represents an interest in the same assets of the Fund and is
identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service fees, which may affect
performance, (ii) each class has exclusive voting rights with respect to any
matter submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, (iii) each
class has a different exchange privilege, (iv) only Class B shares have a
conversion feature and (v) Class Z shares are offered exclusively for sale to
participants in the PSI 401(k) Plan. See "Distributor" and "Shareholder
Investment Account-Exchange Privilege."
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of 5%
and Class B*, Class C* and Class Z shares are sold at net asset value. Using the
Fund's net asset value at April 30, 1996, the maximum offering price of the
Fund's shares is as follows:
<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share ................................ $14.40
Maximum sales charge (5% of offering price) ........................................... .76
------
Offering price to public .............................................................. $15.16
======
CLASS B
Net asset value, offering price and redemption price per Class B share* ............... $14.13
======
Class C
Net asset value, offering price and redemption price per Class C share* ............... $14.13
======
CLASS Z
Net asset value, offering price and redemption price per Class Z share ................ $14.41
======
</TABLE>
*Class B and Class C shares are subject to a contingent deferred
sales charge on certain redemptions. See "Shareholder Guide-How to
Sell Your Shares-Contingent Deferred Sales Charges" in the
Prospectus.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES-CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or 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 "Shareholder
Guide-Alternative Purchase Plan" in the Prospectus.
An eligible group of related Fund investors includes any combination of
the following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group
that holds 25% or more of the outstanding voting securities of a
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.
B-20
<PAGE>
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more retirement or group
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 privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must 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) including retirement and group plans, who
enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds (Investment Letter of Intent). Retirement and group plans may also
qualify to purchase Class A shares at net asset value by entering into a Letter
of Intent whereby they agree to enroll, within a thirteen-month period, a
specified number of eligible employees or participants (Participant Letter of
Intent).
For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of 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.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant
enrollment goal over a thirteen-month period. Each investment made during the
period, in the case of an Investment Letter of Intent, will receive the reduced
sales charge applicable to the amount represented by the goal, as if it were a
single investment. In the case of a Participant Letter of Intent, each
investment made during the period will be made at net asset value. Escrowed
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, except in the case of
retirement and group plans where the employer or plan sponsor will be
responsible for paying any applicable sales charge. The effective date of an
Investment Letter of Intent (except in the case of retirement and group plans)
may be back-dated up to 90 days, in order that any investments made during this
90-day period, valued at the purchaser's cost, can be applied to the fulfillment
of the Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter of
Intent does not obligate the retirement or group plan to enroll the indicated
number of eligible employees or participants. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser (or the
employer or plan sponsor, in the case of any retirement or group plan) is
required to pay the difference between the sales charge otherwise applicable to
the purchases made during this period and 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. Investors
electing to purchase Class A shares of the Fund pursuant to a Letter of Intent
should carefully read such Letter of Intent.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to individual
participants in any retirement or group plans.
B-21
<PAGE>
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.
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
<S> <C>
Death A copy of the shareholder's death certificate or, in the case of
a trust, a copy of the grantor's death certificate, plus a copy
of the trust agreement identifying the grantor.
Disability--An individual will be considered disabled A copy of the Social Security Administration award letter or
if he or she is unable to engage in any substantial gainful a letter from a physician on the physician's letterhead
activity by reason of any medically determinable physical or stating that the shareholder (or, in the case of a trust,
mental impairment which can be expected to result in death the grantor) is permanently disabled. The letter must also
or to be of long-continued and indefinite duration. indicate the date of disability.
Distribution from an IRA or 403(b) Custodial Account A copy of the distribution form from the custodial firm
indicating (i) the date of birth of the shareholder and (ii) that
the shareholder is over age 59-1/2 and is taking a normal
distribution-signed by the shareholder.
Distribution from Retirement Plan A letter signed by the plan administrator/trustee indicating
the reason for the distribution.
Excess Contributions
A letter from the shareholder (for an IRA) or the plan
administrator/trustee on company letterhead indicating the amount
of the excess and whether or not taxes have been paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchased an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares of
the Fund following the second purchase was $550,000, the quantity discount would
be available for the second purchase of $450,000 but not for the first purchase
of $100,000. The quantity discount will be imposed at the following rates
depending on whether the aggregate value exceeded $500,000 or $1 million:
Contingent Deferred Sales Charge
as a Percentage of Dollars Invested
Year Since Purchase or Redemption Proceeds
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-22
<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 applicable state laws. For
retirement and group plans having a limited menu of Prudential Mutual Funds, the
Exchange Privilege is available for those funds eligible for investment in the
particular program.
It is contemplated that the Exchange Privilege may be applicable to new
mutual funds 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 (Short-Intermediate Term Series) and shares of the
money market funds specified below. No fee or sales load will be imposed upon
the exchange. Shareholders of money market funds who acquired such shares upon
exchange of Class A shares may use the Exchange Privilege only to acquire Class
A shares of the Prudential Mutual Funds participating in the Exchange Privilege.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(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, Inc.
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B
and Class C shares for Class B and Class C shares, respectively, of certain
other Prudential Mutual Funds and shares of Prudential Special Money Market
Fund, Inc., 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-23
<PAGE>
Class B and Class C shares of the Fund may also be exchanged for shares of
Prudential Special Money Market Fund, Inc. 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, respectively, of other funds without
being subject to any CDSC.
Additional details about the Exchange Privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on 60 days' notice, and any fund, including the Fund, or
the Distributor, has the right to reject any exchange application relating to
such fund's shares.
CLASS Z. Class Z shares may be exchanged for Class Z shares of the funds
listed below which participate in the PSI 401(k) Plan. No fee or sales load will
be imposed upon the exchange.
Prudential Allocation Fund
(Balanced Portfolio)
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
(Money Market Series)
Prudential Growth Opportunity Fund, Inc.
Prudential High Yield Fund, Inc.
Prudential Jennison Fund, Inc.
Prudential MoneyMart Assets, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Utility Fund, Inc.
B-24
<PAGE>
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 $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class beginning in 2011, the cost of four years at a
private college could reach $210,000 and over $90,000 at a public university.(1)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
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 and private
universities is available from The College Board Annual Survey of Colleges,
1993. Average costs for private institutions include tuition, fees and room
and board for the 1993-1994 academic year.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the Fund.
The investment return and principal value of 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 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.
B-25
<PAGE>
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.
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, e.g., to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as a part
of a program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, investors should consult their Prudential
Securities Financial Adviser or Prudential/Pruco Securities Representative
concerning the appropriate blends of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
B-26
<PAGE>
NET ASSET VALUE
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of
investments listed on a securities exchange and NASDAQ National Market System
securities (other than options on stock and stock indices) are valued at the
last sale price on the day of valuation or, if there was no sale on such day,
the mean between the last bid and asked prices on such day, as provided by a
pricing service or principal market maker. Corporate bonds (other than
convertible debt securities) and U.S. Government securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued on the basis of
valuations provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, agency ratings, market
transactions in comparable securities and various relationships between
securities in determining value. Convertible debt securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued at the mean
between the last reported bid and asked prices provided by principal market
makers. Options on stock and stock indices traded on an exchange are valued at
the mean between the most recently quoted bid and asked prices on the respective
exchange and futures contracts and options thereon are valued at their last sale
prices as of the close of the commodities exchange or board of trade. Quotations
of foreign securities in a foreign currency are converted to U.S. dollar
equivalents at the current rate obtained from a recognized bank or dealer and
forward currency exchange contracts are valued at the current cost of covering
or offseting such contracts. Should an extraordinary event, which is likely to
affect the value of the security, occur after the close of an exchange on which
a portfolio security is traded, such security will be valued at fair value
considering factors determined in good faith by the investment adviser under
procedures established by and under the general supervision of the Fund's Board
of Directors.
Securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
Board of Directors. Short-term debt securities are valued at cost, with interest
accrued or discount amortized to the date of maturity, if their original
maturity was 60 days or less, unless this is determined by the Board of
Directors not to represent fair value. Short-term securities with remaining
maturities of 60 days or more, for which market quotations are readily
available, are valued at their current market quotations as supplied by an
independent pricing agent or principal market maker. The Fund will compute its
net asset value at 4:15 P.M., New York time, on each day the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem Fund shares have been received or days on which changes in the value
of the Fund's portfolio securities do not affect net asset value. In the event
the New York Stock Exchange closes early on any business day, the net asset
value of the Fund's shares shall be determined at the time between such closing
and 4:15 P.M., New York time.
Net asset value is calculated separately for each class. 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. The NAV of Class Z shares will
generally be higher than the NAV of Class A, Class B or Class C shares as a
result of the fact that the Class Z shares are not subject to any distribution
or service fees. 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, Class C and Class Z shares. See "How the Fund
Calculates Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value 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-27
<PAGE>
The average annual total returns for Class A shares for the one year, five
year and since inception (June 29, 1990) periods ended April 30, 1996 were
12.16%, 12.36% and 14.66%, respectively. The average annual total returns for
Class B shares for the one year, five year and since inception (June 29, 1990)
periods ended April 30, 1996 were 12.18%, 12.53%, and 14.84%, respectively. The
average annual total returns for Class C shares for the one year and since
inception (August 1, 1994) periods ended April 30, 1996 were 15.1% and 18.9%,
respectively.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares. See "How the Fund Calculates Performance" in the
Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
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 returns for Class A shares for the one year, five year
and since inception (June 29, 1990) periods ended April 30, 1996 were 20.69%,
88.59% and 105.71%, respectively. The aggregate total returns for Class B shares
for the one year, five year and since inception periods ended April 30, 1996
were 19.84%, 81.50% and 96.60%, respectively. The aggregate total returns for
Class C shares for the one year and since inception (August 1, 1994) periods
ended April 30, 1996 were 19.84% and 27.76%, respectively. The aggregate total
return for Class Z shares for the since inception (March 1, 1996) period ended
April 30, 1996 was 3.59%.
Yield. The Fund may from time to time advertise its yield as calculated
over a 30-day period. Yield is calculated separately for Class A, Class B, Class
C and Class Z shares. 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, 1996 were .18%,
- -.53% -.53% and .43% for the Class A,Class B, Class C and Class Z shares,
respectively.
B-28
<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
PERFORMANCE
COMPARISON OF DIFFERENT
TYPES OF INVESTMENTS
OVER THE LONG TERM
(1/1926 - 12/1994)
Common Stocks ............... 10.2%
Long-Term Govt. Bonds ....... 4.8%
Inflation ................... 3.1%
(1) Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation-1995
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. Common stock returns
are based on the Standard & Poor's 500 Stock Index, a market-weighted, unmanaged
index of 500 common stocks in a variety of industry sectors. It is a commonly
used indicator of broad stock price movements. This chart is for illustrative
purposes only, and is not intended to represent the performance of any
particular investment or fund. Investors cannot invest directly in an index.
Past performance is not a guarantee of future results.
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, 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 reduction 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 reduction for
losses) from the sale or other disposition of securities, options thereon,
futures contracts, options thereon, forward contracts and foreign currencies
held for less than three months (except for
B-29
<PAGE>
foreign currencies directly related to the Fund's business of investing in
securities), (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 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
market value of the assets of the Fund 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); and (d) the Fund distribute to its shareholders at least 90% of its
net investment income and net short-term gains (i.e., the excess of net
short-term capital gains over net long-term capital losses) in each year.
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 purposes 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 treated as
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
writes a call thereon or otherwise holds an offsetting position with respect to
the securities. 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 certain forward foreign currency exchange contracts, 60%
of any gain or loss recognized on such "deemed sales" and on actual dispositions
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.
If a shareholder who acquires shares of the Fund sells or otherwise
disposes of such shares within 90 days of acquisition, certain sales charges
incurred in acquiring such shares may not be included in the basis of such
shares for purposes of calculating gain or loss realized upon such sale or
disposition.
B-30
<PAGE>
Any dividends 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. Furthermore, such dividends, 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, including 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
communications, the processing of shareholder transactions, the maintenance of
shareholder 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, 1996, the Fund incurred fees of
approximately $784,000 for the services of PMFS.
Deloitte & Touche LLP, Two World Financial Center, New York, New York
10281, serves as the Fund's independent accountants and in that capacity audits
the Fund's annual financial statements.
B-31
<PAGE>
Portfolio of Investments as of
April 30, 1996 PRUDENTIAL MULTI-SECTOR FUND, INC.
- ----------------------------------------------------------------
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ----------------------------------------------------------------
LONG-TERM INVESTMENTS--94.7%
COMMON STOCKS--94.7%
- ----------------------------------------------------------------
Auto Sector--2.0%
420,000 Honda Motor Co., Ltd. $ 9,582,359
- ---------------------------------------------------------------
Basic Industry Sector--15.1%
163,900 Advanta Corp. 8,215,488
420,000 Agrium Inc. (Canada) 5,507,640
79,000 Alaska Steel Holding Corp. 3,021,750
80,600 Alumax, Inc. 2,700,100
130,000 Aluminum Co. of America 8,108,750
94,000 Dow Chemical Co. 8,354,250
100,000 Georgia-Pacific Corp. 7,775,000
260,000 INCO Ltd. (Canada) 8,742,500
51,800 National Steel Corp.(a) 705,775
65,500 The PMI Group, Inc. 2,783,750
74,400 TJ International, Inc. 1,283,400
175,000 Union Carbide Corp. 7,962,500
132,500 Uniphase Corp. 6,989,375
------------
72,150,278
- ---------------------------------------------------------------
Consumer Goods & Services Sector--3.8%
365,000 RJR Nabisco Holdings Corp. 10,904,375
422,000 Stone Container Corp.(a) 7,174,000
------------
18,078,375
- ---------------------------------------------------------------
Financial Services Sector--18.8%
75,000 Aetna Life & Casualty Co. 5,343,750
55,000 Amerin Corp.(a) 1,244,375
112,500 Citicorp 8,859,375
85,000 Dean Witter, Discover & Co. 4,632,500
43,900 Equitable of Iowa Cos. 1,547,475
130,000 Federal Home Loan Mortgage Corp. 10,838,750
355,000 Federal National Mortgage
Association 10,871,875
31,700 Nichiei Construction Co., Ltd.
(Japan) 2,118,276
115,300 Primark Corporation(a) 4,093,150
40,000 Republic New York Corp. 2,375,000
93,500 Student Loan Marketing Association 6,848,875
190,000 SunAmerica, Inc. 10,355,000
153,200 The Equitable Companies Inc. 3,619,350
332,800 The Money Store, Inc. 8,403,200
140,000 Travelers Group Inc. 8,610,000
------------
89,760,951
- ---------------------------------------------------------------
Health Care Sector--9.4%
150,000 AMGEN Inc.(a) 8,625,000
84,400 Bard (C.R.), Inc. 3,080,600
90,000 Ciba-Geigy Ltd. (ADR)
(Switzerland) 5,231,250
150,000 Columbia/HCA Healthcare Corp. 7,968,750
130,900 Forest Laboratories, Inc.(a) 6,037,762
101,300 Physician Corp. of America(a) 1,513,169
135,000 St. Jude Medical, Inc.(a) 4,927,500
205,700 United States Surgical Corp. 7,610,900
------------
44,994,931
- ---------------------------------------------------------------
Leisure Sector--0.7%
117,300 Carnival Cruise Lines, Inc. 3,401,700
- ---------------------------------------------------------------
Precious Metals Sector--1.9%
224,300 UCAR International Inc.(a) 9,196,300
- ---------------------------------------------------------------
Retailing Sector--1.8%
210,000 Dillard Department Stores, Inc. 8,426,250
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-32
<PAGE>
Portfolio of Investments as of
April 30, 1996 PRUDENTIAL MULTI-SECTOR FUND, INC.
- ------------------------------------------------------------------
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ----------------------------------------------------------------
Technology Sector--31.8%
195,000 ADC Telecommunications, Inc.(a) $ 8,190,000
133,000 Applied Materials, Inc. 5,320,000
285,000 Bay Networks, Inc. 8,977,500
200,000 BDM International, Inc. 9,300,000
109,000 Burr-Brown Corp. 2,098,250
440,000 Cisco Systems, Inc. 22,825,000
100,600 Comverse Technology, Inc.(a) 2,351,525
73,900 Engineering Animation Inc. 1,718,175
110,000 Harman International Industries,
Inc. 5,197,500
145,000 Intel Corp. 9,823,750
80,000 International Business Machines
Corp. 8,600,000
208,800 LSI Logic Corp.(a) 7,516,800
102,200 Macromedia, Inc.(a) 3,851,662
116,000 Microsoft Corporation(a) 13,151,500
284,400 Network Express, Inc.(a) 2,346,300
230,000 NEXTEL Communications, Inc.(a) 4,168,750
215,000 Oracle Systems Corp. 7,256,250
31,700 PIXAR Inc.(a) 737,025
73,700 Ross Technology Inc. 930,463
271,300 SoftKey International Inc.(a) 7,596,400
122,000 Sun Microsystems Inc. 6,618,500
224,700 Ultratech Stepper Inc.(a) 5,870,287
311,900 Western Digital Corp. 7,329,650
------------
151,775,287
- ---------------------------------------------------------------
Transportation Sector--9.4%
100,000 AMR Corp.(a) 8,925,000
220,000 Consolidated Freightways, Inc. 5,747,500
124,000 Southwest Airlines Co. 3,689,000
86,000 The Boeing Co. 7,062,750
30,000 Union Pacific Corp. 2,043,750
600,000 USAir Group Inc.(a) 10,650,000
155,000 Varity Corp.(a) 6,606,875
------------
44,724,875
------------
Total long-term investments
(cost $384,320,799) 452,091,306
------------
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- ---------------------------------------------------------------
SHORT-TERM INVESTMENTS--6.9%
- ---------------------------------------------------------------
U.S. Government Securities--2.4%
United States Treasury Bills,
$1,014(b) 4.85%, 5/30/96 $ 1,010,033
3,025(b) 4.89%, 6/6/96 3,010,365
4,200(b) 4.955%, 6/13/96 4,176,082
1,000(b) 5.005%, 6/13/96 994,305
500(b) 4.92%, 7/11/96 495,099
200(b) 5.00%, 7/11/96 198,040
900 4.99%, 7/25/96 889,417
500 4.995%, 7/25/96 494,121
------------
Total U.S. Government Securities
(cost $11,266,086) 11,267,462
------------
- ---------------------------------------------------------------
Repurchase Agreement--4.5%
21,765 Joint Repurchase Agreement
Account, 5.33%, 5/1/96, (Note 5)
(cost $21,765,000) 21,765,000
------------
Total short-term investments
(cost $33,031,086) 33,032,462
------------
Total investments before short
sale - 101.6%
(cost $417,351,885; Note 4) 485,123,768
------------
<CAPTION>
Shares
- --------
<C> <S> <C>
COMMON STOCK SOLD SHORT(a)--(0.3%)
- ---------------------------------------------------------------
Consumer Goods & Services Sector--(0.3%)
60,000 Reebok International, Ltd.
(proceeds $2,101,070) (1,740,000)
------------
- ---------------------------------------------------------------
Total Investments, net of short sales--101.3% 483,383,768
Liabilities in excess of
other assets--(1.3%) (5,984,560)
------------
Net Assets--100% $477,399,208
============
</TABLE>
- ---------------
(a) Non-income producing security.
(b) Pledged as collateral on short sale.
ADR--American Depository Receipt.
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-33
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL MULTI-SECTOR FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
April 30, 1996
--------------
<S> <C>
Assets
Investments, at value (cost $417,351,885)................................................................... $485,123,768
Receivable for investments sold............................................................................. 7,140,396
Deposits with broker for securities sold short.............................................................. 2,793,655
Interest and dividends receivable........................................................................... 456,620
Receivable for Fund shares sold............................................................................. 441,166
Forward currency contracts--net amount receivable from counterparties....................................... 48,979
Deferred expenses........................................................................................... 2,685
------------
Total assets............................................................................................. 496,007,269
------------
Liabilities
Bank overdraft.............................................................................................. 466,957
Payable for investments purchased........................................................................... 14,311,969
Investments sold short, at value (proceeds $2,101,070)...................................................... 1,740,000
Payable for Fund shares reacquired.......................................................................... 1,207,671
Accrued expenses............................................................................................ 317,422
Management fee payable...................................................................................... 240,850
Distribution fee payable.................................................................................... 240,391
Forward currency contracts--net amount payable to counterparties............................................ 82,801
------------
Total liabilities........................................................................................ 18,608,061
------------
Net Assets.................................................................................................. $477,399,208
============
Net assets were comprised of:
Common stock, at par..................................................................................... $ 33,473
Paid-in capital in excess of par......................................................................... 380,856,757
------------
380,890,230
Undistributed net investment income...................................................................... 1,845,925
Accumulated net realized capital and currency gains...................................................... 26,572,124
Net unrealized appreciation on investments and foreign currencies........................................ 68,090,929
------------
Net assets, April 30, 1996.................................................................................. $477,399,208
============
Class A:
Net asset value and redemption price per share
($211,919,946 (division Sign) 14,714,470 shares of common stock issued and outstanding)............... $14.40
Maximum sales charge (5.0% of offering price)............................................................ .76
------
Maximum offering price to public......................................................................... $15.16
======
Class B:
Net asset value, offering price and redemption price per share
($239,738,839 (division Sign) 16,965,870 shares of common stock issued and outstanding)............... $14.13
======
Class C:
Net asset value, offering price and redemption price per share
($5,124,724 (division Sign) 362,660 shares of common stock issued and outstanding).................... $14.13
======
Class Z:
Net asset value, offering price and redemption price per share
($20,615,699 (division Sign) 1,430,389 shares of common stock issued and outstanding).................. $14.41
======
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-34
<PAGE>
PRUDENTIAL MULTI-SECTOR FUND, INC. PRUDENTIAL MULTI-SECTOR FUND, INC.
Statement of Operations Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income April 30, 1996
--------------
<S> <C>
Income
Dividends (net of foreign withholding taxes
of $97,612)............................. $ 4,984,093
Interest................................... 2,738,582
--------------
Total income............................ 7,722,675
--------------
Expenses
Distribution fee--Class A.................. 503,288
Distribution fee--Class B.................. 2,365,805
Distribution fee--Class C.................. 50,559
Management fee............................. 2,800,143
Transfer agent's fees and expenses......... 875,000
Reports to shareholders.................... 266,000
Custodian's fees and expenses.............. 235,000
Legal fees and expenses.................... 75,000
Directors' fees and expenses............... 38,500
Audit fee and expenses..................... 35,000
Registration fees.......................... 28,000
Amortization of organization expense....... 7,000
Miscellaneous.............................. 9,644
--------------
Total expenses.......................... 7,288,939
--------------
Net investment income......................... 433,736
--------------
Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency Transactions
Net realized gain on:
Security transactions...................... 66,185,047
Foreign currency transactions.............. 1,213,312
Short sale transactions.................... (5,648,284)
Written option transactions................ (169,051)
--------------
61,581,024
--------------
Net change in unrealized appreciation/
depreciation on:
Securities................................. 54,048,365
Foreign currencies......................... 464,073
Short sales................................ (400,645)
--------------
54,111,793
--------------
Net gain on investments and foreign currency
transactions............................... 115,692,817
--------------
Net Increase in Net Assets
Resulting from Operations..................... $ 116,126,553
==============
</TABLE>
<TABLE>
<CAPTION>
Year Ended April 30,
Increase (Decrease) -----------------------
in Net Assets 1996 1995
---- ----
<S> <C> <C>
Operations
Net investment income.......... $ 433,736 $ 282,795
Net realized gain on
investments and foreign
currencies.................. 61,581,024 20,151,682
Net change in unrealized
appreciation/depreciation of
investments................. 54,111,793 3,370,491
-------------- ------------
Net increase in net assets
resulting from operations... 116,126,553 23,804,968
-------------- ------------
Net equalization credits.......... 443,875 72,776
-------------- ------------
Dividends and distributions (Note
1)
Dividends from net investment
income
Class A..................... (219,972) --
Class B..................... (209,135) --
Class C..................... (4,629) --
-------------- ------------
(433,736) --
-------------- ------------
Distributions in excess of net
investment income
Class A..................... (1,134) --
Class B..................... (1,078) --
Class C..................... (24) --
-------------- ------------
(2,236) --
-------------- ------------
Distributions from net capital
and currency gains
Class A..................... (18,374,785) (5,260,734)
Class B..................... (26,052,498) (13,945,867)
Class C..................... (586,778) (48,280)
-------------- ------------
(45,014,061) (19,254,881)
-------------- ------------
Fund share transactions (net of
share conversion) (Note 6)
Net proceeds from Fund shares
subscribed (Note 7)......... 299,516,817 131,985,932
Net asset value of Fund shares
issued in reinvestment of
dividends and
distributions............... 42,592,536 17,954,751
Cost of shares reacquired...... (200,926,665) (70,803,068)
-------------- ------------
Net increase in net assets from
Fund share transactions..... 141,182,688 79,137,615
-------------- ------------
Total increase.................... 212,303,083 83,760,478
-------------- ------------
Net Assets
Beginning of year................. 265,096,125 181,335,647
-------------- ------------
End of year....................... $ 477,399,208 $265,096,125
============== ============
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-35
<PAGE>
Notes to Financial Statements PRUDENTIAL MULTI-SECTOR FUND, INC.
- -------------------------------------------------------------------------------
Prudential Multi-Sector Fund, Inc. (the "Fund"), is registered under the
Investment Company Act of 1940 as a 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 under triparty repurchase
agreements, as the case may be, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. If the seller defaults, and the value
of the collateral declines or if bankruptcy proceedings are commenced with
respect to the seller of the security, realization of the collateral by the Fund
may be delayed or limited.
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 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 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 portfolio securities sold during the
fiscal year. Accordingly, such realized foreign currency gains (losses) are
included in the reported net realized gains (losses) on investment transactions.
Net realized gain on foreign currency transactions of $1,213,312 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 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: 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.
- -------------------------------------------------------------------------------
B-36
<PAGE>
Notes to Financial Statements PRUDENTIAL MULTI-SECTOR FUND, INC.
- -------------------------------------------------------------------------------
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.
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.
Expenses are recorded on the accrual basis which may require the use of certain
estimates by management.
Option Writing: When the Fund writes an option, an amount equal to the premium
received by the Fund is recorded as a liability and is subsequently adjusted to
the current market value of the option written. Premiums received from writing
options which expire unexercised are treated by the Fund on the expiration date
as realized gains from options. The difference between the premium and the
amount paid on effecting a closing purchase transaction, including brokerage
commissions, is also treated as a realized gain, or if the premium received is
less than the amount paid for the closing purchase transaction, as a realized
loss. If a call option is exercised, the premium is added to the proceeds from
the sale of the underlying security or currency in determining whether the Fund
has realized a gain or loss. If a put option is exercised, the premium reduces
the cost basis of the securities or currencies purchased by the Fund. The Fund,
as writer of an option may have no control over whether the underlying
securities may be sold (call) or purchased (put) and, as a result, bears the
market risk of an unfavorable change in the price of the security or currency
underlying the written option.
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. During the fiscal year ended April 30, 1996, the Fund reclassified
$1,382,107 of foreign currency gains which were recognized for tax purposes in
the current fiscal year by increasing undistributed net investment income and
decreasing accumulated net realized capital and currency gains. 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 organization and initial registration of the
Fund. This amount has been 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.
- -------------------------------------------------------------------------------
B-37
<PAGE>
Notes to Financial Statements PRUDENTIAL MULTI-SECTOR FUND, INC.
- -------------------------------------------------------------------------------
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 manager has agreed
to limit its management fee to no more than .625 of 1% of the first $500 million
of the average daily net assets of the Fund, .55 of 1% of the next $500 million
and .50 of 1% thereafter for the fiscal year ending April 30, 1997.
The Fund had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. ("PMFD"), which acted as the distributor of the Class A shares of the
Fund through January 1, 1996. Prudential Securities Incorporated ("PSI")
became the distributor of the Class A shares of the Fund effective January 2,
1996 and is serving the Fund under the same terms and conditions as under the
arrangement with PMFD and continues as the distributor of the Class B, Class C
and Class Z shares of the Fund. The Fund compensates PMFD and PSI for
distributing and servicing the Fund's Class A, Class B and Class C shares,
pursuant to plans of distribution (the "Class A, B and C Plans") regardless of
expenses actually incurred by them. The distribution fees are accrued daily and
payable monthly.
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 year ended April 30, 1996.
PMFD and PSI have advised the Fund that they have received approximately
$171,900 in front-end sales charges resulting from sales of Class A shares
during the year ended April 30 1996. From these fees, PMFD and PSI paid such
sales charges to dealers which in turn paid commissions to salespersons and
incurred other distribution costs.
PSI has advised the Fund that for the year ended April 30, 1996, it received
approximately $526,300 and $2,500 in contingent deferred sales charges imposed
upon redemptions by certain Class B and Class C shareholders, respectively.
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 Transactions with Affiliates
Prudential Mutual Fund Services, Inc. ("PMFS"), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year ended April 30, 1996,
the Fund incurred fees of approximately $784,000 for the services of PMFS. As of
April 30, 1996, approximately $74,000 of such fees were due to PMFS. Transfer
agent's fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
For the year ended April 30, 1996, PSI earned approximately $75,700 in brokerage
commissions from portfolio transactions executed on behalf of the Fund.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended April 30, 1996 aggregated $632,320,206 and $532,120,115,
respectively.
The federal income tax basis of the Fund's investments at April 30, 1996 was
$417,514,054 and, accordingly, net unrealized appreciation for federal income
tax purposes was $67,609,714 (gross unrealized appreciation--$74,376,424, gross
unrealized depreciation--$6,766,710).
Transactions in options written during the fiscal year ended April 30, 1996 were
as follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
--------- ---------
<S> <C> <C>
Options outstanding at April 30,
1995................................ -- --
Options written....................... 300 $132,225
Options terminated in closing purchase
transactions........................ (300) (132,225)
---
---------
Options outstanding at April 30,
1996................................ -- --
--- ---------
--- ---------
</TABLE>
At April 30, 1996, the Fund had outstanding forward currency contracts to
purchase and sell foreign currency as follows:
<TABLE>
<CAPTION>
Value at
Foreign Currency Settlement Date Current
Purchase Contracts Payable Value Appreciation
<S> <C> <C> <C>
- ---------------------- ---------------- ---------- ------------
Japanese Yen,
expiring 5/2/96 $4,725,451 $4,774,430 $ 48,979
---------------- ---------- ------------
---------------- ---------- ------------
</TABLE>
<TABLE>
<CAPTION>
Value at
Foreign Currency Settlement Date Current
Sale Contracts Receivable Value Depreciation
<S> <C> <C> <C>
- --------------------- ---------------- ---------- -------------
Japanese Yen,
expiring 5/2/96 $9,467,456 $9,548,861 $ (81,405)
---------------- ---------- -------------
---------------- ---------- -------------
</TABLE>
- -------------------------------------------------------------------------------
B-38
<PAGE>
Notes to Financial Statements PRUDENTIAL MULTI-SECTOR FUND, INC.
- -------------------------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered 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. As of April 30, 1996, the Fund
had a 1.34% undivided interest in the repurchase agreements in the joint
account. The undivided interest for the Fund represents $21,765,000 in principal
amount. As of such date, each repurchase agreement in the joint account and the
value of the collateral therefor were as follows:
Bear, Stearns & Co., 5.32%, in the principal amount of $535,000,000, repurchase
price $535,079,055, due 5/1/96. The value of the collateral including accrued
interest is $547,286,203.
Goldman Sachs & Co., 5.33%, in the principal amount of $535,000,000, repurchase
price $535,079,209, due 5/1/96. The value of the collateral including accrued
interest is $545,700,215.
Morgan Stanley & Co., Inc., 5.30%, in the principal amount of $22,851,000,
repurchase price $22,854,364, due 5/1/96. The value of the collateral including
accrued interest is $23,347,897.
Smith Barney, Inc., 5.33%, in the principal amount of $535,000,000, repurchase
price $535,079,209, due 5/1/96. The value of the collateral including accrued
interest is $545,700,779.
- ------------------------------------------------------------
Note 6. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending 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. A special exchange privilege is also available for
shareholders who qualified to purchase Class A shares at net asset value.
Effective March 1, 1996, the Fund commenced offering Class Z shares. Class Z
shares are not subject to any sales or redemption charge and are offered
exclusively for sale to the Trustees of the PSI 401(k) Plan, a defined
contribution plan sponsored by PSI.
The Fund has authorized 2 billion shares of common stock, $.001 par value per
share, equally divided into four classes, designated Class A, B, C and Class Z
common stock.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------ ---------------- -------------
<S> <C> <C>
Year ended April 30, 1996:
Shares sold................... 6,462,195 $ 62,191,760
Shares issued in connection
with acquisition of
Prudential Strategist Fund
(Note 7).................... 10,275,056 140,334,823
Shares issued in reinvestment
of dividends and
distributions............... 1,318,660 17,532,326
Shares reacquired............. (9,677,912) (133,825,643)
---------------- -------------
Net increase in shares
outstanding before
conversion.................. 8,377,999 86,233,266
Shares issued upon conversion
from Class B................ 683,336 9,391,724
---------------- -------------
Net increase in shares
outstanding................. 9,061,335 $ 95,624,990
---------------- -------------
---------------- -------------
Year ended April 30, 1995:
Shares sold................... 3,485,186 $ 45,817,949
Shares issued in reinvestment
of distributions............ 389,581 5,024,771
Shares reacquired............. (2,985,480) (39,186,110)
---------------- -------------
Net increase in shares
outstanding before
conversion.................. 889,287 11,656,610
Shares issued upon conversion
from Class B................ 733,225 9,121,406
---------------- -------------
Net increase in shares
outstanding................. 1,622,512 $ 20,778,016
---------------- -------------
---------------- -------------
<CAPTION>
Class B
- --------
<S> <C> <C>
Year ended April 30, 1996:
Shares sold................... 3,389,483 $ 30,825,970
Shares issued in connection
with acquisition of
Prudential Strategist Fund
(Note 7).................... 3,011,418 40,656,859
Shares issued in reinvestment
of dividends and
distributions............... 1,853,593 24,491,053
Shares reacquired............. (4,546,535) (62,190,799)
---------------- -------------
Net increase in shares
outstanding before
conversion.................. 3,707,959 33,783,083
Shares reacquired upon
conversion from Class A..... (693,976) (9,391,724)
---------------- -------------
Net increase in shares
outstanding................. 3,013,983 $ 24,391,359
---------------- -------------
---------------- -------------
</TABLE>
- -------------------------------------------------------------------------------
B-39
<PAGE>
Notes to Financial Statements PRUDENTIAL MULTI-SECTOR FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares Amount
- ------------------------------ ---------------- -------------
<S> <C> <C>
Year ended April 30, 1995:
Shares sold................... 6,351,539 $ 82,308,938
Shares issued in reinvestment
of distributions............ 1,004,374 12,882,502
Shares reacquired............. (2,410,850) (31,149,102)
---------------- -------------
Net increase in shares
outstanding before
conversion.................. 4,945,063 64,042,338
Shares reacquired upon
conversion from Class A..... (725,642) (9,121,406)
---------------- -------------
Net increase in shares
outstanding................. 4,219,421 $ 54,920,932
---------------- -------------
---------------- -------------
<CAPTION>
Class C
- ------------------------------
<S> <C> <C>
Year ended April 30, 1996:
Shares sold................... 196,902 $ 2,694,195
Shares issued in connection
with acquisition of
Prudential Strategist Fund
(Note 7).................... 5,166 69,751
Shares issued in reinvestment
of dividends and
distributions............... 43,092 569,157
Shares reacquired............. (152,356) (2,060,271)
---------------- -------------
Net increase in shares
outstanding................. 92,804 $ 1,272,832
---------------- -------------
---------------- -------------
<CAPTION>
August 1, 1994* through
April 30, 1995:
<S> <C> <C>
Shares sold................... 303,058 $ 3,859,045
Shares issued in reinvestment
of distributions............ 3,797 47,478
Shares reacquired............. (36,999) (467,856)
---------------- -------------
Net increase in shares
outstanding................. 269,856 $ 3,438,667
---------------- -------------
---------------- -------------
- ---------------
* Commencement of offering of Class C shares.
<CAPTION>
Class Z
- ------------------------------
<S> <C> <C>
March 1, 1996* through April 30, 1996:
Shares sold................... 1,634,755 $ 22,743,459
Shares reacquired............. (204,366) (2,849,952)
---------------- -------------
Net increase in shares
outstanding................. 1,430,389 $ 19,893,507
---------------- -------------
---------------- -------------
</TABLE>
- ---------------
* Commencement of offering of Class Z shares.
Note 7. Acquisition of Prudential Strategist Fund, Inc.
On June 23, 1995, the Fund acquired all the net assets of Prudential Strategist
Fund, Inc. ("Strategist") pursuant to a plan of reorganization approved by
Strategist shareholders on June 9, 1995. The acquisition was accomplished by a
tax-free exchange of 10,275,056 Class A shares, 3,011,418 Class B shares, and
5,166 Class C shares of the Fund (valued at $181,061,433 in the aggregate) for
the Class A, B and C shares of Strategist outstanding on June 23, 1995.
Strategist's net assets at that date ($181,061,433), including $42,340,413 of
unrealized appreciation, were combined with those of the Fund. The aggregate net
assets of the Fund and Strategist immediately before the acquisition were
$283,310,931 and $181,061,433, respectively.
- ------------------------------------------------------------
Note 8. Distributions
On June 13, 1996 the Board of Directors of the Fund declared a dividend from net
investment income of $.028 and $.04 per Class A and Z shares, respectively, and
a distribution from net capital and currency gains to Class A, B, C and Z
shareholders of $.825 per share, payable on June 21, 1996 to shareholders of
record on June 18, 1996.
- -------------------------------------------------------------------------------
B-40
<PAGE>
Financial Highlights PRUDENTIAL MULTI-SECTOR FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
--------------------------------------------------------
Years Ended April 30,
--------------------------------------------------------
1996 1995(a) 1994 1993 1992
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 13.45 $ 13.21 $ 13.19 $ 12.51 $ 12.10
-------- ------- ------- ------- -------
Income from investment operations:
Net investment income......................... .09 .09 .18 .30 .23
Net realized and unrealized gain on
investments and foreign currency
transactions............................... 2.52 1.44 1.64 1.47 .50
-------- ------- ------- ------- -------
Total from investment operations........... 2.61 1.53 1.82 1.77 .73
-------- ------- ------- ------- -------
Less distributions:
Dividends from net investment income.......... (.04) -- (.21) (.30) (.30)
Distributions from net capital and currency
gains...................................... (1.62) (1.29) (1.59) (.79) (.02)
-------- ------- ------- ------- -------
Total distributions........................ (1.66) (1.29) (1.80) (1.09) (.32)
-------- ------- ------- ------- -------
Net asset value, end of year.................. $ 14.40 $ 13.45 $ 13.21 $ 13.19 $ 12.51
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
TOTAL RETURN(b):.............................. 20.69% 12.15% 14.16% 15.14% 6.16%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $211,920 $76,035 $53,237 $43,390 $52,625
Average net assets (000)...................... $201,315 $59,316 $49,840 $46,890 $57,403
Ratios to average net assets:
Expenses, including distribution fees...... 1.23% 1.44% 1.30% 1.28% 1.29%
Expenses, excluding distribution fees...... .98% 1.19% 1.08% 1.08% 1.09%
Net investment income...................... .47% .68% 1.15% 2.44% 1.83%
For Class A, B, C and Z shares:
Portfolio turnover............................ 136% 122% 110% 209% 147%
Average commission rate paid per share........ $ .0537 N/A N/A N/A N/A
</TABLE>
- ---------------
(a) Calculated based upon weighted average shares outstanding during the year.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-41
<PAGE>
Financial Highlights PRUDENTIAL MULTI-SECTOR FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
----------------------------------------------------------- -----------
Years Ended April 30, Year Ended
----------------------------------------------------------- April 30,
1996 1995(a) 1994 1993 1992 1996
-------- -------- -------- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 13.29 $ 13.16 $ 13.15 $ 12.47 $ 12.06 $ 13.29
-------- -------- -------- ------- -------- -----
Income from investment operations:
Net investment income (loss).................. .02 (.01) .07 .19 .13 .03
Net realized and unrealized gain on
investments and foreign currency
transactions............................... 2.45 1.43 1.63 1.47 .51 2.44
-------- -------- -------- ------- -------- -----
Total from investment operations........... 2.47 1.42 1.70 1.66 .64 2.47
-------- -------- -------- ------- -------- -----
Less distributions:
Dividends from net investment income.......... (.01) -- (.10) (.19) (.21) (.01)
Distributions from net capital and currency
gains...................................... (1.62) (1.29) (1.59) (.79) (.02) (1.62)
-------- -------- -------- ------- -------- -----
Total distributions........................ (1.63) (1.29) (1.69) (.98) (.23) (1.63)
-------- -------- -------- ------- -------- -----
Net asset value, end of period................ $ 14.13 $ 13.29 $ 13.16 $ 13.15 $ 12.47 $ 14.13
-------- -------- -------- ------- -------- -----
-------- -------- -------- ------- -------- -----
TOTAL RETURN(b):.............................. 19.84% 11.31% 13.22% 14.13% 5.39% 19.84%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $239,739 $185,474 $128,098 $92,921 $108,276 $ 5,125
Average net assets (000)...................... $236,580 $153,209 $108,981 $99,072 $108,510 $ 5,056
Ratios to average net assets:(c)
Expenses, including distribution fees...... 1.98% 2.19% 2.08% 2.08% 2.09% 1.98%
Expenses, excluding distribution fees...... .98% 1.19% 1.08% 1.08% 1.09% .98%
Net investment income (loss)............... (.22)% (.07)% .35% 1.64% 1.03% (.21)%
<CAPTION>
Class Z
----------
August 1, March 1,
1994(d) 1996(e)
Through Through
April 30, April 30,
1995(a) 1996
--------- ----------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 13.74 $ 13.91
--------- ----------
Income from investment operations:
Net investment income (loss).................. -- .01
Net realized and unrealized gain on
investments and foreign currency
transactions............................... .84 .49
--------- ----------
Total from investment operations........... .84 .50
--------- ----------
Less distributions:
Dividends from net investment income.......... -- --
Distributions from net capital and currency
gains...................................... (1.29) --
--------- ----------
Total distributions........................ (1.29) --
--------- ----------
Net asset value, end of period................ $ 13.29 $ 14.41
--------- ----------
--------- ----------
TOTAL RETURN(b):.............................. 6.62% 3.59%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 3,587 $ 20,616
Average net assets (000)...................... $ 1,653 $ 20,298
Ratios to average net assets:(c)
Expenses, including distribution fees...... 2.37%(c) .98%(c)
Expenses, excluding distribution fees...... 1.37%(c) .98%(c)
Net investment income (loss)............... .03%(c) .54%(c)
</TABLE>
- ---------------
(a) Calculated based upon weighted average shares outstanding during the
period.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total return for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares.
(e) Commencement of offering of Class Z shares.
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-42
<PAGE>
Independent Auditors' Report PRUDENTIAL MULTI-SECTOR FUND, INC.
- -------------------------------------------------------------------------------
The Shareholders and Board of Directors of
Prudential Multi-Sector Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Multi-Sector Fund, Inc. as of April
30, 1996, 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 five years in the period then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
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, 1996, 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, 1996, 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 LLP
New York, New York
June 13, 1996
- -------------------------------------------------------------------------------
B-43
<PAGE>
APPENDIX--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the
rate of inflation.
Each Investment Provides A Different Opportunity
(Value of $1 invested on 12/31/25)
[GRAPHICAL REPRESENTATION OF HISTORICAL PERFORMANCE DATA]
Source: Prudential Investment Corporation based on data from Ibbotson
Associates' EnCORR Software, Chicago, Illinois. Used with permission. This chart
is for illustrative purposes only and is not indicative of the past, present, or
future performance of any portfolio.
Generally, stock returns are attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile than
bond prices over the long-term.
Small stock returns for 1926-1989 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.
Long-term government bond returns are represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. At the beginning of each year
a new bond with a then-current coupon replaces the old bond. Treasury bill
returns are for a one-month bill. Treasuries are guaranteed by the government as
to the timely payment of principal and interest; equities are not. Inflation is
measured by the consumer price index (CPI).
Impact of Inflation. The "real" rate of investment return is that which exceeds
the rate of inflation, the percentage change in the value of consumer goods and
the general cost of living. A common goal of long-term investors is to outpace
the erosive impact of inflation on investment returns.
I-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987
through 1995. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Fund Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
Historical Total Returns of Different Bond Market Sectors
<TABLE>
<CAPTION>
Year '87 '88 '89 '90 '91 '92 '93 '94 '95
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.
Treasury
Bonds 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% -3.4% 18.4%
Mortgage
Securities 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% -1.6% 16.8%
U.S.
Corporate
Bonds 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% -3.9% 22.3%
U.S.
High Yield
Corporate
Bonds 5.0% 12.5% 0.8% -9.6% 46.2% 15.8% 17.1% -1.0% 19.2%
World
Government
Bonds 35.2% 2.3% -3.4% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6%
Difference
between
highest and
lowest return
in percent 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5
</TABLE>
(1) Lehman Brothers Treasury Bond Index is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.
(2) Lehman Brothers Mortgage-Backed Securities Index is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3) Lehman Brothers Corporate Bond Index includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
(4) Lehman Brothers High Yield Bond Index is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one year.
(5) Salomon Brothers World Government Index (Non U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the U.S.,
but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
I-2
<PAGE>
This chart illustrates the performance of major world stock markets for the
period from 1986 through 1995. It does not represent the performance of any
Prudential Mutual Fund.
Average Annual Total Returns
of Major World Stock Markets
(1986~1995) (in U.S. dollars)
Hong Kong 23.8%
Belgium 20.7%
Sweden 19.4%
Netherland 19.3%
Spain 17.9%
Switzerland 17.1%
France 15.3%
U.K. 15.0%
U.S. 14.8%
Japan 12.8%
Austria 10.9%
Germany 10.7%
Source: Morgan Stanley Capital International (MSCI). Used with permission.
Morgan Stanley Country indices are unmanaged indices which include those stocks
making up the largest two~thirds of each country's total stock market
capitalization. Returns reflect the reinvestment of all distributions. This
chart is for illustrative purposes only and is not indicative of the past,
present or future performance of any specific investment. Investors cannot
invest directly in stock indices.
This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 stock index with and without reinvested
dividends.
(CHART)
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is used for illustrative
purposes only and is not intended to represent the past, present or future
performance of any Prudential Mutual Fund. Common stock total return is based on
the Standard & Poor's 500 Stock Index, a market~value~weighted index made up of
500 of the largest stocks in the U.S. based upon their stock market value.
Investors cannot invest directly in indices.
World Stock Market
Capitalization by Region
World Total: $9.2 Trillion
Canada 2.2%
Europe 28.3%
U.S. 40.8%
Pacific Basin 28.7%
Source: Morgan Stanley Capital International, December 1995. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of 1579 companies
in 22 countries (representing approximately 60% of the aggregate market value of
the stock exchanges). This chart is for illustrative purposes only and does not
represent the allocation of any Prudential Mutual Fund.
I-3
<PAGE>
This chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1994)
[GRAPH]
- ------------
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. The chart illustrates the historical
yield of the long-term U.S. Treasury Bond from 1926-1994. Yields represent that
of an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes and should not
be construed to represent the yields of any Prudential Mutual Fund.
The following chart, although not relevant to share ownership in the Fund,
may provide useful information about the effects of a hypothetical investment
diversified over different asset portfolios. The chart shows the range of annual
total returns for major stock and bond indices for the period from December 31,
1975 through December 31, 1995. The horizontal "Best Returns Zone" band shows
that a hypothetical blended portfolio constructed of one-third U.S. stocks (S&P
500), one-third foreign stocks (EAFE Index), and one-third U.S. bonds (Lehman
Index) would have eliminated the "highest highs" and "lowest lows" of any single
asset class.
[CHART]
- ------------
*Source: Prudential Investment Corporation based on data from Lipper Analytical
New Application (LANA). Past performance is not indicative of future results.
The S&P 500 Index is a weighted, unmanaged index comprised of 500 stocks which
provides a broad indication of stock price movements. The Morgan Stanley EAFE
Index is an unmanaged index comprised of 20 overseas stock markets in Europe,
Australia, New Zealand and the Far East. The Lehman Aggregate Index includes all
publicly-issued investment grade debt with maturities over one year, including
U.S. government and agency issues, 15 and 30 year fixed-rate government agency
mortgage securities, dollar denominated SEC registered corporate and government
securities, as well as asset-backed securities. Investors cannot invest directly
in stock or bond market indices.
I-4
<PAGE>
APPENDIX--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
Asset Allocation
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns, while
enabling investors to work toward their financial goal(s). Asset allocation is
also a strategy to gain exposure to better performing asset classes while
maintaining investment in other asset classes.
Diversification
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.
Duration
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
payments. Duration is expressed as a measure of time in years--the longer the
duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
Market Timing
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
Power of Compounding
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
II-1
<PAGE>
APPENDIX--INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "Management of the Fund--Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1995 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
bythe Fund.
Information about Prudential
The Manager and PIC(1) are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1995. Its primary business is to offer a full range of products and services in
three areas: insurance, investments and home ownership for individuals and
families; health-care management and other benefit programs for employees of
companies and members of groups; and asset management for institutional clients
and their associates. Prudential (together with its subsidiaries) employs more
than 92,000 persons worldwide, and maintains a sales force of approximately
13,000 agents and 5,600 financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.
Insurance. Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to more than 50 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of individual life insurance, the Prudential has 19 million life
insurance policies in force today with a face value of $1 trillion. Prudential
has the largest capital base ($11.4 billion) of any life insurance company in
the United States. The Prudential provides auto insurance for more than 1.7
million cars and insures more than 1.4 million homes.
Money Management. The Prudential is one of the largest pension fund
managers in the country, providing pension services to 1 in 3 Fortune 500 firms.
It manages $36 billion of individual retirement plan assets, such as 401(k)
plans. In July 1995, Institutional Investor ranked Prudential the third largest
institutional money manager of the 300 largest money management organizations in
the United States as of December 31, 1994. As of December 31, 1995, Prudential
had more than $314 billion in assets under management. Prudential's Money
Management Group (of which Prudential Mutual Funds is a key part) manages over
$190 billion in assets of institutions and individuals.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest
real estate brokerage network in the United States, has more than 34,000 brokers
and agents and more than 1,100 offices in the United States.(2)
Healthcare. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 5 million
Americans receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Bank, a wholly-owned subsidiary of the
Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.
Information about the Prudential Mutual Funds
Prudential Mutual Fund Management is one of the sixteen largest mutual fund
companies in the country, with over 2.5 million shareholders invested in more
than 50 mutual fund portfolios and variable annuities with more than 3.7 million
shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
The Wall Street Journal, The New York Times, Barron's and USA Today.
- ----------
(1) Prudential Mutual Fund Investment Management, a unit of PIC, serves as the
Subadviser to substantially all of the Prudential Mutual Funds.
Wellington Management Company serves as the subadviser to Global Utility
Fund, Inc., Nicholas-Applegate Capital Management as subadviser to
Nicholas-Applegate Fund, Inc., Jennison Associates Capital Corp. as the
subadviser to Prudential Jennison Fund, Inc. and BlackRock Financial
Management, Inc. as subadviser to The BlackRock Government Income Trust.
There are multiple subadvisers for The Target Portfolio Trust.
(2) As of December 31, 1994.
III-1
<PAGE>
Equity Funds. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Fund, a growth-style equity
fund managed by Jennison Associates Capital Corp., a premier institutional
equity manager and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of its
kind in the country) along with 100 or so other high yield bonds, which may be
considered for purchase.(3) Non-investment grade bonds, also known as junk bonds
or high yield bonds, are subject to a greater risk of loss of principal and
interest including default risk than higher-rated bonds. Prudential high yield
portfolio managers and analysts meet face-to-face with almost every bond issuer
in the High Yield Fund's portfolio annually, and have additional telephone
contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential mutual
fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over
1,200 companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their
visits overseas, often holding private meetings with a company in a foreign
language (our global equity managers speak 7 different languages, including
Mandarin Chinese).
Trading Data.(4) On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.(5) Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities.(6)
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services, Inc., the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
- ----------
(3) As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
(4) Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of thePrudential Series Fund and institutional and non-US accounts managed
by Prudential Mutual Fund Investment Management, a division of PIC, for the
year ended December 31, 1995.
(5) Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General U.S. Government and Mortgage funds.
(6) As of December 31, 1994.
<PAGE>
Information about Prudential Securities
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI.(7)
Prudential Securities has a two-year Financial Advisor training program
plus advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment areas.
Prudential Securities is the only Wall Street firm to have its own in-house
Certified Financial Planner (CFP) program. In the December 1995 issue of
Registered Rep, an industry publication, Prudential Securities' Financial
Advisor training programs received a grade of A- (compared to an industry
average of B+).
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey. Five
Prudential Securities analysts were ranked as first-team finishers.(8)
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial ArchitectSM, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ----------
(7) As of December 31, 1994.
(8) On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual analyst
and weighting them based on the size of the voting institution. In total,
the magazine sends its survey to approximately 2,000 institutions and a
group of Eurpoean and Asian institutions.
III-3
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements:
(1) Financial statements included in the Prospectus constituting Part A
of this Registration Statement:
Financial Highlights.
(2) Financial statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
Portfolio of Investments at April 30, 1996.
Statement of Assets and Liabilities at April 30, 1996.
Statement of Operations for the year ended April 30, 1996.
Statement of Changes in Net Assets for the years ended April 30,
1996 and April 30, 1995.
Notes to Financial Statements.
Financial Highlights for the five years ended April 30, 1996.
Independent Auditors' Report.
(b) Exhibits:
1. (a) Articles of Restatement. Incorporated by reference to Exhibit
No. 1 to Post-Effective Amendment No. 8 to the Registration
Statement on Form N-1A filed via EDGAR on June 29, 1995 (File No.
33-33477).
(b) Articles Supplementary.*
2. By-Laws of the Registrant. Incorporated by reference to Exhibit No.
2 to the Registration Statement on Form N-1A filed on February 23,
1990 (File No. 33-33477).
4. (a) Specimen certificate for Class A shares of common stock, $.001
par value, of the Registrant. Incorporated by reference to Exhibit
No. 4(a) to Post-Effective Amendment No. 1 to the Registration
Statement on Form N-1A filed on November 30, 1990 (File No.
33-33477).
(b) Specimen certificate for Class B shares of common
stock, $.001 par value, of the Registrant. Incorporated by
reference to Exhibit No. 4(b) to Post-Effective Amendment No. 1 to
the Registration Statement on Form N-1A filed on November 30, 1990
(File No. 33-33477).
(c) Instruments defining rights of shareholders. Incorporated by
reference to Exhibits 1 and 2.
5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc. Incorporated by reference to Exhibit
No. 5(a) to Post-Effective Amendment No. 1 to the Registration
Statement on Form N-1A filed on November 30, 1990 (File No.
33-33477).
(b) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and The Prudential Investment Corporation.
Incorporated by reference to Exhibit No. 5(b) to Post-Effective
Amendment No. 1 to the Registration Statement on Form N-1A filed on
November 30, 1990 (File No. 33-33477).
6. Restated Distribution Agreement.*
8. Custodian Contract between the Registrant and State Street Bank and
Trust Company. Incorporated by reference to Exhibit No. 8 to
Post-Effective Amendment No. 1 to the Registration Statement on
Form N-1A filed on November 30, 1990 (File No. 33-33477).
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. Incorporated by reference to
Exhibit No. 9 to Post-Effective Amendment No. 1 to the Registration
Statement on Form N-1A filed on November 30, 1990 (File No.
33-33477).
10. (a) Opinion of Counsel. Incorporated by reference to Exhibit No. 10
to Pre-Effective Amendment No. 2 to the Registration Statement on
Form N-1A filed on May 21, 1990 (File No. 33-33477).
(b) Opinion of Counsel. Incorporated by reference to Exhibit No.
10(b) to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A filed on June 30, 1993 (File No. 33-33477).
11. Consent of Independent Accountants.*
C-1
<PAGE>
13. Purchase Agreement. Incorporated by reference to Exhibit No. 13 to
Pre-Effective Amendment No. 2 to the Registration Statement on Form
N-1A filed on May 21, 1990 (File No. 33-33477).
15. (a) Distribution and Service Plan for Class A shares. Incorporated
by reference to Exhibit No. 15(a) to Post-Effective Amendment No. 8
to the Registration Statement on Form N-1A filed via EDGAR on June
29, 1995 (File No. 33-33477).
(b) Distribution and Service Plan for Class B shares. Incorporated
by reference to Exhibit No. 15(b) to Post-Effective Amendment No. 8
to the Registration Statement on Form N-1A filed via EDGAR on June
29, 1995 (File No. 33-33477).
(c) Distribution and Service Plan for Class C shares. Incorporated
by reference to Exhibit No. 15(c) to Post-Effective Amendment No. 8
to the Registration Statement on Form N-1A filed via EDGAR on June
29, 1995 (File No. 33-33477).
16. (a) Schedule of Computation of Performance Quotations (Class A
Shares). Incorporated by reference to Exhibit No. 16(a) to
Post-Effective Amendment No. 1 to the Registration Statement on
Form N-1A filed on November 30, 1990 (File No. 33-33477).
(b) Schedule of Computation of Performance Quotations (Class B
Shares). Incorporated by reference to Exhibit No. 16(b) to
Post-Effective Amendment No. 1 to the Registration Statement on
Form N-1A filed on November 30, 1990 (File No. 33-33477).
18. Rule 18f-3 Plan. Incorporated by reference to Exhibit No. 18 to
Post-Effective Amendment No. 9 to the Registration Statement on
Form N-1A filed via EDGAR on October 30, 1995 (File No. 33-33477).
27. Financial Data Schedules.*
Other Exhibits
Powers of Attorney for
Edward D. Beach
Donald D. Lennox
Douglas H. McCorkindale
Thomas T. Mooney
Louis A. Weil, III
Executed copies filed under Other Exhibits to Pre-Effective Amendment No. 2 to
the Registration Statement on Form N-1A (File No. 33-33477) filed on May 21,
1990.
- ----------
*Filed herewith.
Item 25. Persons Controlled by or under Common Control with Registrant.
None.
Item 26. Number of Holders of Securities.
As of June 7, 1996 there were 31,207, 28,059, 608 and 2,666 record holders of
Class A, Class B, Class C and Class Z shares, respectively, of common stock,
$.001 par value per share, of the Registrant.
Item 27. Indemnification.
As permitted by Sections 17(h) and (i) of the Investment Company Act of
1940 (the 1940 Act) and pursuant to Article VII of the Fund's By-Laws (Exhibit 2
to the Registration Statement), officers, directors, employees and agents of the
Registrant will not be liable to the Registrant, any stockholder, officer,
director, employee, agent or other person for any action or failure to act,
except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Section 2-418 of Maryland General Corporation Law permits indemnification of
directors who acted in good faith and reasonably believed that the conduct was
in the best interests of the Registrant. As permitted by Section 17(i) of the
1940 Act, pursuant to Section 10 of the Distribution Agreement (Exhibit 6 to the
Registration Statement), each Distributor of the Registrant may be indemnified
against liabilities which it may incur, except liabilities arising from bad
faith, gross negligence, willful misfeasance or reckless disregard of duties.
C-2
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (Securities Act) may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1940 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such director,
officer or controlling person in connection with the shares being registered,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1940 Act and will be governed by the final adjudication of such
issue.
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and directors under certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Mutual Fund
Management, Inc. (PMF) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from reckless
disregard by them of their respective obligations and duties under the
agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and each Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretation of Sections 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
Item 28. Business and other Connections of Investment Adviser.
(i) Prudential Mutual Fund Management, Inc. (PMF)
See "How the Fund is Managed-Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PMF are listed in
Schedules A and D of Form ADV of PMF as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104, filed on March 30, 1996).
The business and other connections of PMF's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is One Seaport Plaza, New York, NY 10292.
<TABLE>
<CAPTION>
Name and Address Position with PMF Principal Occupations
- ---------------- ----------------- ---------------------
<S> <C> <C>
Stephen P. Fisher Senior Vice President Senior Vice President, PMF; Senior Vice President,
Prudential Securities Incorporated (Prudential
Securities); Vice President, Prudential Mutual Fund
Distributors, Inc. (PMFD)
Frank W. Giordano Executive Vice Executive Vice President, General Counsel, Secretary and
President, General Director, PMF and PMFD; Senior Vice President,
Counsel, Secretary and Prudential Securities; Director, Prudential Mutual Fund
Director Services, Inc. (PMFS)
</TABLE>
C-3
<PAGE>
<TABLE>
<CAPTION>
Name and Address Position with PMF Principal Occupations
- ---------------- ---------------- ---------------------
<S> <C> <C>
Robert F. Gunia Executive Vice Executive Vice President, Chief Financial and
President, Chief Financial Administrative Officer, Treasurer and Director, PMF;
and Administrative Officer, Senior Vice President, Prudential Securities; Executive
Treasurer and Director Vice President, Chief Financial Officer, Treasurer and
Director, PMFD; Director, PMFS
Theresa A. Hamacher Director Director, PMF; Vice President, The Prudential Insurance
751 Broad St. Company of America (Prudential); Vice President, The
Newark, NJ 07102 Prudential Investment Corporation (PIC); President,
Prudential Mutual Fund Investment Management (PMFIM)
Timothy J. O'Brien Director President, Chief Executive Officer, Chief Operating Officer
Raritan Plaza One and Director, PMFD; Chief Executive Officer and
Edison, NJ 08837 Director, PMFS; Director, PMF
Richard A. Redeker President, Chief President, Chief Executive Officer and Director, PMF;
Executive Officer and Executive Vice President, Director and Member of
Director Operating Committee, Prudential Securities; Director,
Prudential Securities Group, Inc. (PSG); Executive Vice
President, PIC; Director, PMFD; Director, PMFS
S. Jane Rose Senior Vice President, Senior Vice President, Senior Counsel and Assistant
Senior Counsel and Secretary, PMF; Senior Vice President and Senior
Assistant Secretary Counsel, Prudential Securities
Donald Webber Executive Vice President Executive Vice President and Director of Sales, PMF
and Director of Sales
</TABLE>
(ii) The Prudential Investment Corporation (PIC)
See "How the Fund is Managed--Manager" in the Prospectus constituting Part
A of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of PIC's directors and executive
officers are as set forth below. Except as otherwise indicated, the address of
each person is Prudential Plaza, Newark, NJ 07102.
<TABLE>
<CAPTION>
Name and Address Position with PIC Principal Occupations
- ---------------- ----------------- ---------------------
<S> <C> <C>
William M. Bethke Senior Vice President Senior Vice President, Prudential; Senior Vice
Two Gateway Center President, PIC
Newark, NJ 07102
Barry M. Gillman Director Director, PIC
Theresa A. Hamacher Vice President Vice President, Prudential; Vice President, PIC; Director,
PMF; President, PMFIM
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
Name and Address Position with PIC Principal Occupations
- ---------------- ----------------- ---------------------
<S> <C> <C>
Richard A. Redeker Executive Vice President President, Chief Executive Officer and Director, PMF;
One Seaport Plaza Executive Vice President, Director and Member of
New York, NY 10292 Operating Committee, Prudential Securities; Director,
PSG; Executive Vice President, PIC; Director, PMFD;
Director, PMFS
John L. Reeve Senior Vice President Managing Director, Presidential Asset Management Group;
Senior Vice President, PIC
Eric A. Simonson Vice President and Director Vice President and Director, PIC; Executive Vice President,
Prudential
</TABLE>
Item 29. Principal Underwriters.
(a) Prudential Securities Incorporated
Prudential Securities is distributor for The BlackRock Government Income
Trust, Command Money Fund, Command Government Fund, Command Tax-Free Fund, The
Global Government Plus Fund, Inc., The Global Total Return Fund, Inc., Global
Utility Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth
Equity Fund), Prudential Allocation Fund, Prudential California Municipal Fund,
Prudential Distressed Securities Fund, Inc., Prudential Diversified Bond Fund,
Inc., Prudential Equity Fund, Inc., Prudential Equity Income Fund, Prudential
Europe Growth Fund, Inc., Prudential Global Fund, Inc., Prudential Global
Genesis Fund, Inc., Prudential Global Limited Maturity Fund, Inc., Prudential
Global Natural Resources Fund, Inc., Prudential Government Income Fund, Inc.,
Prudential Government Securities Trust, Prudential Growth Opportunity Fund,
Inc., Prudential High Yield Fund, Inc., Prudential Institutional Liquidity
Portfolio, Inc., Prudential Intermediate Global Income Fund, Inc., Prudential
Jennison Fund, Inc., Prudential MoneyMart Assets, Inc., Prudential Mortgage
Income Fund, Inc., Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond
Fund, Prudential Municipal Series Fund, Prudential National Municipals Fund,
Inc., Prudential Pacific Growth Fund, Inc., Prudential Special Money Market
Fund, Inc., Prudential Structured Maturity Fund, Inc., Prudential Tax-Free Money
Fund, Inc., Prudential Utility Fund, Inc. and The Target Portfolio Trust.
Prudential Securities is also a depositor for the following unit investment
trusts:
The Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
(b) Information concerning directors and officers of Prudential Securities
Incorporated is set forth below.
<TABLE>
<CAPTION>
Positions and Positions and
Offices with Offices with
Name(1) Underwriter Registrant
- ------ ------------- -------------
<S> <C> <C>
Robert Golden .............. Executive Vice President and Director None
One New York Plaza
New York, NY
Alan D. Hogan .............. Executive Vice President, Chief Administrative Officer
and Director None
George A. Murray ........... Executive Vice President and Director None
Leland B. Paton ............ Executive Vice President and Director None
One New York Plaza
New York, NY
Martin Pfinsgraff .......... Executive Vice President, Chief Financial Officer and Director None
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
Positions and Positions and
Offices with Offices with
Name(1) Underwriter Registrant
- ------ ------------- --------------
<S> <C> <C>
Vincent T. Pica, II ........ Executive Vice President and Director None
One New York Plaza
New York, NY
Richard A. Redeker ......... Executive Vice President and Director President
and Director
Hardwick Simmons ........... Chief Executive Officer, President and Director None
Lee B. Spencer, Jr. ........ Executive Vice President, General Counsel, Secretary and Director None
</TABLE>
- ----------
(1) The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
Item 30. Location of Accounts and Records
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules thereunder are maintained at the
offices of State Street Bank and Trust Company, One Heritage Drive, North
Quincy, Massachusetts, The Prudential Investment Corporation, Prudential Plaza,
745 Broad Street, Newark, New Jersey, the Registrant, One Seaport Plaza, New
York, New York, and Prudential Mutual Fund Services, Inc., Raritan Plaza One,
Edison, New Jersey. Documents required by Rules 31a-1(b)(5), (6), (7), (9), (10)
and (11) and 31a-1(f) will be kept at Three Gateway Center, documents required
by Rules 31a-1(b)(4) and (11) and 31a-1(d) at One Seaport Plaza and the
remaining accounts, books and other documents required by such other pertinent
provisions of Section 31(a) and the Rules promulgated thereunder will be kept by
State Street Bank and Trust Company and Prudential Mutual Fund Services, Inc.
Item 31. Management Services
Other than as set forth under the captions "How the Fund is
Managed-Manager" and "How the Fund is Managed-Distributor" in the Prospectus and
the captions "Manager" and "Distributor" in the Statement of Additional
Information, constituting Parts A and B, respectively, of this Registration
Statement, Registrant is not a party to any management-related service contract.
Item 32. Undertakings
The Registrant undertakes to furnish to each person to whom a Prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders
upon request and without charge.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1993
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned thereunto duly authorized, in the
City of New York, and State of New York, on the 26th day of June, 1996.
PRUDENTIAL MULTI-SECTOR FUND, INC.
By: /s/ RICHARD A. REDEKER
----------------------------------
(Richard A. Redeker, President)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ SUSAN C. COTE Treasurer and Principal Financial June 26, 1996
----------------------- and Accounting Officer
Susan C. Cote
/s/ EDWARD D. BEACH Director June , 1996
-----------------------
Edward D. Beach
/s/ DONALD D. LENNOX Director June 26, 1996
-----------------------
Donald D. Lennox
/s/ DOUGLAS H. McCORKINDALE Director June 26, 1996
-----------------------
Douglas H. McCorkindale
/s/ THOMAS T. MOONEY Director June 26, 1996
-----------------------
Thomas T. Mooney
/s/ RICHARD A. REDEKER President and Director June 26, 1996
-----------------------
Richard A. Redeker
/s/ LOUIS A. WEIL, III Director June 26, 1996
-----------------------
Louis A. Weil, III
<PAGE>
EXHIBIT INDEX
EXHIBITS DESCRIPTION PAGE NO.
- -------- ----------- --------
1. (a) Articles of Restatement. Incorporated by reference to
Exhibit No. 1 to Post-Effective Amendment No. 8 to the
Registration Statement on Form N-1A filed via EDGAR on June 29,
1995 (File No. 33-33477).
(b) Articles Supplementary.*
2. By-Laws of the Registrant. Incorporated by reference to Exhibit
No. 2 to the Registration Statement on Form N-1A filed on
February 23, 1990 (File No. 33-33477).
4. (a) Specimen certificate for Class A shares of common stock,
$.001 par value, of the Registrant. Incorporated by reference to
Exhibit No. 4(a) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A filed on November 30, 1990
(File No. 33-33477).
(b) Specimen certificate for Class B shares of common stock,
$.001 par value, of the Registrant. Incorporated by reference to
Exhibit No. 4(b) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A filed on November 30, 1990
(File No. 33-33477).
(c) Instruments defining rights of shareholders. Incorporated by
reference to Exhibits 1 and 2.
5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc. Incorporated by reference to
Exhibit No. 5(a) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A filed on November 30, 1990
(File No. 33-33477).
(b) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and The Prudential Investment Corporation.
Incorporated by reference to Exhibit No. 5(b) to Post-Effective
Amendment No. 1 to the Registration Statement on Form N-1A filed
on November 30, 1990 (File No. 33-33477).
6. Restated Distribution Agreement*
8. Custodian Contract between the Registrant and State Street Bank
and Trust Company. Incorporated by reference to Exhibit No. 8 to
Post-Effective Amendment No. 1 to the Registration Statement on
Form N-1A filed on November 30, 1990 (File No. 33-33477).
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. Incorporated by reference
to Exhibit No. 9 to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A filed on November 30, 1990
(File No. 33-33477).
10. (a) Opinion of Counsel. Incorporated by reference to Exhibit No.
10 to Pre-Effective Amendment No. 2 to the Registration
Statement on Form N-1A filed on May 21, 1990 (File No.
33-33477).
(b) Opinion of Counsel. Incorporated by reference to Exhibit No.
10(b) to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A filed on June 30, 1993 (File No.
33-33477).
11. Consent of Independent Accountants.*
13. Purchase Agreement. Incorporated by reference to Exhibit No. 13
to Pre-Effective Amendment No. 2 to the Registration Statement
on Form N-1A filed on May 21, 1990 (File No. 33-33477).
15. (a) Distribution and Service Plan for Class A shares.
Incorporated by reference to Exhibit No. 15(a) to Post-Effective
Amendment No. 8 to the Registration Statement on Form N-1A filed
via EDGAR on June 29, 1995 (File No. 33-33477).
(b) Distribution and Service Plan for Class B shares.
Incorporated by reference to Exhibit No. 15(b) to Post-Effective
Amendment No. 8 to the Registration Statement on Form N-1A filed
via EDGAR on June 29, 1995 (File No. 33-33477).
(c) Distribution and Service Plan for Class C shares.
Incorporated by reference to Exhibit 15(c) to Post-Effective
Amendment No. 8 to the Registration Statement on Form N-1A filed
via EDGAR on June 29, 1995 (File No. 33-33477).
- ----------
*Filed herewith.
<PAGE>
EXHIBIT INDEX--Continued
EXHIBITS DESCRIPTION PAGE NO.
- -------- ----------- --------
16. (a) Schedule of Computation of Performance Quotations (Class A
Shares). Incorporated by reference to Exhibit No. 16(a) to
Post-Effective Amendment No. 1 to the Registration Statement on
Form N-1A filed on November 30, 1990 (File No. 33-33477).
(b) Schedule of Computation of Performance Quotations (Class B
Shares). Incorporated by reference to Exhibit No. 16(b) to
Post-Effective Amendment No. 1 to the Registration Statement on
Form N-1A filed on November 30, 1990 (File No. 33-33477).
18. Rule 18f-3 Plan. Incorporated by reference to Exhibit No. 18 to
Post-Effective Amendment No. 9 to the Registration Statement on
Form N-1A filed via EDGAR on October 30, 1995 (File No.
33-33477).
27. Financial Data Schedules.*
Other Exhibits
Powers of Attorney for
Edward D. Beach
Donald D. Lennox
Douglas H. McCorkindale
Thomas T. Mooney
Louis A. Weil, III
Executed copies filed under Other Exhibits to Pre-Effective Amendment No. 2 to
the Registration Statement on Form N-1A (File No. 33-33477) filed on May 21,
1990.
- ----------
*Filed herewith.
Ex-99.1(b)
ARTICLES SUPPLEMENTARY
OF
PRUDENTIAL MULTI-SECTOR FUND, INC.
* * *
Pursuant to Section 2-208.1
of the Maryland General Corporation Law
* * *
Prudential Multi-Sector Fund, Inc., a Maryland corporation having its
principal offices in Baltimore, Maryland and New York, New York (the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland, that:
FIRST: The Corporation is registered as an open-end company under the
Investment Company Act of 1940.
SECOND: The total number of shares of all classes of stock which the
Corporation has authority to issue is 2,000,000,000 shares of common stock, par
value of $.001 each, having an aggregate par value of $2,000,000, and the total
number of shares of common stock that the Corporation has authority to issue is
not being increased or decreased.
THIRD: Heretofore, the number of authorized shares of which the Corporation
has authority to issue was divided into three classes of shares, consisting of
666,666,666 2/3 Class A shares, 666,666,666 2/3 Class B shares and 666,666,666
2/3 Class C shares.
FOURTH: In accordance with Section 2-105(c) of the Maryland General
Corporation Law and pursuant to a resolution duly adopted by the Board of
Directors of the Corporation at a meeting held on July 26, 1995, the number of
authorized shares of which the Corporation has authority to issue is hereby
divided into four classes of shares, consisting of 500 million Class A shares,
500 million Class B shares, 500 million Class C shares and 500 million Class Z
shares.
FIFTH: The Class Z shares shall represent the same interest in the
Corporation and have identical voting, dividend, liquidation and other rights as
the Class A, Class B and Class C shares except that (i) Expenses related to the
distribution of each class of shares shall be borne solely by such class; (ii)
The bearing of such expenses solely by shares of each class shall be
appropriately reflected (in the manner determined by the Board of Directors) in
the net asset value, dividends, distribution and liquidation rights of the
shares of such class; (iii) The Class A Common Stock shall be subject to a
front-end sales load and a Rule 12b-1 distribution fee as determined by the
Board of Directors from time to time; (iv) The Class B Common Stock shall be
subject to a contingent deferred sales charge and a Rule 12b-1 distribution fee
as determined by the Board of Directors from time to time; (v) The Class C
Common Stock shall be subject to a contingent deferred sales charge and a Rule
12b-1 distribution fee as determined by the Board of Directors from time to time
and (vi) The Class Z Common Stock shall not be subject to a front-end sales
load, a contingent deferred sales charge nor a 12b-1 distribution fee. All
shares of each particular class shall represent an equal proportionate interest
in that class, and each share of any particular class shall be equal to each
other share of that class.
<PAGE>
IN WITNESS WHEREOF, PRUDENTIAL MULTI-SECTOR FUND, INC., has caused these
presents to be signed in its name and on its behalf by its President and
attested by its Assistant Secretary on February 21, 1996.
PRUDENTIAL MULTI-SECTOR FUND, INC.
By /s/ RICHARD A. REDEKER
-------------------------------
Richard A. Redeker
President
Attest: /s/ MARGUERITE E. H. MORRISON
-----------------------------
Marguerite E. H. Morrison
Assistant Secretary
THE UNDERSIGNED, President of Prudential Multi-Sector Fund, Inc., who
executed on behalf of the Corporation the foregoing Articles Supplementary of
which this certificate is made a part, hereby acknowledges in the name and on
behalf of said Corporation the foregoing Articles Supplementary to be the
corporate act of said Corporation and hereby certifies that to the bet of his
knowledge, information and belief the matters and facts set forth therein with
respect to the authorization and approval thereof are true in all material
respects under the penalties of perjury.
/s/ RICHARD A. REDEKER
-------------------------------
Richard A. Redeker
President
2
PRUDENTIAL MULTI-SECTOR FUND, INC.
Distribution Agreement
Agreement made as of May 8, 1996 between Prudential Multi-Sector Fund,
Inc., a Maryland corporation (the Fund), and Prudential Securities Incorporated,
a Delaware corporation (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of 1940,
as amended (the Investment Company Act), as a diversified, open-end, management
investment company and it is in the interest of the Fund to offer its shares for
sale continuously;
WHEREAS, the shares of the Fund may be divided into classes and/or series
(all such shares being referred to herein as Shares) and the Fund currently is
authorized to offer Class A, Class B, Class C and Class Z Shares;
WHEREAS, the Distributor is a broker-dealer registered under the Securities
Exchange Act of 1934, as amended, and is engaged in the business of selling
shares of registered investment companies either directly or through other
broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement with
each other, with respect to the continuous offering of the Fund's Shares from
and after the date hereof in order to promote the growth of the Fund and
facilitate the distribution of its Shares; and
WHEREAS, upon approval by the holders of the respective classes and/or
series of Shares of the Fund it is contemplated that the Fund will adopt a plan
(or plans) of distribution pursuant to Rule 12b-1 under the Investment Company
Act with respect to certain of its classes and/or series of Shares (the Plans)
authorizing payments by the Fund to the Distributor with respect to the
<PAGE>
distribution of such classes and/or series of Shares and the maintenance of
related shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
The Fund hereby appoints the Distributor as the principal underwriter and
distributor of the Shares of the Fund to sell Shares to the public on behalf of
the Fund and the Distributor hereby accepts such appointment and agrees to act
hereunder. The Fund hereby agrees during the term of this Agreement to sell
Shares of the Fund through the Distributor on the terms and conditions set forth
below.
Section 2. Exclusive Nature of Duties
The Distributor shall be the exclusive representative of the Fund to act as
principal underwriter and distributor of the Fund's Shares, except that:
2.1 The exclusive rights granted to the Distributor to sell Shares of the
Fund shall not apply to Shares of the Fund issued in connection with the merger
or consolidation of any other investment company or personal holding company
with the Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding shares of any such company by
the Fund.
2.2 Such exclusive rights shall not apply to Shares issued by the Fund
pursuant to reinvestment of dividends or capital gains distributions or through
the exercise of any conversion feature or exchange privilege.
2.3 Such exclusive rights shall not apply to Shares issued by the Fund
pursuant to the reinstatement privilege afforded redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases made through the
Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean the
Prospectus and Statement of Additional Information included as part of the
Fund's
2
<PAGE>
Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. Purchase of Shares from the Fund
3.1 The Distributor shall have the right to buy from the Fund on behalf of
investors the Shares needed, but not more than the Shares needed (except for
clerical errors in transmission) to fill unconditional orders for Shares placed
with the Distributor by investors or registered and qualified securities dealers
and other financial institutions (selected dealers).
3.2 The Shares shall be sold by the Distributor on behalf of the Fund and
delivered by the Distributor or selected dealers, as described in Section 6.4
hereof, to investors at the offering price as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of any or all classes
and/or series of its Shares at times when redemption is suspended pursuant to
the conditions in Section 4.3 hereof or at such other times as may be determined
by the Board of Directors. The Fund shall also have the right to suspend the
sale of any or all classes and/or series of its Shares if a banking moratorium
shall have been declared by federal or New York authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the Fund,
shall be promptly advised of all purchase orders for Shares received by the
Distributor. Any order may be rejected by the Fund; provided, however, that the
Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Shares. The Fund (or its agent) will confirm
orders upon their receipt, will make appropriate book entries and upon receipt
by the Fund (or its agent) of payment therefor, will deliver deposit receipts
for such Shares pursuant to the instructions of the Distributor. Payment shall
be made to the Fund in New York Clearing House funds or federal funds. The
3
<PAGE>
Distributor agrees to cause such payment and such instructions to be delivered
promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Shares by the Fund
4.1 Any of the outstanding Shares may be tendered for redemption at any
time, and the Fund agrees to repurchase or redeem the Shares so tendered in
accordance with its Articles of Incorporation as amended from time to time, and
in accordance with the applicable provisions of the Prospectus. The price to be
paid to redeem or repurchase the Shares shall be equal to the net asset value
determined as set forth in the Prospectus. All payments by the Fund hereunder
shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as defined
in the above paragraph pursuant to the instructions of the Distributor on or
before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Shares shall be
paid by the Fund as follows: (i) in the case of Shares subject to a contingent
deferred sales charge, any applicable contingent deferred sales charge shall be
paid to the Distributor, and the balance shall be paid to or for the account of
the redeeming shareholder, in each case in accordance with applicable provisions
of the Prospectus; and (ii) in the case of all other Shares, proceeds shall be
paid to or for the account of the redeeming shareholder, in each case in
accordance with applicable provisions of the Prospectus.
4.3 Redemption of any class and/or series of Shares or payment may be
suspended at times when the New York Stock Exchange is closed for other than
customary weekends and holidays, when trading on said Exchange is restricted,
when an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or during any
other period when the Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Fund
4
<PAGE>
5.1 Subject to the possible suspension of the sale of Shares as provided
herein, the Fund agrees to sell its Shares so long as it has Shares of the
respective class and/or series available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Shares, and this shall
include one certified copy, upon request by the Distributor, of all financial
statements prepared for the Fund by independent public accountants. The Fund
shall make available to the Distributor such number of copies of its Prospectus
and annual and interim reports as the Distributor shall reasonably request.
5.3 The Fund shall take, from time to time, but subject to the necessary
approval of the Board of Directors and the shareholders, all necessary action to
fix the number of authorized Shares and such steps as may be necessary to
register the same under the Securities Act, to the end that there will be
available for sale such number of Shares as the Distributor reasonably may
expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Shares for sales under the
securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Articles of
Incorporation or By-Laws to comply with the laws of any state, to maintain an
office in any state, to change the terms of the offering of its Shares in any
state from the terms set forth in its Registration Statement, to qualify as a
foreign corporation in any state or to consent to service of process in any
state other than with respect to claims arising out of the offering of its
Shares. Any such qualification may be withheld, terminated or withdrawn by the
Fund at any time in its discretion. As provided in Section 9 hereof, the expense
of qualification and maintenance of
5
<PAGE>
qualification shall be borne by the Fund. The Distributor shall furnish such
information and other material relating to its affairs and activities as may be
required by the Fund in connection with such qualifications.
Section 6. Duties of the Distributor
6.1 The Distributor shall devote reasonable time and effort to effect sales
of Shares, but shall not be obligated to sell any specific number of Shares.
Sales of the Shares shall be on the terms described in the Prospectus. The
Distributor may enter into like arrangements with other investment companies.
The Distributor shall compensate the selected dealers as set forth in the
Prospectus.
6.2 In selling the Shares, the Distributor shall use its best efforts in
all respects duly to conform with the requirements of all federal and state laws
relating to the sale of such securities. Neither the Distributor nor any
selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the confirmation
of sales to investors and selected dealers, the collection of amounts payable by
investors and selected dealers on such sales and the cancellation of unsettled
transactions, as may be necessary to comply with the requirements of the
National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected dealer
agreements with registered and qualified securities dealers and other financial
institutions of its choice for the sale of Shares, provided that the Fund shall
approve the forms of such agreements. Within the United States, the Distributor
shall offer and sell Shares only to such selected dealers as are members in good
standing of the NASD. Shares sold to selected dealers shall be for resale by
such dealers only at the offering price determined as set forth in the
Prospectus.
Section 7. Payments to the Distributor
6
<PAGE>
7.1 With respect to classes and/or series of Shares which impose a
front-end sales charge, the Distributor shall receive and may retain any portion
of any front-end sales charge which is imposed on such sales and not reallocated
to selected dealers as set forth in the Prospectus, subject to the limitations
of Article III, Section 26 of the NASD Rules of Fair Practice. Payment of these
amounts to the Distributor is not contingent upon the adoption or continuation
of any applicable Plans.
7.2 With respect to classes and/or series of Shares which impose a
contingent deferred sales charge, the Distributor shall receive and may retain
any contingent deferred sales charge which is imposed on such sales as set forth
in the Prospectus, subject to the limitations of Article III, Section 26 of the
NASD Rules of Fair Practice. Payment of these amounts to the Distributor is not
contingent upon the adoption or continuation of any Plan.
Section 8. Payment of the Distributor under the Plan
8.1 The Fund shall pay to the Distributor as compensation for services
under any Plans adopted by the Fund and this Agreement a distribution and
service fee with respect to the Fund's classes and/or series of Shares as
described in each of the Fund's respective Plans and this Agreement.
8.2 So long as a Plan or any amendment thereto is in effect, the
Distributor shall inform the Board of Directors of the commissions and account
servicing fees with respect to the relevant class and/or series of Shares to be
paid by the Distributor to account executives of the Distributor and to
broker-dealers and financial institutions which have dealer agreements with the
Distributor. So long as a Plan (or any amendment thereto) is in effect, at the
request of the Board of Directors or any agent or representative of the Fund,
the Distributor shall provide such additional information as may reasonably be
requested concerning the activities of the Distributor hereunder and the costs
incurred in performing such activities with respect to the relevant class and/or
series of Shares.
Section 9. Allocation of Expenses
7
<PAGE>
The Fund shall bear all costs and expenses of the continuous offering of
its Shares (except for those costs and expenses borne by the Distributor
pursuant to a Plan and subject to the requirements of Rule 12b-1 under the
Investment Company Act), including fees and disbursements of its counsel and
auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and all amendments and supplements thereto, and preparing
and mailing annual and periodic reports and proxy materials to shareholders
(including but not limited to the expense of setting in type any such
Registration Statements, Prospectuses, annual or periodic reports or proxy
materials). The Fund shall also bear the cost of expenses of qualification of
the Shares for sale, and, if necessary or advisable in connection therewith, of
qualifying the Fund as a broker or dealer, in such states of the United States
or other jurisdictions as shall be selected by the Fund and the Distributor
pursuant to Section 5.4 hereof and the cost and expense payable to each such
state for continuing qualification therein until the Fund decides to discontinue
such qualification pursuant to Section 5.4 hereof. As set forth in Section 8
above, the Fund shall also bear the expenses it assumes pursuant to any Plan, so
long as such Plan is in effect.
Section 10. Indemnification
10.1 The Fund agrees to indemnify, defend and hold the Distributor, its
officers and directors and any person who controls the Distributor within the
meaning of Section 15 of the Securities Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any
reasonable counsel fees incurred in connection therewith) which the Distributor,
its officers, directors or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, except insofar as such claims,
demands, liabilities or expenses arise out of or are based upon any such untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in
8
<PAGE>
conformity with information furnished in writing by the Distributor to the Fund
for use in the Registration Statement or Prospectus; provided, however, that
this indemnity agreement shall not inure to the benefit of any such officer,
director, trustee or controlling person unless a court of competent jurisdiction
shall determine in a final decision on the merits, that the person to be
indemnified was not liable by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations under this Agreement (disabling conduct), or, in
the absence of such a decision, a reasonable determination, based upon a review
of the facts, that the indemnified person was not liable by reason of disabling
conduct, by (a) a vote of a majority of a quorum of directors or trustees who
are neither "interested persons" of the Fund as defined in Section 2(a)(19) of
the Investment Company Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. The Fund's agreement to indemnify the
Distributor, its officers and directors or trustees and any such controlling
person as aforesaid is expressly conditioned upon the Fund's being promptly
notified of any action brought against the Distributor, its officers or
directors or trustees, or any such controlling person, such notification to be
given by letter or telegram addressed to the Fund at its principal business
office. The Fund agrees promptly to notify the Distributor of the commencement
of any litigation or proceedings against it or any of its officers or directors
in connection with the issue and sale of any Shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund, its
officers and Directors and any person who controls the Fund, if any, within the
meaning of Section 15 of the Securities Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending against such claims, demands or liabilities and any
reasonable counsel fees incurred in connection therewith) which the Fund, its
officers and Directors or any such controlling person may incur under the
Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its Directors or officers or
such controlling person resulting from such claims or demands shall arise out of
or be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration
9
<PAGE>
Statement or Prospectus or shall arise out of or be based upon any alleged
omission to state a material fact in connection with such information required
to be stated in the Registration Statement or Prospectus or necessary to make
such information not misleading. The Distributor's agreement to indemnify the
Fund, its officers and Directors and any such controlling person as aforesaid,
is expressly conditioned upon the Distributor's being promptly notified of any
action brought against the Fund, its officers and Directors or any such
controlling person, such notification being given to the Distributor at its
principal business office.
Section 11. Duration and Termination of this Agreement
11.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Board of Directors of the Fund, or by the
vote of a majority of the outstanding voting securities of the applicable class
and/or series of the Fund, and (b) by the vote of a majority of those
Directors who are not parties to this Agreement or interested persons
of any such parties and who have no direct or indirect financial interest in
this Agreement or in the operation of any of the Fund's Plans or in any
agreement related thereto (Independent Directors), cast in person at a meeting
called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the payment of
any penalty, by a majority of the Independent Directors or by vote of a majority
of the outstanding voting securities of the applicable class and/or series of
the Fund, or by the Distributor, on sixty (60) days' written notice to the other
party. This Agreement shall automatically terminate in the event of its
assignment.
11.3 The terms "affiliated person," "assignment," "interested person" and
"vote of a majority of the outstanding voting securities", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
10
<PAGE>
Section 12. Amendments to this Agreement
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Board of Directors of the Fund, or
by the vote of a majority of the outstanding voting securities of the applicable
class and/or series of the Fund, and (b) by the vote of a majority of the
Independent Directors cast in person at a meeting called for the
purpose of voting on such amendment.
Section 13. Separate Agreement as to Classes and/or Series
The amendment or termination of this Agreement with respect to any class
and/or series shall not result in the amendment or termination of this Agreement
with respect to any other class and/or series unless explicitly so provided.
Section 14. Governing Law
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year above written.
Prudential Securities Incorporated
By: /s/ROBERT F. GUNIA
------------------------------
Robert F. Gunia
Senior Vice President
Prudential Multi-Sector Fund, Inc.
By: /s/RICHARD A. REDEKER
------------------------------
Richard A. Redeker
President
12
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 11 to Registration
Statement No. 33-33477 of Prudential Multi-Sector Fund, Inc. of our report
dated June 13, 1996, appearing in the Statement of Additional Information, which
is a part of such Registration Statement, and to the references to us under the
headings "Financial Highlights" in the Prospectus, which is a part of such
Registration Statement, and "Custodian, Transfer and Dividend Disbursing Agent
and Independent Accountants" in the Statement of Additional Information.
Deloitte & Touche LLP
New York, New York
June 26, 1996
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<NAME> PRUDENTIAL MULTI-SECTOR FUND, INC. (CLASS B)
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</TABLE>
