Filed Pursuant to Rule 497(c)
Registration No. 33-42391
Prudential Pacific Growth Fund, Inc.
- --------------------------------------------------------------------------------
PROSPECTUS DATED AUGUST 1, 1994
- --------------------------------------------------------------------------------
Prudential Pacific Growth Fund, Inc. (the Fund) is an open-end, diversified
management investment company whose investment objective is long-term growth of
capital. The Fund seeks to achieve this objective by investing primarily in
common stocks, common stock equivalents (such as convertible debt securities and
warrants) and other securities of companies doing business in or domiciled in
the Pacific Basin region. See "How the Fund Invests--Investment Objective and
Policies." Under normal circumstances, the Fund intends to invest at least 65%
of its total assets in such securities. The Fund may invest in equity securities
of other companies and in non-convertible debt securities and options on stocks,
stock indices, foreign currencies and futures contracts on foreign currencies
and may purchase and sell futures contracts on foreign currencies and groups of
currencies and on financial or stock indices so as to hedge its portfolio and to
attempt to enhance income. See "How the Fund Invests--Investment Objective and
Policies." There is no assurance that the Fund's investment objective will be
achieved. The Fund's address is One Seaport Plaza, New York, New York 10292, and
its telephone number is (800) 225-1852.
The Fund is not intended to constitute a complete investment program. Because of
its objective and policies, including its Pacific Basin orientation, the Fund is
subject to greater investment risks than certain other mutual funds. See "How
the Fund Invests--Special Considerations and Risks of Investing in Foreign
Securities" and "Portfolio Turnover."
- --------------------------------------------------------------------------------
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 August 1, 1994, 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 PACIFIC GROWTH FUND, INC.?
Prudential Pacific Growth 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 investment objective is long term growth of capital. It seeks to
achieve this objective by investing primarily in common stocks, common stock
equivalents and other securities of companies doing business in or domiciled
in the Pacific Basin region. There can be no assurance that the Fund's
objective will be achieved. See "How the Fund Invests-- Investment Objective
and Policies" at page 6.
RISK FACTORS AND SPECIAL CHARACTERISTICS
Under normal circumstances, the Fund anticipates that at least 65% of its
total assets will consist of Pacific Basin region corporate securities,
primarily common stock and other securities convertible into common stock. See
"How the Fund Invests--Investment Objective and Policies" at page 6. Investing
in securities of foreign companies and countries involves certain risks and
considerations not typically associated with investments in U.S. Government
Securities and those of domestic companies. See "How the Fund Invests--Special
Considerations and Risks of Investing in Foreign Securities" at page 7. The
Fund may also engage in various hedging and income enhancement strategies,
including investing in derivatives. See "How the Fund Invests--Hedging and
Income Enhancement Strategies--Risks of Hedging and Income Enhancement
Strategies" at page 10.
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
.75 of 1% of the Fund's average daily net assets. As of June 30, 1994, PMF
served as manager or administrator to 66 investment companies, including 37
mutual funds, with aggregate assets of approximately $47 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. See "How the Fund is Managed--Manager" at page
13. The management fee is higher than that paid by most other investment
companies.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Fund's Class A shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .25 of 1% of the average daily
net assets of the Class A 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 B and Class C shares and is paid an annual
distribution and service fee at the 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 13.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. 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 19 and "Shareholder Guide--Shareholder
Services" at page 28.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its
transfer agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities plus a
sales charge which may be imposed either (i) at the time of purchase (Class A
shares) or (ii) or on a deferred basis (Class B or Class C shares). See "How
the Fund Values Its Shares" at page 15 and "Shareholder Guide-- How to Buy
Shares of the Fund" at page 19.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers three classes of shares:
<TABLE>
<S> <C>
. Class A Shares: Sold with an initial sales charge of up to 5% of the offering price
. Class B Shares: Sold without an initial sales charge but are subject to a contingent deferred
sales charge or CDSC (declining from 5% to zero of the lower of the amount
invested or the redemption proceeds) which will be imposed on certain redemptions
made within six years of purchase. Although Class B shares are subject to higher
ongoing distribution-related expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are subject to lower ongoing
distribution-related expenses) approximately seven years after purchase.
. Class C Shares: Sold without an initial sales charge and for one year after purchase, are subject
to a 1% CDSC on redemptions. Like Class B shares, Class C shares are subject to
higher ongoing distribution-related expenses than Class A shares but do not
convert to another class.
</TABLE>
See "Shareholder Guide--Alternative Purchase Plan" at page 20.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 23.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to pay dividends of net investment income, if any, and
make distributions of any net capital gains at least annually. Dividends and
distributions will be automatically reinvested in additional shares of the
Fund at NAV without a sales charge unless you request that they be paid to you
in cash. See "Taxes, Dividends and Distributions" at page 17.
3
<PAGE>
FUND EXPENSES
<TABLE> <CAPTION>
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 1% on redemptions made
year, decreasing by 1% within one year of
annually to 1% in the purchase
fifth and the sixth
years and 0% the seventh
year*
Redemption Fees...................... None None None
Exchange Fees........................ None None None
</TABLE>
<TABLE> <CAPTION>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS) CLASS A SHARES CLASS B SHARES CLASS C SHARES
--------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
Management Fees...................... .75% .75% .75%
12b-1 Fees........................... .25%++ 1.00% 1.00%
Other Expenses....................... .68% .62% .62%
--- --- ---
Total Fund Operating Expenses........ 1.68% 2.37% 2.37%
--- --- ---
--- --- ---
</TABLE>
<TABLE> <CAPTION>
EXAMPLE 1 3 5 10
- -----------------------------------------------------------------------------
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.................................................................. $ 66 $ 100 $ 137 $ 239
Class B.................................................................. $ 74 $ 104 $ 137 $ 245
Class C**................................................................ $ 34 $ 74 $ 127 $ 271
You would pay the following expenses on the same investment, assuming no
redemption:
Class A.................................................................. $ 66 $ 100 $ 137 $ 239
Class B.................................................................. $ 24 $ 74 $ 127 $ 245
Class C**................................................................ $ 24 $ 74 $ 127 $ 271
</TABLE>
The above example with respect to Class A and Class B shares is based
on restated data for the Fund's fiscal year ended October 31, 1993. The
above example with respect to Class C shares is based on expenses expected
to have been incurred if Class C shares had been in existence during the
fiscal year ended October 31, 1993. 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 an investor in understanding the
various types of 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" include operating expenses of the Fund, such as Directors' and
professional fees, registration fees, reports to shareholders, transfer
agency and custodian (domestic and foreign) fees (but excludes foreign
withholding taxes).
------------------------
* Class B shares will automatically convert to Class A shares
approximately seven years after purchase. See "Shareholder Guide--
Conversion Feature--Class B Shares."
** Estimated based on expenses expected to have been incurred if Class C
shares had been in existence during the fiscal year ended October 31,
1993.
+ Pursuant to rules of the National Association of Securities Dealers,
Inc., the aggregate initial sales charges, deferred sales charges and
asset-based sales charges on shares of the Fund may not exceed 6.25% of
total gross sales, subject to certain exclusions. This 6.25% limitation
is imposed on the Fund rather than on a per shareholder basis.
Therefore, long-term shareholders of the Fund may pay more in total
sales charges than the economic equivalent of 6.25% of such
shareholders' investment in such shares. See "How the Fund is
Managed--Distributor."
++ Although the Class A Distribution and Service Plan provides that the
Fund may pay up to an annual rate of .30 of 1% of average daily net
assets of the Class A shares, the Distributor has agreed to limit its
distribution fee with respect to Class A shares of the Fund to .25 of
1% of the average daily net asset value of the Class A shares for the
fiscal year ending October 31, 1994. Total operating expenses without
such limitation would be 1.73%. See "How the Fund is
Managed--Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
The following financial highlights (with the excep-
tion of the six months ended April 30, 1994) have been audited by Deloitte &
Touche, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a Class A and Class B
share of common stock outstanding, respectively, total return, ratios to average
net assets and other supplemental data for the periods indicated. The
information is based on data contained in the financial statements. No Class C
shares were outstanding during the periods indicated.
<TABLE> <CAPTION>
CLASS A CLASS B
----------------------------------------------- ---------------------------------------------
SIX MONTHS FISCAL JULY 24, 1992* SIX MONTHS FISCAL JULY 24, 1992*
ENDED APRIL YEAR ENDED THROUGH ENDED APRIL YEAR ENDED THROUGH
30, 1994 OCTOBER 31, OCTOBER 31, 30, 1994 OCTOBER 31, OCTOBER 31,
(UNAUDITED) 1993+ 1992 (UNAUDITED) 1993+ 1992
------------- --------------- --------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................ $ 16.10 $ 10.65 $ 10.00 $ 15.94 $ 10.63 $ 10.00
------ ------ ------ ----------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment loss....... -- (.01) (.02) (.06) (.10) (.04)
Net realized and
unrealized gain on
investment and foreign
currency transactions..... .92 5.48 .67 .90 5.43 .67
------ ------ ------ ----------- ------- ------
Total from investment
operations................ .92 5.47 .65 .84 5.33 .63
------ ------ ------ ----------- ------- ------
LESS DISTRIBUTIONS:
Distributions in excess of
net investment income.... (.06) (.02) -- (.03) (.02) --
Distributions from net
realized gains........... (.21) -- -- (.21) -- --
Total distributions.... (.27) (.02) -- (.24) (.02) --
------ ------ ------ ----------- ------- ------
Net asset value, end of
period.................... $ 16.75 $ 16.10 $ 10.65 $ 16.54 $ 15.94 $ 10.63
------ ------ ------ ----------- ------- ------
------ ------ ------ ----------- ------- ------
TOTAL RETURN***........... 5.73% 51.39% 6.50% 5.28% 50.17% 6.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)..................... $ 98,901 $ 64,353 $ 13,918 $ 426,726 $ 250,997 $ 20,050
Average net assets
(000)..................... $ 86,830 $ 26,264 $ 12,884 $ 363,693 $ 74,590 $ 16,025
Ratios to average net
assets:
Expenses, including
distribution fees...... 1.35%** 1.63% 2.72%** 2.12%** 2.37% 3.52%**
Expenses, excluding
distribution fees...... 1.12%** 1.43% 2.52%** 1.12%** 1.37% 2.52%**
Net investment loss...... (.21)%** (.04)% (.75)%** (.97)%** (.83)% (1.55)%**
Portfolio turnover rate... 22% 44% 0% 22% 44% 0%
</TABLE>
------------------------
* Commencement of investment operations.
** Annualized.
*** Total return represents the change in net asset value from the first
day to the last day of each period reported and does not take into
account any sales charges. Total returns for periods of less than
one year are not annualized.
+ Calculated based upon average shares outstanding during the year.
5
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS LONG-TERM GROWTH OF CAPITAL. THE FUND
SEEKS TO ACHIEVE THIS OBJECTIVE BY INVESTING PRIMARILY IN EQUITY SECURITIES OF
CORPORATIONS DOMICILED IN THE PACIFIC BASIN REGION, INCLUDING, BUT NOT LIMITED
TO, JAPAN, AUSTRALIA, HONG KONG, SINGAPORE, SOUTH KOREA, MALAYSIA, THAILAND,
INDONESIA, THE PHILIPPINES AND NEW ZEALAND. CURRENT INCOME FROM DIVIDENDS AND
INTEREST WILL NOT BE AN IMPORTANT CONSIDERATION IN SELECTING PORTFOLIO
SECURITIES. THE FUND ANTICIPATES THAT UNDER NORMAL CONDITIONS AT LEAST 65% OF
ITS TOTAL ASSETS WILL CONSIST OF PACIFIC BASIN REGION CORPORATE SECURITIES,
PRIMARILY COMMON STOCKS AND OTHER SECURITIES CONVERTIBLE INTO COMMON STOCK.
THERE IS NO LIMIT ON THE PERCENTAGE OF FUND ASSETS THAT MAY BE INVESTED IN ANY
SINGLE COUNTRY. THE FUND RESERVES THE RIGHT AS A DEFENSIVE MEASURE TO HOLD OTHER
TYPES OF SECURITIES WITHOUT LIMIT, INCLUDING COMMERCIAL PAPER OF CORPORATIONS,
BANKERS' ACCEPTANCES, NON-CONVERTIBLE DEBT SECURITIES OR GOVERNMENT AND HIGH
QUALITY MONEY MARKET SECURITIES OF UNITED STATES AND NON-UNITED STATES ISSUERS,
OR CASH (FOREIGN CURRENCIES OR UNITED STATES DOLLARS), IN SUCH PROPORTIONS AS,
IN THE OPINION OF THE FUND'S INVESTMENT ADVISER, PREVAILING MARKET, ECONOMIC OR
POLITICAL CONDITIONS WARRANT. A PORTION OF THE PORTFOLIO NORMALLY WILL BE HELD
IN DOLLARS OR SHORT-TERM INTEREST-BEARING DOLLAR-DENOMINATED SECURITIES TO
PROVIDE FOR POSSIBLE REDEMPTIONS. THERE CAN BE NO ASSURANCE THAT THE FUND'S
OBJECTIVE WILL BE ACHIEVED. See "Investment Objective and Policies" in the
Statement of Additional Information.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND 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. FUND
POLICIES THAT ARE NOT FUNDAMENTAL MAY BE MODIFIED BY THE BOARD OF DIRECTORS.
UNDER NORMAL CIRCUMSTANCES, THE FUND MAY INVEST UP TO 35% OF ITS TOTAL ASSETS
IN THE SECURITIES OF ISSUERS DOMICILED OUTSIDE OF THE PACIFIC BASIN REGION. For
example, the Fund may invest in a company outside of the Pacific Basin region
when the Fund's investment adviser believes at the time of investment that the
value of the company's securities may be enhanced by conditions or developments
in the Pacific Basin region even though the company's production facilities are
located outside of the Pacific Basin region.
THE FUND MAY INVEST IN SECURITIES NOT LISTED ON SECURITIES EXCHANGES. THESE
SECURITIES WILL GENERALLY HAVE AN ESTABLISHED MARKET (SUCH AS THE
OVER-THE-COUNTER MARKET), THE DEPTH AND LIQUIDITY OF WHICH MAY VARY FROM TIME TO
TIME AND FROM SECURITY TO SECURITY. THE FUND MAY INVEST UP TO 5% OF ITS NET
ASSETS (DETERMINED AT THE TIME OF INVESTMENT) IN SECURITIES FOR WHICH MARKET
QUOTATIONS ARE NOT READILY AVAILABLE AND IN REPURCHASE AGREEMENTS WHICH HAVE A
MATURITY LONGER THAN SEVEN DAYS. THE FUND MAY FROM TIME TO TIME LEND ITS
PORTFOLIO SECURITIES TO BROKERS OR DEALERS, BANKS OR OTHER RECOGNIZED
INSTITUTIONAL BORROWERS OF SECURITIES AND MAY INVEST TO A LIMITED EXTENT IN
SECURITIES OF COMPANIES THAT HAVE BEEN IN EXISTENCE FOR LESS THAN THREE YEARS
AND IN SECURITIES OF OTHER REGISTERED INVESTMENT COMPANIES. See "Investment
Restrictions" in the Statement of Additional Information.
In addition to analyzing the companies in which investments are made, the
investment adviser also considers such factors as prospects for economic growth
for each foreign country; expected levels of inflation and interest rates;
government policies influencing business conditions; the range of individual
investment opportunities available to international investors; and other
pertinent financial, tax, social, political and national factors--all in
relation to the prevailing prices of securities in each country.
IN ADDITION TO PURCHASING EQUITY SECURITIES OF PACIFIC BASIN REGION ISSUERS,
THE FUND MAY INVEST IN AMERICAN DEPOSITARY RECEIPTS (ADRS), EUROPEAN DEPOSITARY
RECEIPTS (EDRS) OR OTHER SECURITIES CONVERTIBLE INTO SECURITIES OF
6
<PAGE>
CORPORATIONS DOMICILED IN PACIFIC BASIN REGION COUNTRIES. These securities may
not necessarily be denominated in the same currency as the securities into which
they may be converted. Generally, ADRs, in registered form, are designed for use
in the United States securities markets and EDRs, in bearer form, are designed
for use in European securities markets.
THE FUND MAY INVEST UP TO 5% OF ITS NET ASSETS IN WARRANTS. A warrant gives
the holder thereof the right to subscribe by a specified date to a stated number
of shares of stock of the issuer at a fixed price. Warrants tend to be more
volatile than the underlying stock, and if at a warrant's expiration date the
stock is trading at a price below the price set in the warrant, the warrant will
expire worthless. Conversely, if at the expiration date the underlying stock is
trading at a price higher than the price set in the warrant, the Fund can
acquire the stock at a price below its market value.
IN ADDITION TO THE PACIFIC BASIN REGION COUNTRIES LISTED ABOVE, THE FUND MAY
INVEST DIRECTLY IN TAIWAN, INDIA, PAKISTAN, VIETNAM AND THE PEOPLE'S REPUBLIC OF
CHINA, IF AND WHEN THEIR RESPECTIVE STOCK MARKETS BECOME OPEN TO DIRECT FOREIGN
INVESTMENT AND SUBJECT TO LOCAL RESTRICTIONS. COMPANIES LOCATED IN THOSE
COUNTRIES IN WHICH THE FUND MIGHT INVEST MAY HAVE LIMITED PRODUCT LINES, MARKETS
OR FINANCIAL RESOURCES AND MAY LACK MANAGEMENT DEPTH. THE SECURITIES OF THESE
COMPANIES MAY HAVE LIMITED MARKETABILITY AND MAY BE SUBJECT TO MORE ABRUPT OR
ERRATIC MARKET MOVEMENTS THAN SECURITIES OF LARGER, MORE ESTABLISHED COMPANIES
OR THE MARKET AVERAGES IN GENERAL. Due to restrictions on direct investment in
equity securities in those countries, the Fund may currently invest in such
markets only through a limited number of approved vehicles. At present, this
includes investments through listed and unlisted funds. Investment in such funds
is subject to limitations under the Investment Company Act of 1940, as amended
(the Investment Company Act), and market availability and may involve the
payment of substantial premiums above the value of such funds' portfolio
securities. The yield of such securities will be reduced by operating expenses
of such funds. To the extent to which such vehicles would be treated as "passive
foreign investment companies" under the Internal Revenue Code of 1986, as
amended (the Internal Revenue Code), the Fund may further limit its investments
in order to avoid adverse U.S. federal income tax consequences.
AS INDICATED ABOVE, WHEN CONDITIONS DICTATE A DEFENSIVE STRATEGY, THE FUND
MAY INVEST, WITHOUT LIMIT, IN HIGH QUALITY MONEY MARKET INSTRUMENTS OF UNITED
STATES AND NON-UNITED STATES ISSUERS (INCLUDING, WITH RESPECT TO UNITED STATES
ISSUERS, REPURCHASE AGREEMENTS MATURING IN SEVEN DAYS OR LESS). The Fund will
only invest in money market instruments that have short term ratings in at least
the second highest category by at least one Nationally Recognized Statistical
Rating Organization (NRSRO) or are issued by companies that have outstanding
debt securities rated BBB or higher, or its equivalent by an NRSRO or in unrated
securities of issuers that the Fund's investment adviser has determined to be of
comparable quality. Subsequent to its purchase by the Fund, a security 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 Investors Service
Inc. (Moodys) or BBB by Standard & Poor's Ratings Group (S&P), for example,
although considered to be investment grade, lack outstanding investment
characteristics and, in fact, have speculative characteristics. See "Description
of Security Ratings" in the Statement of Additional Information.
SPECIAL CONSIDERATIONS AND RISKS OF INVESTING IN FOREIGN SECURITIES
FOREIGN SECURITIES INVOLVE CERTAIN RISKS, WHICH SHOULD BE CONSIDERED
CAREFULLY BY AN INVESTOR IN THE FUND. THESE RISKS INCLUDE POLITICAL OR ECONOMIC
INSTABILITY IN THE COUNTRY OF THE ISSUER, THE DIFFICULTY OF PREDICTING
INTERNATIONAL TRADE PATTERNS, THE POSSIBILITY OF IMPOSITION OF EXCHANGE CONTROLS
AND THE RISK OF CURRENCY FLUCTUATIONS. Such securities may be subject to greater
fluctuations in price than securities issued by U.S. corporations or issued or
guaranteed by the U.S. Government, its instrumentalities or agencies. In
addition, there may be less publicly available information about a foreign
company than about a domestic company. Foreign companies generally are not
subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to domestic companies. There is generally less
7
<PAGE>
government regulation of securities exchanges, brokers and listed companies
abroad than in the United States and there is a possibility of expropriation,
confiscatory taxation or diplomatic developments which could affect investment.
ALTHOUGH THE FUND INTENDS TO INVEST PRIMARILY IN EQUITY SECURITIES, IT MAY
INVEST FROM TIME TO TIME IN DEBT SECURITIES OF FOREIGN ISSUERS. In many
instances, foreign debt securities may provide higher yields than securities of
domestic issuers which have similar maturities and quality. These investments,
however, may be less liquid than the securities of U.S. corporations. In the
event of default of any such foreign debt obligations, it may be more difficult
for the Fund to obtain or enforce a judgment against the issuers of such
securities.
ADDITIONAL COSTS COULD BE INCURRED IN CONNECTION WITH THE FUND'S
INTERNATIONAL INVESTMENT ACTIVITIES. Foreign brokerage commissions are generally
higher than in the United States. Increased custodian costs as well as
administrative difficulties (such as the applicability of foreign laws to
foreign custodians in various circumstances) may be associated with the
maintenance of assets in foreign jurisdictions.
If the security is denominated in a foreign currency, it will be affected by
changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversions between currencies. A
change in the value of any such currency against the U.S. dollar will result in
a corresponding change in the U.S. dollar value of the Fund's securities
denominated in that currency. Such changes also will affect the Fund's income
and distributions to shareholders. In addition, although the Fund will receive
income in such currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the exchange rate for any such
currency declines after the Fund's income has been accrued and translated into
U.S. dollars, the Fund could be required to liquidate portfolio securities to
make such distributions, particularly in instances in which the amount of income
the Fund is required to distribute is not immediately reduced by the decline in
such currency. Similarly, if an exchange rate declines between the time the Fund
incurs expenses in U.S. dollars and the time such expenses are paid, the amount
of such currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in any such
currency of such expenses at the time they were incurred. The Fund may, but need
not, enter into futures contracts on foreign currencies, forward foreign
currency exchange contracts and options on foreign currencies for hedging
purposes, including: locking-in the U.S. dollar price of the purchase or sale of
securities denominated in a foreign currency; locking-in the U.S. dollar
equivalent of interest or dividends to be paid on such securities which are held
by the Fund; and protecting the U.S. dollar value of such securities which are
held by the Fund.
SHAREHOLDERS SHOULD BE AWARE THAT INVESTING IN THE EQUITY AND FIXED-INCOME
MARKETS OF DEVELOPING COUNTRIES GENERALLY INVOLVES EXPOSURE TO ECONOMIES THAT
ARE GENERALLY LESS DIVERSE AND MATURE, AND TO POLITICAL SYSTEMS WHICH CAN BE
EXPECTED TO HAVE LESS STABILITY THAN THOSE OF DEVELOPED COUNTRIES. HISTORICAL
EXPERIENCE INDICATES THAT THE MARKETS OF DEVELOPING COUNTRIES HAVE BEEN MORE
VOLATILE THAN THE MARKETS OF DEVELOPED COUNTRIES. THE FUND IS ALSO SUSCEPTIBLE
TO POLITICAL AND ECONOMIC FACTORS AFFECTING ISSUERS IN PACIFIC BASIN COUNTRIES.
MANY OF THE COUNTRIES IN THE PACIFIC BASIN ARE DEVELOPING BOTH POLITICALLY AND
ECONOMICALLY AND MAY HAVE RELATIVELY UNSTABLE GOVERNMENTS, ECONOMIES BASED ON
ONLY A FEW COMMODITIES OR INDUSTRIES, AND SECURITIES MARKETS TRADING
INFREQUENTLY OR IN LOW VOLUME. SOME PACIFIC BASIN COUNTRIES MAY ALSO RESTRICT
THE EXTENT TO WHICH FOREIGNERS MAY INVEST IN THEIR SECURITIES MARKETS.
HEDGING AND INCOME ENHANCEMENT STRATEGIES
THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING INVESTING
IN DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE INCOME. These strategies currently include the use of options, forward
currency exchange contracts and futures contracts and options thereon. 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. See "Investment Objective and Policies" and
"Taxes" in the Statement of Additional Information.
8
<PAGE>
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 objective and policies.
OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON
SECURITIES AND CURRENCIES THAT ARE TRADED ON U.S. OR FOREIGN SECURITIES
EXCHANGES OR IN THE OVER-THE-COUNTER MARKET TO ENHANCE INCOME OR TO HEDGE THE
FUND'S PORTFOLIO. THESE OPTIONS WILL BE ON EQUITY SECURITIES, FINANCIAL INDICES
(E.G., S&P 500) AND FOREIGN CURRENCIES. The Fund may write covered put and call
options to generate additional income through the receipt of premiums, purchase
put options in an effort to protect the value of a security that it owns against
a decline in market value and purchase call options in an effort to protect
against an increase in the price of securities (or currencies) it intends to
purchase. The Fund may also purchase put and call options to offset previously
written put and call options of the same series. See "Investment Objective and
Policies--Options on Securities" in the Statement of Additional Information.
A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE RIGHT
FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE SECURITIES OR CURRENCY SUBJECT TO
THE OPTION AT A SPECIFIED PRICE (THE EXERCISE PRICE OR STRIKE PRICE). The writer
of a call option, in return for the premium, has the obligation, upon exercise
of the option, to deliver, depending upon the terms of the option contract, the
underlying securities or a specified amount of cash 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 or currency in
excess of the exercise price of the option during the period that the option is
open.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES OR CURRENCY SUBJECT TO THE
OPTION TO THE WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of
the put option, in return for the premium, has the obligation, upon exercise of
the option, to acquire the securities or currency underlying the option at the
exercise price. The Fund might, therefore, be obligated to purchase the
underlying securities or currency for more than their current market price.
THE FUND WILL WRITE ONLY "COVERED" OPTIONS. An option is covered if, so long
as the Fund is obligated under the option, it owns an offsetting position in the
underlying security or currency or maintains cash, U.S. Government securities or
other liquid high-grade debt obligations with a value sufficient at all times to
cover its obligations in a segregated account. See "Investment Objective and
Policies--Options on Securities" in the Statement of Additional Information.
There is no limitation on the amount of call options the Fund may write. The
Fund has undertaken with certain state securities commissions that, so long as
shares of the Fund are registered in those states, it will not (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 aggregate value of the obligations
underlying put options will not exceed 50% of the Fund's assets.
FORWARD CURRENCY EXCHANGE CONTRACTS
THE FUND MAY ENTER INTO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO
PROTECT THE VALUE OF ITS ASSETS AGAINST FUTURE CHANGES IN THE LEVEL OF CURRENCY
EXCHANGE RATES. The Fund may enter into such contracts on a spot, i.e., cash,
basis at the rate then prevailing in the currency exchange market or on a
forward basis, by entering into a forward contract to purchase or sell currency.
A forward contract on foreign currency is an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days agreed
upon by the parties from the date of the contract at a price set on the date of
the contract.
9
<PAGE>
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 a forward contract 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 or in a
currency bearing a substantial correlation to the value of that currency (cross
hedge). Although there are no limits on the number of forward contracts which
the Fund may enter into, the Fund may not position hedge (including cross
hedges) with respect to a particular currency for an amount greater than the
aggregate market value (determined at the time of making any sale of forward
currency) of the securities being hedged. See "Investment Objective and
Policies--Risks Related to Forward Currency Exchange Contracts" in the Statement
of Additional Information.
FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE FOR CERTAIN
HEDGING, RETURN ENHANCEMENT AND RISK MANAGEMENT PURPOSES IN ACCORDANCE WITH
REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION. These futures contracts
and related options will be on financial indices and foreign currencies or
groups of foreign currencies such as the European Currency Unit. A European
Currency Unit is a basket of specified amounts of the currencies of certain
member states of the European Economic Community, a Western European economic
cooperative organization including France, Germany, the Netherlands and the
United Kingdom. A financial futures contract is an agreement to purchase or sell
an agreed amount of securities or currencies at a set price for delivery in the
future.
The Fund may not purchase or sell futures contracts and related options for
return enhancement or risk management purposes, if immediately thereafter the
sum of the amount of initial margin deposits on the Fund's existing futures and
options on futures and premiums paid for such related options would exceed 5% of
the liquidation value of the Fund's total assets. The Fund may purchase and sell
futures contracts and related options, without limitation, for bona fide hedging
purposes. The value of all futures contracts sold will not exceed the total
market value of the Fund's portfolio.
THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND RELATED OPTIONS DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET AND
IS SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements in the
price of a futures contract and the movements in the index or price of the
currencies being hedged is imperfect and there is a risk that the value of the
indicies or currencies being hedged may increase or decrease at a greater rate
than the related futures contracts resulting in losses to the Fund. Certain
futures exchanges or boards of trade have established daily limits on the amount
that the price of futures contracts or related options may vary, either up or
down, from the previous day's settlement price. These daily limits may restrict
the Fund's ability to purchase or sell certain futures contracts or related
options on any particular day.
The Fund's ability to enter into futures contracts and options thereon is
limited by the requirements of the Internal Revenue Code for qualification as a
regulated investment company. See "Taxes" in the Statement of Additional
Information.
RISKS OF HEDGING AND INCOME ENHANCEMENT STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS AND IN CURRENCY EXCHANGE
TRANSACTIONS 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 predictions of movements in the direction of the securities, foreign
currency 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, foreign currency 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 currency markets; (2) imperfect
correlation between the price of options and futures contracts and options
10
<PAGE>
thereon and movements in the prices of the securities or currencies 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
segregate securities in connection with hedging transactions. See "Taxes" in the
Statement of Additional Information.
The Fund will generally purchase options and futures on an exchange only if
there appears to be a liquid secondary market for such options or futures; the
Fund will generally purchase OTC options only if management believes that the
other party to the options will continue to make a market for such options.
However, there can be no assurance that a liquid secondary market will continue
to exist or that the other party will continue to make a market. Thus, it may
not be possible to close an options or futures transaction. The inability to
close options and futures positions also could have an adverse impact on the
Fund's ability to effectively hedge its portfolio. There is also the risk of
loss by the Fund of margin deposits or collateral in the event of bankruptcy of
a broker with whom the Fund has an open position in an option, a futures
contract or related option.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Fund will enter into repurchase agreements, whereby the seller of the
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 extend over a number of months. The
Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the purchase price of the underlying securities
(including accrued interest earned thereon). 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.
pursuant to an order of the Securities and Exchange Commission (SEC). See
"Investment Objective and Policies--Repurchase Agreements" in the Statement of
Additional Information.
BORROWING
The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) from banks for temporary,
extraordinary or emergency purposes or for the clearance of transactions. The
Fund may pledge up to 20% of its total assets to secure these borrowings.
ILLIQUID SECURITIES
The Fund may invest up to 5% 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), securities that are not readily marketable in securities markets
either within or outside of the United States and privately placed commercial
paper. Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933, as amended (the Securities Act) 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. 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 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, at
the Fund's
11
<PAGE>
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."
PORTFOLIO TURNOVER
As a result of the Fund's investment policies, its portfolio turnover rate
may exceed 100%, although the rate is not expected to exceed 200%. 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. In addition, high portfolio turnover may result in increased
short-term capital gains, which, when distributed to shareholders, are treated
as ordinary income. See "Taxes, Dividends and Distributions."
WHEN-ISSUED AND 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 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. While
the Fund will only purchase securities on a when-issued or delayed delivery
basis with the intention of acquiring the securities, the Fund may sell the
securities before the settlement date, if it is deemed advisable. At the time
the Fund makes the commitment to purchase securities on a when-issued or delayed
delivery basis, the Fund will record the transaction and thereafter reflect the
value, each day, of such security in determining the net asset value of the
Fund. At the time of delivery of the securities, the value may be more or less
than the purchase price. 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 Custodian will likewise segregate securities sold on a delayed
delivery basis. Subject to this requirement, the Fund may purchase securities on
such basis without limit. See "Investment Objective and Policies--When-Issued
and Delayed Delivery Securities" in the Statement of Additional Information.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral or secures a
letter of credit in favor of the Fund in an amount equal to at least 100%,
determined daily, of the market value of the securities loaned which are
maintained in a segregated account pursuant to applicable regulations. During
the time portfolio securities are on loan, the borrower will pay the Fund an
amount equivalent to any dividend or interest paid on such securities and the
Fund may invest the cash collateral and earn additional income, or it may
receive an agreed-upon amount of interest income from the borrower. As with any
extensions of credit, there are risks of delay in recovery and in some cases
loss of rights in the collateral should the borrower of the securities fail
financially. As a matter of fundamental policy, the Fund cannot lend more than
30% of the value of its total assets. See "Investment Objective and
Policies--Lending of Securities" in the Statement of Additional Information.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
12
<PAGE>
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, 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 October 31, 1993, the total expenses as a
percentage of average net assets for the Fund's Class A and Class B shares were
1.63% and 2.37%, respectively. See "Financial Highlights." No Class C shares
were outstanding during the fiscal year ended October 31, 1993.
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 .75 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 October 31, 1993, the Fund paid management fees to PMF
of 0.75% of the Fund's average net assets. See "Manager" in the Statement of
Additional Information.
As of June 30, 1994, PMF served as the manager to 37 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 29 closed-end investment companies with aggregate assets of
approximately $47 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.
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 Daniel J. Duane, a Managing
Director and Chief Investment Officer for Global Equity Investments of
Prudential Investment Advisors, a unit of PIC. Mr. Duane has responsibility for
the day-to-day management of the Fund's portfolio. Mr. Duane has managed the
Fund's portfolio since its inception in July 1992 and has been employed by PIC
as a portfolio manager since 1990. He was formerly with First Investors Asset
Management from 1986 to 1990 as senior portfolio manager and head of global
equity investments. Mr. Duane is a Chartered Financial Analyst. Mr. Duane also
serves as the portfolio manager of the Prudential Series Fund Global Equity
Portfolio, Prudential Global Fund, Prudential Europe Growth Fund and Prudential
Global Genesis Fund.
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 MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW
YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE FUND. IT IS
A WHOLLY-OWNED SUBSIDIARY OF PMF.
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 CLASS B AND
CLASS C SHARES OF THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF
PRUDENTIAL.
13
<PAGE>
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 SEPARATE DISTRIBUTION AGREEMENTS
(THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY, THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE FUND'S CLASS A, CLASS B AND
CLASS C SHARES. 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 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 PMFD FOR ITS DISTRIBUTION-RELATED
ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The Class A Plan provides
that (i) up to .25 of 1% of the 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. PMFD 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 October 31, 1994.
For the fiscal year ended October 31, 1993, PMFD received payments of $52,529
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 October 31, 1993, PMFD also received
approximately $1,305,500 in initial sales charges.
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 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 October 31, 1993, Prudential Securities incurred
distribution expenses of approximately $6,693,000 under the Class B Plan and
received $745,906 from the Fund under the Class B Plan. In addition Prudential
Securities received approximately $168,400 in contingent deferred sales charges
from redemptions of Class B shares during this period. No Class C shares were
outstanding for the fiscal year ended October 31, 1993. Prior to the date of
this Prospectus, the Class A and Class B Plans operated as "reimbursement type"
plans and, in the case of Class B, provided for the reimbursement of
distribution expenses incurred in current and prior years. See "Distributor" in
the Statement of Additional Information.
For the fiscal year ended October 31, 1993, the Fund paid distribution
expenses of .20% and 1.00% of the average net assets of the Class A and Class B
shares, respectively. The Fund records all payments made under the Plans as
expenses in the calculation of net investment income. No Class C shares were
outstanding during the fiscal year ended October 31, 1993.
14
<PAGE>
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 allocable to a particular class.
The distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the 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 of a majority of the outstanding shares of the applicable class of the Fund.
The Fund will not be obligated to pay expenses 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 which 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. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
FEE WAIVERS AND SUBSIDY
PMF may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. Fee waivers
and expense subsidies will increase the Fund's total return. See "Performance
Information" in the Statement of Additional Information and "Fund Expenses."
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. For
valuation purposes, quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents. THE BOARD OF DIRECTORS HAS FIXED THE
SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE FUND'S NAV TO BE AS OF 4:15
P.M., NEW YORK TIME.
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 Fund's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
15
<PAGE>
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. See "Net Asset Value" in the Statement of
Additional Information.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. It is
expected, however, that the NAV of the three 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.
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 may also from time to time
advertise its 30-day yield. See "Performance Information" in the Statement of
Additional Information. 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. The Fund will include performance data for each class of shares of
the Fund in any advertisement or information including performance data of the
Fund. 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."
16
<PAGE>
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY THE
FUND WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS.
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 are subject to special tax provisions that may result in the taxation of
certain gains realized by the Fund. See "Taxes" in the Statement of Additional
Information.
In addition, 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 may 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.
TAXATION OF SHAREHOLDERS
All dividends out of net investment income, together with distributions of
net short-term capital gains, will be taxable as ordinary income to the
shareholder whether or not reinvested. Any net long-term capital gains
distributed to shareholders will be taxable as such to the shareholder, 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 corporate
shareholders is currently the same as the maximum tax rate for ordinary income.
The maximum long-term capital gains rate for individual shareholders is
currently 28% and the maximum tax rate for ordinary income is 39.6%.
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.
Any gain or loss realized upon a sale or redemption of shares by a
shareholder who is not a dealer in securities will 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 short-term capital loss will
be treated as long-term capital loss to the extent of any capital gain
distributions received by the shareholder regardless of the length of time such
shares were held.
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 urged 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 U.S. Treasury Regulations, the Fund is required to withhold and remit
to the U.S. Treasury 31% of dividend, capital gain income and redemption
proceeds, payable 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.
17
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO PAY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY, AND MAKE
DISTRIBUTIONS OF ANY CAPITAL GAINS IN EXCESS OF NET LONG-TERM CAPITAL LOSSES ON
AN ANNUAL BASIS. 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. Distribution 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., Attn: Account Maintenance Unit, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. The Fund will notify each shareholder after
the close of the Fund's taxable year both of the dollar amount and the taxable
status of that year's dividends and distributions on a per share basis. If you
hold shares through Prudential Securities, you should contact your financial
advisor to elect to receive dividends and distributions in cash.
WHEN THE FUND GOES "EX-DIVIDEND," ITS NAV IS REDUCED BY THE AMOUNT OF THE
DIVIDEND OR DISTRIBUTION. 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 DISTRIBUTION. YOU SHOULD,
THEREFORE, CONSIDER THE TIMING OF DIVIDENDS AND DISTRIBUTIONS WHEN MAKING YOUR
PURCHASES.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON AUGUST 14, 1991. THE FUND IS
AUTHORIZED TO ISSUE 2 BILLION SHARES OF COMMON STOCK, $.001 PAR VALUE PER SHARE,
DIVIDED INTO THREE CLASSES, DESIGNATED CLASS A, CLASS B AND CLASS C COMMON STOCK
EACH OF WHICH CONSISTS OF 666,666,666 2/3 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 bears different
distribution expenses, (ii) each class has exclusive voting rights with respect
to its distribution and service plan (except that the Fund has agreed with the
SEC in connection with the offering of a conversion feature on Class B shares to
submit any amendment of the Class A Plan to both Class A and Class B
shareholders), (iii) each class has a different exchange privilege and (iv) only
Class B shares have a conversion feature. See "How the Fund is
Managed--Distributor." Pursuant to an order of the SEC, the Fund is permitted to
issue and sell multiple classes of common stock. Currently, the Fund is offering
three classes, designated Class A, Class B and Class C shares. In accordance
with the Fund's Articles of Incorporation, the Board of Directors may authorize
the creation of additional series of common stock and classes within such
series, with such preferences, privileges, limitations and voting and dividend
rights as the Board may determine.
The Board of Directors may increase or decrease the number of authorized
shares. 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
18
<PAGE>
stock of the Fund is entitled to its portion of all of the Fund's assets after
all debts and expenses of the Fund have been paid. Since Class B and Class C
shares generally bear higher distribution expenses than Class A shares, the
liquidation proceeds to shareholders of those classes are likely to be lower
than to Class A shareholders. 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, FOR EXAMPLE, THE ELECTION OF DIRECTORS IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OR MORE
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. Copies of the Registration Statement may be obtained at a
reasonable charge from the SEC or may be examined, without charge, at the office
of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
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 08966-5020. 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
through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment is $50. See "Shareholder Services" below.
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."
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."
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must first telephone PMFS to receive an account number at (800) 225-1852
(toll-free). The following information will be requested: your name, address,
tax
19
<PAGE>
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 Pacific Growth 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 4:15
P.M., New York time, on a business day, you may purchase shares of the Fund as
of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Pacific Growth
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.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS 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% Initial sales charge waived or reduced
the public offering price (Currently being for certain purchases
charged at a rate
of .25 of 1%)
CLASS B Maximum contingent deferred sales charge 1% Shares convert to Class A shares
or CDSC of 5% of the lesser of the approximately seven years after purchase
amount invested or the redemption
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of the 1% Shares do not convert to another class
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"
20
<PAGE>
below) and (5) the fact that Class B shares automatically convert to Class A
shares approximately seven years after purchase (see "Conversion Feature--Class
B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 5% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 7 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to a
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 fee on Class A
shares. This does not take into account the time value of money, which further
reduces the impact of the higher Class B or Class C distribution-related fee on
the investment, fluctuations in net asset value, the effect of the return on the
investment over this period of time or redemptions during which 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:
<TABLE> <CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- -------------------------------------------------------------- --------------------- ----------------- -----------------
<S> <C> <C> <C>
$0 to $24,999................................................. 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 $249,000.......................................... 3.25 3.36 3.00
$250,000 to $499,999.......................................... 2.50 2.56 2.40
$500,000 to $999,999.......................................... 2.00 2.04 1.90
$1,000,000 and above.......................................... None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act.
21
<PAGE>
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 money
market funds other than those acquired pursuant to the exchange privilege) or
1,000 eligible employees or members. In the case of Benefit Plans whose accounts
are held directly with the Transfer Agent or Prudential Securities and for which
the Transfer Agent or Prudential Securities does individual account record
keeping (Direct Account Benefit Plans) and Benefit Plans sponsored by PSI or its
subsidiaries (PSI or Subsidiary Prototype Benefit Plans), Class A shares may be
purchased at NAV by participants who are repaying loans made from such plans to
the participant.
Prudential Retirement Accumulation Program 401(k) Plan. Class A shares may
be purchased at net asset value, with a waiver of the initial sales charge, by
or on behalf of participants in the Prudential Retirement Accumulation Program
401(k) Plan for which the Transfer Agent or Prudential Securities provides
recordkeeping services (PruRap Plan) provided that (i) for existing plans, the
plan has existing assets of $1 million or more, as measured on the last business
day of the month, invested in shares of Prudential Mutual Funds (excluding money
market funds other than those acquired pursuant to the exchange privilege) held
at the Transfer Agent or Prudential Securities and (ii) for new plans, the plan
initially invests $1 million or more in shares of non-money market Prudential
Mutual Funds or has at least 1,000 eligible employees or members.
Special Rules Applicable to Retirement Plans. After a Benefit Plan or the
PruRap plan qualifies to purchase Class A shares at NAV, all subsequent
purchases will be made at NAV.
Miscellaneous Waivers. In addition, Class A shares may be purchased at NAV,
through Prudential Securities or the Transfer Agent, by the following persons:
(a) Directors and officers of the Fund and other Prudential Mutual Funds, (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 90 days
of the commencement of the financial adviser's employment at Prudential
Securities, (ii) the purchase is made with proceeds of a redemption of shares of
any open-end, non-money market fund sponsored by the financial adviser's
previous employer (other than a fund which imposes a distribution or service fee
of .25 of 1% or less) on which no deferred sales load, fee or other charge was
imposed on redemption and (iii) the financial adviser served as the client's
broker on the previous purchases.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
purchased 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.
22
<PAGE>
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, Prudential Securities or Prusec.
Although there is no sales charge imposed at the time of purchase, redemption of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
HOW TO SELL YOUR SHARES
YOU CAN REDEEM SHARES OF THE FUND 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 REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, 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 Prudential Preferred Financial 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
23
<PAGE>
rules of the SEC. Securities will be readily marketable and 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 has, however, 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 the 90-day period for any one
shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board of
Directors may redeem all of the shares of any shareholder, other than 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
any such shareholder 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 involuntary redemption.
30-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 30 days after the
date of redemption. No sales charge will apply to such repurchases. You will
receive pro rata credit for any contingent deferred sales charge paid in
connection with the redemption of Class B or Class C shares. You must notify the
Fund's Transfer Agent, either directly or through Prudential Securities or
Prusec, at the time the repurchase privilege is exercised that you are entitled
to credit for the contingent deferred sales charge previously paid. Exercise of
the repurchase privilege will not affect federal income tax treatment of any
gain realized upon redemption. If the redemption resulted in a loss, some or all
of the loss, depending on the amount reinvested, will not be allowed for federal
income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares purchased
through reinvestment of dividends or distributions are not subject to CDSC. The
amount of any contingent deferred sales charge will be paid to and retained by
the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of the
Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of 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."
24
<PAGE>
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
<TABLE> <CAPTION>
CONTINGENT DEFERRED
SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ------------------------------------------------------------------------- -----------------------
<S> <C>
First.................................................................... 5.0%
Second................................................................... 4.0%
Third.................................................................... 3.0%
Fourth................................................................... 2.0%
Fifth.................................................................... 1.0%
Sixth.................................................................... 1.0%
Seventh.................................................................. None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Fund shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
then of amounts representing shares acquired prior to July 1, 1985, and finally,
of amounts representing the cost of shares held for the longest period of time
within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC
will be waived in the case of a redemption following the death or disability of
a shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), or a trust, at the time of death or initial
determination of disability, provided that the shares were purchased prior to
death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement:
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (i.e.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on
25
<PAGE>
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
Directors 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.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares approximately
seven years after purchase. It is currently anticipated that conversions will
occur during the months of February, May, August and November commencing in or
about February 1995. Conversions will be effected at relative net asset value
without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula; (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described 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."
26
<PAGE>
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment 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 described above will not be implemented and,
consequently, the first conversion of Class B shares will not occur before
February, 1995, but as soon thereafter as practicable. At that time all amounts
representing Class B shares then outstanding for at least seven years will
automatically convert to Class A shares, together with all shares or amounts
representing Class B shares acquired through the automatic reinvestment of
dividends and distributions then held in your account.
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.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET
FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A,
CLASS B AND CLASS C SHARES 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 that imposed by the fund in
which shares are initially purchased and will be calculated from the first day
of the month after the initial purchase, excluding the time shares were held in
a money market fund. Class B and Class C shares may not be exchanged into money
market funds other than Prudential Special Money Market Fund. For purposes of
calculating the holding period applicable to the Class B conversion feature, the
time period during which Class B shares were held in a money market fund will be
excluded. See "Conversion Feature--Class B Shares" above. An exchange will be
treated as a redemption and purchase for tax purposes. See "Shareholder
Investment Account--Exchange Privilege" in the Statement of Additional
Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. ALL EXCHANGES WILL BE MADE ON THE BASIS OF THE
RELATIVE NAV OF THE TWO FUNDS NEXT DETERMINED AFTER THE REQUEST IS RECEIVED IN
GOOD ORDER. THE EXCHANGE PRIVILEGE IS AVAILABLE ONLY IN STATES WHERE THE
EXCHANGE MAY LEGALLY BE MADE.
27
<PAGE>
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL PACIFIC 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. Commencing in or about February 1995, 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. It is
currently anticipated that this exchange will occur quarterly in February, May,
August and November. Eligibility for this exchange privilege will be calculated
on the business day prior to the date of the exchange. Amounts representing
Class B or Class C shares which are not subject to a CDSC include the following:
(1) amounts representing Class B or Class C shares acquired pursuant to the
automatic reinvestment of dividends and distributions, (2) amounts representing
the increase in the net asset value above the total amount of payments for the
purchase of Class B or Class C shares and (3) amounts representing Class B or
Class C shares held beyond the applicable CDSC period. Class B and Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities or Prusec that they are eligible for this special exchange
privilege.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you can
take advantage of the following additional services and privileges:
. AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
. AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Fund's shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
. TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or the
28
<PAGE>
Transfer Agent. If you are considering adopting such a plan, you should consult
with your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.
. SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges."
. REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at One Seaport
Plaza, New York, New York 10292. In addition, monthly unaudited financial data
are available upon request from the Fund.
. 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.
29
<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........................... 6
Investment Objective and Policies............ 6
Special Considerations and Risks of Investing
in Foreign Securities.......................... 7
Hedging and Income Enhancement Strategies.... 8
Other Investments and Policies............... 11
Investment Restrictions...................... 12
HOW THE FUND IS MANAGED........................ 13
Manager...................................... 13
Distributor.................................. 13
Fee Waivers and Subsidy...................... 15
Portfolio Transactions....................... 15
Custodian and Transfer and Dividend
Disbursing Agent............................... 15
HOW THE FUND VALUES ITS SHARES................. 15
HOW THE FUND CALCULATES PERFORMANCE............ 16
TAXES, DIVIDENDS AND DISTRIBUTIONS............. 17
GENERAL INFORMATION............................ 18
Description of Common Stock.................. 18
Additional Information....................... 19
SHAREHOLDER GUIDE.............................. 19
How to Buy Shares of the Fund................ 19
Alternative Purchase Plan.................... 20
How to Sell Your Shares...................... 23
Conversion Feature--Class B Shares........... 26
How to Exchange Your Shares.................. 27
Shareholder Services......................... 28
THE PRUDENTIAL MUTUAL FUND FAMILY.............. A-1
- ------------------------------------------------------
MF 157A 4445680
CUSIP NOS.: CLASS A: 743941 10 6
CLASS B: 743941 20 5
CLASS C: 743941 30 4
Prudential
Pacific Growth
Fund, Inc.
------------------------------------------
PRUDENTIAL MUTUAL FUNDS
BUILDING YOUR FUTURE
ON OUR STRENGTH
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
<TABLE> <CAPTION>
TAXABLE BOND FUNDS EQUITY FUNDS
<S> <C>
Prudential Adjustable Rate Securities Fund, Inc. Prudential Allocation Fund
Prudential GNMA Fund, Inc. Conservatively Managed Portfolio
Prudential Government Income Fund, Inc. Strategy Portfolio
Prudential Government Securities Trust Prudential Equity Fund, Inc.
Intermediate Term Series Prudential Equity Income Fund
Prudential High Yield Fund, Inc. Prudential Growth Opportunity Fund, Inc.
Prudential Structured Maturity Fund, Inc. Prudential IncomeVertible(R) Fund, Inc.
Income Portfolio Prudential Multi-Sector Fund, Inc.
Prudential U.S. Government Fund Prudential Strategist Fund, Inc.
The BlackRock Government Income Trust Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund Nicholas-Applegate Growth Equity Fund
California Series
MONEY MARKET FUNDS
California Income Series . Taxable Money Market Funds
Prudential Municipal Bond Fund Prudential Government Securities Trust
High Yield Series Money Market Series
Insured Series U.S. Treasury Money Market Series
Modified Term Series Prudential Special Money Market Fund
Prudential Municipal Series Fund Money Market Series
Arizona Series Prudential MoneyMart Assets
Florida Series . Tax-Free Money Market Funds
Georgia Series Prudential Tax-Free Money Fund
Maryland Series Prudential California Municipal Fund
Massachusetts Series California Money Market Series
Michigan Series Prudential Municipal Series Fund
Minnesota Series Connecticut Money Market Series
New Jersey Series Massachusetts Money Market Series
New York Series New Jersey Money Market Series
North Carolina Series New York Money Market Series
Ohio Series . Command Funds
Pennsylvania Series Command Money Fund
Prudential National Municipals Fund, Inc. Command Government Fund
GLOBAL FUNDS Command Tax-Free Fund
Prudential Europe Growth Fund, Inc. . Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Prudential Global Fund, Inc. Institutional Money Market Series
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
</TABLE>
A-1
<PAGE>
Filed Pursuant to Rule 497(c)
Registration No. 33-42391
PRUDENTIAL PACIFIC GROWTH FUND, INC.
Statement of Additional Information
dated August 1, 1994
Prudential Pacific Growth Fund, Inc. (the Fund) is an open-end, diversified
management investment company whose investment objective is long-term growth of
capital. The Fund seeks to achieve this objective by investing primarily in
common stocks, common stock equivalents (including warrants and convertible debt
securities) and other equity securities of companies doing business in or
domiciled in the Pacific Basin region. Under normal circumstances, the Fund
intends to invest at least 65% of its total assets in such securities. The Fund
may invest in equity securities of other companies and in non-convertible debt
securities and options on stocks, stock indices, foreign currencies and futures
contracts on foreign currencies and on financial or stock indices and may
purchase and sell futures contracts on foreign currencies and groups of
currencies so as to hedge its portfolio and to attempt to enhance income. There
can be no assurance that the Fund's investment objective will be achieved. See
"Investment Objective and Policies."
The Fund's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus dated August 1, 1994, a copy of
which may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE> <CAPTION>
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
--------- -----------------
<S> <C> <C>
Investment Objective and Policies............................................................ B-2 6
Investment Restrictions...................................................................... B-12 12
Directors and Officers....................................................................... B-14 13
Manager...................................................................................... B-17 13
Distributor.................................................................................. B-19 13
Portfolio Transactions and Brokerage......................................................... B-21 15
Purchase and Redemption of Fund Shares....................................................... B-22 19
Shareholder Investment Account............................................................... B-25 28
Net Asset Value.............................................................................. B-29 15
Taxes........................................................................................ B-29 17
Performance Information...................................................................... B-33 16
Custodian, Transfer and Dividend Disbursing Agent and Independent Accountants................ B-35 15
Description of Security Ratings.............................................................. B-35 --
Financial Statements......................................................................... B-37 --
Independent Auditor's Report................................................................. B-60 --
</TABLE>
- --------------------------------------------------------------------------------
MF 157 B
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is long-term growth of capital. It seeks to
achieve this objective by investing primarily in common stocks, common stock
equivalents (including warrants and convertible debt securities) and other
equity securities of companies doing business in or domiciled in the Pacific
Basin region, including but not limited to, Japan, Australia, Hong Kong,
Singapore, South Korea, Malaysia, Thailand, Indonesia, The Philippines and New
Zealand. There can be no assurance that the Fund's investment objective will be
achieved. See "How the Fund Invests--Investment Objective and Policies" in the
Prospectus.
OPTIONS ON SECURITIES
The Fund may purchase and write (i.e., sell) put and call options on
securities that are traded on U.S. or foreign securities exchanges or that are
traded in the over-the-counter markets. A call option is a short-term contract
pursuant to which the purchaser, in return for a premium paid, has the right to
buy the security underlying the option at a specified exercise price at any time
during the term of the option. The writer of the call option, who receives the
premium, has the obligation, upon exercise of the option, to deliver the
underlying security against payment of the exercise price. A put option is a
similar contract which gives the purchaser, in return for a premium, the right
to sell the underlying security at a specified price during the term of the
option. The writer of the put, who receives the premium, has the obligation to
buy the underlying security upon exercise at the exercise price. The Fund will
write put options only when the investment adviser desires to invest in the
underlying security. 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.
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,
U.S. Government securities or other liquid high-grade debt obligations in a
segregated account with its Custodian. A put option written by the Fund is
"covered" if the Fund maintains cash, U.S. Government securities or other liquid
high-grade debt obligations with a value equal to the exercise price in a
segregated account with its Custodian, or else holds on a share-for-share basis
a put of the same security as the put written where the exercise price of the
put held is equal to or greater than the exercise price of the put written.
If the writer of an 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 had 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 is generally required to pledge
for the benefit of the broker the underlying security or other assets in
accordance with the rules of the relevant exchange or clearinghouse, such as The
Options Clearing Corporation (OCC), an institution created to interpose itself
between buyers and sellers of options in the United States. Technically, the
clearinghouse assumes the other side of every purchase and sale transaction on
an exchange and, by doing so, guarantees the transaction.
B-2
<PAGE>
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 may be offset in whole or in
part if the Fund holds the underlying security 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 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.
OPTIONS ON SECURITIES INDICES. In addition to options on securities, the Fund
may also purchase and sell put and call options on securities indices traded on
U.S. or foreign securities exchanges or traded in the over-the-counter markets.
Options on securities indices are similar to options on securities except that,
rather than the right to take or make delivery of a security at a specified
price, an option on a securities index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the
securities 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 for
equity securities options, all settlements are in cash, and gain or loss depends
on price movements in the securities market generally (or in a particular
industry or segment of the market) rather than price movements in individual
securities.
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. 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 security, 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 security prices in the market generally or in an
industry or market segment rather than movements in the price of a particular
security. 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 securities 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 currently uses such
techniques in conjunction with the management of other mutual funds.
RISKS OF TRANSACTIONS IN OPTIONS
An 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
B-3
<PAGE>
which there appears to be an active secondary market, there is no assurance that
a liquid secondary market on an exchange will exist for any particular option,
or at any particular time, and for some options no secondary market on an
exchange or otherwise may exist. In such event it might not be possible to
effect closing transactions in particular options, with the result that the Fund
would have to exercise its options in order to realize any profit and would
incur brokerage commissions upon the exercise of call options and upon the
subsequent disposition of underlying securities acquired through the exercise of
call options or upon the purchase of underlying securities for the exercise of
put options. If the Fund as a covered call option writer is unable to effect a
closing purchase transaction in a secondary market, it will not be able to sell
the underlying security until the option expires or it delivers the underlying
security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle current
trading 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. The Fund intends to purchase and sell only those options which are
cleared by clearinghouses whose facilities are considered to be adequate to
handle the volume of options transactions.
RISKS OF OPTIONS ON INDICES
The Fund's purchase and sale of options on indices will be subject to risks
described above under "Risks of Transactions in Options." In addition, the
distinctive characteristics of options on indices create certain risks that are
not present with stock options.
Index prices may be distorted if trading of certain stocks 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
stocks 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 stocks sufficient to
minimize the likelihood of a trading halt in the index.
The ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop in all index option contracts. The
Fund will not purchase or sell any index option contract unless and until, in
the investment adviser's opinion, the market for such options has developed
sufficiently that the risk in connection with such transactions is not
substantially greater than the risk in connection with options on securities in
the index.
SPECIAL RISKS OF WRITING CALLS ON INDICES
Because exercises of index options are settled in cash, a call writer such as
the Fund 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. However, the Fund will write call options on
B-4
<PAGE>
indices only under the circumstances described below under "Limitations on
Purchase and Sale of Stock Options and Options on Stock Indices, Foreign
Currencies and Futures Contracts on Foreign Currencies."
Price movements in the Fund's portfolio probably will not correlate precisely
with movements in the level of the index and, therefore, the Fund bears the risk
that the price of the securities held by the Fund may not increase as much as
the index. In such event, the Fund would bear a loss on the call which is not
completely offset by movements in the price of the Fund's portfolio. It is also
possible that the index may rise when the Fund's portfolio of stocks does not
rise. If this occurred, the Fund would experience a loss on the call which is
not offset by an increase in the value of its portfolio and might also
experience a loss in its portfolio. However, because the value of a diversified
portfolio will, over time, tend to move in the same direction as the market,
movements in the value of the Fund in the opposite direction as the market would
be likely to occur for only a short period or to a small degree.
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
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
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 stocks 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 investment portfolio in order to make settlement in
cash, and the price of such investments 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.
If the Fund holds an index option and exercises it before final determination
of the closing index value for that day, it runs the risk that the level of the
underlying index may change before closing. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer. Although the Fund may
be able to minimize this risk by withholding exercise instructions until just
before the daily cutoff time or by selling rather than exercising an option when
the index level is close to the exercise price, it may not be possible to
eliminate this risk entirely because the cutoff times for index options may be
earlier than those fixed for other types of options and may occur before
definitive closing index values are announced.
RISKS OF OPTIONS ON FOREIGN CURRENCIES
Options on foreign currencies involve the currencies of two nations and
therefore, developments in either or both countries affect the values of options
on foreign currencies. Risks include those described in the Prospectus under
"How the Fund Invests--Special Considerations and Risks of Investing in Foreign
Securities," including government actions affecting currency valuation and the
movements of currencies from one country to another. The quantity of currency
underlying option contracts represent odd lots in a market dominated by
transactions between banks; this can mean extra transaction costs upon exercise.
Option markets may be closed while round-the-clock interbank currency markets
are open, and this can create price and rate discrepancies.
B-5
<PAGE>
RISKS RELATED TO FORWARD CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts in
several circumstances. 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 may be able to protect itself
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the 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 Fund's portfolio securities denominated in such foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the forward
contract is entered into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the successful execution of
a short-term hedging strategy is highly uncertain. The Fund does not intend to
enter into such forward contracts to protect the value of its portfolio
securities on a regular or continuous basis. The Fund does not intend to enter
into such forward contracts or maintain a net exposure to such contracts where
the consummation of the contracts would obligate the Fund to deliver an amount
of foreign currency in excess of the value of the Fund's portfolio securities or
other assets denominated in that currency. However, the Fund believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Fund will thereby be served. The
Fund's Custodian will place cash or liquid securities into a segregated account
of the Fund in an amount equal to the value of the Fund's total assets committed
to the consummation of forward foreign currency exchange contracts. If the value
of the securities placed in the segregated account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will equal the amount of the Fund's commitments with respect to such
contracts.
The Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the forward contract.
Accordingly, if a decision is made to sell the security and make delivery of the
foreign currency and if the market value of the security is less than the amount
of foreign currency that the Fund is obligated to deliver, then it would be
necessary for the Fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase).
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. Should forward contract prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent that the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward contract prices increase,
the Fund will suffer a loss to the extent that the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
B-6
<PAGE>
The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. Of course, the Fund is
not required to enter into such transactions with regard to its foreign
currency-dominated securities. It also should be recognized that this method of
protecting the value of the Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities which are unrelated to exchange rates. Additionally, although
such contracts tend to minimize the risk of loss due to a decline in the value
of the hedged currency, at the same time they tend to limit any potential gain
which might result should the value of such currency increase.
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors should
be aware of the costs of currency conversion. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference (the spread) between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
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 currency or group of currencies, the price of a
futures contract may move more or less than the price of the currencies being
hedged. In the case of futures contracts on securities indices, the correlation
between the price of the futures contract and the movements in the index may not
be perfect. Therefore, a correct forecast of currency rates, market trends or
international political 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. There is no guarantee that the price movements of the
portfolio securities denominated in foreign currencies will, in fact, correlate
with the price movements in the futures contract and thus provide an offset to
losses on a futures contract. Currently, currency futures contracts are
available on various foreign currencies including the Australian Dollar, British
Pound, Canadian Dollar, Japanese Yen, Swiss Franc, West German Mark and
Eurodollars. Index futures contracts are available on various U.S. and foreign
securities indices.
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
a requirement that all of the Fund's futures or options transactions constitute
bona fide hedging transactions within the meaning of the regulations of the
Commodity Futures Trading Commission (CFTC). The Fund will use currency futures
and options on futures or commodity options contracts in a manner consistent
with this requirement. The Fund may also enter into futures or related options
contracts for income enhancement and risk management purposes if the aggregate
initial margin and option premiums do not exceed 5% of the liquidation value of
the Fund's total assets, after taking into account unrealized profits and
unrealized losses on any such contracts, provided, however, that in the case of
an option that is in-the-money, the in-the-money amount may be excluded in
computing such 5%. The above restriction does not apply to the purchase and sale
of futures and related options contracts for bona fide hedging purchases.
B-7
<PAGE>
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 markets and other factors affecting currencies or the securities
market generally. For example, if the Fund had hedged against the possibility of
an increase in currency 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 markets.
OPTIONS ON FUTURES CONTRACTS
An option on a futures contract gives the purchaser the right, but not the
obligation, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option exercise period. The writer of the
option is required upon exercise to assume an offsetting futures position (a
short position if the option is a call and a long position if the option is a
put). Upon exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by delivery
of the accumulated cash balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. Currently options can
be purchased or written with respect to futures contracts on various foreign
currencies, including the Australian Dollar, British Pound, Canadian Dollar,
Japanese Yen, Swiss Franc, West German Mark and Eurodollars. With respect to
stock indices, options are traded on futures contracts for various U.S. and
foreign stock indicies including the S&P 500 Stock Index and the NYSE Composite
Index.
The holder or writer of an option may terminate its position by selling or
purchasing an option of the same series. There is no guarantee that such closing
transactions can be effected.
LIMITATIONS ON PURCHASE AND SALE OF STOCK OPTIONS AND OPTIONS ON STOCK INDICES,
FOREIGN CURRENCIES AND FUTURES CONTRACTS ON FOREIGN CURRENCIES
The Fund may write put and 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. The Fund will write put options on stock indices and foreign currencies
and futures contracts on foreign currencies only if they are covered by
segregating with the Fund's Custodian an amount of cash, U.S. Government
securities, or liquid assets equal to the aggregate exercise price of the puts.
The Fund has undertaken with certain state securities commissions that, so long
as shares of the Fund are registered in those states, it will not (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, foreign currencies or futures contracts on foreign
currencies or (iii) call options on stocks, 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 net 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. In addition, the Fund will not enter into futures contracts or related
options if the aggregate initial margin and premiums exceed 5% of the
liquidation value of the Fund's total assets, taking into account unrealized
profits and losses on such contracts, provided, however, that in the case of an
option that is in-the-money, the in-the-money amount may be excluded in
computing such 5%. The above restriction does not apply to the purchase or sale
of futures contracts and related options for bona fide hedging purposes. The
Fund does not intend to purchase options on equity securities or securities
indices if the aggregate premiums paid for such outstanding options would exceed
10% of the Fund's total assets.
B-8
<PAGE>
Except as described below, the Fund will write call options on indices only
if on such date it holds a portfolio of stocks 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, U.S. Government securities, liquid high-grade
debt securities 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.
If the Fund has written an option on an industry or market segment index, it
will segregate or put into escrow with its Custodian, or pledge to a broker as
collateral for the option, at least ten "qualified securities," all of which are
stocks of issuers in such industry or market segment, with a market value at the
time the option is written of not less than 100% of the current index value
times the multiplier times the number of contracts. Such stocks will include
stocks which represent at least 50% of the weighting of the industry or market
segment index and will represent at least 50% of the Fund's holdings in that
industry or market segment. 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 so segregate, escrow or pledge an amount in cash, U.S.
Government securities 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
securities 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 obligations in a segregated account with its
Custodian, it will not be subject to the requirements described in this
paragraph.
The Fund may engage in futures contracts and options on futures transactions
as a hedge against changes, resulting from market or political conditions, in
the value of the currencies to which the Fund is subject or to which the Fund
expects to be subject in connection with future purchases. The Fund may engage
in such transactions when they are economically appropriate for the reduction of
risks inherent in the ongoing management of the Fund. 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.
POSITION LIMITS. Transactions by the Fund in futures contracts and options
will be subject to limitations, if any, established by each of the exchanges,
boards of trade or other trading facilities (including NASDAQ) governing the
maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert, regardless of whether
the options are written on the same or different exchanges, boards of trade or
other trading facilities or are held or written in one or more accounts or
through one or more brokers. Thus, the number of futures contracts and options
which the Fund may write or purchase may be affected by the futures contracts
and options written or purchased by other investment advisory clients of the
investment adviser. An exchange, board of trade or other trading facility may
order the liquidations of positions found to be in excess of these limits, and
it may impose certain other sanctions.
B-9
<PAGE>
DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When conditions dictate a defensive strategy, the Fund may invest in money
market instruments, including commercial paper of corporations, certificates of
deposit, bankers' acceptances and other obligations of domestic and foreign
banks, obligations issued or guaranteed by the U.S. Government, its agencies or
its instrumentalities and repurchase agreements (described more fully below).
Such investments 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.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
From time to time, in the ordinary course of business, the Fund may purchase
or sell securities on a when-issued or delayed delivery basis, that is, delivery
and payment can take place a month or more after the date of the transaction.
The Fund will limit such purchases to those in which the date for delivery and
payment falls within 120 days of the date of the commitment. The Fund will make
commitments for such when-issued transactions only with the intention of
actually acquiring the securities. The Fund's Custodian will maintain, in a
separate account of the Fund, cash, U.S. Government securities or other liquid
high-grade debt obligations having a value equal to or greater than such
commitments. If the Fund chooses to dispose of the right to acquire a
when-issued security prior to its acquisition, it could, as with the disposition
of any other portfolio security, incur a gain or loss due to market
fluctuations. The Fund does not intend to have more than 5% of its net assets
(determined at the time of entering into the transaction) involved in
transactions on a when-issued or delayed delivery basis during the coming year.
SHORT SALES AGAINST-THE-BOX
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,
without payment of any further consideration, for an equal amount of the
securities of the same issuer as the securities sold short (a short sale
against-the-box), and that not more than 25% of the Fund's net assets
(determined at the time of the short sale) may be subject to such sales. Short
sales will be made primarily to defer realization of gain or loss for federal
tax purposes. As a matter of current operating policy, the Fund will not engage
in short-sales other than short-sales against-the-box. The Fund does not intend
to have more than 5% of its net assets (determined at the time of the short
sale) subject to short sales against-the-box during the coming year.
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 agreement account with other
investment companies managed by Prudential Mutual Fund Management, Inc. (PMF)
pursuant to an order of the Securities and Exchange Commission (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.
B-10
<PAGE>
LENDING OF SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and financial institutions, provided
that outstanding loans do not exceed in the aggregate 30% of the value of the
Fund's total assets and provided that such loans are callable at any time by the
Fund and are at all times secured by cash or equivalent collateral that is equal
to at least the market value, determined daily, of the loaned securities. The
advantage of such loans is that the Fund continues to receive payments in lieu
of the interest and dividends of the loaned securities, while at the same time
earning interest either directly from the borrower or on the collateral which
will be invested in short-term obligations.
A loan may be terminated by the borrower on one business day's notice or by
the Fund at any time. If the borrower fails to maintain the requisite amount of
collateral, the loan automatically terminates, and the Fund could use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases loss of rights in the
collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will only be made to firms determined to be
creditworthy pursuant to procedures approved by the Board of Directors of the
Fund. On termination of the loan, the borrower is required to return the
securities to the Fund, and any gain or loss in the market price during the loan
would inure to the Fund.
Since voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such rights if the matters
involved would have a material effect on the Fund's investment in the securities
which are the subject of the loan. The Fund will pay reasonable finders',
administrative and custodial fees in connection with a loan of its securities or
may share the interest earned on collateral with the borrower.
ILLIQUID SECURITIES
The Fund may not invest more than 5% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market (either within or outside of the United States) or
legal or contractual restrictions on resale. Historically, illiquid securities
have included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (Securities Act), securities which are otherwise not readily marketable
and repurchase agreements having a maturity of longer than seven days.
Securities which have not been registered under the Securities Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities 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 of the Securities Act allows for a broader institutional trading
market for securities otherwise subject to restriction on resale to the general
public. Rule 144A establishes a "safe harbor" from the registration requirements
of the Securities Act for resales of certain securities to qualified
institutional buyers. The investment adviser anticipates that the market for
certain restricted securities such as institutional commercial paper and foreign
securities will expand further as a
B-11
<PAGE>
result of this new regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association
of Securities Dealers, Inc.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Board of Directors. In reaching liquidity decisions, the investment adviser will
consider, inter alia, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer). In addition, in order for commercial paper that is issued in
reliance on Section 4(2) of the Securities Act to be considered liquid, (i) it
must be rated in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations (NRSRO), or if only one
NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable
quality in the view of the investment adviser; and (ii) it must not be "traded
flat" (i.e., without accrued interest) or in default as to principal or
interest. Repurchase agreements subject to demand are deemed to have a maturity
equal to the notice period.
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of its total assets in securities of other
investment companies. Generally, the Fund does not intend to invest in such
securities, except as set forth in the Prospectus with respect to certain
countries which do not permit direct foreign equity investments. If the Fund
does invest in securities of other investment companies, shareholders of the
Fund may be subject to duplicate management and advisory fees.
PORTFOLIO TURNOVER
As a result of the investment policies described above, the Fund may engage
in a substantial number of portfolio transactions, but the Fund's portfolio
turnover rate is not expected to exceed 200%. The portfolio turnover rate is
generally the percentage computed by dividing the lesser of portfolio purchases
or sales (excluding all securities, including options, whose maturities or
expiration date at acquisition were one year or less) by the monthly average
value of the portfolio. High portfolio turnover involves correspondingly greater
brokerage commissions and other transaction costs, which are borne directly by
the Fund. In addition, high portfolio turnover may also mean that a
proportionately greater amount of distributions to shareholders will be taxed as
ordinary income rather than long-term capital gains compared to investment
companies with lower portfolio turnover. See "Portfolio Transactions and
Brokerage" and "Taxes."
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 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
B-12
<PAGE>
short sales and (ii) allocated to segregated accounts in connection with
short sales. Short sales "against-the-box" are not subject to this
limitation.
3. Issue senior securities, borrow money or pledge its assets, except
that the Fund may borrow from banks up to 20% of the value of its total
assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes or for the clearance of transactions. 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: (i) with
respect to 75% of the Fund's total assets, more than 5% of the Fund's total
assets (determined at the time of investment) would then be invested in
securities of a single issuer, or (ii) 25% or more of the Fund's total
assets (determined at the time of the investment) would be invested in a
single industry.
5. 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, except that the Fund may invest in the securities of any U.S.
Government agency or instrumentality, and in any security guaranteed by such
an agency or instrumentality.
6. 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.
7. Buy or sell commodities or commodity contracts, except that the Fund
may purchase and sell financial futures contracts and options thereon. (For
purposes of this restriction, futures contracts on currencies and on
securities indices and forward foreign currency exchange contracts are not
deemed to be commodities or commodity contracts.)
8. Act as 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. The Fund has not adopted a
fundamental investment policy with respect to investments in restricted
securities. See "Illiquid Securities."
9. Make investments for the purpose of exercising control or
management.
10. Invest in securities of other investment companies, except by
purchases in the open market involving only customary brokerage commissions
and as a result of which the Fund will not hold more than 3% of the
outstanding voting securities of any one investment company, will not have
invested more than 5% of its total assets in any one investment company and
will not have invested more than 10% of its total assets (determined at the
time of investment) in such securities of one or more investment companies,
or except as part of a merger, consolidation or other acquisition.
11. 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.
12. Make loans, except through (i) repurchase agreements and (ii) loans
of portfolio securities limited to 30% of the Fund's total assets.
13. Purchase more than 10% of all outstanding voting securities of any
one issuer.
The foregoing restrictions are fundamental policies that may not be changed
without the approval of a majority of the Fund's voting securities.
B-13
<PAGE>
In order to comply with certain "blue sky" restrictions, the Fund will not as
a matter of operating policy:
1. Invest in oil, gas and mineral leases.
2. 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.
3. Purchase warrants if as a result the Fund would then have more than
5% of its 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 or a major foreign exchange will be limited to 2%
of the Fund's net assets (determined at the time of investment). For
purposes of this limitation, warrants acquired in units or attached to
securities are deemed to be without value.
4. Invest in 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 issued or guaranteed by the U.S.
Government, its agencies or instrumentalities.
5. 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.
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.
DIRECTORS AND OFFICERS
<TABLE> <CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST 5 YEARS
- -------------------------- ---------------------- ------------------------------------------------------------------
<S> <C> <C>
Stephen C. Eyre Director Executive Director, The John A. Hartford Foundation, Inc.
c/o Prudential Mutual (charitable foundation) (since May 1985); Director of Faircom,
Fund Inc..
Management, Inc.
One Seaport Plaza
New York, NY
Delayne Dedrick Gold Director Marketing and Management Consultant.
c/o Prudential Mutual
Fund
Management, Inc.
One Seaport Plaza
New York, NY
Don G. Hoff Director Chairman and Chief Executive Officer of Intertec, Inc.
c/o Prudential Mutual (Investments) since 1980; Director of Innovative Capital
Fund Management, Inc., The Asia Pacific Fund, Inc. and The Greater
Management, Inc. China Fund, Inc..
One Seaport Plaza
New York, NY
</TABLE>
B-14
<PAGE>
<TABLE> <CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST 5 YEARS
- -------------------------- ---------------------- ------------------------------------------------------------------
<S> <C> <C>
*Harry A. Jacobs, Jr. Director Senior Director (since January 1986) of Prudential Securities
One Seaport Plaza Incorporated (Prudential Securities); formerly Interim Chairman
New York, NY and Chief Executive Officer of Prudential Mutual Fund
Management, Inc. (PMF) (June-September 1993); formerly Chairman
of the Board of Prudential Securities (1982-1985) and Chairman
and Chief Executive Officer of Bache Group Inc. (1977-1982);
Trustee of The Trudeau Institute; Director of The First
Australia Fund, Inc., The First Australia Prime Income Fund,
Inc., The Global Government Plus Fund, Inc., The Global Yield
Fund, Inc. and the Center for National Policy.
</TABLE>
<TABLE>
<S> <C> <C>
Sidney R. Knafel Director Managing Partner of SRK Management Company (investments) since
c/o Prudential Mutual 1981; Chairman of Insight Communications Company, L.P., Micro-
Fund biological Associates, Inc.; Director of Cellular
Management, Inc. Communications, Inc., Cellular Communications International,
One Seaport Plaza Inc., Cellular Communications of Puerto Rico, Inc., IGENE
New York, NY Biotechnology, Inc., International CabelTel Incorporated,
Medical Imaging Centers of America, Inc. and a number of private
companies.
Robert E. LaBlanc Director President of Robert E. LaBlanc Associates, Inc.
c/o Prudential Mutual (telecommunications) since 1981; Director of Contel Cellular,
Fund Inc., M/A-COM, Inc., Storage Technology Corporation,
Management, Inc. TIE/communications, Inc. and Tribune Company; Trustee of
One Seaport Plaza Manhattan College.
New York, NY
*Lawrence C. McQuade President and Director Vice Chairman of PMF (since 1988) and Managing Director, Invest-
One Seaport Plaza ment Banking of Prudential Securities (1988-1991); Director of
New York, NY Quixote Corporation (since February 1992); Director, BUNZL,
P.L.C. (since June 1991); formerly Director of Crazy Eddie Inc.
(1987-1990) and Kaiser Tech., Ltd. and Kaiser Aluminum and
Chemical Corp. (March 1987-November 1988); formerly Executive
Vice President and Director of W. R. Grace & Co. (1975-1987);
President and Director of The High Yield Income Fund, Inc., The
Global Yield Fund, Inc. and The Global Government Plus Fund,
Inc.
Thomas A. Owens, Jr. Director Consultant
c/o Prudential Mutual
Fund
Management, Inc.
One Seaport Plaza
New York, NY
</TABLE>
- ---------------
* Interested director, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities or PMF.
B-15
<PAGE>
<TABLE> <CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE FUND DURING PAST 5 YEARS
- -------------------------- ---------------------- ------------------------------------------------------------------
<S> <C> <C>
*Richard A. Redeker Director President, Chief Executive Officer and Director (since October
One Seaport Plaza 1993); PMF; Executive Vice President, Director and Member of the
New York, NY Operating Committee (since October 1993); Prudential Securities;
Director (since October 1993) of Prudential Securities Group,
Inc. (PSG); formerly Senior Executive Vice President and
Director of Kemper Financial Services, Inc. (September
1978-September 1993); Director of The Global Government Plus
Fund, Inc. ,The Global Yield Fund, Inc. and The High Yield
Income Fund, Inc.
Clay T. Whitehead Director President of National Exchange Inc. (since May 1983).
c/o Prudential Mutual
Fund
Management, Inc.
One Seaport Plaza
New York, NY
Robert F. Gunia Vice President Director (since January 1989), Chief Administrative Officer (since
One Seaport Plaza July 1990) 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; Vice
President and Director of The Asia Pacific Fund, Inc. (since May
1989).
S. Jane Rose Secretary Senior Vice President (since January 1991), Senior Counsel (since
One Seaport Plaza June 1987) and First Vice President (June 1987-December 1990) of
New York, NY PMF; Senior Vice President and Senior Counsel of Prudential
Securities (since July 1992); formerly Vice President and
Associate General Counsel of Prudential Securities.
Susan C. Cote Treasurer and Princi- Senior Vice President (since January 1989) of PMF; Senior Vice
One Seaport Plaza pal President (since January 1992) and Vice President (January 1986-
New York, NY Financial and December 1991) of Prudential Securities.
Accounting
Officer
Domenick Pugliese Assistant Secretary Vice President (since June 1992) and Associate General Counsel
One Seaport Plaza (since March 1992) of PMF; Vice President and Associate General
New York, NY Counsel of Prudential Securities (since July 1992); prior
thereto, associated with the law firm of Battle Fowler.
</TABLE>
Directors and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities or PMFD.
The officers conduct and supervise the daily business operations of the Fund,
while the Directors, in addition to their functions set forth under "Manager"
and "Distributor," oversee such actions and decide on general policy.
Pursuant to 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.
The Fund pays each of its Directors who is not an affiliated person of PMF or
The Prudential Investment Corporation (PIC) annual compensation of $6,000, in
addition to certain out-of-pocket expenses.
Directors may receive their Directors' fees 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
- ---------------
* Interested director, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities or PMF.
B-16
<PAGE>
rate applicable to 90-day U.S. Treasury bills at the beginning of each calendar
quarter or, pursuant to an SEC exemptive order, at the daily rate of return of
the Fund (the Fund rate). Payment of the interest so accrued is also deferred
and accruals become payable at the option of the Director. The Fund's obligation
to make payments of deferred Directors' fees, together with interest thereon, is
a general obligation of the Fund.
As of June 17, 1994, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding common stock of the Fund.
As of June 17, 1994, The Prudential Insurance Company of America was
beneficial owner of 508,851 Class A shares (8.5% of the outstanding Class A
shares). As of June 17, 1994, Prudential Securities was the record holder for
other beneficial owners of 3,555,060 Class A shares (or 59.6% of the outstanding
Class A shares) and 22,054,053 Class B shares (or 83.2% of the outstanding Class
B shares) of the Fund. In the event of any meetings of shareholders, Prudential
Securities will forward, or cause the forwarding of, proxy materials to the
beneficial owners for which it is the record holder.
MANAGER
The manager of the Fund is Prudential Mutual Fund Management, Inc. (PMF or
the Manager), One Seaport Plaza, New York, New York 10292. PMF serves as manager
to all of the other investment companies that, together with the Fund, comprise
the Prudential Mutual Funds. See "How the Fund is Managed--Manager" in the
Prospectus. As of June 30, 1994, PMF managed and/or administered open-end and
closed-end management investment companies with assets of approximately $47
billion. According to the Investment Company Institute, as of April 30, 1994,
the Prudential Mutual Funds were the 12th largest family of mutual funds in the
United States.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Board of Directors and
in conformity with the stated policies of the Fund, manages both the investment
operations of the Fund and the composition of the Fund's portfolio, including
the purchase, retention, disposition and loan of securities. In connection
therewith, PMF is obligated to keep certain books and records of the Fund. PMF
also administers the Fund's corporate affairs 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 Fund's custodian, and Prudential Mutual Fund Services, Inc.
(PMFS or the Transfer Agent), the Fund's transfer and dividend disbursing agent.
The management services of PMF for the Fund are not exclusive under the terms of
the Management Agreement and PMF is free to, and does, render management
services to others.
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .75 of 1% of the Fund's average daily net assets. The fee
is computed daily and payable monthly. The Management Agreement also provides
that, in the event the expenses of the Fund (including the fees of PMF, but
excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due to PMF will be
reduced by the amount of such excess. Reductions in excess of the total
compensation payable to PMF will be paid by PMF to the Fund. No such reductions
were required during the fiscal year ended October 31, 1993. Currently, the Fund
believes that the most restrictive expense limitation of state securities
commissions is 2 1/2% of the 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. Because the expenses incurred by the Fund are anticipated to be
higher than those of funds that invest only in U.S. securities, the Fund has
received waivers from applicable state expense limitations to exclude certain
foreign transactional expenses subject to the limitation.
B-17
<PAGE>
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 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 and Dividend Disbursing 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) certain organization expenses of the Fund and 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 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 June 6, 1994, and by the
initial shareholder of the Fund on June 25, 1992.
For the fiscal year ended October 31, 1993 and for the period July 24, 1992
(commencement of investment operations) to October 31, 1992, PMF received
management fees of $756,412 (.75% of the average daily net assets) and $59,403
(.75% of the average net assets of the Fund), respectively.
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.
The Subadvisory Agreement was 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 June 6,
1994, and by the initial shareholder of the Fund on June 25, 1992.
B-18
<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.
The Manager and the Subadviser (The Prudential Investment Corporation) are
subsidiaries of The Prudential which, as of December 31, 1993, was the largest
insurance company in North America. Prudential has been engaged in the insurance
business since 1875. In July 1993, Institutional Investor ranked The Prudential
the third largest institutional money manager of the 300 largest money
management organizations in the United States as of December 31, 1992.
DISTRIBUTOR
Prudential Mutual Fund Distributors, Inc. (PMFD), One Seaport Plaza, New
York, New York 10292, acts as the distributor of the Class A shares of the Fund.
Prudential Securities Incorporated (Prudential Securities), One Seaport Plaza,
New York, New York 10292, acts as the distributor of the Class B and Class C
shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and separate distribution
agreements (the Distribution Agreements), PMFD and Prudential Securities
(collectively, the Distributor) incur the expenses of distributing the Fund's
Class A, Class B and Class C shares. See "How the Fund is Managed--Distributor"
in the Prospectus.
On June 4, 1992, the Board of Directors, including a majority of the
Directors who are not interested persons of the Fund and who have no direct or
indirect financial interest in the operation of the Class A or Class B Plan or
in any agreement related to either Plan (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 A shares and Class B shares of the Fund (the Class A Plan and
Class B Plan, respectively). On June 3, 1993, the Board of Directors, including
a majority of the Rule 12b-1 Directors, at a meeting called for the purpose of
voting on each Plan, approved the continuance of the Plans and Distribution
Agreements and approved modifications of the Fund's Class A and Class B Plans
and Distribution Agreements to conform them with recent amendments to the
National Association of Securities Dealers, Inc. (NASD) maximum sales charge
rule described below. As so modified, the Class A Plan provides that (i) up to
.25 of 1% of the average daily net assets of the Class A shares may be used to
pay for personal service and 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) of the
average daily net assets of the Class B shares (asset-based sales charge) may be
used as reimbursement for distribution-related expenses with respect to the
Class B shares. On June 3, 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 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 October 31, 1993, PMFD received
payments of $52,529, under the Class A Plan. This amount was expended on
commission credits to Prudential Securities and Pruco Securities Corporation, an
affiliated broker-dealer (Prusec), for payments of commissions and account
servicing fees to financial advisers and other persons who sell Class A shares.
For the fiscal year ended October 31, 1993, PMFD also received approximately
$1,305,500 in initial sales charges.
B-19
<PAGE>
CLASS B PLAN. For the fiscal year ended October 31, 1993, Prudential
Securities received $745,906 from the Fund under the Class B Plan and spent
approximately $6,693,000 in distributing the Class B shares of the Fund. It is
estimated that of the latter amount approximately $74,000 (1.1%) was spent on
interest and/or carrying costs; $44,400 (0.7%) on printing and mailing of
prospectuses to other than current shareholders; $324,300 (4.8%) on compensation
to Prusec for commissions to its representatives and other expenses, including
an allocation on account of overhead and other branch office distribution-
related expenses incurred by it for distribution of Class B shares; and
$6,250,300 (93.4%) on the aggregate of (i) payments of commissions and account
servicing fees to its financial advisers ($2,511,200 or 37.5%) and (ii) an
allocation on account of overhead and other branch office distribution-related
expenses ($3,739,100 or 55.9%); The term "overhead and other branch office
distribution-related expenses" represents (a) the expenses of operating Prusec's
and Prudential Securities' branch offices in connection with the sale of Fund
shares, including lease costs, the salaries and employee benefits of operations
and sales support personnel, utility costs, communications costs and the costs
of stationery and supplies, (b) the costs of client sales seminars, (c) expenses
of mutual fund sales coordinators to promote the sale of Fund shares, and (d)
other incidental expenses relating to branch promotion of Fund sales.
Prudential Securities also receives the proceeds of contingent deferred sales
charges paid by holders of Class B shares 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 October 31, 1993,
Prudential Securities received approximately $168,400 in contingent deferred
sales charges.
CLASS C PLAN. Prudential Securities receives the proceeds of contingent
deferred sales charges paid by investors upon certain redemptions of Class C
shares. See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred
Sales Charges" in the Prospectus. Prior to the date of this Statement of
Additional Information, no distribution expenses were incurred under the Class C
Plan.
The Class A, Class B and Class C Plans will 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 includes an itemization of
the distribution expenses and the purposes of such expenditures. In addition, as
long as the Plans remain in effect, the selection and nomination of Rule 12b-1
Directors shall be committed to the Rule 12b-1 Directors.
Pursuant to each Distribution Agreement, the Fund has agreed to indemnify
PMFD and Prudential Securities to the extent permitted by applicable law against
certain liabilities under the Securities Act. Each Distribution Agreement was
last approved by the Board of Directors, including a majority of the Rule 12b-1
Directors, on June 6, 1994.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred sales
charges and asset-based sales charges to 6.25% of total gross sales of each
class of shares. Interest charges on unreimbursed distribution expenses equal to
the prime rate plus one percent per annum may be added to the 6.25% limitation.
Sales from the reinvestment of dividends and distributions are not required to
be included in the calculation of the 6.25% limitation. The annual asset-based
sales charge on shares of the Fund may not exceed .75 of 1% per class. The 6.25%
limitation applies to the Fund rather than on a per shareholder basis. If
aggregate sales charges were to exceed 6.25% of total gross sales of any class,
all sales charges on shares of that class would be suspended.
B-20
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities, futures
and options on securities and futures for the Fund, the selection of brokers,
dealers and futures commission merchants to effect the transactions and the
negotiation of brokerage commissions, if any. The term "Manager" as used in this
section includes the Subadviser. On a national securities exchange,
broker-dealers may receive negotiated brokerage commissions on Fund portfolio
transactions, including options and the purchase and sale of underlying
securities upon the exercise of options. On foreign securities exchanges,
commissions may be fixed. 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.
Equity securities traded in the over-the-counter market and bonds, including
convertible bonds, are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments and U.S.
Government agency securities may be purchased directly from the issuer, in which
case no commissions or discounts are paid. The Fund will not deal with
Prudential Securities or any affiliate in any transaction in which Prudential
Securities or any affiliate acts as principal. Thus, it will not deal 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 of 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's, 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 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 other than
Prudential Securities in order to secure research and investment services
described above, subject to review by the Fund's Board of Directors from time to
time as to the extent and continuation of this practice. The allocation or
orders among brokers and the commission rates paid are reviewed periodically by
the Fund's Board of Directors. The Fund will not pay up for research in
principal transactions.
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.
B-21
<PAGE>
Subject to the above considerations, Prudential Securities may act as a
securities 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 an 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 noninterested 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) under
the Securities Exchange Act of 1934, Prudential Securities may not retain
compensation for effecting transactions on a national securities exchange for
the Fund unless the Fund has expressly authorized the retention of such
compensation. 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.
For the fiscal year ended October 31, 1993 and for the period July 24, 1992
(commencement of investment operations) to October 31, 1992 the Fund paid
brokerage commissions of $6,500 and $115,652, respectively, none of which were
paid to Prudential Securities.
- --------------------------------------------------------------------------------
PURCHASE AND REDEMPTION OF FUND SHARES
- --------------------------------------------------------------------------------
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A shares), or
(ii) on a deferred basis (Class B or Class C shares). See "Shareholder
Guide--Alternative Purchase Plan" in the Prospectus.
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan, (except
that the Fund has agreed with the SEC in connection with the offering of a
conversion feature on Class B shares to submit any amendment of the Class A
distribution and service plan to both Class A and Class B shareholders) and
(iii) only Class B shares have a conversion feature. See "Distributor." Each
class also has separate exchange privileges. See "Shareholder Investment
Account--Exchange Privilege."
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 5% and Class
B* and Class C* shares are sold at net asset value. Using the Fund's net asset
value at October 31, 1993, 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........................................ $ 16.10
Maximum sales charge (5% of offering price)................................................... .85
---------
Offering price to public...................................................................... $ 16.95
=========
CLASS B
Net asset value, redemption price and offering price to public per Class B share*............. $ 15.94
=========
CLASS C
Net asset value, offering price and redemption price per Class C share........................ $ 15.94
=========
</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.
Class C Shares did not exist on October 31, 1993.
B-22
<PAGE>
REDUCTION OR WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See the table of breakpoints under "Shareholder
Guide--Alternative Purchase Plan" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group
that holds 25% or more of the outstanding voting securities of a company
will be deemed to control the company, and a partnership will be deemed to
be controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are
the individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act
account created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Distributor must be notified at the time of purchase that the investor is
entitled to a reduced sales charge. The reduced sales 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 or price (net asset value plus maximum sales charge)
as of the previous business day. See "How the Fund Values its Shares" in the
Prospectus. The Distributor must be notified at the time of purchase that the
investor is entitled to a reduced sales charge. The reduced sales charges will
be granted subject to confirmation of the investor's holdings. Rights of
Accumulation are not available to individual participants in any retirement or
group plans.
LETTERS OF INTENT. Reduced sales charges are available to investors or an
eligible group of related investors who enter into a written Letter of Intent
providing for the purchase, within a thirteen-month period, of shares of the
Fund and shares of other Prudential Mutual Funds. All shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either
B-23
<PAGE>
directly with the Transfer Agent or through Prudential Securities. The
Distributor must be notified at the time of purchase that the investor is
entitled to a reduced sales charge. The reduced sales charges will be granted
subject to confirmation of the investor's holdings. Letters of Intent are not
available to individual participants in any retirement or group plans.
A Letter of Intent permits a purchaser to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Escrowed Class A shares totaling 5% of the dollar amount of the
Letter of Intent will be held by the Transfer Agent in the name of the
purchaser. The effective date of a Letter of Intent may be back-dated up to 90
days, in order that any investments made during this 90-day period, valued at
the purchaser's cost, can be applied to the fulfillment of the Letter of Intent
goal.
The Letter of Intent does not obligate the investor to purchase, nor the Fund
to sell, the indicated amount. In the event the Letter of Intent goal is not
achieved within the thirteen-month period, the purchaser is required to pay the
difference between the sales charge otherwise applicable to the purchases made
during this period and sales charges actually paid. Such payment may be made
directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain such difference. If the goal is exceeded in
an amount which qualified for a lower sales charge, a price adjustment is made
by refunding to the purchaser the amount of excess sales charge, if any, paid
during the thirteen-month period. Investors electing to purchase Class A shares
of the Fund pursuant to a Letter of Intent should carefully read such Letter of
Intent.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES.
The Contingent Deferred Sales Charge is waived under circumstances described
in the Prospectus. See "Shareholder Guide--How to Sell Your Shares--Waiver of
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>
<S> <C>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death certificate or, in the case of a
trust, a copy of the grantor's death certificate, plus a copy of the
trust agreement identifying the grantor.
Disability - An individual will be A copy of the Social Security Administration award letter or a letter
considered disabled if he or she is from a physician on the physician's letterhead stating that the
unable to engage in any substantial shareholder (or, in the case of a trust, the grantor) is permanently
gainful activity by reason of any disabled. The letter must also indicate the date of disability.
medically determinable physical or
mental impairment which can be
expected to result in death or to be
of long-continued and indefinite
duration.
Distribution from an IRA or 403(b) A copy of the distribution form from the custodial firm indicating (i)
Custodial Account 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.
B-24
<PAGE>
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 exceeds
$500,000. For example, if you purchased $100,000 of Class B shares of the Fund
and the following year purchase an additional $450,000 of Class B shares with
the result that the aggregate cost of your Class B shares of the Fund following
the second purchase was $550,000, the quantity discount would be available for
the second purchase of $450,000 but not for the first purchase of $100,000. The
quantity discount will be imposed at the following rates depending on whether
the aggregate value exceeded $500,000 or $1 million:
<TABLE><CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS INVESTED
OR REDEMPTION PROCEEDS
--------------------------------------
YEAR SINCE PURCHASE $500,001 TO $1
PAYMENT MADE MILLION OVER $1 MILLION
- --------------------------------------------------------------- --------------------- ---------------
<S> <C> <C>
First.......................................................... 3.0% 2.0%
Second......................................................... 2.0% 1.0%
Third.......................................................... 1.0% 0%
Fourth and thereafter.......................................... 0% 0%
</TABLE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
- --------------------------------------------------------------------------------
SHAREHOLDER INVESTMENT ACCOUNT
- --------------------------------------------------------------------------------
Upon the initial purchase of Fund shares, a Shareholder Investment Account
established for each investor under which a record of the shares held is
maintained by the Transfer Agent. If a stock certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to its
shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND 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 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 dividend or 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.
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.
B-25
<PAGE>
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
Structured Maturity Fund and Prudential Government Securities Trust
(Intermediate Term Series) and shares of the money market funds specified below.
No fee or sales load will be imposed upon the exchange. Shareholders of money
market funds who acquired such shares upon exchange of Class A shares may use
the Exchange Privilege only to acquire Class A shares of the Prudential Mutual
Funds participating in the Exchange Privilege.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets
Prudential Tax-Free Money Fund
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential Mutual Funds and shares of Prudential Special Money Market Fund, a
money market fund. No CDSC will be payable upon such exchange, but a CDSC may be
payable upon the redemption of Class B and Class C shares acquired as a result
of the 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 date of the initial purchase, rather than the date of the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of an
eligible money market fund without imposition of any CDSC at the time of
exchange. Upon subsequent redemption from such money market fund or after re-
exchange into the Fund, such shares will be subject to the CDSC calculated
without regard to the time such shares were held in the money market fund. In
order to minimize the period of time in which shares are subject to a CDSC,
shares exchanged out of the money market fund will be exchanged on the basis of
their remaining holding periods, with the longest remaining holding periods
being transferred first. In measuring the time period shares are held in a money
market fund and "tolled" for purposes of calculating the CDSC holding period,
exchanges are deemed to have been made on the last day of the month. Thus, if
shares are exchanged into the Fund from a money market fund during the month
(and are held in the Fund at the end of the month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class
B or Class C exchange privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of the Fund, respectively, without subjecting such shares to any CDSC. Shares of
any fund participating in the Class B or Class C
B-26
<PAGE>
exchange privilege that were acquired through reinvestment of dividends or
distributions may be exchanged for Class B or Class C shares of other funds,
respectively, without being subject to any CDSC.
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on 60 days' notice, and any fund, including the Fund, or
the Distributor, has the right to reject any exchange application relating to
such fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a fixed
amount of dollars in shares at set intervals. An investor buys more shares when
the price is low and fewer shares when the price is high. The average cost per
share is lower than it would be if a constant number of shares were bought at
set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $4,800 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2007, the cost of four years at a private
college could reach $163,000 and over $97,000 at a public university.1
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.2
<TABLE><CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- --------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
25 Years................................................. $ 110 $ 165 $ 220 $ 275
20 Years................................................. 176 264 352 440
15 Years................................................. 296 444 592 740
10 Years................................................. 555 833 1,110 1,388
5 Years.................................................. 1,371 2,057 2,742 3,428
</TABLE>
See "Automatic Savings Accumulation Plan."
- ---------------
1 Source information concerning the costs of education at public universities is
available from The College Board Annual Survey of Colleges, 1992. Information
about the costs of private colleges is from the Digest of Education
Statistics, 1992; The National Center for Educational Statistics; and the U.S.
Department of Education. Average costs for private institutions include
tuition, fees, room and board.
2 The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the Fund.
The investment return and principal value of an investment will fluctuate so
that an investor's shares when redeemed may be worth more or less than their
original cost.
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP, an investor may
arrange to have a fixed amount automatically invested in shares of the Fund
monthly by authorizing his or her bank account or Prudential Securities Account
(including a Command Account) to be debited to invest 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
B-27
<PAGE>
to the value of the shares in the shareholder's account. Withdrawals of Class B
or Class C shares may be subject to a CDSC. See "Shareholder Guide--How to Sell
Your Shares--Contingent Deferred Sales Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment
Account--Automatic Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any gain
or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the sales charges applicable to (i) the purchase of Class
A shares and (ii) the withdrawal of Class B and Class C shares. Each shareholder
should consult his or her own tax adviser with regard to the tax consequences of
the plan, particularly if used in connection with a retirement plan.
TAX-DEFERRED RETIREMENT PLANS. Various qualified 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, and the administration, custodial fees and
other details are available fom 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 COMPOUNDING1
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
- ------------- --------- ---------
10 years $ 26,165 $ 31,291
15 years 44,676 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
- ---------------
1 The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings
in the IRA account will be subject to tax when withdrawn from the account.
B-28
<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 sales 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. 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 value 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 or independent pricing agents.
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 sales prices
as of the close of the commodities exchange or board of trade. 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.
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. It is expected, however, that the net
asset value per share of each class will tend to converge immediately after the
recording of dividends which will differ by approximately the amount of the
distribution expense accrual differential among the classes.
- --------------------------------------------------------------------------------
TAXES
- --------------------------------------------------------------------------------
The Fund intends to qualify and 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 long-term 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.
B-29
<PAGE>
Qualification as a regulated investment company 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 derive 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 foreign currencies directly related to the Fund's business of investing in
foreign securities) (the short-short rule); (c) the Fund diversify its holdings
so that, at the end of each quarter of the taxable year (i) at least 50% of the
market value of the Fund's assets is represented by cash, U.S. Government
securities and other securities limited in respect of any one issuer to an
amount not greater than 5% of the market value of the Fund's assets and 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of its assets is invested in the securities of any one issuer (other
than U.S. Government securities); and (d) the Fund distribute to its
shareholders at least 90% of its net investment income (including short-term
capital gains) other than long-term capital gains in each year.
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 makes a short sale against-the-box. Other gains or
losses on the sale of securities will be short-term capital gains or losses.
Gains and losses on the sale, lapse or other termination of options on
securities will generally be treated as gains and losses from the sale of
securities (assuming they do not qualify as Section 1256 contracts). If an
option written by the Fund on securities lapses or is terminated through a
closing transaction, such as a repurchase by the Fund of the option from its
holder, the Fund will generally realize capital gain or loss. If securities are
sold by the Fund pursuant to the exercise of a call option written by it, the
Fund will include the premium received in the sale proceeds of the securities
delivered in determining the amount of gain or loss on the sale. Certain of the
Fund's transactions 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 apply to most options on stock indices, futures contracts and
options thereon, and forward foreign currency exchange contracts in which the
Fund may invest. See "Investment Objective and Policies." These investments will
generally constitute Section 1256 contracts and will be required to be "marked
to market" for federal income tax purposes at the end of the Fund's taxable
year; that is, treated as having been sold at market value. Except with respect
to forward foreign currency exchange contracts, 60% of any gain or loss
recognized on such deemed sales and on actual dispositions will be treated as
long-term capital gain or loss, and the remainder will be treated as short-term
capital gain or loss.
Gain or loss on the sale, lapse or other termination of options on stock and
on narrowly-based stock indices will be capital gain or loss and will be
long-term or short-term depending upon the holding period of the option. In
addition, positions which are part of a straddle will be subject to certain wash
sale and short sale provisions of the Internal Revenue Code. In the case of a
straddle, the Fund may be required to defer the recognition of losses on
positions it holds to the extent of any unrecognized gain on offsetting
positions held by the Fund.
The Fund's ability to hold foreign currencies or engage in hedging activities
may be limited by the 30%-of-income qualification test discussed above.
A "passive foreign investment company" (PFIC) is a foreign corporation that,
in general, meets either of the following tests: (a) at least 75% of its gross
income is passive or (b) an average of at least 50% of its assets produce, or
are held for the production of, passive income. If the Fund acquires and holds
stock in a PFIC beyond the end of the year of its acquisition, the Fund will be
subject to federal income tax on a portion of any "excess distribution" received
on the stock or of any gain
B-30
<PAGE>
from disposition of the stock (collectively PFIC Income), plus interest thereon,
even if the Fund distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the Fund's
investment company taxable income and, accordingly, will not be taxable to it to
the extent that income is distributed to its shareholders. Proposed Treasury
regulations provide that the Fund may make a "mark-to-market" election with
respect to any stock it holds of a PFIC. If the election is in effect, at the
end of the Fund's taxable year, the Fund will recognize the amount of gains, if
any, with respect to PFIC stock. No loss will be recognized on PFIC stock.
Alternatively, the Fund may elect to treat any PFIC in which it invests as a
"qualified electing fund," in which case, in lieu of the foregoing tax and
interest obligation, the Fund will be required to include in income each year
its pro rata share of the qualified electing fund's annual ordinary earnings and
net capital gain, even if they are not distributed to the Fund; those amounts
would be subject to the distribution requirements applicable to the Fund
described above. It may be very difficult, if not impossible, to make this
election because of certain requirements thereof. Proposed legislation in
Congress could dramatically change the manner in which U.S. shareholders of
foreign corporations are taxed. There can be no assurance that any such
legislation will become law, or if so, what its impact on U.S. shareholders of
foreign corporations will be.
Under the Internal Revenue Code, 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 forward foreign currency exchange contracts or
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, 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 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 Fund shares.
The Fund is required 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
12 months ending on October 31 of such calendar year, as well as all
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 year,
respectively. To the extent it does not meet these distribution requirements,
the Fund will be subject to a nondeductible 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.
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. Therefore,
prior to purchasing shares of the Fund, the investor should carefully consider
the impact of dividends, including capital gains distributions, which are
expected to be or have been announced.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of the Fund and sells or otherwise disposes
of such shares within 90 days of acquisition may not be allowed to include
certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
B-31
<PAGE>
The per share dividends on Class B and Class C shares will generally 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 net capital gains will be paid in the same amounts for
Class A, Class B and Class C shares. See "Net Asset Value."
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.
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.
Interest income, capital gain net income, gain or loss from Section 1256
contracts (described above), dividend income from foreign corporations and
income from other sources will not constitute qualified dividends. Since the
Fund is likely to have a substantial portion of its assets invested in
securities of foreign issuers, the amount of the Fund's dividends eligible for
the corporate dividends-received deduction will be minimal. Individual
shareholders are not eligible for the dividends-received deduction.
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 will vary.
If the Fund is liable for foreign income taxes, the Fund expects to meet the
requirements of the Internal Revenue Code for "passing-through" to its
shareholders foreign income taxes paid, but there can be no assurance that the
Fund will be able to, or will elect to do so. Shareholders would be required to:
(i) include in gross income (in addition to taxable dividends actually received)
their pro rata share of the foreign income taxes paid by the Fund; and (ii)
treat their pro rata share of foreign income taxes as paid by them. Shareholders
are then permitted either to deduct their pro rata share of foreign income taxes
in computing their taxable income or use it as a foreign tax credit against U.S.
income taxes. No deduction for foreign taxes may be claimed by a shareholder who
does not itemize deductions. Foreign shareholders may not deduct or claim a
credit for foreign tax unless the dividends paid to them by the Fund are
effectively connected with a U.S. trade or business.
Each shareholder will be notified within 60 days after the close of the
Fund's taxable year whether the foreign taxes 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 tax
consequences to a foreign shareholder entitled to claim the benefits of an
applicable tax treaty may be different from those described herein. Foreign
shareholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Fund.
The amount of foreign taxes for which a shareholder may claim a credit in any
year will generally be subject to a separate limitation for "passive income,"
which includes, among other things, dividends, interest and certain foreign
currency gains. Gain or loss from the sale of a security or from a Section 988
transaction which is treated as ordinary income or loss (or would have been so
treated absent an election by the Fund) will be treated as derived from sources
within the United States, potentially reducing the amount allowable as a credit
under the limitation.
B-32
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B and Class C shares. See "How the Fund Calculates
Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
n
P (1+T) = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a
hypothetical $1000 payment made at the beginning of the 1, 5
or 10 year periods.
Average annual total return takes into account any applicable initial or
deferred sales charges but does not take into account any federal or state
income taxes that may be payable upon redemption.
The average annual total return of the Class A shares for the one year period
ended April 30, 1994 and for the period from July 24, 1992 (commencement of
investment operations) through April 30, 1994 was 23.68% and 31.17%,
respectively, and for the Class B shares, was 24.48% and 34.15% for Class B
shares, respectively, for the same period. During these periods, no Class C
shares were outstanding.
YIELD. The Fund may from time to time advertise its yield as calculated over
a 30-day period. Yield is calculated separately for Class A, Class B and Class C
shares. This yield will be computed by dividing the Fund's net investment income
per share earned during this 30-day period by the maximum offering price per
share on the last day of this period. Yield is calculated according to the
following formula:
[( a-b ) ]
YIELD = 2[(---- +1)6-1]
[( 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. Yields for the Fund will vary based on a number of factors including
changes in net asset value, market conditions, the level of interest rates and
the level of Fund income and expenses.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B and
Class C shares. See "How the Fund Calculates Performance" in the Prospectus.
B-33
<PAGE>
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV-P
-----
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 $1000
payment made at the beginning of the 1, 5 or 10 year periods.
Aggregate total return does not take into account any federal or state income
taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The aggregate total return for Class A shares for the one year period ended
on April 30, 1994 and for the period from July 24, 1992 (commencement of
operations) to April 30, 1994 was 30.54% and 70.47%, respectively, and for Class
B shares was 29.48% and 68.05%, respectively, for the same period. During these
periods, no Class C shares were outstanding.
PERFORMANCE CHART. 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
- ---------------
1 Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1993
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Common stock returns are based on the Standard & Poor's 500 Stock
Index, a market-weighted, unmanaged index of 500 common stocks in a variety of
industry sectors. It is a commonly used indicator of broad stock price
movements. This chart is for illustrative purposes only, and is not intended to
represent the performance of any particular investment or fund.
B-34
<PAGE>
- --------------------------------------------------------------------------------
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.
PMFS is a wholly-owned subsidiary of PMF. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, 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 communication expenses and other costs.
For the fiscal year ended October 31, 1993, the Fund incurred fees of
approximately $128,000 for such services.
Deloitte & Touche, 1633 Broadway, New York, New York 10019, serves as the
Fund's independent accountants, and in that capacity audits the Fund's annual
reports.
- --------------------------------------------------------------------------------
DESCRIPTION OF SECURITY RATINGS
- --------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE
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 edge." 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 Aaa bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in 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 sometime in the future.
B-35
<PAGE>
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.
COMMERCIAL PAPER
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months.
P-1: The designation "Prime-1" or "P-1" indicates the highest quality
repayment capacity of the rated issue.
P-2: The designation "Prime-2" or "P-2" indicates a strong capacity for
repayment.
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated AAA has the highest rating assigned by S&P to a debt
obligation. 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 higher 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 rate 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 for debt in higher rated categories.
COMMERCIAL PAPER
Standard & Poor's commercial paper ratings are current assessments of the
likelihood of timely payment of debt having an original maturity of no more than
270 days.
A-1: The A-1 designation indicates that the degree of safety regarding timely
payment is very strong.
A-2: Capacity for timely payment on issues with the designation A-2 is
strong. However, the relative degree of safety is not as
overwhelming as for issues designated A-1.
B-36
<PAGE>
<TABLE><CAPTION>
PRUDENTIAL PACIFIC GROWTH FUND, INC. PORTFOLIO OF INVESTMENTS
APRIL 30, 1994 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------
VALUE VALUE
SHARES DESCRIPTION (NOTE 1) SHARES DESCRIPTION (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--95.0%
COMMON STOCKS--90.0%
AUSTRALIA--8.4% HONG KONG--(CONT'D.)
<S> <C> <C> <C> <C> <C>
3,322,700 AAPC, Ltd.*................... $ 2,614,576 3,193,000 Liu Chong Hing Investment,
(Lodging) Ltd. ......................... $ 5,704,071
950,574 Bank of Melbourne, Ltd. ...... 3,807,953 (Real estate)
(Banking) 1,000,000 New World Development Co.,
270,000 Brambles Industries, Ltd. .... 2,785,137 Ltd. ......................... 3,068,000
(Business & public services) (Real estate)
715,500 Broken Hill Proprietary 16,682,000 Techtronic Industries, Ltd.... 2,958,519
Company, Ltd. .............. 8,701,141 (Machinery)
(Energy sources) 6,225,000 UDL Holdings, Ltd............. 902,532
3,352,473 BTR Nylex, Ltd. .............. 7,314,466 (Construction) -------------
(Industrial components) 52,976,462
1,030,813 Coca Cola Amatil, Ltd. ....... 6,267,819 INDIA--0.4% -------------
(Food & household products) 685,000 Indo Gulf Fertilizer &
3,455,000 Sea World Property Trust, Chemicals*.................... 2,157,750
Ltd. ......................... 2,570,388 (Basic industries) -------------
(Leisure & tourism) INDONESIA--0.5%
1,498,500 West Australia Newspaper...... 4,341,396 931,800 Kabel Metal Industries,
(Publishing) Ltd.*......................... 2,603,293
1,200,000 Western Mining Corp. Holdings, (Wire & cable) -------------
Ltd. ......................... 6,008,927 JAPAN--41.6%
(Mining) -------------- 159,000 Acom Co., Ltd................. 8,373,363
44,411,803 (Financial services)
-------------- 406,000 Aiwa Co....................... 10,390,786
HONG KONG--10.1% (Consumer electronics)
2,771,000 Amoy Properties, Ltd. ........ 3,658,842 50,000 Amano Corp.................... 807,166
(Real estate) (Machinery & engineering)
1,184,800 Consolidated Electric 58,300 Autobacs Seven Co............. 7,460,380
Power*........................ 1,763,802 (Merchandising)
(Utilities - Electric & gas) 24,680 Capcom Co., Ltd............... 1,190,393
2,462,000 Giordano Holdings, Ltd. ...... 1,107,516 (Recreation & other consumer
(Merchandising) goods)
2,127,600 Guoco Group, Ltd. ............ 9,846,301 125,000 Enplas Corp................... 4,466,483
(Financial services) (Electronic components)
436,000 HSBC Holdings, PLC............ 4,825,693 118,000 Higashi Nihon House........... 6,260,655
(Financial services) (Housing)
12,167,000 Hung Hing Printing Group, 54,000 IO Data Device, Inc........... 9,621,026
Ltd. ......................... 3,346,947 (Electronic components)
(General manufacturing) 67,200 Japan Associates Finance
1,802,000 Hutchison Whampoa, Ltd. ...... 7,406,373 Co............................ 8,665,420
(Multi-industry) (Financial services)
695,000 Hysan Development Co., 714,000 Kamigumi Co., Ltd............. 8,574,466
Ltd.*......................... 2,033,295 (Transportation &
(Real estate) warehousing)
643,000 Jardine Matheson Holdings, 79,200 Keyence Corp.................. 8,419,726
Ltd. ......................... 4,203,484 (Electronic components)
(General trading) 116,600 Koei Co....................... 8,034,255
3,374,000 JCG Holdings, Ltd. ........... 2,151,087 (Recreation & other consumer
(Financial services) goods)
B-37 See Notes to Financial Statements
<PAGE>
PRUDENTIAL PACIFIC GROWTH FUND, INC.
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
VALUE VALUE
SHARES DESCRIPTION (NOTE 1) SHARES DESCRIPTION (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JAPAN--(CONT'D.)
124,000 Kyocera Corp.................. $ 7,811,792 KOREA--(CONT'D.)
(Public works - electronics) 127,412 Dong Ah Construction Industry
123,000 Maezawa Industries............ 5,787,381 Co., Ltd.................... $ 5,521,134
(Public works - (Housing)
construction) 90,558 Dong Shin Construction Co..... 1,233,302
420,000 Mitsumi Electric Co., Ltd..... 8,268,530 (Construction)
(Electronic components) 119,814 Hanjin Heavy Industries*...... 1,898,748
280,500 Mr. Max Corp.................. 7,648,243 (Shipbuilding)
(Merchandising) 73,660 Kun Young Construction
238,000 Murata Manufacturing Co., Corp.*........................ 1,285,881
Ltd........................... 10,308,101 (Housing)
(Electronic components) 67,926 Pusan Steel Pipe Corp.*....... 2,295,877
321,000 National House Industrial..... 5,877,153 (Steel)
(Housing) 69,333 Samsung Electronics Co........ 6,850,035
156,000 Nichiei Co.................... 13,897,037 (Electronics)
(Financial services) 44,540 Shinwon Corp.*................ 1,378,606
339,000 Nichiei Construction Co., (Merchandising)
Ltd........................... 5,272,369 4,602 Shinyoung Wacoal*............. $136,744
(Construction (Financial services) --------------
220,400 Nissen Co., Ltd............... 8,678,020 23,055,429
(Merchandising) MALAYSIA--13.2% --------------
88,750 Promise Co., Ltd.............. 5,704,671 755,000 Arab-Malaysian Finance
(Financial services) Berhad*....................... 2,791,387
204,000 Rohm Co., Ltd................. 8,132,690 (Banking)
(Electronic components) 2,000,000 Bandar Raya Developments
96,000 Secom Co., Ltd................ 6,312,432 Berhad........................ 3,062,328
(Security/investigation (Real estate)
services) 1,572,000 Berjaya Sports Toto Berhad.... 2,817,940
108,000 Sho-Bond Construction Co., (Real estate)
Ltd........................... 3,348,755 1,000 Dunlop Estates Berhad......... 2,988
(Public works - (Miscellaneous basic
construction) industry)
137,550 Sony Corp..................... 8,800,817 390,000 Genting Berhad................ 4,369,421
(Entertainment) (Financial services)
640,000 Suzuki Motor Co., Ltd......... 8,504,774 347,666 Golden Plus Holdings Berhad... 1,597,002
(Automotive) (Building materials)
157,000 Taihei Dengyo Co., Ltd........ 4,605,374 1,614,000 Granite Industries Berhad*.... 4,369,981
(Energy equipment & (Leisure & tourism)
services) 478,000 Hong Leong Industries
270,000 Tokyo Electronic Co., Ltd..... 8,584,506 Berhad........................ 2,481,308
(Technology) (Building & related
80,000 Tsutsumi Jewelry Co., Ltd..... 8,583,522 industries)
(Merchandising) -------------- 3,000 Hong Leong Properties
218,390,286 Berhad........................ 4,213
KOREA--4.4% -------------- (Real estate)
55,830 Daewoo Securities Co., 1,000 Kedah Cement Holdings
Ltd.*......................... 2,128,964 Berhad........................ 1,554
(Financial services) (Building materials)
14,239 Daishin Securities Co.*....... 326,138 594,000 MGR Corp. Berhad.............. 3,238,749
(Financial services) (Forest products)
935,000 Multi-Purpose Holdings
Berhad........................ 1,592,262
(Consumer goods)
B-38 See Notes to Financial Statements
<PAGE>
PRUDENTIAL PACIFIC GROWTH FUND, INC.
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
VALUE VALUE
SHARES DESCRIPTION (NOTE 1) SHARES DESCRIPTION (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
MALAYSIA--(CONT'D.)
<S> <C> <C> <C> <C> <C>
368,000 Pacific Chemical Berhad*...... $ 2,569,967 THAILAND--1.1%
(Chemicals) 157,801 Land & House, Ltd............. $ 3,597,211
2,834,500 Pilecon Engineering Berhad.... 4,848,194 (Housing)
(Machinery & engineering) 300,000 Srithai Superware Plc* 2,317,315
7,065,000 Renong Berhad................. 9,603,984 (Food & household products) --------------
(Infrastructure) 5,914,526
1,862,000 Resorts World................. 10,430,593 Total common stocks --------------
(Leisure & tourism) (cost $414,170,265)......... 473,089,459
150,000 RJ Reynolds Berhad............ 231,915 PREFERRED STOCKS--1.2% --------------
(Tobacco) AUSTRALIA--0.1%
1,963,000 Technology Resources 63,635 Bank of Melbourne, Ltd........ 626,372
Industries Berhad*.......... 8,430,555 (Banking) --------------
(Telecommunications) KOREA--1.1%
2,131,000 Time Engineering Berhad....... 6,724,782 78,501 Daewoo Securities Co.,
(Engineering) -------------- Ltd.*......................... 2,653,308
69,169,123 (Financial services)
NEW ZEALAND--1.5% -------------- 103,455 Daishin Securities Co......... 2,087,801
3,341,400 Fletcher Challenge, Ltd....... 6,497,887 (Financial services)
(Building & related 22,750 Mando Machinery Corp.......... 971,741
industries) (Automotive Parts)
1,000,000 Fletcher Forestry, Ltd........ 1,442,626 5,712,850
(Forest products) -------------- Total preferred stocks --------------
7,940,513 (cost $5,774,376)........... 6,339,222
SINGAPORE--8.8% -------------- WARRANTS WARRANTS*--1.5% --------------
1,021,750 First Capital Corp............ 3,515,798 JAPAN--0.8%
(Construction) Autobacs Seven Co.
1,443,000 Hong Leong Finance*........... 4,120,734 150 expiring Feb. '95 @
(Financial services) y8,089...................... 720,000
334,000 Jurong Shipyard, Ltd.......... 3,200,798 150 expiring Mar. '96 @
(Capital goods) y8,231...................... 690,000
1,814,000 Kim Eng Holdings, Ltd......... 3,220,117 (Automotive)
(Financial services) Kamigumi Co., Ltd.
1,208,750 Sembawang Maritime, Ltd....... 5,480,890 300 expiring Sept. '96 @ y902... 89,466
(Transportation/shipping) (Transportation &
747,000 Sembawang Shipyards, Ltd...... 6,005,595 warehousing)
(Machinery & engineering) Mr. Max Corp.
757,000 Singapore Airlines, Ltd....... 5,939,927 1,600 expiring July '95 @
(Transportation) y2,194.40................... 468,458
970,000 Van Der Horst, Ltd.*.......... 4,616,670 (Merchandising)
(Technology) Nissen Co., Ltd.
6,016,000 Wing Tai Holdings............. 10,369,745 493 expiring Nov. '96 @
(Multi-industry) -------------- y1,681...................... 656,242
46,470,274 (Merchandising)
-------------- Nitori Company
8,250 expiring Feb. '98 @
y3,268...................... 1,480,927
--------------
4,105,093
--------------
- ------------------------------------------------------------------------------------------------------------------------
B-39 See Notes to Financial Statements
<PAGE>
<CAPTION>
PRUDENTIAL PACIFIC GROWTH FUND, INC.
- ------------------------------------------------------------------------------------------------------------------------
VALUE VALUE
SHARES DESCRIPTION (NOTE 1) SHARES DESCRIPTION (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
SINGAPORE--0.7%
Hong Leong Finance
<S> <C> <C> <C> <C> <C>
190,200 expiring Nov. '98 @
SGD3.25..................... $ 215,302 CONVERTIBLE LOAN STOCKS--1.1%
(Financial services) MALAYSIA--0.9%
Kim Eng Holdings, Ltd. 1,809,000 IJM Corp. Berhad.............. $ 4,036,589
362,800 expiring Feb. '97 (Building & related
@SGD2.00.................... 315,012 industries)
(Financial services) -------------- 239,000 Time Engineering Berhad....... 709,583
United Overseas Bank, Ltd. (Engineering) --------------
678,000 expiring Nov. '94 @ 4,746,172
SGD3.16..................... 3,226,910 SINGAPORE--0.2% --------------
(Banking) -------------- 362,800 Kim Eng Holdings, Ltd.*....... 208,840
3,757,224 (Financial services)
Total warrants -------------- 631,000... Sembawang Maritime, Ltd....... 933,431
(cost $4,935,513)........... 7,862,317 (Transportation/shipping) --------------
RIGHTS RIGHTS* -------------- 1,142,271
MALAYASIA Total convertible loan stocks --------------
Pilecon Engineering Berhad (cost $3,751,753)........... 5,888,443
944,833 expiring June '94........... 149,257 Total long-term investments --------------
(Machinery & engineering) -------------- (cost $434,856,879)......... 499,383,898
PRINCIPAL PRINCIPAL
AMOUNT AMOUNT SHORT-TERM INVESTMENT--1.0%
(000) CONVERTIBLE BONDS--1.2% (000) REPURCHASE AGREEMENT
INDIA--0.7% --------
Gujarat Ambuja Cement $ 5,028 Joint Repurchase Agreement
$3,000..... 3.50%, 6/30/99.............. 3,780,000 Account,
(Building materials) -------------- 3.54%, 5/2/94, (Note 5)..... 5,028,000
KOREA--0.5% TOTAL INVESTMENTS--96.0% --------------
Samsung Electronic Co. (cost $439,884,879; Note
640 3.75%, 12/31/07............. 2,275,200 4)............................ 504,411,898
(Electronics) -------------- Other assets in excess of
Total convertible bonds liabilities--4.0%........... 21,215,424
(cost $6,224,972)........... 6,055,200 --------------
-------------- NET ASSETS--100%.............. $525,627,322
------------ ==============
* Non-income producing security.
B-40 See Notes to Financial Statements
</TABLE>
<PAGE>
PRUDENTIAL PACIFIC GROWTH FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
(UNAUDITED)
<TABLE>
APRIL 30,
1994
------------
ASSETS
<S> <C>
Investments, at value (cost $439,884,879)........................................................... $504,411,898
Foreign currency (cost $20,412,139)................................................................. 20,578,924
Cash................................................................................................ 26,022
Receivable for investments sold..................................................................... 11,770,041
Receivable for Fund shares sold..................................................................... 3,560,679
Dividends and interest receivable................................................................... 1,050,500
Deferred expenses and other assets.................................................................. 141,677
------------
Total assets.................................................................................. 541,539,741
------------
LIABILITIES
Payable for investments purchased................................................................... 12,698,488
Payable for Fund shares reacquired.................................................................. 1,253,633
Forward contracts-net amount payable to counterparties.............................................. 953,649
Distribution fee payable............................................................................ 368,684
Accrued expenses and other liabilities.............................................................. 321,196
Management fee payable.............................................................................. 316,769
------------
Total liabilities............................................................................. 15,912,419
------------
NET ASSETS.......................................................................................... $525,627,322
============
Net assets were comprised of:
Common stock, at par.............................................................................. $ 31,709
Paid-in capital in excess of par.................................................................. 466,515,685
------------
466,547,394
Accumulated net investment loss................................................................... (2,322,454)
Accumulated net realized loss on investments and foreign currency transactions.................... (2,205,314)
Net unrealized appreciation on investments and foreign currencies................................. 63,607,696
------------
Net assets, April 30 ,1994.......................................................................... $525,627,322
============
Class A:
Net asset value and redemption price per share
($98,900,901 / 5,906,015 shares of common stock issued and outstanding)......................... $16.75
Maximum sales charge (5.25% of offering price).................................................... .93
------
Maximum offering price to public.................................................................. $17.68
======
Class B:
Net asset value, offering price and redemption price per share
($426,726,421 / 25,803,155 shares of common stock issued and outstanding)....................... $16.54
======
</TABLE>
See Notes to Financial Statements.
B-41
<PAGE>
<TABLE><CAPTION>
- ------------------------------------------------------ ---------------------------------------------------------
PRUDENTIAL PACIFIC GROWTH FUND, INC. PRUDENTIAL PACIFIC GROWTH FUND, INC.
STATEMENT OF OPERATIONS STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED) (UNAUDITED)
- ------------------------------------------------------ ---------------------------------------------------------
SIX MONTHS SIX MONTHS
ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, OCTOBER 31,
1994 1994 1993
------------- ------------- -------------
NET INVESTMENT INCOME INCREASE (DECREASE)
<S> <C> IN NET ASSETS
<S> <C> <C>
Income Operations
Dividends (net of foreign withholding Net investment loss...... $(1,832,900) $ (633,024)
taxes of $285,520)................. $ 2,338,968 Net realized gain (loss)
Interest (net of foreign withholding on investment and
taxes of $1,849)................... 233,256 foreign currency
------------- transactions............... (1,549,510) 5,416,787
Total income..................... 2,572,224 Net change in unrealized
------------- appreciation/depreciation
Expenses on investments and
Management fee....................... 1,674,017 foreign currencies......... 21,013,364 40,695,258
Distribution fee--Class A............ 107,564 ------------- -------------
Distribution fee--Class B............ 1,801,753 Net increase in net
Custodian's fees and expenses........ 342,000 assets resulting from
Transfer agent's fees and expenses... 320,000 operations................. 17,630,954 45,479,021
Registration fees.................... 60,000 ------------- -------------
Directors' fees...................... 21,000 Distributions in excess of
Reports to shareholders.............. 21,000 net investment income
Amortization of organization (Note 1)
expense................................ 20,000 Class A.................. (293,320) (19,787)
Audit fee............................ 17,000 Class B.................. (658,425) (31,474)
Legal fees........................... 17,000 ------------- -------------
Miscellaneous........................ 3,790 (951,745) (51,261)
------------- ------------- -------------
Total expenses................... 4,405,124 Distributions to
------------- shareholders from net
Net investment loss.................... (1,832,900) realized gains
------------- Class A.................. (944,124) --
REALIZED AND UNREALIZED GAIN (LOSS) ON Class B.................. (3,989,283) --
INVESTMENT AND FOREIGN CURRENCY ------------- -------------
TRANSACTIONS (4,933,407) --
Net realized gain (loss) on: ------------- -------------
Investment transactions.............. (1,815,460) Fund share transactions
Foreign currency transactions........ 265,950 (Note 6)
------------- Net proceeds from shares
(1,549,510) subscribed................. 324,014,408 270,394,550
------------- Net asset value of shares
Net change in unrealized issued to shareholders
appreciation/depreciation on: in reinvestment of
Investments.......................... 22,579,713 distributions.............. 5,612,542 47,105
Foreign currencies................... (1,566,349) Cost of shares
------------- reacquired................. (131,095,907) (34,486,434)
21,013,364 ------------- -------------
------------- Net increase in net
Net gain on investments and foreign assets from Fund share
currencies............................. 19,463,854 transactions............... 198,531,043 235,955,221
------------- ------------- -------------
NET INCREASE IN NET ASSETS Total increase....... 210,276,845 281,382,981
RESULTING FROM OPERATIONS.............. $17,630,954 NET ASSETS
============= Beginning of period........ 315,350,477 33,967,496
------------- -------------
End of period.............. $525,627,322 $315,350,477
============= =============
See Notes to Financial Statements. See Notes to Financial Statements.
</TABLE>
B-42
<PAGE>
- --------------------------------------------------------------------------------
PRUDENTIAL PACIFIC GROWTH FUND, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
Prudential Pacific Growth 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 August 14, 1991 and had no
operations other than the issuance of 5,000 shares each of Class A and Class B
common stock for $100,000 on May 6, 1992 to Prudential Mutual Fund Management,
Inc. ("PMF"). The Fund commenced investment operations on July 24, 1992. The
investment objective of the Fund is to seek long-term capital growth by
investing primarily in common stocks, common stock equivalents and other
securities of companies doing business in or domiciled in the Pacific Basin
region.
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: Securities traded on an exchange (whether domestic or
foreign) 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 for which a last sales price is not
available) are valued at the average of the last reported bid and asked prices.
Any securities or other assets for which current market quotations are not
readily available are valued at fair value as determined in good faith under
procedures established by and under the general supervision and responsibility
of the Fund's Board of Directors. No such securities were held by the Fund at
April 30, 1994.
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 with U.S. financial
institutions, it is the Fund's policy that its custodian or designated
subcustodians, as the case may be under triparty repurchase agreements, takes
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 period, the Fund does not isolate
that portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of securities held at the end of the fiscal period.
Net realized gains on foreign currency transactions of $265,950 represent net
foreign exchange gains from forward currency contracts, disposition of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on security transactions, and the difference between the amounts of
interest, dividends and foreign taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid. Net currency gains and
losses from valuing foreign currency denominated assets and liabilities, other
than investments, at fiscal period end exchange rates are reflected as a
component of unrealized appreciation on 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 possibility of political and economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
B-43
<PAGE>
FORWARD CURRENCY CONTRACTS: 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. A forward contract is a commitment to purchase or
sell a foreign currency at a future date at a negotiated forward rate. The gain
or loss arising from the difference between the settlement value of the original
and renegotiated forward contract, if any, is isolated and is included in net
realized gains from foreign currency transactions. Risks may arise upon entering
into these contracts from the potential inability of the counterparties to meet
the terms of their contracts.
SECURITIES TRANSACTIONS AND INVESTMENT IN-COME: Securities transactions are
recorded on the trade date. Realized gains and losses from investment and
foreign currency transactions are calculated on the identified cost basis.
Dividend income is recorded on the ex-dividend date and interest income is
recorded on an accrual basis.
Net investment income or loss (other than distribution fees) and unrealized
and realized gains or losses are allocated daily to each class of shares of the
Fund based upon the relative proportion of net assets of each class at the
beginning of the day.
DIVIDENDS AND DISTRIBUTIONS: The Fund expects to pay dividends of net investment
income and distributions of net realized capital and currency gains, if any,
annually. Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
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 income to shareholders. Therefore, no federal income tax provision is
required.
Withholding taxes on foreign dividends and interest have been provided for in
accordance with the Fund's understanding of the applicable country's tax rules
and rates.
DEFERRED ORGANIZATION EXPENSES: Approximately $200,000 of organization and
initial registration costs have been deferred and are being amortized over the
period of benefit not to exceed 60 months from the date the Fund commenced
investment operations.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Fund accounts and reports
distributions to shareholders in accordance with Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. As a
result of this statement, the Fund changed the classification of distributions
to shareholders to better disclose the differences between financial statement
amounts and distributions determined in accordance with income tax regulations.
The effect caused by applying this statement was to decrease accumulated net
investment loss and increase accumulated net realized losses on investments and
foreign currency transactions by $462,191 with respect to amounts reported
through April 30, 1994. Net investment income, net realized gains and net assets
were not affected by this change.
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 cost of the subadviser's services, the compensation of officers of
the Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The
Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly at an annual
rate of .75 of 1% of the average daily net assets of the Fund.
The Fund has distribution agreements with Prudential Mutual Fund Distributors,
Inc. ("PMFD"), which acts as the distributor of the Class A shares of the Fund,
and Prudential Securities Incorporated ("PSI"), which acts as distributor of the
Class B shares of the Fund (collectively the "Distributors"). To reimburse the
Distributors for their expenses incurred in distributing and servicing the
Fund's Class A and B shares, the Fund, pursuant to plans of distribution, pays
the Distributors a reimbursement, accrued daily and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its
distribution-related expenses with respect to Class A shares at an annual rate
of up to .30 of 1% of the average
B-44
<PAGE>
daily net assets of the Class A shares. Such expenses under the Class A Plan
were .20 of 1% of the average daily net assets of the Class A shares for the two
months ended December 31, 1993. Effective January 1, 1994, the Class A Plan
distribution expenses were increased to .25 of 1% of the average daily net
assets. PMFD pays various broker-dealers, including PSI and Pruco Securities
Corporation ("Prusec"), affiliated broker-dealers, for account servicing fees
and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to the Class B shares at an annual
rate of up to 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payment of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other branch office distribution-related expenses, interest
and/or carrying charges, the cost of printing and mailing prospectuses to
potential investors and of advertising incurred in connection with the
distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Fund under the plans and
the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Fund that it has received approximately $1,090,600 in
front-end sales charges resulting from sales of Class A shares during the six
months ended April 30, 1994. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons and
incurred other distribution costs.
With respect to the Class B Plan, at any given time, the amount of expenses
incurred by PSI in distributing the Fund's shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payments made by the Fund pursuant to
the Plan. For the six months ended April 30, 1994, PSI advised the Fund that it
received approximately $402,100 in contingent deferred sales charges imposed
upon certain redemptions by investors. PSI, as distributor, has also advised the
Fund that as of April 30, 1994, the amount of distribution expenses incurred by
PSI and not yet reimbursed by the Fund or recovered through contingent deferred
sales charges approximated $10,789,900. This amount may be recovered through
future payments under the Class B Plan or contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America
("Prudential").
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 six months ended April 30,
1994, the Fund incurred fees of approximately $295,000 for the services of PMFS.
As of April 30, 1994, approximately $61,000 of such fees were due to PMFS.
Transfer agent fees and expenses in the statement of operations include certain
out-of-pocket expenses paid to non-affiliates.
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term
investments, for the six months ended April 30, 1994 were $281,332,434 and
$90,277,937, respectively.
The United States federal income tax basis of the Fund's investments at April
30, 1994 was $440,085,809 and accordingly, net unrealized appreciation for
federal income tax purposes was $64,326,089 (gross unrealized
appreciation--$79,644,568; gross unrealized depreciation-- $15,318,479).
At April 30, 1994, the Fund had outstanding forward currency contracts, both
to purchase and sell foreign currencies as follows:
FOREIGN VALUE AT
CURRENCY SETTLEMENT
PURCHASE DATE CURRENT APPRECIATION
CONTRACTS PAYABLE VALUE (DEPRECIATION)
- ------------------------ ---------- ---------- -----------
Australian Dollars,
expiring 5/2/94....... $5,911,596 $5,931,697 $ 20,101
Korean Won, expiring
5/2/94.................. 39,274 39,202 (72)
---------- ---------- -----------
$5,950,870 $5,970,899 $ 20,029
========== ========== ===========
B-45
<PAGE>
FOREIGN VALUE AT
CURRENCY SETTLEMENT
SALE DATE CURRENT
CONTRACTS RECEIVABLE VALUE DEPRECIATION
- ---------------------- ----------- ----------- -----------
Japanese Yen, expiring
8/1/94-2/16/95........ $42,000,000 $42,973,678 $(973,678)
=========== =========== ===========
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. At April 30,
1994, the Fund had a 0.5% undivided interest in the repurchase agreements in the
joint account. The undivided interest for the Fund represented $5,028,000 in
principal amount. As of such date, each repurchase agreement in the joint
account and the value of the collateral therefor was as follows:
Barclays de Zoete Wedd, Inc., 3.55%, in the principal amount of $53,000,000,
repurchase price $53,015,679, due 5/2/94. The value of the collateral including
accrued interest is $54,060,428.
Goldman Sachs & Co., 3.50%, in the principal amount of $315,000,000,
repurchase price $315,091,875, due 5/2/94. The value of the collateral including
accrued interest is $321,300,231.
Merrill Lynch, Pierce, Fenner & Smith, Inc., 3.55%, in the principal amount of
$315,000,000, repurchase price $315,093,188, due 5/2/94. The value of the
collateral including accrued interest is $321,300,584.
Morgan (J.P.) Securities, Inc., 3.58%, in the principal amount of
$295,000,000, repurchase price $295,088,008, due 5/2/94. The value of the
collateral including accrued interest is $300,901,625.
NOTE 6. CAPITAL
The Fund offers both Class A and Class B shares. Class A shares are sold with
a front-end sales charge of up to 5.25%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized 2 billion shares of common stock at $.001 par value
per share equally divided into two classes, designated Class A and Class B
common stock. Of the 31,709,170 shares of common stock issued and outstanding at
April 30, 1994, PMF owned 5,000 Class A shares and 5,000 Class B shares and
Prudential owned 508,851 Class A shares.
Transactions in shares of common stock for the six months ended April 30, 1994
and for the year ended October 31, 1993 were as follows:
CLASS A SHARES AMOUNT
- ------- ---------- ------------
Six months ended April 30, 1994:
Shares sold..................... 4,776,477 $ 80,179,584
Shares issued in reinvestment of
distributions................... 68,502 1,139,181
Shares reacquired............... (2,935,363) (49,269,288)
---------- ------------
Net increase in shares
outstanding..................... 1,909,616 $ 32,049,477
========== ============
Year ended October 31, 1993:
Shares sold..................... 3,564,128 $ 51,357,221
Shares issued in reinvestment of
distributions................... 1,727 17,942
Shares reacquired............... (876,093) (12,582,153)
---------- ------------
Net increase in shares
outstanding..................... 2,689,762 $ 38,793,010
========== ============
CLASS B
- -------
Six months ended April 30, 1994:
Shares sold..................... 14,757,688 $243,834,824
Shares issued in reinvestment of
distributions................. 271,772 4,473,361
Shares reacquired............... (4,974,146) (81,826,619)
---------- ------------
Net increase in shares
outstanding..................... 10,055,314 $166,481,566
========== ============
Year ended October 31, 1993:
Shares sold..................... 15,458,343 $219,037,329
Shares issued in reinvestment of
distributions................. 2,818 29,163
Shares reacquired............... (1,599,655) (21,904,281)
---------- ------------
Net increase in shares
outstanding..................... 13,861,506 $197,162,211
========== ============
- ---------------
These financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
period presented.
B-46
<PAGE>
- --------------------------------------------------------------------------------
PRUDENTIAL PACIFIC GROWTH FUND, INC.
FINANCIAL HIGHLIGHTS
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE><CAPTION>
CLASS A CLASS B
------------------------------------- -------------------------------------
JULY 24, JULY 24,
SIX MONTHS YEAR 1992* SIX MONTHS YEAR 1992*
ENDED ENDED THROUGH ENDED ENDED THROUGH
APRIL 30, OCTOBER 31, OCTOBER 31, APRIL 30, OCTOBER 31, OCTOBER 31,
1994 1993+ 1992 1994 1993+ 1992
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 16.10 $ 10.65 $ 10.00 $ 15.94 $ 10.63 $ 10.00
----------- ----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss........................... -- (.01) (.02) (.06) (.10) (.04)
Net realized and unrealized gains on
investment and foreign currency
transactions................................... .92 5.48 .67 .90 5.43 .67
----------- ----------- ----------- ----------- ----------- -----------
Total from investment operations.......... .92 5.47 .65 .84 5.33 .63
----------- ----------- ----------- ----------- ----------- -----------
LESS DISTRIBUTIONS
Distributions in excess of net investment
income......................................... (.06) (.02) -- (.03) (.02) --
Distributions from net realized gains......... (.21) -- -- (.21) -- --
----------- ----------- ----------- ----------- ----------- -----------
Total distributions....................... (.27) (.02) -- (.24) (.02) --
----------- ----------- ----------- ----------- ----------- -----------
Net asset value, end of period................ $ 16.75 $ 16.10 $ 10.65 $ 16.54 $ 15.94 $ 10.63
=========== =========== =========== =========== =========== ===========
TOTAL RETURN#................................. 5.73% 51.39% 6.50% 5.28% 50.17% 6.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 98,901 $ 64,353 $ 13,918 $ 426,726 $ 250,997 $ 20,050
Average net assets (000)...................... $ 86,830 $ 26,264 $ 12,884 $ 363,693 $ 74,590 $ 16,025
Ratios to average net assets:
Expenses, including distribution fees....... 1.35%** 1.63% 2.72%** 2.12%** 2.37% 3.52%**
Expenses, excluding distribution fees....... 1.12%** 1.43% 2.52%** 1.12%** 1.37% 2.52%**
Net investment loss......................... (.21)%** (.04)% (.75)%** (.97)%** (.83)% (1.55)%**
Portfolio turnover............................ 22% 44% 0% 22% 44% 0%
</TABLE>
----------------
* Commencement of investment operations.
** Annualized.
# 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.
+ Calculated based upon average shares outstanding during the year.
See Notes to Financial Statements.
B-47
<PAGE>
PRUDENTIAL PACIFIC GROWTH FUND, INC. PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1993
<TABLE><CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
VALUE VALUE
SHARES DESCRIPTION (NOTE 1) SHARES DESCRIPTION (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--91.2%
COMMON STOCKS--84.6%
AUSTRALIA--5.8%
<S> <C> <C> <C> <C> <C>
2,746,000 AAPC, Ltd.*................... $ 1,499,077 HONG KONG--(CONT'D.)
(Lodging) 1,548,000 Yips Hang Cheung Holdings,
426,000 Broken Hill Proprietary Ltd........................... $ 465,751
Company, Ltd................ 5,025,545 (Chemicals) --------------
(Energy sources) 39,962,670
1,915,447 BTR Nylex, Ltd................ 4,004,142 INDIA--0.3% --------------
(Industrial components) 53,000 Reliance Industries Ltd.*..... 907,625
350,000 Coca Cola Amatil, Ltd......... 2,400,021 (Miscellaneous basic --------------
(Food & household products) industry)
2,855,400 Sea World Property Trust, INDONESIA--0.8%
Ltd........................... 1,748,898 769,800 Kabel Metal Industries,
(Leisure & tourism) Ltd.*......................... 2,564,107
1,238,500 West Australia Newspaper...... 3,487,757 (Wire & cable) --------------
(General business) -------------- JAPAN--35.8%
18,165,440 263,000 Aiwa Co....................... 4,294,373
HONG KONG--12.7% -------------- (Consumer electronics)
2,290,000 Amoy Properties, Ltd.......... 2,963,441 80,000 Aoyama Trading Co............. 5,992,620
(Real estate) (Merchandising)
4,598,000 Giordano Holdings, Ltd........ 2,945,336 30,000 Autobacs Seven Co............. 3,653,136
(Merchandising) (Merchandising)
1,122,600 Guoco Group, Ltd.............. 4,902,976 42,400 Capcom Co., Ltd............... 3,610,258
(Financial services) (Recreation & other consumer
1,270,000 Hopewell Holdings, Ltd........ 1,273,697 goods)
(Real estate) 97,000 Higashi Nihon House........... 5,413,745
10,055,000 Hung Hing Printing Group, (Housing)
Ltd........................... 3,545,755 27,000 Japan Associates Finance
(General manufacturing) Co.*.......................... 2,964,022
1,324,000 Hutchison Whampoa, Ltd........ 4,985,881 (Financial services)
(Multi-industry) 46,000 Juntendo Co................... 534,686
832,000 Hysan Development Co., Ltd.... 2,411,750 (Merchandising)
(Property related) 378,000 Kamigumi Co., Ltd............. 4,289,114
532,000 Jardine Matheson Holdings, (Transportation &
Ltd........................... 5,094,532 warehousing)
(General trading) 79,000 Koei Co....................... 4,656,919
2,790,000 JCG Holdings, Ltd............. 2,148,236 (Recreation & other consumer
(Financial services) goods)
1,548,000 Lamex Holdings, Ltd........... 610,986 86,000 Kyocera Corp.................. 4,879,151
(Furniture) (Public works - electronics)
2,639,000 Liu Chong Hing Investment, 112,000 Maezawa Industries............ 4,577,122
Ltd........................... 2,902,813 (Public works -
(Real estate) construction)
13,787,000 Techtronic Industries, Ltd.... 2,587,006 157,000 Maruichi Steel Tube, Ltd...... 2,853,229
(Machinery) (Steel)
11,636,000 UDL Holdings, Ltd............. 3,124,510 297,000 Mitsui Fudosan Co............. 3,589,206
(Construction) (Real estate)
149,000 Mitsui Home Co................ 2,941,513
(Housing)
136,000 Mr. Max Corp.................. 3,763,838
(Merchandising)
249,000 Murata Manufacturing Co.,
Ltd........................... 8,751,753
(Electronic components)
B-48 See Notes to Financial Statements
<PAGE>
PRUDENTIAL PACIFIC GROWTH FUND, INC.
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
VALUE VALUE
SHARES DESCRIPTION (NOTE 1) SHARES DESCRIPTION (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JAPAN--(CONT'D.) KOREA--(CONT'D.)
92,000 Namco......................... $ 2,333,948 72,960 Kun Young Construction
(Recreation & other consumer Corp.......................... $ 1,210,055
goods) (Housing)
212,000 National House Industrial..... 4,185,240 54,350 Pusan Steel Pipe.............. 1,674,998
(Housing) (Steel)
50,000 Nichiei Co.................... 4,658,672 57,880 Samsung Electronic Co......... 2,951,489
(Financial services) (Electronics)
125,000 Nissen Co., Ltd............... 5,362,085 873 Samsung Electronic Co.*....... 28,309
(Merchandising) (New shares)
109,000 P.S. Corp..................... 2,202,122 (Electronics)
(Public works - 44,540 Shinwon Corp.*................ 1,356,128
construction) (Merchandising) --------------
576,000 Ricoh Co...................... 3,804,576 11,489,585
(Data processing & MALAYSIA--14.2% --------------
reproduction) 624,000 Arab-Malaysian Finance*....... 2,429,012
63,000 Secom Co., Ltd................ 3,928,782 (Banking)
(Security/investigation 1,000,000 Bedford Berhad................ 2,073,471
services) (Real estate)
86,000 Sega Enterprises, Ltd......... 7,187,823 862,000 Golden Plus Holdings Berhad... 3,102,539
(Recreation & other consumer (Building materials)
goods) 921,000 Granite Industries Berhad*.... 5,188,529
126,000 Sho-Bond Construction Co., (Leisure & tourism)
Ltd........................... 3,463,837 1,134,000 Kedah Cement Holdings
(Public works - Berhad........................ 1,854,434
construction) (Building materials &
138,000 Taihei Dengyo Co., Ltd........ 3,233,579 components)
(Energy equipment & 1,587,500 Magnum Corp. Berhad*.......... 3,912,699
services) (Leisure)
67,000 Tsutsumi Jewelry Co., Ltd..... 5,748,155 491,000 MGR Corp. Berhad*............. 1,479,089
(Merchandising) -------------- (Forest products)
112,873,504 850,000 Multi-Purpose Holdings
KOREA--3.6% -------------- Berhad........................ 1,745,824
21,200 Daewoo Securities Co., Ltd.... 543,152 (Consumer goods)
(Financial services) 2,342,500 Pilecon Engineering Berhad.... 4,178,943
1,060 Daishin Securities Co......... 22,828 (Machinery & engineering)
(Financial services) 3,484,000 Renong Berhad*................ 4,879,589
47,470 Dong Ah Construction Industry (Infrastructure)
Co., Ltd.................... 1,286,704 1,003,000 Resorts World................. 5,493,525
(Housing) (Leisure & tourism)
9,195 Dong Ah Construction Industry 1,440,000 RJ Reynolds Berhad............ 2,309,769
Co., Ltd.................... 163,881 (Tobacco)
(New shares) 300,000 Tanjong Plc................... 1,995,227
(Housing) (Leisure & tourism)
40,539 Dong Shin Construction Co.*... 687,399
(Construction)
1,756 Dong Shin Construction Co.*... 22,386
(New shares)
(Construction)
119,814 Hanjin Heavy Industries*...... 1,542,256
(Ship building)
B-49 See Notes to Financial Statements
<PAGE>
PRUDENTIAL PACIFIC GROWTH FUND, INC.
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
VALUE VALUE
SHARES DESCRIPTION (NOTE 1) WARRANTS DESCRIPTION (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
MALAYSIA--(CONT'D.) JAPAN--(CONT'D.)
902,000 Technology Resources 493 Nissen Co., Ltd.
Industries Berhad*.......... $ 3,987,559 expiring Nov. '96 @
(Telecommunication) -------------- y1,681........................ $ 614,421
44,630,209 (Merchandising) --------------
SINGAPORE--9.9% 2,047,709
750,000 First Capital Corp.*.......... 3,190,986 SINGAPORE--0.7% --------------
(Construction) 190,200 Hong Leong Finance
114,750 First Capital Corp.*.......... 459,289 expiring Nov. '98 @
(New shares) SGD3.25....................... 238,095
(Construction) (Financial services)
1,193,000 Hong Leong Finance............ 3,579,376 616,000 United Overseas Bank, Ltd.
(Financial services) expiring Nov. '94 @
276,000 Jurong Shipyard, Ltd.......... 2,348,566 SGD3.16....................... 2,096,691
(Capital goods) (Banking) --------------
1,499,000 Kim Eng Holdings.............. 3,193,582 2,334,786
(Financial services) Total warrants --------------
1,012,750 Sembawang Maritime, Ltd....... 4,787,661 (cost $3,058,123)........... 4,382,495
(Transportation/shipping) SHARES PREFERRED STOCKS--1.1% --------------
435,000 Sembawang Shipyards, Ltd...... 3,619,287 KOREA
(Machinery & engineering) 64,330 Daewoo Securities Co., Ltd.... 1,552,615
502,000 Singapore Airlines, Ltd....... 3,923,605 (Financial services)
(Transportation) 58,200 Daishin Securities Co......... 1,217,377
2,486,000 Wing Tai Holdings............. 6,205,206 (Financial services)
(Multi-industry) -------------- 22,750 Mando Machinery Corp.......... 825,020
31,307,558 (Automobile parts)
THAILAND--1.5% -------------- Total preferred stocks
265,800 Land & House, Ltd.*........... 4,825,099 (cost $3,806,891)........... 3,595,012
(Housing) -------------- RIGHTS RIGHTS--1.1% --------------
Total common stocks (cost AUSTRALIA
$228,615,463)................. 266,725,797 763,631 Bank of Melbourne, Ltd.*......
WARRANTS WARRANTS*--1.4% -------------- (Banking)
JAPAN--0.7% (cost $3,126,593)........... 3,558,700
Autobacs Seven Co. CONVERTIBLE LOAN STOCKS--1.3% --------------
150 expiring Feb. '95 @ MALAYSIA--1.0%
y8,089...................... 579,375 1,593 IJM Corp. Berhad.............. 3,053,752
100 expiring Mar. '96 @ (Building related) --------------
y8,231...................... 368,750 SINGAPORE--0.3%
(Merchandising) 631 Sembawang Maritime, Ltd....... 994,327
300 Kamigumi Co., Ltd. (Transportation/shipping) --------------
expiring Sept. '96 @ y902... 86,350 Total convertible loan stocks
(Transportation & (cost $2,585,118)........... 4,048,079
warehousing) --------------
1,600 Mr. Max Corp.
expiring July '95 @
y2,194.40..................... 398,813
(Merchandising)
B-50 See Notes to Financial Statements
</TABLE>
<PAGE>
PRUDENTIAL PACIFIC GROWTH FUND, INC.
- --------------------------------------------------------------------------------
VALUE
SHARES DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
(000) CONVERTIBLE BONDS--1.7%
JAPAN--0.6%
y122,000 Capcom Co., Ltd.
3.90%, 9/30/96.............. $ 1,744,465
(Recreation & other consumer
goods)
KOREA--0.7%
US$ 1,120 Samsung Electronic Co.
3.75%, 12/31/07............. 2,105,600
(Electronics)
THAILAND--0.4%
US$ 1,000 Land & House, Ltd.
5.00%, 4/29/03.............. 1,405,000
(Housing)
Total convertible bonds
(cost $4,425,654)........... 5,255,065
Total long-term investments
(cost $245,617,842)......... 287,565,148
SHORT-TERM INVESTMENTS--4.6%
US$ 14,519 Joint Repurchase Agreement
Account,
2.93%, 11/1/93 (Note 5)..... 14,519,000
TOTAL INVESTMENTS--95.8%
(cost $260,136,842; Note
4)............................ 302,084,148
Other assets in excess of
liabilities--4.2%........... 13,266,329
NET ASSETS--100%.............. $315,350,477
- ------------
* Non-income producing security.
B-51
See Notes to Financial Statements
<PAGE>
<TABLE><CAPTION>
- ------------------------------------------------------------------------------------------------------------------
PRUDENTIAL PACIFIC GROWTH FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
- ------------------------------------------------------------------------------------------------------------------
OCTOBER 31,
1993
------------
ASSETS
<S> <C>
Investments, at value (cost $260,136,842)........................................................... $302,084,148
Foreign currency (cost $4,605,134).................................................................. 4,562,732
Cash................................................................................................ 401,282
Receivable for Fund shares sold..................................................................... 14,900,259
Forward contracts-net amount receivable from counterparties......................................... 668,149
Dividends and interest receivable................................................................... 366,840
Deferred expenses and other assets.................................................................. 149,436
------------
Total assets.................................................................................. 323,132,846
------------
LIABILITIES
Payable for investments purchased................................................................... 6,560,076
Payable for Fund shares reacquired.................................................................. 703,435
Due to Distributors................................................................................. 194,516
Due to Manager...................................................................................... 175,531
Accrued expenses and other liabilities.............................................................. 148,811
------------
Total liabilities............................................................................. 7,782,369
------------
NET ASSETS.......................................................................................... $315,350,477
============
Net assets were comprised of:
Common stock, at par.............................................................................. $ 19,744
Paid-in capital in excess of par.................................................................. 267,996,607
------------
268,016,351
Accumulated net realized gain on investment and foreign currency transactions..................... 4,739,794
Net unrealized appreciation on investments and foreign currencies................................. 42,594,332
------------
Net assets, October 31, 1993........................................................................ $315,350,477
============
Class A:
Net asset value and redemption price per share
($64,353,319 / 3,996,399 shares of common stock issued and outstanding)......................... $16.10
Maximum sales charge (5.25% of offering price).................................................... 89
------
Maximum offering price to public.................................................................. $16.99
======
Class B:
Net asset value, offering price and redemption price per share
($250,997,158 / 15,747,841 shares of common stock issued and outstanding)....................... $15.94
======
</TABLE>
See Notes to Financial Statements.
B-52
<PAGE>
<TABLE><CAPTION>
- ------------------------------------------------------ ----------------------------------------------------------
PRUDENTIAL PACIFIC GROWTH FUND, INC. PRUDENTIAL PACIFIC GROWTH FUND, INC.
STATEMENT OF OPERATIONS STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------ ----------------------------------------------------------
YEAR ENDED 1992*
OCTOBER 31, YEAR ENDED THROUGH
1993 OCTOBER 31, OCTOBER 31,
----------- 1993 1992
<S> <C> <S> <C> <C>
NET INVESTMENT INCOME ------------ -----------
INCREASE (DECREASE)
Income IN NET ASSETS
Dividends (net of foreign withholding
taxes of $142,102).................. $ 1,355,202 Operations
Interest (net of foreign withholding Net investment loss......... $ (633,024) $ (94,650)
taxes of $1,344).................... 202,936 Net realized gain on
----------- investment and foreign
Total income...................... 1,558,138 currency transactions..... 5,416,787 101,942
----------- Net change in unrealized
Expenses appreciation on
Management fee........................ 756,412 investments and foreign
Distribution fee--Class A............. 52,529 currencies................ 40,695,258 1,899,074
Distribution fee--Class B............. 745,906 ------------ -----------
Custodian's fees and expenses......... 238,000 Net increase in net assets
Transfer agent's fees and expenses.... 147,000 resulting from operations. 45,479,021 1,906,366
Registration fees..................... 81,000 ------------ -----------
Directors' fees....................... 42,000 Dividends to shareholders from
Amortization of organization foreign currency gains (Note
expense.................................. 40,000 1)
Reports to shareholders............... 35,000 Class A..................... (19,787) --
Legal fees............................ 30,000 Class B..................... (31,474) --
Audit fee............................. 20,000 ------------ -----------
Miscellaneous......................... 3,315 (51,261) --
----------- ------------ -----------
Total expenses.................... 2,191,162 Fund share transactions (Note
Net investment loss..................... (633,024) 6)
----------- Net proceeds from shares
REALIZED AND UNREALIZED GAIN ON subscribed................ 270,394,550 32,829,326
INVESTMENT AND FOREIGN CURRENCY Net asset value of shares
TRANSACTIONS issued to shareholders in
Net realized gain on reinvestment of
Investment transactions............... 4,980,679 distributions............. 47,105 --
Foreign currency transactions......... 436,108 Cost of shares reacquired... (34,486,434) (868,196)
----------- ------------ -----------
5,416,787 Net increase in net assets
----------- from Fund share
Net change in unrealized appreciation on transactions.............. 235,955,221 31,961,130
Investments........................... 40,048,426 ------------ -----------
Foreign currencies.................... 646,832 Total increase.......... 281,382,981 33,867,496
----------- NET ASSETS
40,695,258 Beginning of period........... 33,967,496 100,000
----------- ------------ -----------
Net gain on investments and foreign End of period................. $315,350,477 $33,967,496
currencies............................... 46,112,045 ============ ===========
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS............... $45,479,021 * Commencement of operations.
===========
See Notes to Financial Statements. See Notes to Financial Statements.
</TABLE>
B-53
<PAGE>
- --------------------------------------------------------------------------------
PRUDENTIAL PACIFIC GROWTH FUND, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Prudential Pacific Growth 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 August 14, 1991 and had no
operations other than the issuance of 5,000 shares each of Class A and Class B
common stock for $100,000 on May 6, 1992 to Prudential Mutual Fund Management,
Inc. ("PMF"). The Fund commenced investment operations on July 24, 1992. The
investment objective of the Fund is to seek long-term capital growth by
investing primarily in common stocks, common stock equivalents and other
securities of companies doing business in or domiciled in the Pacific Basin
region.
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: Securities traded on an exchange (whether domestic or
foreign) 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 for which a last sales price is not
available) are valued at the average of the last reported bid and asked prices.
Any securities or other assets for which current market quotations are not
readily available are valued at fair value as determined in good faith under
procedures established by and under the general supervision and responsibility
of the Fund's Board of Directors. No such securities were held by the Fund at
October 31, 1993.
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 with U.S. financial
institutions, it is the Fund's policy that its custodian takes 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 the end of the fiscal year.
Net realized gains on foreign currency transactions of $436,108 represent net
foreign exchange gains from forward currency contracts, disposition of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on security transactions, and the difference between the amounts of
interest, dividends and foreign taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid. Net currency gains and
losses from valuing foreign currency denominated assets and liabilities, other
than investments, at fiscal year end exchange rates are reflected as a component
of unrealized appreciation on 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 possibility of political and economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
FORWARD CURRENCY CONTRACTS: 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. A forward contract is a commitment to
B-54
<PAGE>
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The gain or loss arising from the difference between the settlement value
of the original and renegotiated forward contracts, if any, is isolated and is
included in net realized gains from foreign currency transactions. Risks may
arise upon entering into these contracts from the potential inability of the
counterparties to meet the terms of their contracts.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized gains and losses from investment and
foreign currency transactions are calculated on the identified cost basis.
Dividend income is recorded on the ex-dividend date and interest income is
recorded on an accrual basis.
Net investment income or loss (other than distribution fees) and unrealized
and realized gains or losses are allocated daily to each class of shares of the
Fund based upon the relative proportion of net assets of each class at the
beginning of the day.
DIVIDENDS AND DISTRIBUTIONS: The Fund expects to pay dividends of net investment
income and distributions of net realized capital and currency gains, if any,
annually. Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
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 income to shareholders. Therefore, no federal income tax provision is
required.
Withholding taxes on foreign dividends and interest have been provided for in
accordance with the Fund's understanding of the applicable country's tax rules
and rates.
DEFERRED ORGANIZATION EXPENSES: Approximately $200,000 of organization and
initial registration costs have been deferred and are being amortized over the
period of benefit not to exceed 60 months from the date the Fund commenced
investment operations.
RECLASSIFICATION OF CAPITAL ACCOUNTS: Effective November 1, 1992, the Fund began
accounting and reporting for distributions to shareholders in accordance with
Statement of Position 93-2: Determination, Disclosure, and Financial Statement
Presentation of Income, Capital Gain, and Return of Capital Distributions by
Investment Companies. As a result of this statement, the Fund changed the
classification of distributions to shareholders to better disclose the
differences between financial statement amounts and distributions determined in
accordance with income tax regulations. The effect caused by adopting this
statement was to decrease accumulated net investment loss and decrease
accumulated net realized gains on investments and foreign currency transactions
by $727,674 with respect to amounts reported through October 31, 1993. Net
investment income, net realized gains and net assets were not affected by this
change.
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 cost of the subadviser's services, the compensation of officers of
the Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The
Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly at an annual
rate of .75 of 1% of the average daily net assets of the Fund.
The Fund has distribution agreements with Prudential Mutual Fund Distributors,
Inc. ("PMFD"), which acts as the distributor of the Class A shares of the Fund,
and Prudential Securities Incorporated ("PSI"), which acts as distributor of the
Class B shares of the Fund (collectively the "Distributors"). To reimburse the
Distributors for their expenses incurred in distributing and servicing the
Fund's Class A and B shares, the Fund, pursuant to plans of distribution, pays
the Distributors a reimbursement, accrued daily and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its
distribution-related expenses with respect to Class A shares at an annual rate
of up to .30 of 1% of the average daily net assets of the Class A shares. Such
expenses under the Class A Plan were .20 of 1% of the average daily
B-55
<PAGE>
net assets of the Class A shares for the fiscal year ended October 31, 1993.
PMFD pays various broker-dealers, including PSI and Pruco Securities Corporation
("Prusec"), affiliated broker-dealers, for account servicing fees and other
expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to the Class B shares at an annual
rate of up to 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payment of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other branch office distribution-related expenses, interest
and/or carrying charges, the cost of printing and mailing prospectuses to
potential investors and of advertising incurred in connection with the
distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Fund under the plans and
the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Fund that it has received approximately $1,305,500 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended October 31, 1993. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons and
incurred other distribution costs.
With respect to the Class B Plan, at any given time, the amount of expenses
incurred by PSI in distributing the Fund's shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payments made by the Fund pursuant to
the Plan. For the fiscal year ended October 31, 1993, PSI advised the Fund that
it received approximately $168,400 in contingent deferred sales charges imposed
upon certain redemptions by investors. PSI, as distributor, has also advised the
Fund that as of October 31, 1993, the amount of distribution expenses incurred
by PSI and not yet reimbursed by the Fund or recovered through contingent
deferred sales charges approximated $6,322,200. This amount may be recovered
through future payments under the Class B Plan or contingent deferred sales
charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America
("Prudential").
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 October 31,
1993, the Fund incurred fees of approximately $128,000 for the services of PMFS.
As of October 31, 1993, approximately $29,000 of such fees were due to PMFS.
Transfer agent fees and expenses in the statement of operations include certain
out-of-pocket expenses paid to non-affiliates.
For the fiscal year ended October 31, 1993, PSI received approximately $6,500
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 October 31, 1993 were $258,325,430 and
$43,659,682, respectively.
The United States federal income tax basis of the Fund's investments at
October 31, 1993 was $260,405,940 and accordingly, net unrealized appreciation
for federal income tax purposes was $41,678,208 (gross unrealized
appreciation--$45,195,586; gross unrealized depreciation-- $3,517,378).
At October 31, 1993, the Fund had outstanding forward currency contracts to
sell foreign currencies as follows:
FOREIGN VALUE AT
CURRENCY SETTLEMENT
SALE DATE CURRENT
CONTRACTS RECEIVABLE VALUE APPRECIATION
- ---------------------- ----------- ----------- -----------
Japanese Yen, expiring
8/1/94-8/25/94........ $22,000,000 $21,331,851 $ 668,149
----------- ----------- -----------
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
B-56
<PAGE>
invested in one or more repurchase agreements collateralized by U.S. Treasury or
federal agency obligations. At October 31, 1993, the Fund had a 1.1% undivided
interest in the repurchase agreements in the joint account. The undivided
interest for the Fund represented $14,519,000 in principal amount. As of such
date, each repurchase agreement in the joint account and the collateral therefor
were as follows:
CS First Boston Corp., 2.93%, in the principal amount of $360,000,000,
repurchase price $360,087,900, due 11/1/93, collateralized by $47,400,000 U.S.
Treasury Notes, 6.75%, due 2/28/97; $40,000,000 U.S. Treasury Notes, 11.25%, due
2/15/95; $100,000,000 U.S. Treasury Bonds, 7.50%, due 11/15/16; $50,000,000 U.S.
Treasury Bonds, 10.375%, due 11/15/12 and $50,000,000 U.S. Treasury Bonds,
12.00%, due 5/15/05; aggregate value including accrued interest--$368,368,052.
Goldman Sachs & Co., 2.93%, in the principal amount of $450,154,000,
repurchase price $450,263,909, due 11/1/93, collateralized by $104,915,000 U.S.
Treasury Bonds, 12.00%, due 8/15/13 and $200,000,000 U.S. Treasury Bonds,
10.75%, due 8/15/05; aggregate value including accrued interest--$462,739,932.
Kidder Peabody & Co. Inc., 2.95%, in the principal amount of $305,000,000,
repurchase price $305,074,979, due 11/1/93, collateralized by $210,030,000 U.S.
Treasury Bonds, 9.875%, due 11/15/15; value including accrued
interest--$311,527,136.
Nomura Securities International, Inc., 2.90%, in the principal amount of
$60,889,000, repurchase price $60,903,715, due 11/1/93, collateralized by
$8,280,000 U.S. Treasury Notes, 7.75%, due 2/15/95; $25,000,000 U.S. Treasury
Notes, 7.375%, due 5/15/96 and $22,775,000 U.S. Treasury Notes, 8.875%, due
2/15/96; aggregate value including accrued interest--$62,140,276.
Smith Barney Shearson, Inc., 2.94%, in the principal amount of $175,000,000,
repurchase price $175,042,875, due 11/1/93, collateralized by $4,465,000 U.S.
Treasury Bonds, 12.00%, due 5/15/05; $11,435,000 U.S. Treasury Notes, 9.125%,
due 5/15/99; $75,000,000 U.S. Treasury Bonds, 8.125%, due 8/15/19 and
$50,000,000 U.S. Treasury Bonds, 8.00%, due 11/15/21; aggregate value including
accrued interest--$178,771,706.
NOTE 6. CAPITAL
The Fund offers both Class A and Class B shares. Class A shares are sold with
a front-end sales charge of up to 5.25%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized 2 billion shares of common stock at $.001 par value
per share equally divided into two classes, designated Class A and Class B
common stock. Of the 19,744,240 shares of common stock issued and outstanding at
October 31, 1993, PMF owned 5,000 Class A shares and 5,000 Class B shares and
Prudential owned 500,722 Class A shares.
Transactions in shares of common stock for the fiscal year ended October 31,
1993 and for the period ended October 31, 1992 were as follows:
CLASS A SHARES AMOUNT
- -------------------------------- ---------- ------------
Year ended October 31, 1993:
Shares sold..................... 3,564,128 $ 51,357,221
Shares issued in reinvestment of
distributions................... 1,727 17,942
Shares reacquired............... (876,093) (12,582,153)
---------- ------------
Net increase in shares
outstanding..................... 2,689,762 $ 38,793,010
========== ============
Period ended October 31, 1992:
Shares sold..................... 1,345,525 $ 13,479,169
Shares reacquired............... (43,888) (458,071)
---------- ------------
Net increase in shares
outstanding..................... 1,301,637 $ 13,021,098
========== ============
CLASS B
- --------------------------------
Year ended October 31, 1993:
Shares sold..................... 15,458,343 $219,037,329
Shares issued in reinvestment of
distributions................. 2,818 29,163
Shares reacquired............... (1,599,655) (21,904,281)
---------- ------------
Net increase in shares
outstanding..................... 13,861,506 $197,162,211
========== ============
Period ended October 31, 1992:
Shares sold..................... 1,921,607 $ 19,350,157
Shares reacquired............... (40,272) (410,125)
---------- ------------
Net increase in shares
outstanding..................... 1,881,335 $ 18,940,032
========== ============
B-57
<PAGE>
NOTE 7. DIVIDENDS AND DISTRIBUTIONS
Subsequent to October 31, 1993, the Board of Directors of the Fund declared
dividends from net investment income to Class A shareholders of $.064 per share
and to Class B shareholders of $.034 per share and both short-term and long-term
capital gain distributions to both Class A and Class B shareholders of $.174 and
$.032 per share, respectively, payable on December 29, 1993 to shareholders of
record on December 22, 1993.
B-58
<PAGE>
- --------------------------------------------------------------------------------
PRUDENTIAL PACIFIC GROWTH FUND, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE><CAPTION>
CLASS A CLASS B
------------------------ ------------------------
JULY 24, JULY 24,
YEAR 1992* YEAR 1992*
ENDED THROUGH ENDED THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1993 1992 1993+ 1992
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................... $ 10.65 $ 10.00 $ 10.63 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment loss................................................ (.01) (.02) (.10) (.04)
Net realized and unrealized gains on investment and foreign
currency transactions............................................ 5.48 .67 5.43 .67
----------- ----------- ----------- -----------
Total from investment operations............................... 5.47 .65 5.33 .63
----------- ----------- ----------- -----------
LESS DISTRIBUTIONS
Distributions from foreign currency gains.......................... (.02) -- (.02) --
----------- ----------- ----------- -----------
Net asset value, end of period..................................... $ 16.10 $ 10.65 $ 15.94 $ 10.63
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
TOTAL RETURN#...................................................... 51.39% 6.50% 50.17% 6.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................................... $ 64,353 $ 13,918 $ 250,997 $ 20,050
Average net assets (000)........................................... $ 26,264 $ 12,884 $ 74,590 $ 16,025
Ratios to average net assets:
Expenses, including distribution fees............................ 1.63% 2.72%** 2.37% 3.52%**
Expenses, excluding distribution fees............................ 1.43% 2.52%** 1.37% 2.52%**
Net investment loss.............................................. (.04)% (.75 %** (.83 )% (1.55 )%**
Portfolio turnover................................................. 44% 0% 44% 0%
</TABLE>
----------------
* Commencement of investment operations.
** Annualized.
# 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.
+ Calculated based upon average shares outstanding during the year.
See Notes to Financial Statements.
B-59
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
PRUDENTIAL PACIFIC GROWTH FUND, INC.
We have audited the accompanying statement of assets and liabilities of
Prudential Pacific Growth Fund, Inc., including the portfolio of investments, as
of October 31, 1993, the related statements of operations for the year then
ended and of changes in net assets for the year ended October 31, 1993 and the
period May 7, 1992 (commencement of operations) to October 31, 1992 and the
financial highlights for the year ended October 31, 1993 and the period July 24,
1992 (commencement of investment operations) to October 31, 1992. 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 as of
October 31, 1993 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 audit provides 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 Pacific
Growth Fund, Inc. as of October 31, 1993, the results of its operations, the
changes in its net assets and the financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE
NEW YORK, NEW YORK
DECEMBER 15, 1993
B-60
