Prudential Pacific Growth Fund, Inc.
Class Z Shares
- --------------------------------------------------------------------------------
PROSPECTUS DATED JANUARY 2, 1996
- --------------------------------------------------------------------------------
Prudential Pacific Growth Fund, Inc. (the Fund) is an open-end, diversified
management investment company whose 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. 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. The
Fund also may engage in various derivative transactions, such as those involving
options on stocks, stock indices, foreign currencies and 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 return. See "How the Fund
Invests--Investment Objective and Policies." There can be no assurance that the
Fund's investment objective will be achieved. The Fund's address is One Seaport
Plaza, New York, New York l0292, 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--Risks and Special Considerations of Investing in Foreign
Securities" and "Portfolio Turnover" in the Retail Class Prospectus (defined
below).
Class Z shares are offered exclusively for sale to participants in the PSI
401(k) Plan, an employee benefit plan sponsored by Prudential Securities
Incorporated (the PSI 401(k) Plan or the Plan). Only Class Z shares are offered
through this Prospectus. The Fund also offers Class A, Class B and Class C
shares through the attached Prospectus dated January 2, 1996 (the Retail Class
Prospectus) which is a part hereof.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated January 2, 1996, which information is
incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund, at the
address or telephone number noted above.
- --------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
CLASS Z SHARES
----------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases (as a percentage of offering
price).................................................................. None
Maximum Sales Load or Deferred Sales Load Imposed on Reinvested
Dividends............................................................... None
Deferred Sales Load (as a percentage of original purchase price or
redemption proceeds, whichever is lower)................................ None
Redemption Fees.......................................................... None
Exchange Fee............................................................. None
</TABLE>
<TABLE>
<CAPTION>
CLASS Z SHARES*
---------------
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets):
Management Fees.......................................................... .75%
12b-1 Fees............................................................... None
Other Expenses........................................................... .46
-----
Total Fund Operating Expenses............................................ 1.21%
-----
-----
</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 Z*..................................................... $ 12 $38 $66 $147
</TABLE>
The above example is based on expenses expected to have been incurred if
Class Z shares had been in existence during the fiscal year ended October
31, 1995. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in Class Z shares of the Fund
will bear, whether directly or indirectly. For more complete descriptions of
the various costs and expenses, see "How the Fund is Managed" in the Retail
Class Prospectus. "Other Expenses" includes operating expenses of the Fund,
such as directors' and professional fees, registration fees, reports to
shareholders, transfer agency and custodian fees and franchise taxes.
------------------
* Estimated based on expenses expected to have been incurred if Class Z
shares had been in existence during the fiscal year ended October 31,
1995.
2
<PAGE>
THE FOLLOWING INFORMATION SUPPLEMENTS "HOW THE FUND IS MANAGED--DISTRIBUTOR"
IN THE RETAIL CLASS PROSPECTUS:
Prudential Securities serves as the Distributor of Class Z shares and incurs
the expenses of distributing the Fund's Class Z shares under a Distribution
Agreement with the Fund, none of which are reimbursed by or paid for by the
Fund.
THE FOLLOWING INFORMATION SUPPLEMENTS "HOW THE FUND VALUES ITS SHARES" IN
THE RETAIL CLASS PROSPECTUS:
The NAV of Class Z shares will generally be higher than the NAV of Class A,
Class B or Class C shares as a result of the fact that Class Z shares are not
subject to any distribution and/or service fee. It is expected, however, that
the NAV of the four classes will tend to converge immediately after the
recording of dividends, which will differ by approximately the amount of the
distribution-related accrual differential among the classes.
THE FOLLOWING INFORMATION SUPPLEMENTS "TAXES, DIVIDENDS AND
DISTRIBUTIONS--TAXATION OF SHAREHOLDERS" IN THE RETAIL CLASS PROSPECTUS:
As a qualified plan, the PSI 401(k) Plan generally pays no federal income
tax. Individual participants in the Plan should consult Plan documents and
their own tax advisers for information on the tax consequences associated with
participating in the PSI 401(k) Plan.
The per share dividends on Class Z shares will generally be higher than the
per share dividends on Class A, Class B or Class C shares as a result of the
fact that Class Z shares are not subject to any distribution or service fee.
THE FOLLOWING INFORMATION REPLACES THE INFORMATION UNDER "SHAREHOLDER
GUIDE--HOW TO BUY SHARES OF THE FUND" AND "SHAREHOLDER GUIDE--HOW TO SELL YOUR
SHARES" IN THE RETAIL CLASS PROSPECTUS:
Class Z shares of the Fund are offered exclusively for sale to participants
in the PSI 401(k) Plan. Such shares may be purchased or redeemed only by the
Plan on behalf of individual plan participants at NAV without any sales or
redemption charge. Class Z shares are not subject to any minimum investment
requirements. The Plan purchases and redeems shares to implement the
investment choices of individual plan participants with respect to their
contributions in the Plan. All purchases through the Plan will be for Class Z
shares. Individual Plan participants should contact the Prudential Securities
Benefits Department for information on making or changing of investment
choices. The Prudential Securities Benefits Department is located at One
Seaport Plaza, 33rd Floor, New York, New York 10292 and may be reached by
calling (212) 214-7194.
The average net asset value per share at which shares of the Fund are
purchased or redeemed by the Plan for the accounts of individual plan
participants might be more or less than the net asset value per share
prevailing at the time that such participants made their investment choices or
made their contributions to the Plan.
THE FOLLOWING INFORMATION SUPPLEMENTS "SHAREHOLDER GUIDE--HOW TO EXCHANGE
YOUR SHARES" IN THE RETAIL CLASS PROSPECTUS:
It is anticipated that Class A shares held through the PSI 401(k) Plan on
behalf of participants will be automatically exchanged at relative net asset
value for Class Z shares in March 1996. You should contact the Prudential
Securities Benefits Department about how to exchange your Class Z shares for
Class Z shares of other Prudential Mutual Funds. See "How to Buy Shares of the
Fund" above.
THE INFORMATION ABOVE ALSO SUPPLEMENTS THE INFORMATION UNDER "FUND
HIGHLIGHTS" IN THE RETAIL CLASS PROSPECTUS AS APPROPRIATE.
3
<PAGE>
Prudential Pacific Growth Fund, Inc.
- --------------------------------------------------------------------------------
PROSPECTUS DATED JANUARY 2, 1996
- --------------------------------------------------------------------------------
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. 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. The
Fund also may engage in various derivative transactions, such as those involving
options on stocks, stock indices, foreign currencies and 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 return. See "How the Fund
Invests--Investment Objective and Policies." There can be 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--Risks and Special Considerations of Investing in Foreign
Securities" and "How the Fund Invests--Other Investments and Policies--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 January 2, 1996, which information is
incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.
- --------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL 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 7.
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 7. 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--Risks
and Special Considerations of Investing in Foreign Securities" at page 8. The
Fund may also engage in various hedging and return enhancement strategies,
including investing in derivatives. See "How the Fund Invests--Hedging and
Return Enhancement Strategies--Risks of Hedging and Return Enhancement
Strategies" at page 11.
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 November 30, 1995, PMF served as
manager or administrator to 60 investment companies, including 36 mutual
funds, with aggregate assets of approximately $50 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 14. The
management fee is higher than that paid by most other investment companies.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's Class A, Class B and Class C shares and is paid an
annual distribution and service fee which is currently being charged at the
annual rate of .25 of 1% of the average daily net assets of the Class A
shares, and at the annual rate of 1% of the average daily net assets of each
of the Class B and Class C shares. Prior to January 2, 1996, Prudential Mutual
Fund Distributors, Inc. (PMFD) acted as Distributor of the Fund's Class A
shares. See "How the Fund is Managed--Distributor" at page 15.
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 21 and "Shareholder Guide--Shareholder
Services" at page 30.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its
transfer agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities plus a
sales charge which may be imposed either (i) at the time of purchase (Class A
shares) or (ii) on a deferred basis (Class B or Class C shares). See "How
the Fund Values Its Shares" at page 17 and "Shareholder Guide-- How to Buy
Shares of the Fund" at page 21.
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 22.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 24.
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 18.
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 year, 1% on redemptions made
decreasing by 1% annually to 1% within one year of
in the fifth and the sixth years purchase
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 (after
reduction).................. .25%++ 1.00% 1.00%
Other Expenses................ .46% .46% .46%
-- -- --
Total Fund Operating
Expenses.................... 1.46% 2.21% 2.21%
-- -- --
-- -- --
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 3 5 10
- -------
YEAR YEARS YEARS YEARS
---- ----- ----- -----
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:
<S> <C> <C> <C> <C>
Class A.................................................... $ 64 $94 $ 126 $ 216
Class B.................................................... $ 72 $99 $ 128 $ 227
Class C.................................................... $ 32 $69 $ 118 $ 254
You would pay the following expenses on the same investment,
assuming no redemption:
Class A.................................................... $ 64 $94 $ 126 $ 216
Class B.................................................... $ 22 $69 $ 118 $ 227
Class C.................................................... $ 22 $69 $ 118 $ 254
</TABLE>
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."
+ 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."
<PAGE>
++ 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, 1996. Total operating expenses without such limitation
would be 1.51%. See "How the Fund is Managed--Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS A SHARES)
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class A share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. The information is based on data contained in
the financial statements.
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------
YEAR ENDED OCTOBER 31, JULY 24, 1992(A)
-------------------------------- THROUGH
1995(D) 1994(D) 1993(D) OCTOBER 31, 1992
-------- ------- ------- ------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 16.90 $ 16.10 $ 10.65 $ 10.00
-------- ------- ------- -----
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)........................ .04 (.08) (.01) (.02)
Net realized and unrealized gain on investment and
foreign currency transactions....................... (1.09) 1.15 5.48 .67
-------- ------- ------- -----
Total from investment operations.................... (1.05) 1.07 5.47 .65
-------- ------- ------- -----
LESS DISTRIBUTIONS:
Distributions in excess of net investment income.... -- (.06) (.02) --
Distributions from net realized gains............... (.10) (.21) -- --
-------- ------- ------- -----
Total distributions............................... (.10) (.27) (.02) --
-------- ------- ------- -----
Net asset value, end of period...................... $ 15.75 $ 16.90 $ 16.10 $ 10.65
-------- ------- ------- -----
-------- ------- ------- -----
TOTAL RETURN(C)..................................... (6.23)% 6.67% 51.39% 6.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..................... $ 98,998 $98,921 $64,353 $ 13,918
Average net assets (000)............................ $101,920 $92,233 $26,264 $ 12,884
Ratios to average net assets:
Expenses, including distribution fees.............. 1.46% 1.57% 1.63% 2.72%(b)
Expenses, excluding distribution fees.............. 1.21% 1.33% 1.43% 2.52%(b)
Net investment income (loss)....................... .26% (.50)% (.04)% (.75)%(b)
Portfolio turnover rate............................. 54% 56% 44% 0%
</TABLE>
------------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Total return considers the effects of sale 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.
(d) Calculated based upon weighted average shares outstanding during the
period.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS B AND CLASS C SHARES)
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class B and Class C 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.
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------- CLASS C
-------------------
YEAR ENDED OCTOBER 31, JULY 24, 1992(A) YEAR
----------------------------------- THROUGH ENDED OCTOBER 31,
1995(E) 1994(E) 1993(E) OCTOBER 31, 1992 1995(E)
--------- -------- -------- ---------------- -------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 16.62 $ 15.94 $ 10.63 $ 10.00 $ 16.62
--------- -------- -------- ----- -----
INCOME FROM INVESTMENT
OPERATIONS:
Net investment loss...... (.08) (.21) (.10) (.04) (.08)
Net realized and
unrealized gain on
investment and foreign
currency transactions. (1.06) 1.13 5.43 .67 (1.06)
--------- -------- -------- ----- -----
Total from investment
operations............. (1.14) .92 5.33 .63 (1.14)
--------- -------- -------- ----- -----
LESS DISTRIBUTIONS:
Distributions in excess
of net investment
income................. -- (.03) (.02) -- --
Distributions from net
realized gains......... (.10) (.21) -- -- (.10)
--------- -------- -------- ----- -----
Total distributions.... (.10) (.24) (.02) -- (.10)
--------- -------- -------- ----- -----
Net asset value, end of
period................. $ 15.38 $ 16.62 $ 15.94 $ 10.63 $ 15.38
--------- -------- -------- ----- -----
--------- -------- -------- ----- -----
TOTAL RETURN(D).......... (6.82)% 5.79% 50.17% 6.30% (6.82)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000).................. $ 344,313 $459,949 $250,997 $ 20,050 $ 2,443
Average net assets
(000).................. $ 368,771 $404,506 $ 74,590 $ 16,025 $ 1,624
Ratios to average net
assets:
Expenses, including
distribution fees...... 2.21% 2.33% 2.37% 3.52%(b) 2.21%
Expenses, excluding
distribution fees...... 1.21% 1.33% 1.37% 2.52%(b) 1.21%
Net investment loss..... (.55)% (1.27)% (.83)% (1.55)%(b) (.43)%
Portfolio turnover
rate................... 54% 56% 44% 0% 54%
<CAPTION>
AUGUST 1, 1994(C)
THROUGH
OCTOBER 31, 1994(E)
-------------------
<S> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 16.68
-----
INCOME FROM INVESTMENT
OPERATIONS:
Net investment loss...... (.06)
Net realized and
unrealized gain on
investment and foreign
currency transactions. --
-----
Total from investment
operations............. (.06)
-----
LESS DISTRIBUTIONS:
Distributions in excess
of net investment
income................. --
Distributions from net
realized gains......... --
-----
Total distributions.... --
-----
Net asset value, end of
period................. $ 16.62
-----
-----
TOTAL RETURN(D).......... (.36)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000).................. $ 718
Average net assets
(000).................. $ 458
Ratios to average net
assets:
Expenses, including
distribution fees...... 3.00%(b)
Expenses, excluding
distribution fees...... 2.00%(b)
Net investment loss..... (1.64)%(b)
Portfolio turnover
rate................... 56%
</TABLE>
------------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Commencement of offering of Class C shares.
(d) Total return considers the effects of sale 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.
(e) Calculated based upon weighted average shares outstanding during the
period.
6
<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 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. 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, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE FUND'S
OUTSTANDING VOTING SECURITIES, AS DEFINED IN THE INVESTMENT COMPANY ACT. 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 CORPORATIONS
DOING BUSINESS IN OR 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,
7
<PAGE>
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
Services, Inc. (Moody's) 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.
RISKS AND SPECIAL CONSIDERATIONS 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
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.
8
<PAGE>
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 RETURN ENHANCEMENT STRATEGIES
THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN. 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. 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.
9
<PAGE>
OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON
SECURITIES, FINANCIAL INDICES AND CURRENCIES THAT ARE TRADED ON U.S. OR FOREIGN
SECURITIES EXCHANGES OR IN THE OVER-THE-COUNTER MARKET TO ENHANCE RETURN 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.
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
10
<PAGE>
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 different 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 held in its portfolio denominated or quoted in, or currently
convertible into or bearing substantial correlation to, such currency. 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 TO REDUCE CERTAIN
RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN IN ACCORDANCE WITH
REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION (CFTC). 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 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. A stock index futures contract is an agreement to purchase or sell cash
equal to a specific dollar amount times the difference between the value of a
specific stock index at the close of the last trading day of the contract and
the price at which the agreement is made. No physical delivery of the underlying
stocks in the index is made. The Fund may purchase and sell stock index futures
contracts or related options as a hedge against changes in market conditions.
The Fund may not purchase or sell futures contracts and related options to
attempt to enhance return, 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 in accordance with regulations of the CFTC (i.e. to reduce certain
risks of its investments). The value of all futures contracts sold will not
exceed the total market value of the Fund's portfolio.
Futures contracts and related options are generally subject to segregation and
coverage requirements of the CFTC or the SEC. If the Fund does not hold the
security or currency underlying the futures contract, the Fund will be required
to segregate on an ongoing basis with its Custodian cash, U.S. Government
securities or other liquid, high grade debt obligations in an amount at least
equal to the Fund's obligations with respect to such futures contracts.
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 underlying the futures contract 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 RETURN 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
11
<PAGE>
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
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 over-the-counter (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 hold 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) and securities that are not readily marketable in securities markets
either within or outside of the United States. Restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933, as amended
(the Securities Act) and privately placed commercial paper that have a readily
available market are not considered illiquid for purposes of this limitation.
The Fund
12
<PAGE>
intends to comply with any applicable state blue sky laws restricting the Fund's
investments in illiquid securities. See "Investment Restrictions" in the
Statement of Additional Information. 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 OTC options and the assets
used as "cover" for written OTC options are illiquid securities unless the Fund
and the counterparty have provided for the Fund, at the Fund's election, to
unwind the OTC option. The exercise of such an option would ordinarily 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
securities used as "cover" as "liquid." See "Investment Objective and
Policies--Illiquid Securities" in the Statement of Additional Information.
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 (over 100%) 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/or 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. The
Fund may pay reasonable administration and custodial fees in connection with a
loan.
13
<PAGE>
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE 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, 1995, the total expenses as a percentage
of average net assets for the Fund's Class A, Class B and Class C shares were
1.46%, 2.21% and 2.21%, respectively. See "Financial Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .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, 1995, 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 November 30, 1995, PMF served as the manager to 36 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 24 closed-end investment companies with aggregate assets of
approximately $50 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 Mutual Fund Investment Management, 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.
14
<PAGE>
Consistent with the investment objectives and policies of the Fund, Mr. Duane
evaluates the economic climate in various countries and focuses on
growth-oriented global equity investments. He seeks to identify long-term themes
and changing economic conditions that, in his opinion, will lead to earnings
growth. His portfolio management style can be referred to as "bottom up" in that
his primary focus is on individual stocks. He evaluates historical business
trends in the United States when looking for long-term investment opportunities
abroad (the "rear view mirror" analysis). He generally maintains exposure to
major world stock markets and, under normal market conditions, seeks to keep the
Fund's portfolio fully invested. Mr. Duane consults with a team of regional
equity analysts who provide research on existing holdings of the Fund and on
potential acquisitions.
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities or PSI), One Seaport
Plaza, New York, New York 10292, is a corporation organized under the laws of
the State of Delaware and serves as the distributor of the Class A, Class B and
Class C shares of the Fund. It is an indirect, wholly-owned subsidiary of
Prudential. Prior to January 2, 1996, Prudential Mutual Fund Distributors, Inc.
(PMFD), One Seaport Plaza, New York, New York 10292, served as the Distributor
of the Class A shares of the Fund.
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), PRUDENTIAL SECURITIES (ALSO THE DISTRIBUTOR)
INCURS THE EXPENSES OF DISTRIBUTING THE FUND'S CLASS A, CLASS B AND CLASS C
SHARES. These expenses include commissions and account servicing fees paid to,
or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of Prudential and Prusec associated with the sale of Fund
shares, including lease, utility, communications and sales promotion expenses.
The State of Texas requires that shares of the Fund may be sold in that state
only by dealers or other financial institutions which are registered there as
broker-dealers.
Under the Plans, the Fund is obligated to pay distribution and/or service fees
to the Distributor as compensation for its distribution and service activities,
not as reimbursement for specific expenses incurred. If the Distributor's
expenses exceed its distribution and service fees, the Fund will not be
obligated to pay any additional expenses. If the Distributor's expenses are less
than such distribution and service fees, it will retain its full fees and
realize a profit.
UNDER THE CLASS A PLAN, THE FUND MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The
Class A 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. Prudential Securities has agreed to limit its
distribution-related fees payable under the Class A Plan to .25 of 1% of the
average daily net assets of the Class A shares for the fiscal year ending
October 31, 1996.
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
15
<PAGE>
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, 1995, the Fund paid distribution
expenses of .25%, 1%, and 1% of the average net assets of the Class A, Class B
and Class C shares, respectively. The Fund records all payments made under the
Plans as expenses in the calculation of net investment income.
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 distribution and service fees incurred under any Plan if it is
terminated or not continued.
In addition to distribution and service fees paid by the Fund under the Class
A, Class B and Class C Plans, the Manager (or one of its affiliates) may make
payments out of its own resources to dealers and other persons 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. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of
16
<PAGE>
the agreement, the U.S. Attorney can then elect to pursue these charges. Under
the terms of the agreement, PSI agreed, among other things, to pay an additional
$330,000,000 into the fund established by the SEC to pay restitution to
investors who purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank & Trust Company, an
independent custodian, are separate and distinct from PSI.
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.
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.
17
<PAGE>
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. The Fund will include performance data for each class of shares of the
Fund offered through this Prospectus 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."
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 OF 1986, AS AMENDED (THE
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.
18
<PAGE>
TAXATION OF SHAREHOLDERS
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (i.e., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (i.e., the excess of net long-term capital gains over net
short-term capital losses) distributed to shareholders will be taxable as
long-term capital gains to the shareholders, whether or not reinvested and
regardless of the length of time a shareholder has owned his or her shares. The
maximum long-term capital gains rate for individuals is 28%. The maximum
long-term capital gains rate for corporate shareholders is currently the same as
the maximum tax rate for ordinary income.
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 capital loss with respect to shares held for six
months or less will be treated as long-term capital loss to the extent of any
capital gain distributions received by the shareholder with respect to such
shares.
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.
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
19
<PAGE>
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 FOUR CLASSES, DESIGNATED CLASS A, CLASS B, CLASS C AND CLASS Z
COMMON STOCK EACH CONSISTING OF 500 MILLION AUTHORIZED SHARES. Each class of
common stock represents an interest in the same assets of the Fund and is
identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service fees which may affect performance,
(ii) each class has exclusive voting rights on any matter submitted to
shareholders that relates solely to its arrangement and has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of any other class, (iii) each class has a
different exchange privilege, (iv) only Class B shares have a conversion feature
and (v) Class Z shares are offered exclusively for sale to participants in the
PSI 401(k) Plan, an employee benefit plan sponsored by Prudential Securities.
Since Class B and Class C shares generally bear higher distribution expenses
than Class A shares, the liquidation proceeds to shareholders of those classes
are likely to be lower than to Class A shareholders and to Class Z shareholders,
whose shares are not subject to any distribution and/or service fee. In
accordance with the Fund's Articles of Incorporation, the Board of Directors may
authorize the creation of additional series and classes within such series, with
such preferences, privileges, limitations and voting and dividend rights as the
Board of Directors may determine. Currently, the Fund is offering three classes,
designated Class A, Class B and Class C shares. It is anticipated that the Fund
will offer Class Z shares in or about March 1996.
The Board of Directors may increase or decrease the number of authorized
shares without approval by shareholders. Shares of the Fund, when issued, are
fully paid, nonassessable, fully transferable and redeemable at the option of
the holder. Shares are also redeemable at the option of the Fund under certain
circumstances as described under "Shareholder Guide-- How to Sell Your Shares."
Each share of each class of common stock is equal as to earnings, assets and
voting privileges, except as noted above, and each class bears the expenses
related to the distribution of its shares. Except for the conversion feature
applicable to the Class B shares, there are no conversion, preemptive or other
subscription rights. In the event of liquidation, each share of common stock of
the Fund is entitled to its portion of all of the Fund's assets after all debts
and expenses of the Fund have been paid. The Fund's shares do not have
cumulative voting rights for the election of Directors.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, 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.
20
<PAGE>
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08966-5020. The offering 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 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 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 third business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must first telephone PMFS to receive an account number at (800) 225-1852
(toll-free). The following information will be requested: your name, address,
tax identification number, class election, dividend distribution election,
amount being wired and wiring bank. Instructions should then be given by you to
your bank to transfer funds by wire to State Street Bank and Trust Company
(State Street), Boston, Massachusetts, Custody and Shareholder Services
Division, Attention: Prudential 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 the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential 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.
21
<PAGE>
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 .30 of 1% (Currently Initial sales charge waived or
5% of the public offering price being charged at a rate reduced for certain purchases
of .25 of 1%)
CLASS B Maximum contingent deferred 1% Shares convert to Class A shares
sales charge or CDSC of 5% of approximately seven years after
the lesser of the amount purchase
invested or the redemption
proceeds; declines to zero after
six years
CLASS C Maximum CDSC of 1% of the lesser 1% Shares do not convert to another
of the amount invested or the class
redemption proceeds on
redemptions made within one year
of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information--Description of Common Stock"), and
(iii) only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 7 years and do
not qualify for a reduced sales charge on Class A shares, since Class A shares
are subject to a maximum initial sales charge of 5% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6 year period, you should
consider purchasing Class C shares over either Class A or Class B shares.
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
22
<PAGE>
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 when the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
SEE "REDUCTION AND WAIVER OF INITIAL SALES CHARGES" BELOW.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<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.
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 Code and deferred compensation and annuity
plans under Sections 457 and 403(b)(7) of the 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 participants.
In the case of Benefit Plans whose accounts are held directly with the Transfer
Agent or Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account recordkeeping (Direct Account Benefit Plans)
and Benefit Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary
Prototype Benefit Plans), Class A shares may be purchased at NAV by participants
who are repaying loans made from such plans to the participant.
23
<PAGE>
PruArray Plans. Class A shares may be purchased at NAV by certain retirement
and deferred compensation plans, qualified or non-qualified under the Code,
including pension, profit-sharing, stock-bonus or other employee benefit plans
under Section 401 of the Code and deferred compensation and annuity plans under
Sections 457 and 403(b)(7) of the Code that participate in the Transfer Agent's
PruArray Program (a benefit plan recordkeeping service) (hereafter referred to
as a PruArray Plan); provided (i) that the plan has at least $1 million in
existing assets or 1,000 eligible employees or participants and (ii) that
Prudential Mutual Funds constitute at least one-half of the plan's investment
options. The term "existing assets" for this purpose includes stock issued by a
PruArray Plan sponsor, shares of non-money market Prudential Mutual Funds and
shares of certain unaffiliated non-money market mutual funds that participate in
the PruArray Program (Participating Funds). "Existing assets" also include
shares of money market funds acquired by exchange from a Participating Fund.
Special Rules Applicable to Retirement Plans. After a Benefit Plan or
PruArray Plan qualifies to purchase Class A shares at NAV, all subsequent
purchases will be made at NAV.
Other Waivers. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
Directors/Trustees and officers of the Prudential Mutual Funds (including the
Fund), (b) former Directors/Trustees of the Prudential Mutual Funds (including
the Fund), (c) 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, (d) employees and
special agents of Prudential and its subsidiaries and all persons who have
retired directly from active service with Prudential or one of its subsidiaries,
(e) registered representatives and employees of dealers who have entered into a
selected dealer agreement with Prudential Securities provided that purchases at
NAV are permitted by such person's employer and (f) investors who have a
business relationship with a financial adviser who joined Prudential Securities
from another investment firm, provided that (i) the purchase is made within 180
days of the commencement of the financial adviser's employment at Prudential
Securities, or within one year in the case of Benefit Plans, (ii) the purchase
is made with proceeds of a redemption of shares of any open-end, market fund
sponsored by the financial adviser's previous employer (other than a money
market fund or other no load fund which imposes a distribution or service fee of
.25 of 1% or less) and (iii) the financial adviser served as the client's broker
on the previous 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
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class
A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent, 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
24
<PAGE>
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 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 such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Fund at the net asset value next
determined after the order is received, which must be within 90 days after the
date of the redemption. Any contingent
25
<PAGE>
deferred sales charge or CDSC paid in connection with such redemption will be
credited (in shares) to your account. (If less than a full repurchase is made,
the credit will be on a pro rata basis.) You must notify the Fund's Transfer
Agent, either directly or through Prudential Securities, at the time the
repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales Charge"
below. Exercise of the repurchase privilege will generally not affect federal
tax treatment of any gain realized upon redemption. However, if the redemption
was made within a 30 day period of the repurchase and if the redemption resulted
in a loss, some or all of the loss, depending on the amount reinvested, may not
be allowed for federal income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any contingent deferred sales charge will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
the Contingent Deferred Sales Charges--Class B Shares."
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<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
26
<PAGE>
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 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.
27
<PAGE>
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares approximately
seven years after purchase. Conversions will be effected at relative net asset
value without the imposition of any additional sales charge. The first
conversion of Class B shares occurred in February 1995, when the conversion
feature was first implemented.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula; (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
28
<PAGE>
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.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV. See "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above. Under this exchange privilege, amounts representing any Class B and Class
C shares (which are not subject to a CDSC) held in such a shareholder's account
will be automatically exchanged for Class A shares on a quarterly basis, unless
the shareholder elects otherwise. Eligibility for this exchange privilege will
be calculated on the business day prior to the date of the exchange. Amounts
representing Class B or Class C shares which are not subject to a CDSC include
the following: (1) amounts representing Class B or Class C shares acquired
pursuant to the automatic reinvestment of dividends and distributions, (2)
amounts representing the increase in the net asset value above the total amount
of payments for the purchase of Class B or Class C shares and (3) amounts
representing Class B or Class C shares held beyond the applicable CDSC period.
Class B and Class C shareholders must notify the Transfer Agent either directly
or through Prudential Securities or Prusec that they are eligible for this
special exchange privilege.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice.
29
<PAGE>
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
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." See also "Shareholder Investment
Account--Systematic Withdrawal Plan" in the Statement of Additional Information.
. 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 (toll-free) 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.
30
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Fund at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
Prudential Pacific Growth
Fund, Inc.
TAXABLE BOND FUNDS
Global Utility Fund, Inc.
Prudential Diversified Bond Fund, Inc.
EQUITY FUNDS
Prudential Government Income Fund, Inc.
Prudential Government Securities
Trust Short-Intermediate Term Series
Prudential Allocation Fund
Balanced Portfolio
Prudential High Yield Fund, Inc.
Strategy Portfolio
Prudential Mortgage Income Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential Equity Income Fund
Prudential Growth Opportunity
Fund, Inc.
Prudential U.S. Government Fund
Prudential Jennison Fund, Inc.
The BlackRock Government Income Trust
Prudential Multi-Sector Fund,
Inc.
Prudential Utility Fund, Inc.
TAX-EXEMPT BOND FUNDS
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth
Equity Fund
Prudential California Municipal Fund
California Series
MONEY MARKET FUNDS
California Income Series
Prudential Municipal Bond Fund
. Taxable Money Market Funds
High Yield Series Prudential Government
Securities Trust
Insured Series Money Market Series
Intermediate Series U.S. Treasury Money Market
Series
Prudential Municipal Series Fund Prudential Special Money
Market Fund
Florida Series Money Market Series
Hawaii Income Series Prudential MoneyMart Assets
Maryland Series . Tax-Free Money Market Funds
Massachusetts Series Prudential Tax-Free Money Fund
Michigan Series Prudential California
Municipal Fund
New Jersey Series
California Money Market Series
New York Series Prudential Municipal Series
Fund
North Carolina Series Connecticut Money Market Series
Ohio Series Massachusetts Money Market
Series
Pennsylvania Series New Jersey Money Market Series
Prudential National Municipals Fund, Inc. New York Money Market Series
. Command Funds
GLOBAL FUNDS
Command Money Fund
Prudential Europe Growth Fund, Inc. Command Government Fund
Prudential Global Fund, Inc. Command Tax-Free Fund
Prudential Global Genesis Fund, Inc. . Institutional Money Market
Funds
Prudential Global Limited Maturity Fund, Inc.
Prudential Institutional
Liquidity Portfolio, Inc.
Global Assets Portfolio
Institutional Money Market
Series
Limited Maturity Portfolio
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
A-1
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY
OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, IN
CONNECTION WITH THE OFFER CONTAINED
HEREIN, AND, IF GIVEN OR MADE, SUCH
OTHER INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND OR THE DISTRIBUTOR.
THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER BY THE FUND OR BY THE DISTRIBUTOR TO
SELL, OR A SOLICITATION OF ANY OFFER TO BUY
ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN
SUCH JURISDICTION. Prudential
- ---------------------------------------------
TABLE OF CONTENTS
PAGE Pacific
----
FUND HIGHLIGHTS....................... 2
FUND EXPENSES......................... 4
FINANCIAL HIGHLIGHTS.................. 5
Growth
HOW THE FUND INVESTS.................. 7
Investment Objective and Policies.... 7
Risks and Special Considerations of
Investing in Foreign Securities.... 8 Fund, Inc.
Hedging and Return Enhancement
Strategies......................... 9 --------------------------
Other Investments and Policies....... 12
Investment Restrictions............ 14
HOW THE FUND IS MANAGED............... 14
Manager.............................. 14
Distributor.......................... 15
Fee Waivers and Subsidy.............. 17
Portfolio Transactions............... 17
Custodian and Transfer and Dividend
Disbursing Agent................... 17
HOW THE FUND VALUES ITS SHARES........ 17
HOW THE FUND CALCULATES PERFORMANCE... 18
TAXES, DIVIDENDS AND DISTRIBUTIONS.... 19
GENERAL INFORMATION................... 20
Description of Common Stock.......... 20
Additional Information............... 21
SHAREHOLDER GUIDE..................... 21
How to Buy Shares of the Fund........ 21
Alternative Purchase Plan............ 22
How to Sell Your Shares.............. 25
Conversion Feature--Class B Shares... 28
How to Exchange Your Shares.......... 29
Shareholder Services................. 30
THE PRUDENTIAL MUTUAL FUND FAMILY..... A-1 PROSPECTUS
JANUARY 2, 1996
- --------------------------------------------
MF 157A 4445680
CUSIP NOS.: CLASS A: 743941 10 6 PRUDENTIAL MUTUAL FUNDS [PRUDENTIAL
CLASS B: 743941 20 5 BUILDING YOUR FUTURE LOGO]
CLASS C: 743941 30 4 ON OUR STRENGTH(TM)
<PAGE>
PRUDENTIAL PACIFIC GROWTH FUND, INC.
Statement of Additional Information
dated January 2, 1996
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. The Fund may also engage in various derivative transactions, such as
those involving options on stocks, stock indices, foreign currencies and futures
contracts on foreign currencies and groups of currencies so as to hedge its
portfolio and to attempt to enhance return. 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 January 2, 1996, 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 7
Investment Restrictions................................................... B-12 14
Directors and Officers.................................................... B-14 14
Manager................................................................... B-17 14
Distributor............................................................... B-20 15
Portfolio Transactions and Brokerage...................................... B-23 17
Purchase and Redemption of Fund Shares.................................... B-24 21
Shareholder Investment Account............................................ B-28 30
Net Asset Value........................................................... B-32 17
Taxes..................................................................... B-33 18
Performance Information................................................... B-37 18
Custodian, Transfer and Dividend Disbursing Agent and Independent
Accountants............................................................. B-39 17
Financial Statements...................................................... B-41 --
Independent Auditor's Report.............................................. B-51 --
Description of Security Ratings........................................... B-52 --
Appendix I--General Investment Information................................ Ap-I
Appendix II--Historical Performance Information........................... Ap-II
</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 FOREIGN 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.
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
B-7
<PAGE>
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 within
the meaning of regulations of the Commodities Futures Trading Commission. 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.
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 a
portfolio of stocks substantially replicating the movement of the index, in the
judgment of the Fund's investment adviser, 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
B-8
<PAGE>
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.
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 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.
B-9
<PAGE>
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.
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 hold 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
B-10
<PAGE>
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 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. (NASD).
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper and municipal lease obligations 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. With respect to municipal lease
obligations, the investment adviser also considers: (1) the willingness of the
municipality to continue, annually or biannually, to appropriate funds for
payment of the lease; (2) the general credit quality of the municipality and the
essentiality to the municipality of the property covered by the lease; (3) in
the case of unrated municipal lease obligations, an analysis of factors similar
to that performed by nationally recognized statistical rating organizations in
evaluating the credit quality of a municipal lease obligation, including (i)
whether the lease can be cancelled; (ii) if applicable, what assurance there is
that the assets represented by the lease can be sold; (iii) the strength of the
lessee's general credit (e.g., its debt, administrative, economic and financial
characteristics); (iv) the likelihood that the municipality will discontinue
appropriating funding for the leased property because the property is no longer
deemed essential to the operations of the municipality (e.g., the potential for
an event of nonappropriation); (v) the legal recourse in the event of failure to
appropriate; and (4) any other factors unique to municipal lease obligations as
determined by the investment adviser. Repurchase agreements subject to demand
are deemed to have a maturity equal to the notice period.
B-11
<PAGE>
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 (over 100%) 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 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.
B-12
<PAGE>
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.
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.
B-13
<PAGE>
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.
]6. The dollar amount of short sales at any one time shall not exceed 25%
of the net equity of the Fund, and the value of securities of any one issuer
in which the Fund is short may not exceed the lesser of 2.0% of the value of
the Fund's net assets or 2.0% of the securities of any class of any issuer.
Short sales may be made only in those securities which are fully listed on a
national securities exchange. This provision does not include the sale of
securities if the Fund contemporaneously owns or has the right to obtain
securities equivalent in kind and amount to those sold, i.e., short sales
against the box.
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, ADDRESS AND AGE THE FUND DURING PAST 5 YEARS
--------------------- ------------- ---------------------
<S> <C> <C>
Stephen C. Eyre (73) Director Executive Director, The John A. Hartford
c/o Prudential Mutual Foundation, Inc. (charitable foundation) (since
Fund Management, Inc. May 1985); Director of Faircom, Inc.
One Seaport Plaza
New York, NY
Delayne Dedrick Gold (57) Director Marketing and Management Consultant.
c/o Prudential Mutual
Fund Management, Inc.
One Seaport Plaza
New York, NY
Don G. Hoff (60) Director Chairman and Chief Executive Officer of Intertec,
c/o Prudential Mutual Inc. (Investments) since 1980; Director of
Fund Management, Inc. Innovative Capital Management, Inc., The Asia
One Seaport Plaza Pacific Fund, Inc. and The Greater China Fund,
New York, NY Inc.
*Harry A. Jacobs, Jr. (74) Director Senior Director (since January 1986) of
One Seaport Plaza Prudential Securities Incorporated (Prudential
New York, NY Securities); formerly Interim Chairman and Chief
Executive Officer of Prudential Mutual Fund Man-
agement, 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. and The Global
Total Return Fund, Inc.
</TABLE>
- ------------
* Interested director, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities or PMF.
B-14
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE THE FUND DURING PAST 5 YEARS
--------------------- ------------- ---------------------
<S> <C> <C>
Sidney R. Knafel (65) Director Managing Partner of SRK Management Company
c/o Prudential Mutual (investments) since 1981; Chairman of Insight
Fund Management, Inc. Communications Company, L.P., Microbiological
One Seaport Plaza Associates, Inc.; Director of Cellular
New York, NY Communications, Inc., Cellular Communications
International, Inc., Cellular Communications of
Puerto Rico, Inc.,General American Investors
Company, Inc., IGENE Biotechnology, Inc.,
International CableTel Incorporated and a number
of private companies.
Robert E. LaBlanc (61) Director President of Robert E. LaBlanc Associates, Inc.
c/o Prudential Mutual (telecommunications) since 1981; Director of
Fund Management, Inc. Storage Technology Corporation,
One Seaport Plaza TIE/communications, Inc. and Tribune Company;
New York, NY Trustee of Manhattan College.
Thomas A. Owens, Jr. (73) Director Consultant
c/o Prudential Mutual
Fund Management, Inc.
One Seaport Plaza
New York, NY
*Richard A. Redeker (52) President and Director President, Chief Executive Officer and Director
One Seaport Plaza (since October 1993); PMF; Executive Vice
New York, NY President, Director and Member of the Operating
Committee (since October 1993); Prudential
Securities; Director (since October 1993) of
Prudential Securities Group, Inc. (PSG); Vice
President, The Prudential Investment Corporation
(since July 1994); Director (since January 1994)
of Prudential Mutual Fund Distributors, Inc.
(PMFD) and Prudential Mutual Fund Services, Inc.
(PMFS); formerly Senior Executive Vice President
and Director of Kemper Financial Services, Inc.
(September 1978-September 1993); Director of The
Global Government Plus Fund, Inc. and The Global
Total Return Fund, Inc.
Clay T. Whitehead (57) Director President of National Exchange Inc. (since May
c/o Prudential Mutual Fund 1983).
Management, Inc.
One Seaport Plaza
New York, NY
Robert F. Gunia (49) Vice President Director (since January 1989), Chief
One Seaport Plaza Administrative Officer (since July 1990) and
New York, NY Executive Vice President, Treasurer and Chief
Financial Officer (since June 1987) of PMF;
Senior Vice President (since March 1987) of
Prudential Securities; Executive Vice President,
Treasurer, Comptroller, Director (since March
1994) of PMFD; Director (since June 1987) of
PMFS; Vice President and Director of The Asia
Pacific Fund, Inc. (since May 1989).
</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, ADDRESS AND AGE THE FUND DURING PAST 5 YEARS
--------------------- ------------- ---------------------
<S> <C> <C>
Eugene S. Stark (37) Treasurer and First Vice President (since January 1990) of PMF;
One Seaport Plaza Principal Financial and First Vice President of Prudential Securities
New York, NY Accounting Officer (since January 1992).
Stephen M. Ungerman (42) One Assistant Treasurer First Vice President of Prudential Mutual Fund
Seaport Plaza Management Inc. (since February 1993). Prior
New York, NY thereto, Senior Tax Manager at Price Waterhouse
(since 1981).
S. Jane Rose (49) Secretary Senior Vice President (since January 1991),
One Seaport Plaza Senior Counsel (since June 1987) and First Vice
New York, NY President (June 1987- December 1990) of PMF;
Senior Vice President and Senior Counsel of
Prudential Securities (since July 1992);
formerly Vice President and Associate General
Counsel of Prudential Securities.
Ellyn C. Acker (34) Assistant Secretary Vice President and Associate General Counsel of
One Seaport Plaza Prudential Securities and PMF (since March
New York, NY 1995); prior thereto, associated with the law
firm of Fulbright & Jaworski L.L.P.
</TABLE>
Directors and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities.
The officers conduct and supervise the daily business operations of the Fund,
while the Directors, in addition to their functions set forth under "Manager"
and "Distributor," 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 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.
The Directors have adopted a retirement policy which calls for the retirement
of Directors on December 31 of the year in which they reach the age of 72,
except that retirement is being phased in for Directors who were age 68 or older
as of December 31, 1993. Under this phase-in provision, Messrs. Eyre, Jacobs and
Owens are scheduled to retire on December 31, 1998.
Pursuant to the terms of the Management Agreement with the Fund, the Manager
pays all compensation of officers and employees of the Fund as well as the fees
and expenses of all Directors of the Fund who are affiliated persons of the
Manager.
The following table sets forth the aggregate compensation paid by the Fund for
the fiscal year ended October 31, 1995 to the Directors who are not affiliated
with the Manager and the aggregate compensation paid to such Directors for
service on the Fund's board and that of all other funds managed by Prudential
Mutual Fund Management, Inc. (Fund Complex) for the calendar year ended December
31, 1994.
B-16
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM FUND
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PART OF TRUST BENEFITS UPON COMPLEX PAID
NAME AND POSITION FROM FUND EXPENSES RETIREMENT TO TRUSTEES
- ---------------------------------------- ------------ ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Stephen C. Eyre--Director $6,000 None N/A $ 41,000( 4/5 )*
Delayne Dedrick Gold--Director $6,000 None N/A $185,000(24/43)*
Don G. Hoff--Director $6,000 None N/A $ 48,500( 5/6 )*
Sidney R. Knafel--Director $6,000 None N/A $ 35,500( 4/5 )*
Robert E. LaBlanc--Director $6,000 None N/A $ 35,500( 4/5 )*
Thomas A. Owens, Jr.--Director $6,000 None N/A $100,500(12/13)*
Clay T. Whitehead--Director $6,000 None N/A $ 35,500( 4/5 )*
</TABLE>
- ------------
* Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
As of December 6, 1995, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding common stock of the Fund.
As of December 6, 1995, there were no beneficial owners, directly or
indirectly, of more than 5% of the outstanding common stock of the Prudential
Pacific Growth Fund, Inc.
As of December 6, 1995, Prudential Securities was the record holder for other
beneficial owners of 3,417,653 Class A shares (or approximately 50% of the
outstanding Class A shares), 17,721,274 Class B shares (or approximately 82% of
the outstanding Class B shares) and 153,786 Class C shares (or approximately 92%
of the outstanding Class C 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 November 30, 1995, PMF managed and/or administered open-end
and closed-end management investment companies with assets of approximately $50
billion. According to the Investment Company Institute, as of November 30, 1995,
the Prudential Mutual Funds were the 13th largest family of mutual funds in the
United States.
PMF is a subsidiary of Prudential Securities Incorporated and The Prudential
Insurance Company of America (Prudential). PMF has three wholly-owned
subsidiaries: Prudential Mutual Fund Distributors, Inc., Prudential Mutual Fund
Services, Inc. (PMFS or the Transfer Agent) and Prudential Mutual Fund
Investment Management, Inc. PMFS serves as the transfer agent for the Prudential
Mutual Funds and, in addition, provides customer service, recordkeeping and
management and administration services to qualified plans.
Pursuant to the Management Agreement with the Fund (the Management Agreement),
PMF, subject to the supervision of the Fund's Board of Directors and in
conformity with the stated policies of the Fund, manages both the investment
operations of the Fund and the composition of the Fund's portfolio, including
the purchase, retention, disposition and loan of securities. In connection
therewith, PMF is obligated to keep certain books and records of the Fund. PMF
also administers the Fund's corporate affairs and, in connection therewith,
furnishes the Fund with office facilities, together with those ordinary clerical
and bookkeeping services which are not being furnished by State Street Bank and
Trust Company, the Fund's custodian, and
B-17
<PAGE>
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, 1995. 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.
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
B-18
<PAGE>
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 5, 1995, and by the initial shareholder of the Fund on June 25, 1992.
For the fiscal years ended October 31, 1995, 1994 and 1993, PMF received
management fees of $3,542,363 (.75% of the average daily net assets) $3,726,394
(.75% of the average daily net assets) and $756,412 (.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 The Prudential Insurance Company of America
(Prudential). The Subadvisory Agreement provides that PIC will furnish
investment advisory services in connection with the management of the Fund. In
connection therewith, PIC is obligated to keep certain books and records of the
Fund. PMF continues to have responsibility for all investment advisory services
pursuant to the Management Agreement and supervises PIC's performance of such
services. PIC is reimbursed by PMF for the reasonable costs and expenses
incurred by PIC in furnishing those services. Investment advisory services are
provided to the Fund by a unit at PIC, known as Prudential Mutual Fund
Investment Management.
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 5,
1995, and by the initial shareholder of the Fund on June 25, 1992.
The Subadvisory Agreement provides that it will terminate in the event of its
assignment (as defined in the Investment Company Act) or upon the termination of
the Management Agreement. The Subadvisory Agreement may be terminated by the
Fund, PMF or PIC upon not more than 60 days', nor less than 30 days', written
notice. The Subadvisory Agreement provides that it will continue in effect for a
period of more than two years from its execution only so long as such
continuance is specifically approved at least annually in accordance with the
requirements of the Investment Company Act.
The Manager and the Subadviser are subsidiaries of Prudential, which is one of
the largest diversified financial services institutions in the world and, based
on total assets, the largest insurance company in North America as of December
31, 1994. Its primary business is to offer a full range of products and services
in three areas: insurance, investments and home ownership for individuals and
families; health-care management and other benefit programs for employees of
companies and members of groups; and asset management for institutional clients
and their associates. Prudential (together with its subsidiaries) employs nearly
100,000 persons worldwide, and maintains a sales force of approximately 19,000
agents, 3,400 insurance brokers and 6,000 financial advisors. It insures or
provides other financial services to more than 50 million worldwide--to more
than one of every five people in the United States. Prudential is a major issuer
of annuities, including variable annuities. Prudential seeks to develop
innovative products and services to meet consumer needs in each of its business
areas. Prudential has been engaged in the insurance business since 1875. In July
1995, Institutional Investor ranked Prudential the third largest institutional
money manager of the 300 largest money management organizations in the United
States as of December 31, 1994. As of December 31, 1994, Prudential through its
subsidiaries provided automobile insurance for more than 1.8 million cars and
insured more than 1.5 million homes. For the year ended December 31, 1994, The
Prudential Bank, a subsidiary of Prudential, served 940,000 customers in 50
states providing credit card services and loans totaling more than $1.2 billion.
Assets held by PSI for its clients totaled approximately $150 billion at
December 31, 1994. During 1994, over 28,000 new customer accounts were opened
each month at PSI. The Prudential Real Estate Affiliates, the fourth largest
real estate brokerage network in the United States, has more than 34,000 brokers
and agents and more than 1,100 offices in the United States.
Based on data for the period from January 1, 1995 to September 30, 1995 for
the Prudential Mutual Funds, on an average day, there are approximately $80
million in common stock transactions, over $150 million in bond transactions and
over $3.1 billion in money market transactions. In 1994, the Prudential Mutual
Funds effected more than 40,000 trades in money market securities and held on
average $20 billion of money market securities. Based on complex-wide data for
the period
B-19
<PAGE>
from January 1, 1995 to September 30, 1995, on an average day, over 7,000
shareholders telephoned Prudential Mutual Fund Services, Inc., the Transfer
Agent of the Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free
number. On an annual basis, that represents approximately 1.8 million telephone
calls answered.
From time to time, there may be media coverage of portfolio managers and other
investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
The Wall Street Journal, The New York Times, Barron's and USA Today.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities), One Seaport Plaza,
New York, New York 10292, acts as the distributor of the Class A, Class B and
Class C shares of the Fund. Prior to January 2, 1996, Prudential Mutual Fund
Distributors, Inc. (PMFD), One Seaport Plaza, New York, New York 10292, acted as
distributor of the Class A shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and separate distribution
agreements (the Distribution Agreements), Prudential Securities (the
Distributor) incurs the expenses of distributing the Fund's Class A, Class B and
Class C shares. Prudential Securities serves as the Distributor of the Class Z
shares and incurs the expenses of distributing the Fund's Class Z shares under a
Distribution Agreement with the Fund, none of which are reimbursed by or paid
for by the Fund. See "How the Fund is Managed--Distributor" in the Prospectus.
On 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 Plans were last approved by the Board of Directors, including a
majority of the Rule 12b-1 Directors on June 5, 1995. 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, 1995, PMFD received
payments of $254,800, 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
B-20
<PAGE>
sell Class A shares. For the fiscal year ended October 31, 1995, PMFD also
received approximately $359,000 in initial sales charges.
CLASS B PLAN. For the fiscal year ended October 31, 1995, Prudential
Securities received $3,687,707 from the Fund under the Class B Plan and spent
approximately $2,470,600 in distributing the Class B shares of the Fund. It is
estimated that of the latter amount approximately $48,300 (2.0%) was spent on
printing and mailing of prospectuses to other than current shareholders;
$295,100 (11.9%) 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 $2,127,200 (86.1%) on the aggregate of
(i) payments of commissions and account servicing fees to its financial advisers
($1,435,400 or 58.1%) and (ii) an allocation on account of overhead and other
branch office distribution-related expenses ($691,800 or 28.0%); 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, 1995,
Prudential Securities received approximately $1,816,400 in contingent deferred
sales charges.
CLASS C PLAN. For the fiscal year ended October 31, 1995, Prudential
Securities received $16,242 under the Class C Plan and spent approximately
$28,700 in distributing Class C shares. Prudential Securities receives the
proceeds of contingent deferred sales charges paid by investors upon certain
redemptions of Class C shares. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus. For the fiscal
year ended October 31, 1995, Prudential Securities received contingent deferred
sales charges of approximately $2,400.
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
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 5, 1995. On November 3, 1995, the Board of Directors approved
the transfer of the Distribution Agreement for Class A shares with PMFD to
Prudential Securities.
B-21
<PAGE>
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the safety, potential returns
and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSI's
conduct violated the federal securities laws and that and that an order issued
by the SEC in 1986 requiring PSI to adopt, implement and maintain certain
supervisory procedures had not been complied with; (ii) directed PSI to cease
and desist from violating the federal securities laws and imposed a $10 million
civil penalty; and (iii) required PSI to adopt certain remedial measures
including the establishment of a Compliance Committee of its Board of Directors.
Pursuant to the terms of the SEC settlement, PSI established a settlement fund
in the amount of $330,000,000 and procedures, overseen by a court approved
Claims Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend the creation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Dallas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. and PSI entered into
agreements with the United States Attorney deferring prosecution (provided PSI
complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the Fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director will also serve as an independent "ombudsman" whom PSI
employees can call anonymously with complaints about ethics and compliance.
Prudential Securities shall report any allegations or instances of criminal
conduct and material improprieties to the new director. The new director will
submit compliance reports which shall identify all such allegations or instances
of criminal conduct and material improprieties every three months for a
three-year period.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the Distributor
is required to limit aggregate initial sales charges, deferred sales charges and
asset-based sales charges to 6.25% of total gross sales of each class of shares.
Interest charges on unreimbursed distribution expenses equal to the prime rate
plus one percent per annum may be added to the 6.25% limitation. Sales from the
reinvestment of dividends and distributions are not 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-22
<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-23
<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) of the
Securities Exchange Act of 1934, Prudential Securities may not retain
compensation for effecting transactions on a national securities exchange for
the Fund unless the Fund has expressly authorized the retention of such
compensation. Prudential Securities must furnish to the Fund at least annually a
statement setting forth the total amount of all compensation retained by
Prudential Securities from transactions effected for the Fund during the
applicable period. Brokerage and futures transactions with Prudential Securities
(or any affiliate) are also subject to such fiduciary standards as may be
imposed upon Prudential Securities (or such affiliate) by applicable law.
For the fiscal years ended October 31, 1995, October 31, 1994 and October 31,
1993 the Fund paid brokerage commissions of $2,136,278, $3,003,304 and $6,500,
respectively. During the fiscal year ended October 31, 1995, $47,366 of such
commissions were paid to Prudential Securities. No commissions were paid to
Prudential Securities in the two preceeding fiscal years.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis (Class B or Class C shares). Class Z shares of the Fund
are not subject to any sales or redemption charge and are offered exclusively
for sale to participants in the PSI 401(k) Plan, an employee benefit plan
sponsored by Prudential Securities (the PSI 401(k) Plan). See "Shareholder
Guide--How to Buy Shares of the Fund" in the Prospectus.
Each class represents an interest in the same assets of the Fund and is
identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service expenses which may affect
performance, (ii) each class has exclusive voting rights on any matter submitted
to shareholders that relates solely to its arrangement and has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of any other class, (iii) each class has a
different exchange privilege, (iv) only class B shares have a conversion feature
and (v) Class Z shares are offered exclusively for sale to participants in the
PSI 401(k) Plan. See "Distributor." Each class also has separate exchange
privileges. See "Shareholder Investment Account--Exchange Privilege."
B-24
<PAGE>
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, 1995, 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..................... $15.75
Maximum sales charge (5% of offering price)................................ .83
------
Offering price to public................................................... $16.58
------
------
CLASS B
Net asset value, offering price and redemption price per Class B share*.... $15.38
------
------
CLASS C
Net asset value, offering price and redemption price per Class C share*.... $15.38
------
------
CLASS Z
Net asset value, offering price and redemption price per Class Z share**... $15.75
------
------
</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.
** Value is estimated, and it is anticipated that Class Z shares will be
offered in or about March 1996. See "General Information--Description
of Common Stock" in the Prospectus.
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).
B-25
<PAGE>
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), including retirement and group plans, who
enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds. All shares of the Fund and shares of other Prudential Mutual Funds
(excluding money market funds other than those acquired pursuant to the exchange
privilege) which were previously purchased and are still owned are also included
in determining the applicable reduction. However, the value of shares held
directly with the Transfer Agent and through Prudential Securities will not be
aggregated to determine the reduced sales charge. All shares must be held either
directly with the Transfer Agent or through Prudential Securities. The
Distributor must be notified at the time of purchase that the investor is
entitled to a reduced sales charge. The reduced sales 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, except in the case of retirement and group plans where the employer
or plan sponsor will be responsible for paying any applicable sales charge. The
effective date of 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, except in
the case of retirement and group plans.
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 (or the employer or
plan sponsor in the case of any retirement or group plan) is required to pay the
difference between the sales charge otherwise applicable to the purchases made
during this period and sales charges actually paid. Such payment may be made
directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain such difference. Investors electing to
purchase Class A shares of the Fund pursuant to a Letter of Intent should
carefully read such Letter of Intent.
B-26
<PAGE>
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES.
The contingent deferred sales charge is waived under circumstances described
in the Prospectus. See "Shareholder Guide--How to Sell Your Shares--Waiver of
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
considered disabled if he or she is or a letter from a physician on the physician's
unable to engage in any substantial letterhead stating that the shareholder (or, in the case
gainful activity by reason of any of a trust, the grantor) is permanently disabled. The
medically determinable physical or letter must also indicate the date of disability.
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
Custodial Account indicating (i) the date of birth of the shareholder and
(ii) that the shareholder is over age 59 1/2 and is
taking a normal distribution--signed by the shareholder.
Distribution from Retirement Plan A letter signed by the plan administrator/trustee
indicating the reason for the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or the plan
administrator/trustee on company letterhead indicating
the amount of the excess and whether or not taxes have
been paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents as
it may deem appropriate.
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994. The CDSC
is reduced on redemptions of Class B shares of the Fund purchased prior to
August 1, 1994 if immediately after a purchase of such shares, the aggregate
cost of all Class B shares of the Fund owned by you in a single account 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 -----------------------------------------
PAYMENT MADE $500,001 TO $1 MILLION OVER $1 MILLION
- ------------------- ---------------------- ---------------
<S> <C> <C>
First.............................................. 3.0% 2.0%
Second............................................. 2.0% 1.0%
Third.............................................. 1.0% 0%
Fourth and thereafter.............................. 0% 0%
</TABLE>
B-27
<PAGE>
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.
Such shareholder will receive credit for any contingent deferred sales charge
paid in connection with the amount of proceeds being reinvested.
EXCHANGE PRIVILEGE. The Fund makes available to its shareholders the privilege
of exchanging their shares of the Fund for shares of certain other Prudential
Mutual Funds, including one or more specified money market funds, subject in
each case to the minimum investment requirements of such funds. Shares of such
other Prudential Mutual Funds may also be exchanged for shares of the Fund. All
exchanges are made on the basis of relative net asset value next determined
after receipt of an order in proper form. An exchange will be treated as a
redemption and purchase for tax purposes. Shares may be exchanged for shares of
another fund only if shares of such fund may legally be sold under applicable
state laws. For retirement and group plans having a limited menu of Prudential
Mutual Funds, the Exchange Privilege is available for those funds eligible for
investment in the particular program.
It is contemplated that the Exchange Privilege may be applicable to new mutual
funds whose shares may be distributed by the Distributor.
CLASS A. Shareholders of the Fund may exchange their Class A shares for Class
A shares of certain other Prudential Mutual Funds, shares of Prudential
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.
B-28
<PAGE>
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 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.
B-29
<PAGE>
CLASS Z. Class Z shares may be exchanged for Class Z shares of the funds
listed below which participate in the PSI 401(k) Plan. No fee or sales load will
be imposed upon the exchange.
Prudential Allocation Fund
(Balanced Portfolio)
Prudential Equity Income Fund
Prudential Equity Fund, Inc.
Prudential Global Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
(Money Market Series)
Prudential Growth Opportunity Fund, Inc.
Prudential High Yield Fund, Inc.
Prudential MoneyMart Assets, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Utility Fund, Inc.
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 $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class beginning in 2011, the cost of four years at a
private college could reach $210,000 and over $90,000 at a public university.1
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.2
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- -------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years...................................... $ 110 $ 165 $ 220 $ 275
20 Years...................................... 176 264 352 440
15 Years...................................... 296 444 592 740
10 Years...................................... 555 833 1,110 1,388
5 Years....................................... 1,371 2,057 2,742 3,428
</TABLE>
See "Automatic Savings Accumulation Plan."
(Footnotes on following page)
B-30
<PAGE>
(Footnotes for preceding page)
- ------------
1 Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Average costs for private institutions include tuition, fees, room and
board for the 1993-1994 academic year.
2 The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the Fund.
The investment return and principal value of an investment will fluctuate so
that an investor's shares when redeemed may be worth more or less than their
original cost.
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP, an investor may
arrange to have a fixed amount automatically invested in shares of the Fund
monthly by authorizing his or her bank account or Prudential Securities Account
(including a Command Account) to be debited to invest specified dollar amounts
in shares of the Fund. The investor's bank must be a member of the Automatic
Clearing House System. Stock certificates are not issued to ASAP participants.
Further information about this program and an application form can be obtained
from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders through Prudential Securities or the Transfer Agent. Such
withdrawal plan provides for monthly or quarterly checks in any amount, except
as provided below, up to the value of the shares in the shareholder's account.
Withdrawals of Class B or Class C shares may be subject to a CDSC. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges"
in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment
Account--Automatic Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the shareholder
in redeeming sufficient full and fractional shares to provide the amount of the
periodic withdrawal payment. The systematic withdrawal plan may be terminated at
any time, and the Distributor reserves the right to initiate a fee of up to $5
per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income. If
periodic withdrawals continuously exceed reinvested dividends and distributions,
the shareholder's original investment will be correspondingly reduced and
ultimately exhausted.
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.
B-31
<PAGE>
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.
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter promoted collectively. Typically, these programs are
created with an investment theme, e.g., to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as a part of
the program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, investors should consult their Prudential
Securities Financial Adviser or Prudential/Pruco Securities Representative
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of
investments listed on a securities exchange and NASDAQ National Market System
securities (other than options on stock and stock indices) are valued at 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
B-32
<PAGE>
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. 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.
Quotations of foreign securities in a foreign currency are converted to U.S.
dollar equivalents at the current rate obtained from a recognized bank or dealer
and forward currency exchange contracts are valued at the current cost of
covering or offsetting such contracts. Should an extraordinary event, which is
likely to affect the value of the security, occur after the close of an exchange
on which a portfolio security is traded, such security will be valued at fair
value considering factors determined in good faith by the investment adviser
under procedures established by and under the general supervision of the Fund's
Board of Directors.
Securities or other assets for which 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 more than 60 days, for which market quotations are readily
available, are valued at their current market quotations as supplied by an
independent pricing agent or principal market maker. The Fund will compute its
net asset value at 4:15 P.M., New York time, on each day the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem Fund shares have been received or days on which changes in the value
of the Fund's portfolio securities do not affect net asset value. In the event
the New York Stock Exchange closes early on any business day, the net asset
value of the Fund's shares shall be determined at a time between such closing
and 4:15 P.M., New York time.
Net asset value is calculated separately for each class. The net asset value
of Class B and Class C shares will generally be lower than the net asset value
of Class A shares as a result of the larger distribution-related fee to which
Class B and Class C shares are subject. The net asset value of Class Z shares
will generally be higher than the net asset value of Class A, Class B or Class C
shares as a result of the fact that the Class Z shares are not subject to any
distribution or service fee. It is expected, however, that the net asset value
per share of each class will tend to converge immediately after the recording of
dividends, which will differ by approximately the amount of the
distribution-related expense accrual differential among the classes.
TAXES
The Fund intends to qualify and to remain qualified as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
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.
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
B-33
<PAGE>
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 short-term 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, straddle and conversion transaction provisions of the Code. In addition,
debt securities acquired by the Fund may be subject to original issue discount
and market discount rules.
Special rules apply to certain options (such as 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
generally 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 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
conversion transaction rules also may apply to convert capital gain into
ordinary income.
The Fund's ability to hold foreign currencies or engage in hedging activities
may be limited by the short-short rule 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 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
B-34
<PAGE>
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 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 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.
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
B-35
<PAGE>
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 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, subject to various limitations, 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, although they
still will be required to include in income their share of the foreign taxes
paid by the Fund.
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 separate limitations for various types of
income, such as "passive income," which includes, among other things, dividends,
most 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-36
<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, Class C and Class Z shares. See "How the Fund
Calculates Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P (1+T) n = ERV
<TABLE>
<S> <C>
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.
</TABLE>
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 October 31, 1995 and for the period from July 24, 1992 (commencement of
investment operations) through October 31, 1995 was (10.92)% and 13.94%,
respectively, and for the Class B shares, was (11.82)% and 14.43% for Class B
shares, respectively, for the same period. The average annual total return for
Class C shares for the one year period ended October 31, 1995 and the since
inception period (August 1, 1994) ended October 31, 1995 was (7.82)% and
(5.77)%, respectively. During these periods no Class Z 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, Class C and
Class Z shares. This yield will be computed by dividing the Fund's net
investment income per share earned during this 30-day period by the maximum
offering price per share on the last day of this period. Yield is calculated
according to the following formula:
YIELD = 2[( a-b +1)6-1]
-----
cd
<TABLE>
<S> <C>
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.
</TABLE>
Yield fluctuates and an annualized yield quotation is not a representation by
the Fund as to what an investment in the Fund will actually yield for any given
period. 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,
Class C and Class Z shares. See "How the Fund Calculates Performance" in the
Prospectus.
B-37
<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
<TABLE>
<S> <C>
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.
</TABLE>
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
October 31, 1995 and for the period from July 24, 1992 (commencement of
operations) to October 31, 1995 was (6.23)% and 61.28%, respectively, and for
Class B shares was (6.82)% and 57.35%, respectively, for the same period. The
aggregate total return for Class C shares for the one year period ended on
October 31, 1995 and for the since inception period (August 1, 1994) ended
October 31, 1995 was (6.82) and (7.15)%, respectively. During these periods no
Class Z shares were outstanding.
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
[GRAPH]
1 Source: Ibbotson Associates Stocks, Bonds, Bills and Inflation--1995 Yearbook
(annually updates the work of Roger G. Ibbotson and Rex A. Sinquefield). Used
with permission. All rights reserved. Common stock returns are based on the
Standard & Poor's 500 Stock Index, a market-weighted, unmanaged index of 500
common stocks in a variety of industry sectors. It is a commonly used indicator
of broad stock price movements. This chart is for illustrative purposes only and
is not intended to represent the performance of any particular investment or
fund. Investors cannot invest directly in an index. Past performance is not a
guarantee of future results.
B-38
<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, 1995, the Fund incurred fees of
approximately $771,000 for such services.
Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281,
serves as the Fund's independent accountants, and in that capacity audits the
Fund's annual reports.
B-39
<PAGE>
THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY
B-40
<PAGE>
Portfolio of Investments as of PRUDENTIAL PACIFIC GROWTH FUND, INC.
October 31, 1995
-----------------------------------------------------------------
-----------------------------------------------------------------
Shares Description Value (Note 1)
-----------------------------------------------------------------
LONG-TERM INVESTMENTS--97.2%
COMMON STOCKS--93.3%
-----------------------------------------------------------------
Australia--17.9%
3,837,700 AAPC, Ltd. (Leisure & Tourism) $ 2,220,587
2,710,599 Australian National Industries, Ltd.
(Multi-Industry) 2,125,620
358,300 Brambles Industries, Ltd.
(Business & Public Services) 3,808,162
1,055,616 Broken Hill Proprietary Co., Ltd.
(Other Energy Sources) 14,289,626
2,233,941 Coca Cola Amatil, Ltd.
(Beverages & Tobacco) 17,280,192
1,942,900 Nine Network Australia, Ltd.
(Broadcasting & Publishing) 6,183,151
832,000 Qantas Airways, Ltd.
(Transportation-Airlines) 1,469,584
3,990,500 Sea World Property Trust, Ltd.
(Leisure & Tourism) 2,977,396
1,573,400 West Australia Newspaper, Ltd.
(Broadcasting & Publishing) 4,564,017
3,903,300 Western Mining Corp. Holdings, Ltd.
(Metals - Non Ferrous) 25,022,297
-------------
79,940,632
----------------------------------------------------------------
Hong Kong--16.3%
3,345,000 Amoy Properties, Ltd.
(Property Investment) 3,223,294
2,200,000 CITIC Pacific, Ltd. (Multi-Industry) 6,872,065
3,023,800 Consolidated Electric Power
(Construction) 6,120,894
2,825,600 Guoco Group, Ltd. (Multi-Industry) 13,084,020
3,532,000 Hong Kong & Shanghai Hotels, Ltd.
(Leisure & Tourism) 4,431,389
597,604 HSBC Holdings, PLC (Banking) 8,695,879
12,167,000 Hung Hing Printing Group, Ltd.
(Forest Products & Paper) 2,525,841
1,472,000 Hutchison Whampoa, Ltd.
(Multi-Industry) 8,110,822
853,000 Jardine Matheson Holdings, Ltd.
(Multi-Industry) 5,203,300
1,100,000 New World Development Co., Ltd.
(Property Development) $ 4,282,592
1,393,000 New World Infrastructure, Ltd.(a)
(Construction) 2,450,403
18,350,000 Techtronic Industries Co., Ltd.
(Machinery & Engineering) 1,898,775
1,677,000 Wharf Holdings, Ltd.
(Multi-Industry) 5,661,364
-------------
72,560,638
----------------------------------------------------------------
India--0.2%
685,000 Indo Gulf Fertilizer Industries(a)
(Basic Industries) 1,010,375
----------------------------------------------------------------
Indonesia--0.4%
31,000 HM Sampoerna (Beverages & Tobacco) 286,658
1,545,100 Kabel Metal Indonesia
(Industrial Components) 1,403,245
-------------
1,689,903
----------------------------------------------------------------
Japan--30.3%
218,000 Aiwa Co.
(Appliances & Household Durables) 4,733,105
75,600 Autobacs Seven Co. (Retail) 7,134,866
365,000 Daibiru Corp. (Property Investment) 3,712,469
1,340 DDI Corp.
(Telecommunications-Unregulated) 10,864,156
52,400 Japan Associates Finance Co.
(Financial Services) 5,099,071
211,000 Kato Denki Co. (Retail) 5,530,367
60,000 Keyence Corp.
(Electronic Components &
Instruments) 7,393,643
74,000 Kyocera Corp.
(Electronic Components &
Instruments) 6,064,743
760,000 Mitsui Fudosan Co., Ltd.
(Property Investment) 8,696,333
197,000 Nichiei Co., Ltd. (Financial
Services) 12,234,230
193,000 Nintendo Co., Ltd.
(Recreation & Other Consumer
Goods) 14,194,230
-----------------------------------------------------------------------------
See Notes to Financial Statements.
B-41
<PAGE>
Portfolio of Investments as of PRUDENTIAL PACIFIC GROWTH FUND, INC.
October 31, 1995
------------------------------------------------------------
------------------------------------------------------------
Shares Description Value (Note 1)
------------------------------------------------------------
Japan cont'd.
400,000 Nippon Electric Glass
(Misc. Materials & Commodities) $ 7,393,643
525,000 Nippon Express Co.
(Transportation-Road & Rail) 4,261,614
290,880 Nissen Co., Ltd. (Retail) 8,392,137
394,000 Omron Corp.
(Electronic Components &
Instruments) 9,209,389
149,000 Onward Kashiyama & Co., Ltd.
(Textile-Apparel Manufacturing) 2,054,670
168,000 Rohm Co., Ltd.
(Electronic Components &
Instruments) 10,203,227
185,500 Sony Music Entertainment, Inc.
(Recreation & Other Consumer
Goods) 7,946,112
-------------
135,118,005
----------------------------------------------------------------
Korea--4.8%
40,600 Mando Machinery Corp.
(Automobiles & Auto Parts) 2,493,890
18,812 Mando Machinery Corp.(a)
(Automobiles & Auto Parts) 644,311
12,740 Pohang Iron & Steel Co., Ltd.
(Metals - Steel) 1,108,912
14,829 Samsung Electronics Co., Ltd.
(New, Series 1)(a)
(Electronic Components &
Instruments) 3,265,617
1,113 Samsung Electronics Co., Ltd.
(New, Series 3)(a)
(Electronic Components &
Instruments) 240,739
55,308 Samsung Electronics Co., Ltd.(a)
(Electronic Components &
Instruments) 12,143,689
37,540 Shinwon Corp.(a) (Retail) 1,545,462
-------------
21,442,620
----------------------------------------------------------------
Malaysia--6.4%
4,256,000 IJM Corporation Berhad
(Construction) 7,003,968
1,000 Kedah Cement Holdings Berhad
(Building Materials & Components) 1,559
2,415,000 Kuala Lumpur Kepong Berhad
(Misc. Materials & Commodities) $ 6,512,894
8,260,000 Renong Berhad (Multi-Industry) 12,617,638
843,000 Technology Resources Industries
Berhad(a)(Utilities-Telephones) 2,140,689
-------------
28,276,748
----------------------------------------------------------------
New Zealand--3.2%
3,781,200 Fletcher Challenge, Ltd.
(Forest Products & Paper) 10,001,987
3,224,500 Fletcher Forestry Challenge, Ltd.
(Forest Products & Paper) 4,445,503
-------------
14,447,490
----------------------------------------------------------------
Singapore--12.6%
1,327,000 City Developments, Ltd.
(Property Development) 8,220,354
1,290,750 First Capital Corp.
(Property Development) 3,490,736
582,000 Fraser & Neave, Ltd.
(Beverages & Tobacco) 6,880,991
1,909,000 Hong Leong Finance, Ltd.
(Financial Services) 5,784,439
1,527,000 Overseas Union Bank (Banking) 9,513,345
1,604,750 Sembawang Maritime, Ltd.
(Energy Equipment & Services) 5,430,588
314,000 United Overseas Bank, Ltd. (Banking) 2,756,531
7,987,000 Wing Tai Holdings
(Property Development) 13,853,557
-------------
55,930,541
----------------------------------------------------------------
Thailand--1.2%
215,000 Bangkok Bank (Banking) 2,221,339
190,701 Land & House, Ltd.
(Property Development) 3,076,678
-------------
5,298,017
-------------
Total common stocks
(cost $373,590,889) 415,714,969
-------------
-----------------------------------------------------------------------------
See Notes to Financial Statements.
B-42
<PAGE>
PRUDENTIAL PACIFIC GROWTH FUND, INC. Portfolio of Investments as of
October 31, 1995
-----------------------------------------------------------------
-----------------------------------------------------------------
Shares Description Value (Note 1)
-----------------------------------------------------------------
PREFERRED STOCKS
-----------------------------------------------------------------
Australia--0.1%
63,635 Bank of Melbourne, Ltd. (Banking)
(cost $548,843) $ 654,053
-------------
DEPOSITORY RECEIPTS--1.4%
-----------------------------------------------------------------
Australia--0.5%
132,620 Qantas Airways, Ltd.
(Transportation-Airlines) 2,342,503
----------------------------------------------------------------
Indonesia--0.9%
121,900 PT Indonesia Satellite
(Telecommunications) 4,037,938
-------------
Total depository receipts (cost
$5,984,489) 6,380,441
-------------
CONVERTIBLE LOAN STOCKS
----------------------------------------------------------------
Singapore--0.2%
631,000 Sembawang Maritime, Ltd.
(Energy Equipment & Services)
(cost $402,346) 730,396
-------------
WARRANTS(a)--1.8%
----------------------------------------------------------------
Australia
West Australian Newspaper, Ltd.
214,071 expiring June '99 @ A$5.00
(Broadcasting & Publishing) 65,193
----------------------------------------------------------------
Japan--0.7%
Autobacs Seven Co.
150 expiring Mar. '96 @ (Y)7,440
(Retail) 283,125
Nissen Co., Ltd.
493 expiring Nov. '96 @ (Y)1,681
(Retail) 618,743
Nitori Co.
10,250 expiring Feb. '98 @ (Y)2,724
(Retail) 1,046,195
Onward Kashiyama & Co., Ltd.
927 expiring March '96 @ (Y)1,169
(Textile-Apparel Manufacturing) $ 1,222,481
-------------
3,170,544
----------------------------------------------------------------
Singapore--1.1%
Hong Leong Finance, Ltd.
190,200 expiring Nov.'98 @ SGD3.25
(Financial Services) 165,626
Singapore Finance, Ltd.
144,300 expiring June '99 @ SGD1.50
(Financial Services) 76,619
United Overseas Bank, Ltd.
1,184,800 expiring June '97 @ SGD3.34
(Banking) 4,487,561
-------------
4,729,806
-------------
Total warrants
(cost $9,332,188) 7,965,543
-------------
Principal
Amount
(000)
---------
CONVERTIBLE BONDS
----------------------------------------------------------------
India--0.4%
Gujarat Ambuja Cement
US$1,350 3.50%, 6/30/99 (Building Materials &
Components) (cost $2,020,598) 1,869,750
-------------
Total long-term investments
(cost $391,879,353) 433,315,152
SHORT-TERM INVESTMENTS
----------------------------------------------------------------
Repurchase Agreement--2.6%
Joint Repurchase Agreement Account,
11,403 5.89%, 11/1/95, (cost $11,403,000;
Note 5) 11,403,000
-------------
----------------------------------------------------------------
Total Investments--99.8%
(cost $403,282,353; Note 4) 444,718,152
Other assets in excess of
liabilities--0.2% 1,036,020
-------------
Net Assets--100% $ 445,754,172
-------------
-------------
---------------
(a) Non-income producing security.
-----------------------------------------------------------------------------
See Notes to Financial Statements.
B-43
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL PACIFIC GROWTH FUND, INC.
-----------------------------------------------------------------------------
Assets October 31, 1995
----------------
Investments, at value (cost $403,282,353).................. $444,718,152
Cash....................................................... 2,417,515
Foreign currency (cost $2,012,928)......................... 2,005,337
Forward currency contracts-net amount receivable from
counterparties........................................... 9,752,998
Receivable for investments sold............................ 3,294,063
Dividends and interest receivable.......................... 933,890
Receivable for Fund shares sold............................ 583,571
Deferred expenses and other assets......................... 73,562
------------
Total assets............................................ 463,779,088
------------
Liabilities
Payable for Fund shares reacquired......................... 14,596,778
Forward currency contracts-net amount payable to
counterparties........................................... 1,876,035
Accrued expenses and other liabilities..................... 502,589
Distribution fee payable................................... 325,353
Management fee payable..................................... 295,363
Payable for investments purchased.......................... 289,806
Withholding taxes payable.................................. 112,221
Deferred Thailand capital gains tax liability.............. 26,771
------------
Total liabilities...................................... 18,024,916
------------
Net Assets................................................. $445,754,172
============
Net assets were comprised of:
Common stock, at par.................................... $ 28,833
Paid-in capital in excess of par........................ 410,049,346
------------
410,078,179
Undistributed net foreign exchange gains................ 5,673,168
Accumulated net realized loss on investments........... (19,272,447)
Net unrealized appreciation on investments and foreign
currencies............................................ 49,275,272
------------
Net assets, October 31, 1995............................... $445,754,172
============
Class A:
Net asset value and redemption price per share
($98,998,227 / 6,286,560 shares of common stock issued
and outstanding).................................. $15.75
Maximum sales charge (5% of offering price)............. .83
------
Maximum offering price to public........................ $16.58
======
Class B:
Net asset value, offering price and redemption price per share
($344,312,820 / 22,387,242 shares of common stock issued
and outstanding)................................. $15.38
======
Class C:
Net asset value, offering price and redemption price per share
($2,443,125 / 158,841 shares of common stock issued
and outstanding)................................. $15.38
======
-----------------------------------------------------------------------------
See Notes to Financial Statements.
B-44
<PAGE>
PRUDENTIAL PACIFIC GROWTH FUND, INC.
Statement of Operations
--------------------------------------------------------------
--------------------------------------------------------------
Year Ended
Net Investment Income October 31, 1995
----------------
Income
Dividends (net of foreign withholding
taxes of $686,766)................... $ 7,392,951
Interest................................ 538,790
--------------
Total income......................... 7,931,741
--------------
Expenses
Management fee.......................... 3,542,363
Distribution fee--Class A............... 254,800
Distribution fee--Class B............... 3,687,707
Distribution fee--Class C............... 16,242
Transfer agent's fees and expenses...... 910,000
Custodian's fees and expenses........... 700,000
Reports to shareholders................. 290,000
Registration fees....................... 110,000
Audit fee............................... 48,000
Directors' fees......................... 42,000
Amortization of organization expense.... 40,000
Legal fees.............................. 15,000
Miscellaneous........................... 41,668
--------------
Total expenses....................... 9,697,780
--------------
Net investment loss........................ (1,766,039)
---------------
Realized and Unrealized Gain (Loss) on
Investment and Foreign Currency
Transactions
Net realized loss on:
Investment transactions................. (13,436,387)
Foreign currency transactions........... (1,512,294)
---------------
(14,948,681)
---------------
Net change in unrealized
appreciation on:
Investments (net of deferred Thailand
capital gains tax of $123,539)....... (26,397,406)
Foreign currencies...................... 9,049,313
--------------
(17,348,093)
---------------
Net loss on investments and foreign
currencies.............................. (32,296,774)
---------------
Net Decrease in Net Assets
Resulting from Operations.................. $(34,062,813)
===============
PRUDENTIAL PACIFIC GROWTH FUND, INC.
Statement of Changes in Net Assets
Increase (Decrease) Year Ended October 31,
in Net Assets ---------------------------------
1995 1994
--------------- ---------------
Operations
Net investment loss......... $ (1,766,039) $ (5,622,111)
Net realized gain (loss) on
investment and foreign
currency transactions.. (14,948,681) 2,992,416
Net change in unrealized
appreciation on
investments and foreign
currencies............. (17,348,093) 24,029,033
--------------- -------------
Net increase (decrease) in
net assets resulting from
operations............... (34,062,813) 21,399,338
--------------- -------------
Net equalization credits.... 5,303 --
--------------- -------------
Distributions in excess of net
investment income (Note 1)
Class A..................... -- (293,320)
Class B..................... -- (658,425)
--------------- -------------
-- (951,745)
--------------- -------------
Distributions to shareholders
from net realized gains
Class A..................... (575,474) (944,124)
Class B..................... (2,780,214) (3,989,283)
Class C..................... (5,693) --
--------------- -------------
(3,361,381) (4,933,407)
--------------- -------------
Fund share transactions (net of
share conversion) (Note 6)
Net proceeds from shares
sold..................... 1,087,055,048 520,354,132
Net asset value of shares
issued in reinvestment of
distributions............ 3,169,310 5,612,542
Cost of shares reacquired... (1,166,639,139) (297,243,493)
--------------- -------------
Net increase (decrease) in
net assets from Fund
share transactions....... (76,414,781) 228,723,181
--------------- -------------
Total increase (decrease)...... (113,833,672) 244,237,367
Net Assets
Beginning of year.............. 559,587,844 315,350,477
--------------- -------------
End of year.................... $ 445,754,172 $ 559,587,844
=============== =============
-----------------------------------------------------------------------------
See Notes to Financial Statements.
B-45
<PAGE>
Notes to Financial Statements PRUDENTIAL PACIFIC GROWTH FUND, INC.
-----------------------------------------------------------------------------
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.
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 fiscal year, the Fund does not
isolate that portion of the results of operations arising as a result of
changes in the foreign exchange rates from the fluctuations arising from
changes in the market prices of securities held at the end of the fiscal
year. Similarly, the Fund does not isolate the effect of changes in foreign
exchange rates from the fluctuations arising from changes in the market
prices of long-term debt
securities sold during the fiscal year. Accordingly, realized foreign
currrency gains (losses) are included in the reported net realized losses on
investment transactions.
Net realized losses on foreign currency transactions of $1,512,294 represent
net foreign exchange losses 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 atfiscal year end exchange rates are reflected as a component
of unrealized appreciation on investments and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result
of, among other factors, the possibility of political and economic
instability and the level of governmental supervision and regulation of
foreign securities markets.
Forward Currency Contracts: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign
portfolio holdings or on specific receivables and payables denominated in a
foreign currency. The contracts are valued daily at current exchange rates
and any unrealized gain or loss is included in net unrealized appreciation or
depreciation on investments. Gain or loss is realized on the settlement date
of the contract equal to the difference between the settlement value of the
original and renegotiated forward contracts. This gain or loss, if any, is
included in net realized gain (loss) on foreign
-----------------------------------------------------------------------------
B-46
<PAGE>
Notes to Financial Statements PRUDENTIAL PACIFIC GROWTH FUND, INC.
-----------------------------------------------------------------------------
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 due to timing differences concerning
recognition of income.
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, interest and capital gains 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 for and reports
distributions to shareholders in accordance with the A.I.C.P.A.'s Statement
of Position 93-2: Determination, Disclosure, and Financial Statement
Presentation of Income, Capital Gain, and Return of Capital Distributions by
Investment Companies. The effect caused by applying this statement was to
decrease paid-in capital by $1,904,622, increase accumulated net realized
losses by $5,529,282 and to increase undistributed foreign exchange gains by
$7,433,904 for foreign currency gains recognized for tax purposes during the
fiscal year ended October 31, 1995. 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 with Prudential Securities Incorporated (``PSI''),
which acts as distributor of the Class B shares and Class C shares of the
Fund (collectively the ``Distributors''). The Fund compensates the
Distributors for distributing and servicing the Fund's Class A, Class B and
Class C shares, pursuant to plans of distribution, (the ``Class A, B and C
Plans'') (regardless of expenses actually incurred by them). The distribution
fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, 1%
and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Class A, Class B and Class C Plans were
25%, 1% and 1%, respectively of the average daily net assets of the Class A,
Class B and Class C shares for the fiscal year ended October 31, 1995.
PMFD has advised the Fund that it has received approximately $359,000 in
front-end sales charges resulting from sales of Class A shares during the
year ended October 31, 1995. From these fees, PMFD paid such sales charges to
PSI and Pruco Securities Corporation, affiliated broker-dealers, which in
turn paid commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the year ended October 31, 1995, it
received approximately $1,816,400 and $2,400 in contingent deferred
-----------------------------------------------------------------------------
B-47
<PAGE>
Notes to Financial Statements PRUDENTIAL PACIFIC GROWTH FUND, INC.
-----------------------------------------------------------------------------
sales charges imposed upon certain redemptions by Class B and Class C
shareholders, respectively.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America
(``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, 1995, the Fund incurred fees of approximately $771,000 for the services
of PMFS. As of October 31, 1995, approximately $61,500 of such fees were due
to PMFS. Transfer agent fees and expenses in the statement of operations
include certain out-of-pocket expenses paid to non-affiliates.
------------------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term
investments, for the year ended October 31, 1995 were $247,132,949 and
$317,927,609, respectively.
The United States federal income tax basis of the Fund's investments at
October 31, 1995 was $405,316,224 and accordingly, net unrealized
appreciation for federal income tax purposes was $39,401,928 (gross
unrealized appreciation--$59,625,599; gross unrealized
depreciation--$20,223,671).
For federal income tax purposes, the Fund has a capital loss carryforward as
of October 31, 1995 of approximately $17,227,000 which expires in 2003.
At October 31, 1995, the Fund had outstanding forward currency contracts,
both to purchase and sell foreign currencies, as follows:
Value at
Foreign Currency Settlement Date Current
Purchase Contract Payable Value Depreciation
-------------------- --------------- ----------- --------------
Japanese Yen,
expiring 5/15/96-
5/30/96......... $38,497,129 $36,621,094 $ (1,876,035)
=========== =========== ============
Value at
Foreign Currency Settlement Date Current
Sale Contract Receivable Value Appreciation
------------------- --------------- ----------- --------------
Japanese Yen,
expiring 5/15/96
5/30/96........ $46,374,092 $36,621,094 $9,752,998
=========== =========== ==========
------------------------------------------------------------------
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 October 31,
1995, the Fund had a 1.22% undivided interest in the repurchase agreements in
the joint account. The undivided interest for the Fund represented
$11,403,000 in principal amount. As of such date, each repurchase agreement
in the joint account and the value of the collateral therefor were as
follows:
Bear, Stearns & Co. 5.875%, in the principal amount of $273,000,000,
repurchase price $273,044,552, due 11/1/95. The value of the collateral
including accrued interest was $278,800,077.
CS First Boston Corp., 5.90%, in the principal amount of $273,000,000,
repurchase price $273,044,742, due 11/1/95. The value of the collateral
including accrued interest was $278,529,780.
Goldman, Sachs & Co., 5.88%, in the principal amount of $273,000,000,
repurchase price $273,044,590, due 11/1/95. The value of the collateral
including accrued interest was $278,460,050.
Smith Barney & Co., 5.93%, in the principal amount of $114,753,000,
repurchase price $114,771,902, due 11/1/95. The value of the collateral
including accrued interest was $117,048,982.
----------------------------------------------------------------------------
Note 6. Capital
The Fund currently offers Class A, Class B and Class C shares. Class A shares
are sold with a front-end sales charge of up to 5%. Class B shares are sold
with a contingent deferred sales charge which declines from 5% to zero
depending on the period of time the shares are held. Class C shares are sold
with a contingent deferred sales charge of 1% during the first year. Class B
shares automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase. A special
-----------------------------------------------------------------------------
B-48
<PAGE>
Notes to Financial Statements PRUDENTIAL PACIFIC GROWTH FUND, INC.
-----------------------------------------------------------------------------
exchange privilege is also available for shareholders who qualified to
purchase Class A shares at net asset value.
The Fund has authorized 2 billion shares of common stock at $.001 par value
per share equally divided into three classes, designated Class A, Class B and
Class C common stock. Of the 28,832,643 shares of common stock issued and
outstanding at October 31, 1995, PMF owned 5,000 Class A shares and 5,000
Class B shares and Prudential owned 211,960 Class A shares.
Transactions in shares of common stock for the years ended October 31, 1995
and 1994 were as follows:
Class A Shares Amount
------- ----------- -------------
Year ended October 31, 1995:
Shares sold..................... 38,906,170 $ 589,161,551
Shares issued in reinvestment of
distributions................... 36,104 541,915
Shares reacquired................. (39,986,485) (609,434,118)
----------- -------------
Net decrease in shares outstanding
before conversion............... (1,044,211) (19,730,652)
Shares issued upon conversion from
Class B......................... 1,476,233 20,877,944
----------- -------------
Net increase in shares
outstanding..................... 432,022 $ 1,147,292
=========== =============
Year ended October 31, 1994:
Shares sold..................... 8,481,016 $ 142,276,687
Shares issued in reinvestment of
distributions................... 68,502 1,139,181
Shares reacquired................. (6,691,379) (112,537,168)
----------- -------------
Net increase in shares
outstanding..................... 1,858,139 $ 30,878,700
=========== =============
Class B
-------
Year ended October 31, 1995:
Shares sold..................... 29,316,819 $ 437,515,082
Shares issued in reinvestment of
distributions................... 177,755 2,621,884
Shares reacquired................. (33,274,969) (498,258,260)
----------- -------------
Net decrease in shares outstanding
before conversion............... (3,780,395) (58,121,294)
Shares reacquired upon conversion
into Class A.................... (1,504,465) (20,877,944)
----------- -------------
Net decrease in shares
outstanding..................... (5,284,860) $ (78,999,238)
=========== =============
Class B Shares Amount
------- ----------- -------------
Year ended October 31, 1994:
Shares sold..................... 22,664,100 $ 375,017,028
Shares issued in reinvestment of
distributions................... 271,772 4,473,361
Shares reacquired................. (11,011,611) (182,353,187)
----------- -------------
Net increase in shares
outstanding..................... 11,924,261 $ 197,137,202
=========== =============
Class C
----------------------------------
Year ended October 31, 1995:
Shares sold....................... 4,052,224 $ 60,378,415
Shares issued in reinvestment of
distributions................... 373 5,511
Shares reacquired................. (3,936,941) (58,946,761)
----------- -------------
Net increase in shares
outstanding..................... 115,656 $ 1,437,165
=========== =============
August 1, 1994(a) through
October 31, 1994
Shares sold....................... 183,643 $ 3,060,417
Shares reacquired................. (140,458) (2,353,138)
----------- -------------
Net increase in shares
outstanding..................... 43,185 $ 707,279
=========== =============
<PAGE>
---------------
(a) Commencement of offering of Class C shares.
------------------------------------------------------------
Note 7. Distributions
On December 7, 1995 the Board of Directors of the Fund declared dividends
from foreign currency gains to Class A, B and C shareholders of $.189 per
share, payable on December 15, 1995 to shareholders of record on December 12,
1995.
-----------------------------------------------------------------------------
B-49
<PAGE>
Financial Highlights PRUDENTIAL PACIFIC GROWTH FUND, INC.
-----------------------------------------------------------------------------
<TABLE><CAPTION>
Class A Class B
----------------------------------------------------- ------------------------
July 24,
1992(a)
Year Ended October 31, Through Year Ended October 31,
------------------------------------- October 31, ------------------------
1995(e) 1994(e) 1993(e) 1992 1995(e) 1994(e)
---------- ------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...... $ 16.90 $ 16.10 $ 10.65 $ 10.00 $ 16.62 $ 15.94
-------- ------- -------- ------- -------- --------
Income from investment operations
Net investment income (loss).............. .04 (.08) (.01) (.02) (.08) (.21)
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions............................ (1.09) 1.15 5.48 .67 (1.06) 1.13
-------- ------- -------- ------- -------- -------
Total from investment operations........ (1.05) 1.07 5.47 .65 (1.14) .92
-------- ------- -------- ------- -------- -------
Less distributions
Distributions in excess of net investment
income.................................. -- (.06) (.02) -- -- (.03)
Distributions from net realized gains..... (.10) (.21) -- -- (.10) (.21)
---------- ------- ---------- ----------- ---------- ---------
Total distributions..................... (.10) (.27) (.02) -- (.10) (.24)
---------- ------- ---------- ----------- ---------- ---------
Net asset value, end of period............ $ 15.75 $ 16.90 $ 16.10 $ 10.65 $ 15.38 $ 16.62
========== ======= ========== =========== ========== =========
TOTAL RETURN(d)........................... (6.23)% 6.67% 51.39% 6.50% (6.82)% 5.79%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........... $ 98,998 $98,921 $ 64,353 $13,918 $344,313 $459,949
Average net assets (000).................. $101,920 $92,233 $ 26,264 $12,884 $368,771 $404,506
Ratios to average net assets:
Expenses, including distribution fees... 1.46% 1.57% 1.63% 2.72%(b) 2.21% 2.33%
Expenses, excluding distribution fees... 1.21% 1.33% 1.43% 2.52%(b) 1.21% 1.33%
Net investment income (loss)............ .26% (.50)% (.04)% (.75)%(b) (.55)% (1.27)%
Portfolio turnover........................ 54% 56% 44% 0% 54% 56%
<CAPTION>
Class C
--------------------------
July 24, Year August 1,
1992(a) Ended 1994(c)
Through October Through
October 31, 31, October 31,
1993(e) 1992 1995(e) 1994(e)
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...... $ 10.63 $ 10.00 $16.62 $ 16.68
-------- ------- ------ -------
Income from investment operations
Net investment income (loss).............. (.10) (.04) (.08) (.06)
Net realized and unrealized gain (loss) on
investment and foreign currency
transactions............................ 5.43 .67 (1.06) --
-------- ------- ------ -------
Total from investment operations........ 5.33 .63 (1.14) (.06)
-------- ------- ------ -------
Less distributions
Distributions in excess of net investment
income.................................. (.02) -- -- --
Distributions from net realized gains..... -- -- (.10) --
-------- ------- ------ -------
Total distributions..................... (.02) -- (.10) --
-------- ------- ------ -------
Net asset value, end of period............ $ 15.94 $ 10.63 $15.38 $ 16.62
======== ======= ====== =======
TOTAL RETURN(d)........................... 50.17% 6.30% (6.82)% (.36)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........... $250,997 $20,050 $2,443 $ 718
Average net assets (000).................. $ 74,590 $16,025 $1,624 $ 458
Ratios to average net assets:
Expenses, including distribution fees... 2.37% 3.52%(b) 2.21% 3.00%(b)
Expenses, excluding distribution fees... 1.37% 2.52%(b) 1.21% 2.00%(b)
Net investment income (loss)............ (.83)% (1.55)%(b) (.43)% (1.64)%(b)
Portfolio turnover.................... 44% 0% 54% 56%
</TABLE>
---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Commencement of offering of Class C shares.
(d) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(e) Calculated based upon weighted average shares outstanding during the
period.
------------------------------------------------------------------------------
See Notes to Financial Statements.
B-50
<PAGE>
Independent Auditors' Report PRUDENTIAL PACIFIC GROWTH FUND, INC.
-----------------------------------------------------------------------------
The Shareholders and Board of Directors
Prudential Pacific Growth Fund, Inc.
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Prudential Pacific Growth Fund,
Inc., as of October 31, 1995, the related statements of operations for the
year then ended and of changes in net assets for each of the three years in
the period then ended, and the financial highlights for each of the three
years in the period then ended 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, 1995 by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential
Pacific Growth Fund, Inc. as of October 31, 1995, the results of its
operations, the changes in its net assets, and its financial highlights for
the respective stated periods, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
December 13, 1995
Federal Income Tax Information PRUDENTIAL PACIFIC GROWTH FUND, INC.
-----------------------------------------------------------------------------
We are required by the Internal Revenue Code to advise you within 60 days of
the Fund's fiscal year end (October 31, 1995) as to the federal income tax
status of dividends paid by the Fund during such fiscal year. Accordingly, we
are advising you that in the fiscal year ended October 31, 1995, the Fund
paid a long-term capital gain distribution of $.1025 per share (Class A,
Class B and Class C) which is taxable as such.
In January 1996, you will be advised on IRS Form 1099, DIV or substitute Form
1099, as to the federal tax status of the distributions received by you in
calendar 1995.
-----------------------------------------------------------------------------
B-51
<PAGE>
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.
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.
B-52
<PAGE>
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-53
<PAGE>
APPENDIX--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns, while
enabling investors to work toward their financial goal(s). Asset allocation is
also a strategy to gain exposure to better performing asset classes while
maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks and (general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
Ap-I
<PAGE>
APPENDIX--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the rate
of inflation.
<TABLE><CAPTION>
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
(Value of $1 invested on 12/31/95)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$10,000 -----------------------------------------------------------------------------------
Small Stocks $2,843
$1,000 -----------------------------------------------------------------------------------
Common Stocks $811
$100 -----------------------------------------------------------------------------------
Long-Term
Government Bonds $26
Treasury Bills $12
$10 -----------------------------------------------------------------------------------
Inflation $8
$1 -----------------------------------------------------------------------------------
$0.10 -----------------------------------------------------------------------------------
| | | | | | | |
1925 1935 1945 1955 1965 1975 1985 1994
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is for illustrative
purposes only is not indicative of the past, present, or future performance
of any asset class or any Prudential Mutual Fund.
Generally, stock returns are attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile
than bond prices over the long-term.
Small stock returns for 1926-1989 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of
the Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns
are based on the S&P Composite Index, a market-weighted, unmanaged index of
500 stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.
Long-term government bond returns are represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. At the beginning of each
year a new bond with a then-current coupon replaces the old bond. Treasury bill
returns are for a one-month bill. Treasuries are guaranteed by the government
as to the timely payment and interest; equities are not. Inflation is measured
by the consumer price index (CPI).
Impact of Inflation. The "real" rate of investment return is that which exceeds
the rate of inflation, the percentage change in the value of consumer goods and
the general cost of living. A common goal of long-term investors is to outpace
the erosive impact of inflation on investment returns.
Ap-II
<PAGE>
Set forth below is historical performance data relating to various sectors of
the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987 to
May 1995. The total returns of the indices include accrued interest, plus the
price changes (gains or losses) of the underlying securities during the period
mentioned. The data is provided to illustrate the varying historical total
returns and investors should not consider this performance data as an indication
of the future performance of the Fund or of any sector in which the Fund
invests.
All information relies on data obtained from statistical services, reports and
other services believed by the Manager to be reliable. Such information has not
been verified. The figures do not reflect the operating expenses and fees of a
mutual fund. See "Fund Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
Historical Total Returns of Different Bond Market Sectors
</TABLE>
<TABLE><CAPTION>
YTD
'87 '88 '89 '90 '91 '92 '93 '94 9/95
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
TREASURY
BONDS1 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 13.2%
- --------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
MORTGAGE
SECURITIES2 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 13.1%
- --------------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT
GRADE
CORPORATE
BONDS3 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 16.5%
- --------------------------------------------------------------------------------------------------------------------
U.S.
HIGH YIELD
CORPORATE
BONDS4 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 15.6%
- --------------------------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS5 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 17.1%
====================================================================================================================
DIFFERENCE BETWEEN
HIGHEST
AND LOWEST RETURN
PERCENT 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 4.0
</TABLE>
1 LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over 150
public issues of the U.S. Treasury having maturities of at least one year.
2 LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
3 LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
4 LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the Index have maturities of at least one year.
5 SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the U.S.,
but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
Ap-III
<PAGE>
This chart shows the growth of a
This chart illustrate the performance hypothetical $10,000 investment
of major world stock markets for the made in the stocks representing
period from 1985 through 1994. It does the S&P 500 stock index with and
represent the performance of any without reinvested dividends.
Prudential Mutual Fund.
Average Annual Total Returns of Major
World Stock Markets
(1985 - 1994)(in U.S. dollars)
Hong Kong.........................26.5%
Belgium .........................24.9%
Austria .........................23.3%
Netherlands.......................22.1%
Sweden ...........................21.4%
Switzerland.......................21.3%
[GRAPH]
France ...........................20.8%
Spain ............................20.1%
Germany...........................18.7%
United Kingdom....................17.7%
Japan.............................16.8%
United States.....................14.4%
5% 15% 25%
Source: Morgan Stanley Capital Source: Stocks, Bonds, Bills, and
International (MSCI) and Lipper Inflation 1995 Yearbook, Ibbotson
Analytical New Applications. Associates, Chicago (annually
Used with permission. Morgan updates work by Roger G. Ibbotson
Stanley Country indices are and Rex A. Sinquefield). Used with
unmanaged indices which permission. All rights reserved.
include those stocks making up This chart is used for illustrative
the largest two-thirds of each purposes only and is not intended to
country's total stock market represent the past, present or
capitalization. Returns reflect future performance of any Prudential
the reinvestment of all Mutual Fund. Common stock total
distributions. This chart is return is based on the Standard &
for illustrative purposes only Poor's 500 Stock Index, a market
and is not indicative of the value-weighted index made up of
past, present or future 500 of the largest stocks in the
performance of any specific U.S. based upon their stock market
investment. Investors cannot value. Investors cannot invest
invest directly in stock indices. directly in indices.
------------------------------------------------------------------
WORLD STOCK MARKET CAPITALIZATION BY REGION
World Total: $12.4 Trillion
Europe 28%
Pacific Basin 35%
U.S. 35%
Canada 2%
-----------------------------------------------------------------
Source: Morgan Stanley Capital International, December 1994.
Used with permission. This chart represents the capitalization of
major world stock markets as measured by the Morgan Stanley
Capital International (MSCI) World Index. The total market
capitalization is based on the value of 1577 companies in 22
countries (representing approximately 60% of the aggregate
market value of the stock exchanges). This chart is for
illustrative purposes only and does not represent the allocation
of any Prudential Mutual Fund.
Ap-IV
<PAGE>
This chart below shows the historical volatility of general interest
rates as measured by the long U.S. Treasury Bond.
Long U.S. Treasury Bond Yield in Percent (1926-1994)
16 -----------------------------------------------------------------
14-
12-
10-
8 -
6 -
4 -
2 -
0 --------------------------------------------------------------------
| | | | | | | |
1925 1935 1945 1955 1965 1975 1985 1994
Year-End
---------------------------------------
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson
Associates, Chicago (annually updates work by Roger G. Ibbotson and
Rex A. Sinquefield). Used with permission. All rights reserved. The
chart illustrates the historical yield of the long-term U.S. Treasury
Bond from 1926-1994. Yields represent that of an annually renewed
one-bond portfolio with a remaining maturity of approximately 20
years. This chart is for illustrative purposes and should be not
be construed to represent the yields of any Prudential Mutual Fund.
Ap-V
