<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 27, 1996
REGISTRATION NOS. 33-42391
811-6391
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 8 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 10 /X/
(Check appropriate box or boxes)
------------------------------
PRUDENTIAL PACIFIC GROWTH FUND, INC.
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
100 MULBERRY STREET, 4TH FLOOR
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 367-7530
S. JANE ROSE, ESQ.
100 MULBERRY STREET, 4TH FLOOR
NEWARK, NEW JERSEY 07102-4077
(Name and Address of Agent for Service)
Approximate date of proposed public offering:
As soon as practicable after the effective
date of the Registration Statement.
<TABLE>
<S> <C> <C>
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX):
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/X/ 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of Rule 485
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
/ / this post-effective amendment designates a new effective date for a previously filed
post-effective amendment
</TABLE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<S> <C> <C> <C> <C>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE* REGISTRATION FEE
<S> <C> <C> <C> <C>
Shares of Common Stock, par
value $.001 per share.... 1,913,759 $15.41 $329,989.74 $100
</TABLE>
* The calculation of the maximum aggregate offering price was made pursuant to
Rule 24e-2 and was based upon an offering price of $15.41 per share, equal
to the net asset value per share as of the close of business on December 18,
1996 pursuant to Rule 457(d). The total number of shares redeemed during the
fiscal year ended October 31, 1996 amounted to 146,194,031 shares. Of this
number, no shares have been used for reduction pursuant to paragraph (a) of
Rule 24e-2 in all previous filings of post-effective amendments during the
current year, and 144,301,686 shares have been used for reduction pursuant
to paragraph (c) of Rule 24f-2 in all previous filings during the current
year. 1,892,345 ($28,043,013) of the redeemed shares for the fiscal year
ended October 31, 1996 are being used for the reductions in the post-
effective amendment being filed herein.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant
has previously registered an indefinite number of shares of its Common Stock,
par value $.001 per share. The Registrant filed a notice under such Rule for its
fiscal year ended October 31, 1996 on or about December 26, 1996.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ----------------------------------------------- ----------------------------------
<S> <C> <C> <C>
PART A
Item 1. Cover Page........................ Cover Page
Item 2. Synopsis.......................... Fund Expenses; Fund Highlights
Item 3. Condensed Financial Information... Fund Expenses; Financial
Highlights; How the Fund
Calculates Performance
Item 4. General Description of Cover Page; Fund Highlights; How
Registrant........................ the Fund Invests; General
Information
Item 5. Management of the Fund............ Financial Highlights; How the Fund
is Managed
Item 5A. Management's Discussion of Fund
Performance....................... Financial Highlights
Item 6. Capital Stock and Other Taxes, Dividends and
Securities........................ Distributions; General Information
Item 7. Purchase of Securities Being Shareholder Guide; How the Fund
Offered........................... Values its Shares
Item 8. Redemption or Repurchase.......... Shareholder Guide; How the Fund
Values its Shares
Item 9. Pending Legal Proceedings......... Not Applicable
PART B
Item 10. Cover Page........................ Cover Page
Item 11. Table of Contents................. Table of Contents
Item 12. General Information and History... Not Applicable
Item 13. Investment Objectives and Investment Objective and Policies;
Policies.......................... Investment Restrictions
Item 14. Management of the Fund............ Directors and Officers; Manager;
Distributor
Item 15. Control Persons and Principal
Holders of Securities............. Not Applicable
Item 16. Investment Advisory and Other Manager; Distributor; Custodian,
Services.......................... Transfer and Dividend Disbursing
Agent and Independent Accountants
Item 17. Brokerage Allocation and Other Portfolio Transactions and
Practices......................... Brokerage
Item 18. Capital Stock and Other
Securities........................ Not Applicable
Item 19. Purchase, Redemption and Pricing Purchase and Redemption of Fund
of Securities Being Offered....... Shares; Shareholder Investment
Account; Net Asset Value
Item 20. Tax Status........................ Taxes
Item 21. Underwriters...................... Distributor
Item 22. Calculation of Performance Data... Performance Information
Item 23. Financial Statements.............. Financial Statements
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Post-Effective Amendment
to the Registration Statement.
</TABLE>
<PAGE>
PRUDENTIAL PACIFIC GROWTH FUND, INC.
- --------------------------------------------------------------------------------
PROSPECTUS DATED DECEMBER 30, 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 convertible and 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 Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077, 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 December 30, 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 8.
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 8.
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 9. The Fund is permitted to invest up to 25% of its net
assets in lower quality foreign convertible debt securities provided that
such securities have a minimum rating of at least B as determined by a
nationally recognized securities rating organization (NRSRO), such as
Standard & Poor's Ratings Group or another NRSRO or, if unrated, are of
equivalent quality. Lower rated securities are subject to a greater risk of
loss of principal and interest. See "How the Fund Invests--Risk Factors
Relating to Investing in Foreign Debt Securities Rated Below Investment
Grade" at page 11. 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 14.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management LLC (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, 1996, PMF
served as manager or administrator to 62 investment companies, including 40
mutual funds, with aggregate assets of approximately $53.4 billion. The
Prudential Investment Corporation (PIC, the Subadviser or the investment
adviser) 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 16.
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, Class C and Class Z 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. Prudential Securities
incurs the expenses of distributing the Class Z shares under a Distribution
Agreement with the Fund, none of which is reimbursed by or paid for by the
Fund. See "How the Fund is Managed-- Distributor" at page 17.
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. There is no minimum initial
investment requirement for investors who qualify to purchase Class Z shares.
The minimum subsequent investment is $100 for all classes, except for Class
Z shares for which there is no such minimum. 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 23 and
"Shareholder Guide--Shareholder Services" at page 33.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its
transfer agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities plus a
sales charge which may be imposed either (i) at the time of purchase (Class
A shares) or (ii) on a deferred basis (Class B or Class C shares). Class Z
shares are offered to a limited group of investors at net asset value
without any sales charge. See "How the Fund Values Its Shares" at page 19
and "Shareholder Guide--How to Buy Shares of the Fund" at page 23.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four 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.
- - Class Z Shares: Sold without either an initial or contingent deferred sales
charge to a limited group of investors. Class Z shares are
not subject to any ongoing service or distribution-related
expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page
24.
</TABLE>
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares" at page
28.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to pay dividends of net investment income, if any, and
make distributions of any net capital gains at least annually. Dividends and
distributions will be automatically reinvested in additional shares of the
Fund at NAV without a sales charge unless you request that they be paid to
you in cash. See "Taxes, Dividends and Distributions" at page 21.
3
<PAGE>
- --------------------------------------------------------------------------------
FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
SHAREHOLDER TRANSACTION EXPENSES+ SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price).................... 5% None None None
Maximum Sales Load or Deferred Sales
Load Imposed on Reinvested
Dividends.......................... None None None None
Deferred Sales Load (as a percentage
of original purchase price or
redemption proceeds, whichever is
lower)............................. None 5% during the first 1% on redemptions None
year, decreasing by made within one year
1% annually to 1% in of purchase
the fifth and the
sixth years and 0%
the seventh year*
Redemption Fees......................... None None None None
Exchange Fees........................... None 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........................... .37% .37% .37%
--- --- ---
Total Fund Operating Expenses............ 1.37% 2.12% 2.12%
--- --- ---
--- --- ---
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) CLASS Z SHARES**
----------------------------
<S> <C>
Management Fees.......................... .75%
12b-1 Fees (after reduction)............. None
Other Expenses........................... .37%
---
Total Fund Operating Expenses............ 1.12%
---
---
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------- --- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period:
Class A..................................................................... $ 63 $ 91 $ 121 $ 206
Class B..................................................................... $ 72 $ 96 $ 124 $ 217
Class C..................................................................... $ 32 $ 66 $ 114 $ 245
Class Z**................................................................... $ 11 $ 36 $ 62 $ 136
You would pay the following expenses on the same investment, assuming no
redemption:
Class A..................................................................... $ 63 $ 91 $ 121 $ 206
Class B..................................................................... $ 22 $ 66 $ 114 $ 217
Class C..................................................................... $ 22 $ 66 $ 114 $ 245
Class Z**................................................................... $ 11 $ 36 $ 62 $ 136
</TABLE>
The above example is based on data for the Fund's fiscal year ended
October 31, 1996. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The purpose of this table is to assist an investor in understanding the
various types of costs and expenses that an investor in the Fund will
bear, whether directly or indirectly. For more complete descriptions of
the various costs and expenses, see "How the Fund is Managed." "Other
Expenses" include operating expenses of the Fund, such as Directors' and
professional fees, registration fees, reports to shareholders, transfer
agency and custodian (domestic and foreign) fees (but excludes foreign
withholding taxes).
-----------------------
* Class B shares will automatically convert to Class A shares
approximately seven years after purchase. See "Shareholder
Guide--Conversion Feature--Class B Shares."
** Estimated based on expenses expected to have been incurred if Class Z
shares had been in existence throughout the entire fiscal year ended
October 31, 1996.
+ Pursuant to rules of the National Association of Securities Dealers,
Inc., the aggregate initial sales charges, deferred sales charges and
asset-based sales charges on shares of the Fund may not exceed 6.25% of
total gross sales, subject to certain exclusions. This 6.25% limitation
is imposed on the Fund rather than on a per shareholder basis.
Therefore, long-term shareholders of the Fund may pay more in total
sales charges than the economic equivalent of 6.25% of such
shareholders' investment in such shares. See "How the Fund is
Managed--Distributor."
++ Although the Class A Distribution and Service Plan provides that the
Fund may pay up to an annual rate of .30 of 1% of average daily net
assets of the Class A shares, the Distributor has agreed to limit its
distribution fee with respect to Class A shares of the Fund to .25 of
1% of the average daily net asset value of the Class A shares for the
fiscal year ending October 31, 1997. Total operating expenses
without such limitation would be 1.42%. 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. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------
YEAR ENDED OCTOBER 31, JULY 24, 1992(A)
---------------------------------------------- THROUGH
1996(D) 1995(D) 1994(D) 1993(D) OCTOBER 31, 1992
--------- --------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................... $ 15.75 $ 16.90 $ 16.10 $ 10.65 $ 10.00
--------- --------- ----------- ----------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)............................ .07 .04 (.08) (.01) (.02)
Net realized and unrealized gain (loss) on investment
and foreign currency transactions................... .23 (1.09) 1.15 5.48 .67
--------- --------- ----------- ----------- -------
Total from investment operations........................ .30 (1.05) 1.07 5.47 .65
--------- --------- ----------- ----------- -------
LESS DISTRIBUTIONS:
Distributions in excess of net investment income........ (.19) -- (.06) (.02) --
Distributions from net realized gains................... -- (.10) (.21) -- --
--------- --------- ----------- ----------- -------
Total distributions................................. (.19) (.10) (.27) (.02) --
--------- --------- ----------- ----------- -------
Net asset value, end of period.......................... $ 15.86 $ 15.75 $ 16.90 $ 16.10 $ 10.65
--------- --------- ----------- ----------- -------
--------- --------- ----------- ----------- -------
TOTAL RETURN(C)......................................... 1.97% (6.23)% 6.67% 51.39% 6.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......................... $ 113,585 $ 98,998 $ 98,921 $ 64,353 $ 13,918
Average net assets (000)................................ $ 106,148 $ 101,920 $ 92,233 $ 26,264 $ 12,884
Ratios to average net assets:
Expenses, including distribution fees................. 1.37% 1.46% 1.57% 1.63% 2.72%(b)
Expenses, excluding distribution fees................. 1.12% 1.21% 1.33% 1.43% 2.52%(b)
Net investment income (loss).......................... .44% .26% (.50)% (.04)% (.75)%(b)
Portfolio turnover rate................................. 91% 54% 56% 44% 0%
Average commission rate paid per share.................. $ .0209 N/A N/A N/A N/A
</TABLE>
---------------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Total return does not consider 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 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 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. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------
YEAR ENDED OCTOBER 31, JULY 24, 1992(A)
------------------------------------------ THROUGH
1996(D) 1995(D) 1994(D) 1993(D) OCTOBER 31, 1992
--------- --------- --------- --------- -----------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................. $ 15.38 $ 16.62 $ 15.94 $ 10.63 $ 10.00
--------- --------- --------- --------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss................................... (.04) (.08) (.21) (.10) (.04)
Net realized and unrealized gain (loss) on investment
and foreign currency transactions................. .25 (1.06) 1.13 5.43 .67
--------- --------- --------- --------- -------
Total from investment operations...................... .21 (1.14) .92 5.33 .63
--------- --------- --------- --------- -------
LESS DISTRIBUTIONS:
Distributions in excess of net investment income...... (.19) -- (.03) (.02) --
Distributions from net realized gains................. -- (.10) (.21) -- --
--------- --------- --------- --------- -------
Total distributions............................... (.19) (.10) (.24) (.02) --
--------- --------- --------- --------- -------
Net asset value, end of period........................ $ 15.40 $ 15.38 $ 16.62 $ 15.94 $ 10.63
--------- --------- --------- --------- -------
--------- --------- --------- --------- -------
TOTAL RETURN(C)....................................... 1.36% (6.82)% 5.79% 50.17% 6.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....................... $ 327,315 $ 344,313 $ 459,949 $ 250,997 $ 20,050
Average net assets (000).............................. $ 357,548 $ 368,771 $ 404,506 $ 74,590 $ 16,025
Ratios to average net assets:
Expenses, including distribution fees............... 2.12% 2.21% 2.33% 2.37% 3.52%(b)
Expenses, excluding distribution fees............... 1.12% 1.21% 1.33% 1.37% 2.52%(b)
Net investment loss................................. (.25)% (.55)% (1.27)% (.83)% (1.55)%(b)
Portfolio turnover rate............................... 91% 54% 56% 44% 0%
Average commision rate paid per share................. $ .0209 N/A N/A N/A N/A
</TABLE>
---------------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Total return does not consider 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.
6
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(CLASS C AND CLASS Z SHARES)
- --------------------------------------------------------------------------------
The following financial highlights have been audited by Deloitte & Touche LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and notes thereto,
which appear in the Statement of Additional Information. The financial
highlights contain selected data for a Class C and Class Z share of common
stock, respectively, 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. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS C
---------------------------------------------
CLASS Z
YEAR ENDED -------------------
OCTOBER 31, AUGUST 1, 1994(A) MARCH 1, 1996(C)
------------------------ THROUGH THROUGH
1996(E) 1995(E) OCTOBER 31, 1994(E) OCTOBER 31, 1996(E)
----------- ----------- ------------------- -------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................. $ 15.38 $ 16.62 $ 16.68 $ 16.57
----------- ----------- ------ -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).......................... (.04) (.08) (.06) .11
Net realized and unrealized gain (loss) on investment
and foreign currency transactions................. .25 (1.06) -- (.79)
----------- ----------- ------ -------
Total from investment operations...................... .21 (1.14) (.06) (.68)
----------- ----------- ------ -------
LESS DISTRIBUTIONS:
Distributions in excess of net investment income...... (.19) -- -- --
Distributions from net realized gains................. -- (.10) -- --
----------- ----------- ------ -------
Total distributions............................... (.19) (.10) -- --
----------- ----------- ------ -------
Net asset value, end of period........................ $ 15.40 $ 15.38 $ 16.62 $ 15.89
----------- ----------- ------ -------
----------- ----------- ------ -------
TOTAL RETURN(D)....................................... 1.36% (6.82)% (.36)% (4.09)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....................... $ 12,360 $ 2,443 $ 718 $ 37,288
Average net assets (000).............................. $ 6,402 $ 1,624 $ 458 $ 33,868
Ratios to average net assets:
Expenses, including distribution fees............... 2.12% 2.21% 3.00%(b) 1.12%(b)
Expenses, excluding distribution fees............... 1.12% 1.21% 2.00%(b) 1.12%(b)
Net investment income (loss)........................ (.25)% (.43)% (1.64)%(b) .68%(b)
Portfolio turnover rate............................... 91% 54% 56% 91%
Average commission rate paid per share................ $ .0209 N/A N/A $ .0209
</TABLE>
- ---------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) Commencement of offering of Class Z shares.
(d) Total return does not consider 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.
7
<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, CONVERTIBLE AND 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 OF 1940,
AS AMENDED (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 10% 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
8
<PAGE>
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, are designed for use in the United States securities markets and EDRs, in
bearer form, are designed for use in European securities markets.
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, 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.
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.
9
<PAGE>
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.
UNDER NORMAL CONDITIONS, THE FUND MAY ALSO INVEST UP TO 35% OF ITS TOTAL
ASSETS IN DEBT OBLIGATIONS, INCLUDING OBLIGATIONS ISSUED OR GUARANTEED BY THE
U.S. GOVERNMENT, ITS AGENCIES OR INSTRUMENTALITIES OR BY FOREIGN GOVERNMENTS OR
SUPRANATIONAL ORGANIZATIONS, OBLIGATIONS ISSUED BY BANKS AND CORPORATIONS AND
OTHER DEBT OBLIGATIONS. These obligations may be denominated in U.S. dollars or
in foreign currencies. The issuers of such securities may or may not be
domiciled in the Pacific Basin region. Supranational organizations include
entities such as the World Bank, which was chartered to finance development
projects in developing member countries, and the Asian Development Bank, which
is an international development bank established to lend funds, promote
investment and provide technical assistance to member nations in the Asian and
Pacific regions.
The Fund will purchase "investment grade" debt obligations. Investment grade
debt obligations are bonds and other obligations rated within the four highest
quality grades as determined by Moody's Investors Service (Moody's) (currently
Aaa, Aa, A and Baa for bonds, MIG 1, MIG 2, MIG 3 and MIG 4 for notes and P-1
for commercial paper) or Standard & Poor's Ratings Group (S&P) (currently AAA,
AA, A and BBB for bonds, SP-1 and SP-2 for notes and A-1 for commercial paper),
or by another nationally recognized statistical rating organization (NRSRO) or,
if unrated, securities of equivalent quality in the opinion of the investment
adviser. The Fund is permitted to invest up to 25% of its net assets in lower
quality foreign convertible debt securities (I.E., high yield or high risk
securities, commonly referred to as "junk" bonds) provided that such securities
have minimum rating of at least B as determined by one NRSRO or, if unrated, are
deemed by the investment adviser to be of comparable quality. Securities rated
10
<PAGE>
Baa by Moody's or BBB by S&P, although considered to be investment grade, are
subject to changes in economic conditions or other circumstances which are more
likely to lead to a weakened capacity to make interest and principal payments
than is the case with higher grade bonds. Lower rated securities are subject to
a greater risk of loss of principal and interest.
CONVERTIBLE SECURITIES
A convertible security is a bond or preferred stock which may be converted at
a stated price within a specified period of time into a certain quantity of the
common stock of the same or a different issuer. Convertible securities are
senior to common stocks in a corporation's capital structure, but are usually
subordinated to similar nonconvertible securities. While providing a fixed
income stream (generally higher in yield than the income derivable from a common
stock but lower than that afforded by a similar nonconvertible security), a
convertible security also affords an investor the opportunity, through its
conversion feature, to participate in the capital appreciation dependent upon a
market price advance in the convertible security's underlying common stock. The
Fund may invest up to 25% of its net assets in foreign convertible securities as
described above. See "Risk Factors Relating to Investing in Foreign Debt
Securities Rated Below Investment Grade" below.
In general the market value of a convertible security is at least the higher
of its "investment value" (I.E., its value as a fixed-income security) or its
"conversion value" (I.E., its value upon conversion into its underlying common
stock). As a fixed-income security, a convertible security tends to increase in
market value when interest rates decline and tends to decrease in value when
interest rates rise. However, the price of a convertible security is also
influenced by the market value of the security's underlying stock. The price of
a convertible security tends to increase as the market value of the underlying
stock rises, whereas it tends to decrease as the market value of the underlying
stock declines. While no securities investment is without some risk, investments
in convertible securities generally entail less risk than investments in the
common stock of the same issuer.
WARRANTS
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.
RISK FACTORS RELATING TO INVESTING IN FOREIGN DEBT SECURITIES RATED BELOW
INVESTMENT GRADE
The Fund is permitted to invest up to 25% of its net assets in lower quality
foreign convertible debt securities. Fixed-income securities are subject to the
risk of an issuer's inability to meet principal and interest payments on the
obligations (credit risk) and may also be subject to price volatility due to
such factors as interest rate sensitivity, market perception of the
creditworthiness of the issuer and general market liquidity (market risk). Lower
rated or unrated (I.E., high yield or high risk) securities, commonly referred
to as "junk" bonds, are more likely to react to developments affecting market
and credit risk than are more highly rated securities, which react primarily to
movements in the general level of interest rates. The investment adviser
considers both credit risk and market risk in making investment decisions for
the Fund. Investors should carefully consider the relative risks of investing in
high yield securities and understand that such securities are not generally
meant for short-term trading.
Under adverse economic conditions, there is a risk that highly leveraged
issuers may be unable to service their debt obligations or to repay their
obligations upon maturity. In addition, the secondary market for high yield
securities, which is concentrated in relatively few market makers, may not be as
liquid as the secondary market for more highly rated securities. Under adverse
market or economic conditions, the secondary market for high yield securities
could contract further, independent of any specific adverse changes in the
condition of a particular issuer. As a result, the investment adviser would find
it more difficult to
11
<PAGE>
sell these securities or may be able to sell the securities only at prices lower
than if such securities were widely traded. Prices realized upon the sale of
such lower rated or unrated securities, under these circumstances, may be less
than the prices used in calculating the Fund's net asset value.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the debt portion of the Fund's
portfolio and increasing the exposure of the Fund to the risks of high yield
securities.
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. THE FUND, AND THUS ITS INVESTORS, MAY LOSE MONEY THROUGH THE
UNSUCCESSFUL USE OF THESE STRATEGIES. 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.
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. A written option is covered if, as
long as the Fund is obligated under the option, it (i) owns an offsetting
position in the underlying security or currency or (ii) maintains in a
segregated account cash or liquid assets in an amount equal to or greater than
its obligations under the option. Under the first circumstance, the Fund's
losses
12
<PAGE>
are limited because it owns the underlying security or currency; under the
second circumstance, in the case of a written call option, the Fund's losses are
potentially unlimited. 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.
FORWARD FOREIGN 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 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 being hedged. See "Investment
Objective and Policies--Risks Related to Forward Foreign 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). THE FUND, AND
THUS ITS INVESTORS, MAY LOSE MONEY THROUGH THE UNSUCCESSFUL USE OF THESE
STRATEGIES. 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 or liquid assets in an
amount at least equal to the Fund's obligations with respect to such futures
contracts.
13
<PAGE>
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. THE FUND, AND THUS ITS
INVESTORS, MAY LOSE MONEY THROUGH THE UNSUCCESSFUL USE OF THESE STRATEGIES. If
the investment adviser's predictions of movements in the direction of the
securities, foreign currency and interest rate markets are inaccurate, the
adverse consequences to the Fund may leave the Fund in a worse position than if
such strategies were not used. Risks inherent in the use of options, foreign
currency and futures contracts and options on futures contracts include (1)
dependence on the investment adviser's ability to predict correctly movements in
the direction of interest rates, securities prices and currency markets; (2)
imperfect correlation between the price of options and futures contracts and
options 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
resale price is in excess of the purchase price, reflecting an agreed-upon rate
of return effective for the period of time the Fund's money is invested in the
repurchase agreement. The Fund's repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. 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
resale price, the Fund will suffer a loss. The Fund
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participates in a joint repurchase account with other investment companies
managed by PMF 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 10% of its net assets in illiquid securities including
repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities markets
either within or outside of the United States. Restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933, as amended
(the Securities Act) and privately placed commercial paper that have a readily
available market are not considered illiquid for purposes of this limitation.
The Fund's investments in Rule 144A securities could have the effect of
increasing illiquidity to the extent that qualified institutional buyers become,
for a time, uninterested in purchasing Rule 144A 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, which the Fund intends to follow,
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
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of the Fund, cash or liquid assets, having a value equal to or greater than the
Fund's purchase commitments. 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.
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.
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HOW THE FUND IS MANAGED
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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.
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT LLC (PMF OR THE MANAGER), GATEWAY CENTER
THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, 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. PMF is organized in New York as a limited
liability company. It is the successor of Prudential Mutual Fund Management,
Inc., which transferred its assets to PMF in September 1996. For the fiscal year
ended October 31, 1996, 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, 1996, PMF served as the manager to 40 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $53.4 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, THE SUBADVISER OR THE INVESTMENT ADVISER), PIC FURNISHES
INVESTMENT ADVISORY SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND
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<PAGE>
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 World Fund Global Series and Prudential
Europe Growth Fund.
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,
Class C and Class Z shares of the Fund. It is an indirect, wholly-owned
subsidiary of Prudential.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (ALSO THE DISTRIBUTOR) INCURS THE
EXPENSES OF DISTRIBUTING THE FUND'S CLASS A, CLASS B AND CLASS C SHARES.
Prudential Securities also incurs the expenses of distributing the Fund's Class
Z shares under the Distribution Agreement, none of which is reimbursed by or
paid for by the Fund. 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
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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, 1997.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS PRUDENTIAL SECURITIES FOR
ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C SHARES
AT AN ANNUAL RATE OF 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF THE CLASS B
AND CLASS C SHARES. The Class B and Class C Plans provide for the payment to
Prudential Securities of (i) an asset-based sales charge of .75 of 1% of the
average daily net assets of each of the Class B and Class C shares, and (ii) a
service fee of .25 of 1% of the average daily net assets of each of the Class B
and Class C shares. The service fee is used to pay for personal service and/or
the maintenance of shareholder accounts. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended October 31, 1996, 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 Class A, Class B or Class C
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 (including Prudential Securities)
and other persons which distribute shares of the Fund (including Class Z
shares). Such payments may be calculated by reference to the net asset value of
shares sold by such persons or otherwise.
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.
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<PAGE>
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank & 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.
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HOW THE FUND VALUES ITS SHARES
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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.
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Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the 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.
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. The NAV of the Class Z shares will
generally be higher than the NAV of the three other classes because Class Z
shares are not subject to any distribution and/or service fees. 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 and/or service fee expense accrual differential among the
classes.
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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, CLASS C, AND CLASS Z 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. The Fund also may include comparative performance
information in advertising or marketing the Fund's shares. Such performance
information may include data from Lipper Analytical Services, Inc., Morningstar
Publications, Inc., other industry publications, business periodicals and market
Indices. See "Performance Information" in the Statement of Additional
Information. Further performance information is contained in the Fund's annual
and semi-annual reports to shareholders, which may be obtained without charge.
See "Shareholder Guide--Shareholder Services-- Reports to Shareholders."
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TAXES, DIVIDENDS AND DISTRIBUTIONS
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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.
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.
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.
Distributions by the Fund to a shareholder that is a qualified retirement plan
would generally not be taxable to participants in the plan. Distributions from a
qualified retirement plan (or non-qualified arrangement) to a participant or
beneficiary are subject to special rules. These rules vary greatly with
individual situations, therefore potential investors are urged to consult with
their own tax advisors.
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 or Class Z shares or the exchange of Class A
shares for Class Z shares constitutes a taxable event for federal income tax
purposes. However, such opinions are not binding on the Internal Revenue
Service.
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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 dividends, 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 in relation to Class A and Class
Z shares and lower dividends for Class A shares in relation to Class Z shares.
Distribution of net capital gains, if any, will be paid in the same amount for
each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES, BASED ON
THE NAV OF EACH CLASS ON THE RECORD DATE OR SUCH OTHER DATE AS THE BOARD OF
DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN
FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential Mutual
Fund Services, Inc., Attn: Account Maintenance Unit, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. The Fund will notify each shareholder after
the close of the Fund's taxable year both of the dollar amount and the taxable
status of that year's dividends and distributions on a per share basis. If you
hold shares through Prudential Securities, you should contact your financial
advisor to elect to receive dividends and distributions in cash.
WHEN THE FUND GOES "EX-DIVIDEND," ITS NAV IS REDUCED BY THE AMOUNT OF THE
DIVIDEND OR DISTRIBUTION. IF YOU BUY SHARES JUST PRIOR TO THE EX-DIVIDEND DATE
(WHICH GENERALLY OCCURS FOUR BUSINESS DAYS PRIOR TO THE RECORD DATE), THE PRICE
YOU PAY WILL INCLUDE THE DIVIDEND OR DISTRIBUTION AND A PORTION OF YOUR
INVESTMENT WILL BE RETURNED TO YOU AS A TAXABLE DISTRIBUTION. YOU SHOULD,
THEREFORE, CONSIDER THE TIMING OF DIVIDENDS AND DISTRIBUTIONS WHEN MAKING YOUR
PURCHASES.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON AUGUST 14, 1991. THE FUND IS
AUTHORIZED TO ISSUE 2 BILLION SHARES OF COMMON STOCK, $.001 PAR VALUE PER SHARE,
DIVIDED INTO 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 (with the exception of
Class Z shares) 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
22
<PAGE>
sale to a limited group of investors. 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.
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 (with the exception of
Class Z shares which are not subject to any distribution and/or service fees)
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. 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 fees. The Fund's shares do
not have cumulative voting rights for the election of Directors.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF DIRECTORS IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OR MORE
OF THE FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE
OR MORE DIRECTORS OR TO TRANSACT ANY OTHER BUSINESS.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act. Copies of the Registration Statement may be obtained at a
reasonable charge from the SEC or may be examined, without charge, at the office
of the SEC in Washington, D.C.
- --------------------------------------------------------------------------------
SHAREHOLDER GUIDE
- --------------------------------------------------------------------------------
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08966-5020. Participants in programs
sponsored by Prudential Retirement Services should contact their client
representative for more information about Class Z shares. The purchase price is
the NAV next determined following receipt of an order by the Transfer Agent or
Prudential Securities plus a sales charge which, at your option, may be imposed
either (i) at the time of purchase (Class A shares) or (ii) on a deferred basis
(Class B or Class C shares). Class Z shares are offered to a limited group of
investors at net asset value without any sales charge. See "Alternative Purchase
Plan" below. See also "How the Fund Values its Shares."
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares, except that the minimum initial investment
for Class C shares may be waived from time to time. There is no minimum initial
investment requirement for investors who qualify to purchase Class Z shares. The
minimum subsequent investment is $100 for all classes, except for Class Z shares
for which there is no such minimum. 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.
23
<PAGE>
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a stock certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive stock certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares."
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the 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, Class C or Class Z shares).
If you arrange for receipt by State Street of federal funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day. 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, Class C or Class Z shares and your name and
individual account number. It is not necessary to call PMFS to make subsequent
purchase orders utilizing federal funds. The minimum amount which may be
invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS Z
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
--------------------------------------- --------------------- ---------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 5% of .30 of 1% (Currently Initial sales charge waived or reduced
the public offering price being charged at a for certain purchases
rate of .25 of 1%)
CLASS B Maximum contingent deferred sales 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of the 1% Shares do not convert to another class
amount invested or the redemption
proceeds on redemptions made within one
year of purchase
CLASS Z None None Sold to a limited group of investors
</TABLE>
24
<PAGE>
Each class represents an interest in the same assets of the Fund and is
identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service fees (except for Class Z shares,
which are not subject to any sales charge or distribution and/or service fee),
which may affect performance, (ii) each class has exclusive voting rights on any
matter submitted to shareholders that relates solely to its arrangements and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interest 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 a
limited group of investors. 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 (if any) 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 and Class Z shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B, Class C and Class Z
shares and will generally receive more compensation initially for selling Class
A and Class B shares than for selling Class C or Class Z 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 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,
UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. SEE "REDUCTION AND
WAIVER OF INITIAL SALES CHARGES" AND "CLASS Z SHARES" BELOW.
25
<PAGE>
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>
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in the
Securities Act.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares a
finders' fee based on a percentage of the net asset value of shares sold by such
persons.
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 (collectively,
Benefit Plans), provided that the Benefit Plan has existing assets of at least
$1 million invested in shares of Prudential Mutual Funds (excluding money market
funds other than those acquired pursuant to the exchange privilege) or 250
eligible employees or participants. In the case of Benefit Plans whose accounts
are held directly with the Transfer Agent or Prudential Securities and for which
the Transfer Agent or Prudential Securities does individual account
recordkeeping (Direct Account Benefit Plans) and Benefit Plans sponsored by PSI
or its subsidiaries (PSI or Subsidiary Prototype Benefit Plans), Class A shares
may be purchased at NAV by participants who are repaying loans made from such
plans to the participant.
PRUARRAY AND SMARTPATH PLANS. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or
non-qualified under the 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 Prudential's PruArray or SmartPath Programs (benefit plan
recordkeeping services) (hereafter referred to as a PruArray or SmartPath Plan);
provided (i) that the plan has at least $1 million in existing assets or 250
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 or
SmartPath 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.
26
<PAGE>
PRUARRAY ASSOCIATION BENEFIT PLANS. Class A shares are also offered at net
asset value to Benefit Plans or non-qualified plans sponsored by employers which
are members of a common trade, professional or membership association
("Association") that participate in the PruArray Program provided that the
Association enters into a written agreement with Prudential. Such Benefit Plans
or non-qualified plans may purchase Class A shares at net asset value without
regard to the assets or number of participants in the individual employer's
qualified Plan(s) or non-qualified plans so long as the employers in the
Association (i) have retirement plan assets in the aggregate of at least $1
million or 250 participants in the aggregate and (ii) maintain their accounts
with the Fund's transfer agent.
PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at net asset
value to employees of companies that enter into a written agreement with
Prudential Retirement Services to participate in the PruArray Savings Program.
Under this Program, a limited number of Prudential Mutual Funds are available
for purchase at net asset value by Individual Retirement Accounts and Savings
Accumulation Plans of the company's employees. The Program is available only to
(i) employees who open an IRA or Savings Accumulation Plan account with the
Fund's transfer agent and (ii) spouses of employees who open an IRA account with
the Fund's transfer agent. The program is offered to companies that have at
least 250 eligible employees.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a Benefit Plan or
PruArray or SmartPath Plan qualifies to purchase Class A shares at NAV, all
subsequent purchases will be made at NAV.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers and current and former Directors/Trustees of the Prudential Mutual
Funds (including the Fund), (b) employees of Prudential Securities and PMF and
their subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees and special agents of Prudential and its subsidiaries and all persons
who have retired directly from active service with Prudential or one of its
subsidiaries, (d) registered representatives and employees of dealers who have
entered into a selected dealer agreement with Prudential Securities provided
that purchases at NAV are permitted by such person's employer and (e) investors
who have a business relationship with a financial adviser who joined Prudential
Securities from another investment firm, provided that (i) the purchase is made
within 180 days of the commencement of the financial adviser's employment at
Prudential Securities, or within one year in the case of Benefit Plans, (ii) the
purchase is made with proceeds of a redemption of shares of any open-end, 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." The Distributor will pay sales
commissions of up to 4% of the purchase price of Class B shares to dealers,
financial advisers and other persons who sell Class B shares at the time of sale
from its own resources. This facilitates the ability of the Fund to sell the
Class B shares without an initial sales charge being deducted at the time of
purchase. The Distributor anticipates that it will recoup its advancement of
sales commissions from the combination of the
27
<PAGE>
CDSC and the distribution fee. See "Distributor" in connection with the sale of
Class C shares. The Distributor will pay dealers, financial advisers and other
persons which distribute Class C shares a sales commission of up to 1% of the
purchase price at the time of the sale.
CLASS Z SHARES
Class Z shares are available for purchase by: (i) pension, profit sharing or
other employee benefit plans qualified under Section 401 of the Internal Revenue
Code, deferred compensation and annuity plans under Section 457 and 403(b)(7) of
the Internal Revenue Code, and non-qualified plans for which the Fund is an
available option (collectively Benefit Plans), provided such Benefit Plans (in
combination with other plans sponsored by the same employer or group of related
employers) have at least $50 million in defined contribution assets; (ii)
participants in any fee-based program sponsored by Prudential Securities or its
affiliates which includes mutual funds as investment options and for which the
Fund is an available option and (iii) investors who were, or had executed a
letter of intent to become, shareholders of any series of Prudential Dryden Fund
(Dryden Fund) on or before one or more series of Dryden Fund reorganized or who
on that date had investments in certain products for which Dryden Fund provided
exchangeability. After a Benefit Plan qualifies to purchase Class Z shares, all
subsequent purchases will be for Class Z shares.
In connection with the sale of Class Z shares, the Manager, the Distributor or
one of their affiliates may pay dealers, financial advisers and other persons
which distribute shares a finders' fee based on a percentage of the net asset
value of shares sold by such persons.
For more information about Class Z shares, contact your Prudential Securities
financial adviser or Prusec representative or telephone the Fund at (800)
225-1852. Participants in programs sponsored by Prudential Retirement Services
should contact their client representative for more information about Class Z
shares.
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 CDSC, as described below. See "Contingent Deferred Sales Charges"
below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST REDEEM
YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Prudential Preferred Financial Services offices.
28
<PAGE>
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 CDSC will be imposed
on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the net asset
value next determined after the order is received, which must be within 90 days
after the date of the redemption. Any contingent 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 may affect federal tax treatment of any gain realized upon
redemption. For more information on the rule which disallows a loss on the sale
or exchange of shares of the Portfolio which are replaced, see "Taxes, Dividends
and Distributions."
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
29
<PAGE>
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 Class B shares made during the preceding six years;
then of amounts representing the cost of shares held beyond the applicable CDSC
period; and finally, of amounts representing the cost of shares held for the
longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the 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
30
<PAGE>
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.
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."
31
<PAGE>
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately seven 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.
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,
CLASS C AND CLASS Z SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B, CLASS C AND
CLASS Z 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, Inc. 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. (THE FUND OR ITS AGENTS COULD BE SUBJECT TO LIABILITY
IF THEY FAIL TO EMPLOY REASONABLE PROCEDURES.) ALL EXCHANGES WILL BE MADE ON THE
BASIS OF THE RELATIVE NAV OF THE TWO FUNDS NEXT DETERMINED AFTER THE REQUEST IS
RECEIVED IN GOOD ORDER. THE EXCHANGE PRIVILEGE IS AVAILABLE ONLY IN STATES WHERE
THE EXCHANGE MAY LEGALLY BE MADE.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
32
<PAGE>
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.) and for shareholders who qualify to purchase Class Z shares, (see
"Alternative Purchase Plan--Class Z Shares" 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.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value. Similarly, participants in PSI's 401(k) Plan, an employee benefit plan
sponsored by Prudential Securities Incorporated (the PSI 401(k) Plan), for which
the Fund's Class Z shares are an available option and who wish to transfer their
Class Z shares out of the PSI 401(k) Plan following separation of service (I.E.,
voluntary or involuntary termination of employment or retirement) will have
their Class Z shares exchanged for Class A shares at net asset value.
The Fund reserves the right to reject any exchange order including exchanges
(and market timing transactions) which are of a size and/or frequency engaged in
by one or more accounts acting in concert or otherwise, that have or may have an
adverse effect on the ability of the Subadviser to manage the portfolio. The
determination that such exchanges or activity may have an adverse effect and the
determination to reject any exchange order shall be in the discretion of the
Manager and the Subadviser.
The Exchange Privilege is not a right and may be suspended, modified or
terminated at any time upon 60 days' written notice.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you can
take advantage of the following additional services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Fund's shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
- TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the
33
<PAGE>
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
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In
addition, monthly unaudited financial data are available upon request from the
Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, 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.
34
<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.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
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 SERVICES
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.
A-1
<PAGE>
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.
BB, B, CCC, CC: Debt rated BB, B, CCC, and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligations. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposures to adverse
conditions.
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.
A-2
<PAGE>
- --------------------------------------------------------------------------------
THE PRUDENTIAL MUTUAL FUND FAMILY
- --------------------------------------------------------------------------------
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Fund at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
- --------------------
TAXABLE BOND FUNDS
- ------------------------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
- -----------------------
TAX-EXEMPT BOND FUNDS
- ------------------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
- ---------------
GLOBAL FUNDS
- ------------------------------------
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Government Plus Fund, Inc.
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
- --------------
EQUITY FUNDS
- ------------------------------------
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small Companies Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
- ---------------------
MONEY MARKET FUNDS
- ------------------------------------
- -TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- -TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- -COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- -INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
B-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell, or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS........................................ 2
FUND EXPENSES.......................................... 4
FINANCIAL HIGHLIGHTS................................... 5
HOW THE FUND INVESTS................................... 8
Investment Objective and Policies.................... 8
Risks and Special Considerations of Investing in
Foreign Securities.................................. 9
Hedging and Return Enhancement Strategies............ 12
Other Investments and Policies....................... 14
Investment Restrictions.............................. 16
HOW THE FUND IS MANAGED................................ 16
Manager.............................................. 16
Distributor.......................................... 17
Fee Waivers and Subsidy.............................. 19
Portfolio Transactions............................... 19
Custodian and Transfer and Dividend Disbursing
Agent............................................... 19
HOW THE FUND VALUES ITS SHARES......................... 19
HOW THE FUND CALCULATES PERFORMANCE.................... 20
TAXES, DIVIDENDS AND DISTRIBUTIONS..................... 21
GENERAL INFORMATION.................................... 22
Description of Common Stock.......................... 22
Additional Information............................... 23
SHAREHOLDER GUIDE...................................... 23
How to Buy Shares of the Fund........................ 23
Alternative Purchase Plan............................ 24
How to Sell Your Shares.............................. 28
Conversion Feature--Class B Shares................... 31
How to Exchange Your Shares.......................... 32
Shareholder Services................................. 33
DESCRIPTION OF SECURITY RATINGS........................ A-1
THE PRUDENTIAL MUTUAL FUND FAMILY...................... B-1
</TABLE>
- -------------------------------------------
MF 157A 4445680
Class A: 743941 10 6
CUSIP Nos.: Class B: 743941 20 5
Class C: 743941 30 4
Class Z: 743941 40 3
PROSPECTUS
DECEMBER 30, 1996
PRUDENTIAL
PACIFIC GROWTH FUND, INC.
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PRUDENTIAL PACIFIC GROWTH FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED DECEMBER 30, 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 convertible and 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 Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077, 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 December 30, 1996, a copy
of which may be obtained from the Fund upon request.
TABLE OF CONTENTS
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CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
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Investment Objective and Policies..................... B-2 8
Investment Restrictions............................... B-12 16
Directors and Officers................................ B-13 16
Manager............................................... B-16 16
Distributor........................................... B-17 17
Portfolio Transactions and Brokerage.................. B-20 19
Purchase and Redemption of Fund Shares................ B-21 23
Shareholder Investment Account........................ B-24 33
Net Asset Value....................................... B-27 19
Taxes................................................. B-28 21
Performance Information............................... B-31 20
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants.............................. B-33 19
Financial Statements.................................. B-34 --
Independent Auditor's Report.......................... B-45 --
Appendix I--General Investment Information............ Ap-I --
Appendix II--Historical Performance Data.............. Ap-II --
Appendix III--Information Relating to the
Prudential........................................... Ap-V --
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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 or
liquid assets in a segregated account with its Custodian. A put option written
by the Fund is "covered" if the Fund maintains cash or liquid assets 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. "Liquid assets," as used in the Fund's
Prospectus and Statement of Additional Information, include U.S. Government
securities, equity securities, investment grade debt obligations or other liquid
unencumbered assets.
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.
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
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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 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
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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 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
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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--Risks and Special Considerations 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.
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.
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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.
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.
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The hours of trading of futures contracts may not conform to the hours
during which the Fund may trade the underlying securities. To the extent that
the futures markets close before the securities markets, significant price and
rate movements can take place in the securities markets that cannot be reflected
in the futures markets.
OPTIONS ON FUTURES CONTRACTS
An option on a futures contract gives the purchaser the right, but not the
obligation, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option exercise period. The writer of the
option is required upon exercise to assume an offsetting futures position (a
short position if the option is a call and a long position if the option is a
put). Upon exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by delivery
of the accumulated cash balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. Currently options can
be purchased or written with respect to futures contracts on various foreign
currencies, including the Australian Dollar, British Pound, Canadian Dollar,
Japanese Yen, Swiss Franc, West German Mark and Eurodollars. With respect to
stock indices, options are traded on futures contracts for various U.S. and
foreign stock indicies including the S&P 500 Stock Index and the NYSE Composite
Index.
The holder or writer of an option may terminate its position by selling or
purchasing an option of the same series. There is no guarantee that such closing
transactions can be effected.
LIMITATIONS ON PURCHASE AND SALE OF STOCK OPTIONS AND OPTIONS ON STOCK INDICES,
FOREIGN CURRENCIES AND FUTURES CONTRACTS ON FOREIGN CURRENCIES
The Fund may write put and call options on stocks only if they are covered,
and such options must remain covered so long as the Fund is obligated as a
writer. The Fund will write put options on stock indices and foreign currencies
and futures contracts on foreign currencies only if they are covered by
segregating with the Fund's Custodian an amount of cash, U.S. Government
securities, or liquid assets equal to the aggregate exercise price of the puts.
The Fund 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 will so segregate, escrow or pledge an amount in cash or
liquid assets 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
B-7
<PAGE>
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 or liquid assets having a
value equal to or greater than such commitments. If the Fund chooses to dispose
of the right to acquire a when-issued security prior to its acquisition, it
could, as with the disposition of any other portfolio security, incur a gain or
loss due to market fluctuations. The Fund does not intend to have more than 5%
of its net assets (determined at the time of entering into the transaction)
involved in transactions on a when-issued or delayed delivery basis during the
coming year.
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales of securities or maintain a short position,
provided that at all times when a short position is open the Fund owns an equal
amount of such securities or securities convertible into or exchangeable,
without payment of any further consideration, for an equal amount of the
securities of the same issuer as the securities sold short (a short sale
against-the-box), and that not more than 25% of the Fund's net assets
(determined at the time of the short sale) may be subject to such sales. Short
sales will be made primarily to defer realization of gain or loss for federal
tax purposes. As a matter of current operating policy, the Fund will not engage
in short-sales other than short-sales against-the-box. The Fund does not intend
to have more than 5% of its net assets (determined at the time of the short
sale) subject to short sales against-the-box during the coming year.
B-8
<PAGE>
U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES. The Fund is permitted to invest in U.S. Treasury
securities, including bills, notes, bonds and other debt securities issued by
the U.S. Treasury. These instruments are direct obligations of the U.S.
Government and, as such, are backed by the "full faith and credit" of the United
States. They differ primarily in their interest rates, the lengths of their
maturities and the dates of their issuances.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in securities issued by agencies of the
U.S. Government or instrumentalities of the U.S. Government. These obligations,
including those which are guaranteed by Federal Agencies or instrumentalities,
may or may not be backed by the full faith and credit of the United States.
Obligations of the Government National Mortgage Association (GNMA), the Farmers
Home Administration and the Small Business Administration are backed by the full
faith and credit of the United States, In the case of securities not backed by
the full faith and credit of the United States, the Fund must look principally
to the agency issuing or guaranteeing the obligation for ultimate repayment and
may not be able to assert a claim against the United States if the agency or
instrumentality does not meets its commitments. Securities in which the Fund may
invest which are not backed by the full faith and credit of the United States
include obligations such as those issued by the Federal Home Loan Bank, the
Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage
Association, the Student Loan Marketing Association, Resolution Funding
Corporation and the Tennessee Valley Authority, each of which has the right to
borrow from the U.S. Treasury to meet its obligations, and obligations of the
Farm Credit System, the obligations of which may be satisfied only by the
individual credit of the issuing agency. FHLMC investments may include
collateralized mortgage obligations.
Obligations issued or guaranteed as to principal and interest by the United
States Government may be acquired by the Fund in the form of custodial receipts
that evidence ownership of future interest payments, principal payments or both
on certain United States treasury notes or bonds. Such notes and bonds are held
in custody by a bank on behalf of the owners. These custodial receipts are
commonly referred to as Treasury strips.
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in mortgage-backed securities, including
those which represent undivided ownership interest in pools of mortgages. The
U.S. Government or the issuing agency or instrumentality guarantees the payment
of interest on and principal of these securities. However, the guarantees do not
extend to the yield or value of the securities nor do the guarantees extend to
the yield or value of the Fund's shares. These securities are in most cases
pass-through instruments through which the holders receive a share of all
interest and principal payments from the mortgagees underlying the securities,
net of certain fees. Because the prepayment characteristics of the underlying
mortgages vary, it is not possible to predict accurately the average life of a
particular issue of pass-through certificates. Mortgage-backed securities are
often subject to more rapid repayment than their maturity date would indicate as
a result of the pass-through of prepayments of principal on the underlying
mortgage obligations. During periods of declining interest rates, prepayment of
mortgages underlying mortgage-backed securities can be expected to accelerate.
The Fund's ability to invest in high-yielding mortgage-backed securities will be
adversely affected to the extent that prepayments of mortgages must be
reinvested in securities which have lower yields than the prepaid mortgages.
Moreover, prepayments of mortgages which underlie securities purchased at a
premium could result in capital losses. During periods of rising interest rates,
the rate of prepayment of mortgages underlying mortgage-backed securities can be
expected to decline, extending the projected average maturity of the
mortgage-backed securities. This maturity extension risk may effectively change
a security which was considered short- or intermediate-term at the time of
purchase into a long-term security. Long-term securities generally fluctuate
more widely in response to changes in interest rates than short- or
intermediate-term securities.
The Fund may invest in both Adjustable Rate Mortgage Securities (ARMs),
which are pass-through mortgage securities collateralized by adjustable rate
mortgages, and Fixed-Rate Mortgage Securities (FRMs), which are collateralized
by fixed-rate mortgages.
The values of U.S. Government securities (like those of other fixed-income
securities generally) will change as interest rates fluctuate. During periods of
falling U.S. interest rates, the values of U.S. Government securities generally
rise and, conversely, during periods of rising interest rates, the values of
such securities generally decline. The magnitude of these fluctuations will
generally be greater for securities with longer-term maturities.
B-9
<PAGE>
FOREIGN DEBT SECURITIES
The Fund is permitted to invest in foreign corporate and government
securities. "Foreign Government securities" include debt securities issued or
guaranteed, as to payment of principal and interest, by governments,
quasi-governmental entities, governmental agencies, supranational entities and
other governmental entities (collectively, Government Entities) of foreign
countries denominated in the currency of another such country.
A "supranational entity" is an entity constituted by the national
governments of several countries to promote economic development. Examples of
such supranational entities include, among others, the World Bank (International
Bank for Reconstruction and Development), the European Investment Bank and the
Asian Development Bank. Debt securities of quasi-governmental issuers include,
among others, the Province of Ontario and the City of Stockholm. Foreign
governments securities shall also include debt securities of Government Entities
denominated in European Currency Units. A European Currency Unit represents
specified amounts of the currencies of certain of the member states of the
European Community. Foreign government securities shall also include
mortgage-backed securities issued by foreign Government Entities including
quasi-governmental entities.
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 LLC (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.
B-10
<PAGE>
ILLIQUID SECURITIES
The Fund may not hold more than 10% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market (either within or outside of the United States) or
legal or contractual restrictions on resale. Historically, illiquid securities
have included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (Securities Act), securities which are otherwise not readily marketable
and repurchase agreements having a maturity of longer than seven days.
Securities which have not been registered under the Securities Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities 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.
5. 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.
B-12
<PAGE>
6. 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.)
7. 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."
8. Make investments for the purpose of exercising control or
management.
9. 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.
10. 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.
11. Make loans, except through (i) repurchase agreements and (ii) loans
of portfolio securities limited to 30% of the Fund's total assets.
12. Purchase more than 10% of all outstanding voting securities of any
one issuer.
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>
Edward D. Beach (71) Director President and Director of BMC Fund, Inc., a closed-end investment
company; prior thereto, Vice Chairman of Broyhill Furniture
Industries, Inc.; Certified Public Accountant; Secretary and
Treasurer of Broyhill Family Foundation, Inc.; Chairman of the
Board of Trustees of Mars Hill College.
Stephen C. Eyre (73) Director Executive Director of The John A. Hartford Foundation, Inc.
(charitable foundation) (since May 1985); Director of Faircom,
Inc.; Trustee Emeritus of Pace University.
Delayne Dedrick Gold (58) Director Marketing and Management Consultant.
*Robert F. Gunia (49) Vice President and Director Comptroller, Prudential Investments (since May 1996); Senior Vice
President (since March 1987) of Prudential Securities
Incorporated (Prudential Securities); Director (since June
1987), Prudential Mutual Fund Services, Inc. (PMFS); formerly
Chief Administrative Officer (July 1990-September 1996),
Director (January 1989-September 1996), Executive Vice
President, Treasurer and Chief Financial Officer (June
1987-September 1996) of Prudential Mutual Fund Management, Inc.,
Vice President and Director of The Asia Pacific Fund, Inc.
(since May 1989).
Don G. Hoff (60) Director Chairman and Chief Executive Officer of Intertec, Inc.
(investments) since 1980; Chairman and CEO of EHS, Inc.;
Director of Innovative Capital Management Inc., The Asia Pacific
Fund, Inc. and The Greater China Fund, Inc.
</TABLE>
B-13
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE THE FUND DURING PAST 5 YEARS
- ------------------------------ ------------------------------ -----------------------------------------------------------------
<S> <C> <C>
Robert E. LaBlanc (62) Director President of Robert E. LaBlanc Associates, Inc.
(telecommunications) since 1981; formerly General Partner at
Salomon Brothers; formerly Vice Chairman of Continental Telecom;
Director of Storage Technology Corporation, Titan Corporation,
Tribune Company; Trustee of Manhattan College.
*Mendel A. Melzer (35) Director Chief Investment Officer of Prudential Mutual Funds; former Chief
Financial Officer (November 1995-October 1996) of Prudential
Investments; formerly Senior Vice President and Chief Financial
Officer of Prudential Preferred Financial Services (April
1993-November 1995); Managing Director of Prudential Investment
Advisors (April 1991-April 1993); Senior Vice President of
Prudential Capital Corporation (July 1989-April 1991); Chairman
and Director of Prudential Series Fund, Inc.
*Richard A. Redeker (53) President and Director Employee of Prudential Investments; former President, Chief
Executive Officer and Director (October 1993-September 1996) of
PMF; former Executive Vice President, Director and Member of the
Operating Committee (1993-September 1996). Prudential
Securities; Director (since October 1993) of Prudential
Securities Group, Inc.; formerly Senior Executive Vice President
and Director of Kemper Financial Services, Inc. (September
1978-September 1993).
Robin B. Smith (57) Director Chairman (since August 1996) and Chief Executive Officer (since
January 1988), formerly President (September 1981-August 1996)
of Publishers Clearing House; Director of BellSouth Corporation,
The Omnicom Group, Inc., Texaco Inc., Spring Industries Inc. and
Kmart Corporation.
Stephen Stoneburn (53) Director President and Chief Executive Officer of Quadrant Media Corp. (a
publishing company) (since June 1996); formerly President of
Argus Integrated Media, Inc. (June 1995-June 1996); formerly
Senior Vice President and Managing Director, Cowles Business
Media (January 1993-1995); prior thereto. Senior Vice President
(January 1991-1992) and Publishing Vice President (May
1989-December 1990) of Gralla Publications (a division of United
Newspapers, U.K.); formerly Senior Vice President of Fairchild
Publications, Inc.
Nancy H. Teeters (66) Director Economist; formerly Vice President and Chief Economist (March
1986-June 1990) of International Business Machines Corporation;
former Member of the Board of Governors of the Horace H. Rackham
School of Graduate Studies of the University of Michigan;
Director of Inland Steel Corporation (since July 1991).
</TABLE>
- ------------
Unless otherwise noted the address for each of the above persons is c/o
Prudential Mutual Fund Management LLC, Gateway Center Three, 100 Mulberry
Street, 9th Floor, Newark, New Jersey 07102-4077.
* "Interested" director, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities or PMF.
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.
B-14
<PAGE>
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. Beach
and Eyre are scheduled to retire on December 31, 1999 and 1998, respectively.
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.
On October 30, 1996, at an annual meeting of shareholders, shareholders of
record on August 9, 1996, voted to elect new Directors of the Fund and to
continue the services of Ms. Gold and Messrs. Eyre, Hoff, LaBlanc and Redeker as
Directors of the Fund. The following table sets forth the aggregate compensation
paid by the Fund for the fiscal year ended October 31, 1996 to current Directors
of the Fund, as well as to Directors of the Fund who served during the Fund's
1996 fiscal year. The table also shows aggregate compensation paid to those
Directors for service on Boards and of all funds managed by Prudential Mutual
Fund Management LLC, including the Fund, for the calendar year ended December
31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM FUND
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID
NAME AND POSITION FROM FUND EXPENSES RETIREMENT TO DIRECTORS
- ---------------------------------------------------- ------------- ----------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Edward D. Beach--Director -- None N/A $ 183,500(22/43)*
Stephen C. Eyre--Director $ 6,000 None N/A $ 41,000(4/5)*
Delayne D. Gold--Director $ 6,000 None N/A $ 183,250(24/45)*
Robert F. Gunia (1)--Director -- None N/A 0
Don G. Hoff--Director $ 6,000 None N/A $ 50,625(5/6)*
Harry A. Jacobs, Jr. (1)--Former Director -- None N/A 0
Sidney R. Knafel--Former Director $ 6,000 None N/A $ 35,500(4/5)*
Robert F. LaBlanc--Director $ 6,000 None N/A $ 35,500(4/5)*
Mendel A. Melzer (1)--Director -- None N/A 0
Thomas A. Owens, Jr.--Former Director $ 6,000 None N/A $ 87,000(12/13)*
Richard A. Redeker (1)--Director -- None N/A 0
Robin B. Smith--Director $ 6,000 None N/A $ 100,741(10,19)*
Stephen Stoneburn--Director -- None N/A $ 44,875(7/7)*
Nancy H. Teeters--Director -- None N/A $ 107,500(13/31)*
Clay T. Whitehead--Former 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.
(1) Directors who are "interested" do not receive compensation from Fund Complex
(including the Fund).
B-15
<PAGE>
As of December 6, 1996, 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, 1996, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding common stock of the Prudential Pacific Growth
Fund, Inc. were: Dr. Robert J. Weinstein & Mrs. Lois Weinstein Jt Ten, 875 N.
Michigan Avenue, Ste 2930, Chicago, Illinois held 36,910 Class C shares (or
approximately 9% of the outstanding Class C shares); Virtual World Entertainment
Group, 1100 W. Cermak Road, Ste B404, Chicago, Illinois held 21,103 Class C
shares (or approximately 5% of the outstanding Class C shares); Michael Moscone,
Bruce Kaye CO-TTEES FBO M. Michael Moscone Charitable remainder Trust No. 2, 382
Cranbrook Court, Bloomfield, Missouri held 32,091 Class C shares (or
approximately 8% of the outstanding Class C shares); and Prudential Trust Co.
FBO Cash Balance Pension Plan Benefits Dept. 33rd Floor, One Seaport Plaza, New
York, New York held 695,412 Class Z shares (or approximately 31% of the
outstanding Class Z shares).
As of December 6, 1996, Prudential Securities was the record holder for
other beneficial owners of 4,114,614 Class A shares (or approximately 82% of the
outstanding Class A shares), 16,840,113 Class B shares (or approximately 85% of
the outstanding Class B shares); 344,368 Class C shares (or approximately 84% of
the outstanding Class C shares) and 4,498 Class Z shares (less than 1% of the
outstanding Class Z shares) of the Fund. In the event of any meetings of
shareholders, Prudential Securities will forward, or cause the forwarding of,
proxy materials to the beneficial owners for which it is the record holder.
MANAGER
The manager of the Fund is Prudential Mutual Fund Management LLC (PMF or the
Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. 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, 1996, PMF managed
and/or administered open-end and closed-end management investment companies with
assets of approximately $53.4 billion. According to the Investment Company
Institute, as of August 31, 1996, the Prudential Mutual Funds were the 17th
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 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, 1996. Currently, the Fund
believes that there are no such expense limitations.
B-16
<PAGE>
In connection with its management of the corporate affairs of the Fund, PMF
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel
except the fees and expenses of Directors who are not affiliated
persons of PMF or the Fund's investment adviser;
(b) all expenses incurred, by PMF or by the Fund in connection with
managing the ordinary course of the Fund's business, other than those
assumed by the Fund as described below; and
(c) the costs and expenses payable to PIC pursuant to the Subadvisory
Agreement between PMF and PIC (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b) the
fees and expenses of Directors who are not affiliated persons of the Manager or
the Fund's investment adviser, (c) the fees and certain expenses of the
Custodian and Transfer and Dividend Disbursing Agent, including the cost of
providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities transactions, (f) all taxes and
corporate fees payable by the Fund to governmental agencies, (g) the fees of any
trade associations of which the Fund may be a member, (h) the cost of stock
certificates representing shares of the Fund, (i) the cost of fidelity and
liability insurance, (j) certain organization expenses of the Fund and the fees
and expenses involved in registering and maintaining registration of the Fund
and of its shares with the SEC, registering the Fund and qualifying its shares
under state securities laws, including the preparation and printing of the
Fund's registration statements and prospectuses for such purposes, (k) allocable
communications expenses with respect to investor services and all expenses of
shareholders' and Directors' meetings and of preparing, printing and mailing
reports, proxy statements and prospectuses to shareholders in the amount
necessary for distribution to the shareholders, (l) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business and (m) distribution fees.
The Management Agreement provides that PMF will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act.
For the fiscal years ended October 31, 1996, 1995 and 1994, PMF received
management fees of $3,692,994, $3,542,363 and $3,726,394, 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 provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PMF or PIC upon not more than 60 days', nor less than 30
days', written notice. The Subadvisory Agreement provides that it will continue
in effect for a period of more than two years from its execution only so long as
such continuance is specifically approved at least annually in accordance with
the requirements of the Investment Company Act.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities), One Seaport
Plaza, New York, New York 10292, acts as the distributor of the Class A, Class
B, Class C and Class Z 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.
B-17
<PAGE>
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 or paid for
by the Fund. See "How the Fund is Managed--Distributor" in the Prospectus.
CLASS A PLAN. For the fiscal year ended October 31, 1996, PMFD and
Prudential Securities received payments of $265,371, under the Class A Plan.
This amount was expended on commission credits to Prudential Securities and
Pruco Securities Corporation, an affiliated broker-dealer (Prusec), for payments
of commissions and account servicing fees to financial advisers and other
persons who sell Class A shares. For the fiscal year ended October 31, 1996,
PMFD and Prudential Securities also received approximately $363,000 in initial
sales charges.
CLASS B PLAN. For the fiscal year ended October 31, 1996, Prudential
Securities received $3,575,481 from the Fund under the Class B Plan and spent
approximately $2,908,300 in distributing the Class B shares of the Fund. It is
estimated that of the latter amount approximately $20,000 (0.7%) was spent on
printing and mailing of prospectuses to other than current shareholders;
$208,000 (7.2%) 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 $2,681,000 (92.2%) on the aggregate of (i) payments of
commissions and account servicing fees to its financial advisers ($1,593,000 or
54.8%) and (ii) an allocation on account of overhead and other branch office
distribution-related expenses ($1,088,000 or 37.4%); 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,
1996, Prudential Securities received approximately $1,167,000 in contingent
deferred sales charges.
CLASS C PLAN. For the fiscal year ended October 31, 1996, Prudential
Securities received $64,016 from the Fund under the Class C Plan and spent
approximately $69,700 in distributing the Class C shares of the Fund. It is
estimated that of the latter amount approximately $1,800 (2.6%) was spent on
printing and mailing of prospectuses to other than current shareholders; $1,100
(2.4%) 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 C
shares; and $66,200 (95.0%) on the aggregate of (i) payments of commissions and
account servicing fees to its financial advisers ($35,000 or 50.2%) and (ii) an
allocation on account of overhead and other branch office distribution-related
expenses ($31,200 or 44.8%); 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 operations and
sales support personnel, utility costs, communications costs and the costs of
stationery and supplies, (b) the costs of client sales seminars, (c) expenses of
mutual fund sales coordinators to promote the sale of Fund shares, and (d) other
incidental expenses relating to branch promotion of Fund sales.
Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by investors upon certain redemptions of Class C shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges"
in the Prospectus. For the fiscal year ended October 31, 1996, Prudential
Securities received contingent deferred sales charges of approximately $6,000.
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
B-18
<PAGE>
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.
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 serves as an independent "ombudsman" whom PSI employees
can call anonymously with complaints about ethics and compliance. Prudential
Securities reports any allegations or instances of criminal conduct and material
improprieties to the new director. The new director submits compliance reports
which identify all such allegations or instances of criminal conduct and
material improprieties every three months and shall continue to do so 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-19
<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.
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
B-20
<PAGE>
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, 1996, 1995 and 1994 the Fund paid
brokerage commissions of $3,489,060, $2,136,278 and $3,003,304, respectively.
During the fiscal years ended October 31, 1996 and 1995, $85,679 and $47,366,
respectively, of such commissions were paid to Prudential Securities. No
commissions were paid to Prudential Securities in the fiscal year ended October
31, 1994.
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 offered to a limited group of investors at net asset value without any sales
charge. See "Shareholder Guide--How to Buy Shares of the Fund" in the
Prospectus.
Each class represents an interest in the same assets of the Fund and is
identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service fees (except for Class Z shares,
which are not subject to any sales charge or distribution and/or service fee),
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 a
limited group of investors. See "Distributor" and "Shareholder Investment
Account--Exchange Privilege."
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 5% and Class
B*, Class C* and Class Z shares are sold at net asset value. Using the Fund's
net asset value at October 31, 1996, the maximum offering price of the Fund's
shares is as follows:
<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share................... $ 15.86
Maximum sales charge (5% of offering price).............................. .83
---------
Offering price to public................................................. $ 16.69
---------
---------
CLASS B
Net asset value, offering price and redemption price per Class B
share*.................................................................. $ 15.40
---------
---------
CLASS C
Net asset value, offering price and redemption price per Class C
share*.................................................................. $ 15.40
---------
---------
CLASS Z
Net asset value, offering price and redemption price per Class Z share... $ 15.89
---------
---------
</TABLE>
-------------------
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
REDUCTION 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.
B-21
<PAGE>
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group
that holds 25% or more of the outstanding voting securities of a
company will be deemed to control the company, and a partnership will be
deemed to be controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in any
retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential Securities. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering or price (net asset value plus maximum sales charge)
as of the previous business day. See "How the Fund Values its Shares" in the
Prospectus. The Distributor must be notified at the time of purchase that the
investor is entitled to a reduced sales charge. The reduced sales charges will
be granted subject to confirmation of the investor's holdings. Rights of
Accumulation are not available to individual participants in any retirement or
group plans.
LETTERS OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors), including retirement and group plans, who
enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds (Investment Letter of Intent). Retirement and group plans may also
qualify to purchase Class A shares at net asset value by entering into a Letter
of Intent whereby they agree to enroll, within a thirteen month period, as
specified number of eligible employees or participants (Participant Letter of
Intent).
For purposes of the Investment Letter of Intent, all shares of a Fund and
shares of other Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the Transfer
Agent or through Prudential Securities.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period, and in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant
enrollment goal over a thirteen-month period. Each investment made during the
period, in the case of an Investment Letter of Intent, will receive the reduced
sales charge applicable to the amount represented by the goal, as if it were a
single investment. In the case of a Participant Letter of Intent, each
investment made during the period will be made at net asset value. Escrowed
Class A shares totaling 5% of the dollar amount of the Letter of Intent will be
held by the Transfer Agent in the name of the purchaser, except in the case of
retirement and group plans where the employer or plan
B-22
<PAGE>
sponsor will be responsible for paying any applicable sales charge. The
effective date of an Investment Letter of Intent (except in the case of
retirement and group plans) may be back-dated up to 90 days, in order that any
investments made during this 90-day period, valued at the purchaser's cost, can
be applied to the fulfillment of the Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter of
Intent does not obligate the retirement or group plan to enroll the indicated
number of eligible employees or participants. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser (or the
employer or plan sponsor in the case of any retirement or group plan) is
required to pay the difference between the sales charge otherwise applicable to
the purchases made during this period and 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 a Fund pursuant to a Letter of Intent
should carefully read such Letter of Intent.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or, in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to individual
participants in any retirement or group plans.
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>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
<S> <C>
Death A copy of the shareholder's death certificate or,
in the case of a trust, a copy of the grantor's
death certificate, plus a copy of the trust
agreement identifying the grantor.
Disability--An individual will be A copy of the Social Security Administration award
considered disabled if he or she is letter or a letter from a physician on the
unable to engage in any substantial physician's letterhead stating that the shareholder
gainful activity by reason of any (or, in the case of a trust, the grantor) is
medically determinable physical or permanently disabled. The letter must also indicate
mental impairment which can be expected the date of disability.
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
Custodial Account firm indicating (i) the date of birth of the
shareholder and (ii) that the shareholder is over
age 59 1/2 and is taking a normal
distribution--signed by the shareholder.
Distribution from Retirement Plan A letter signed by the plan administrator/trustee
indicating the reason for the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or the
plan administrator/ trustee on company letterhead
indicating the amount of the excess and whether or
not taxes have been paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994. The
CDSC is reduced on redemptions of Class B shares of the Fund purchased prior to
August 1, 1994 if immediately after a purchase of such shares, the aggregate
cost of all Class B shares of the Fund owned by you in a single account 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
B-23
<PAGE>
aggregate cost of your Class B shares of the Fund following the second purchase
was $550,000, the quantity discount would be available for the second purchase
of $450,000 but not for the first purchase of $100,000. The quantity discount
will be imposed at the following rates depending on whether the aggregate value
exceeded $500,000 or $1 million:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS INVESTED
OR REDEMPTION PROCEEDS
YEAR SINCE PURCHASE ------------------------------------------
PAYMENT MADE $500,001 TO $1 MILLION OVER $1 MILLION
-------------------- ----------------------- -----------------
<S> <C> <C>
First........................................................... 3.0% 2.0%
Second.......................................................... 2.0% 1.0%
Third........................................................... 1.0% 0%
Fourth and thereafter........................................... 0% 0%
</TABLE>
You must notify the Fund's 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
(Short-Intermediate Term Series) and shares of the money market funds specified
below. No fee or sales load will be imposed upon the exchange. Shareholders of
money market funds who acquired such shares upon exchange of Class A shares may
use the Exchange Privilege only to acquire Class A shares of the Prudential
Mutual Funds participating in the Exchange Privilege.
B-24
<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, Inc.
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential Mutual Funds and shares of Prudential Special Money Market Fund,
Inc., a money market fund. No CDSC will be payable upon such exchange, but a
CDSC may be payable upon the redemption of 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.
CLASS Z. CLASS Z SHARES MAY BE EXCHANGED FOR CLASS Z SHARES OF OTHER
PRUDENTIAL MUTUAL FUNDS.
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.
B-25
<PAGE>
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."
- ------------
(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.
B-26
<PAGE>
TAX-DEFERRED RETIREMENT PLANS. Various qualified retirement plans, including
a 401(k) plan, self-directed individual retirement accounts and "tax-deferred
accounts" under Section 403(b)(7) of the Internal Revenue Code are available
through the Distributor. These plans are for use by both self-employed
individuals and corporate employers. These plans permit either self-direction of
accounts by participants, or a pooled account arrangement. Information regarding
the establishment of these plans, and the administration, custodial fees and
other details are available fom Prudential Securities or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, an 8% rate of return and a 39.6% federal income tax bracket
and shows how much more retirement income can accumulate within an IRA as
opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING(1)
<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
------------------ --------- ---------
<S> <C> <C>
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
</TABLE>
- ------------
(1)The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
the IRA account will be subject to tax when withdrawn from the account.
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, E.G., to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as a part
of 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 actively traded in the over-
B-27
<PAGE>
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 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
B-28
<PAGE>
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, engage in hedging activities,
or close out certain positions, 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 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.
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
B-29
<PAGE>
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 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.
B-30
<PAGE>
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.
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)to the power of n = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1000 payment
made at the beginning of the 1, 5 or 10 year periods.
Average annual total return takes into account any applicable initial or
deferred sales charges but does not take into account any federal or state
income taxes that may be payable upon redemption.
The average annual total return of the Class A shares for the one year
period ended October 31, 1996 and for the period from July 24, 1992
(commencement of investment operations) through October 31, 1996 was (3.1)% and
11.0%, respectively, and for the Class B shares, was (3.6)% and 11.4%,
respectively, for the same period. The average annual total return for Class C
shares for the one year period ended October 31, 1996 and the since inception
period (August 1, 1994) ended October 31, 1996 was .4% and (2.7)%, respectively.
The average annual total return for Class Z shares for the period from inception
(March 1, 1996) ended October 31, 1996 was (6.1)%.
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:
<TABLE>
<S> <C> <C>
YIELD = 2[( a - b +1)(6) - 1]
-----
cd
</TABLE>
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period. Yields for the Fund will vary based on a number of factors
including changes in net asset value, market conditions, the level of interest
rates and the level of Fund income and expenses.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares. See "How the Fund Calculates Performance" in the
Prospectus.
B-31
<PAGE>
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1000.
ERV = ending redeemable value at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1000 payment
made at the beginning of the 1, 5 or 10 year periods.
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The aggregate total return for Class A shares for the one year period ended
on October 31, 1996 and for the period from July 24, 1992 (commencement of
operations) to October 31, 1996 was 2.0% and 64.5%, respectively, and for Class
B shares was 1.4% and 59.5%, respectively, for the same period. The aggregate
total return for Class C shares for the one year period ended on October 31,
1996 and for the since inception period (August 1, 1994) ended October 31, 1996
was 1.4% and (5.9)%, respectively. The aggregate total return for Class Z shares
for the period from inception (March 1, 1996) ended October 31, 1996 was (4.1)%.
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)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PERFORMANCE COMPARISON OF DIFFERENT TYPES OF INVESTMENTS OVER THE LONG TERM (1/1926 - 12/1994)
<S> <C>
Common Stocks 10.2%
Long-Term Govt. Bonds 4.8%
Inflation 3.1%
</TABLE>
- ------------
(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-32
<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, 1996, the Fund incurred fees of
approximately $753,000 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-33
<PAGE>
PORTFOLIO OF INVESTMENTS
AS OF OCTOBER 31, 1996 PRUDENTIAL PACIFIC GROWTH FUND, INC.
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ----------------------------------------------------------------
EQUITIES AND EQUIVALENTS--90.7%
COMMON STOCKS--89.5%
- ----------------------------------------------------------------
AUSTRALIA--9.3%
646,900 Brambles Industries, Ltd.
(Business & Public Services) $ 10,709,925
1,103,988 Coca Cola Amatil, Ltd.
(Beverages & Tobacco) 15,172,839
3,508,100 Publishing & Broadcasting, Ltd.
(Broadcasting & Publishing) 15,784,227
3,990,500 Sea World Property Trust, Ltd.
(Leisure & Tourism) 4,235,797
-------------
45,902,788
- ----------------------------------------------------------------
HONG KONG--28.0%
1,289,000 Cheung Kong Infrastructure(a)
(Multi-Industry) 2,400,559
4,162,000 CITIC Pacific, Ltd.
(Multi-Industry) 20,238,897
4,344,600 Guoco Group, Ltd.
(Banking) 22,981,059
6,404,000 Hong Kong & Shanghai Hotels, Ltd.
(Leisure & Tourism) 11,760,793
905,204 HSBC Holdings, Plc.
(Banking) 18,438,430
21,157,000 Hung Hing Printing Group, Ltd.
(Forest Products & Paper) 5,677,656
1,906,000 Hutchison Whampoa, Ltd.
(Multi-Industry) 13,311,089
1,466,700 Jardine Matheson Holdings, Ltd.
(Multi-Industry) 8,286,855
3,027,000 New World Development Co., Ltd.
(Property Development) 17,616,590
1,004,000 Television Broadcasts, Ltd.
(Broadcasting & Publishing) 3,518,843
3,172,000 Wharf Holdings, Ltd.
(Multi-Industry) 13,086,418
-------------
137,317,189
- ----------------------------------------------------------------
INDIA--1.9%
74,000 Bajaj Auto Ltd. (GDR)
(Automobiles & Auto Parts) $ 2,368,000
554,040 Tata Engineering & Locomotive Ltd.
(GDR) (Automobiles & Trucks) 6,994,755
-------------
9,362,755
- ----------------------------------------------------------------
INDONESIA--1.4%
230,300 PT Indonesia Satellite (ADR)
(Utilities-Telephones) 6,937,787
- ----------------------------------------------------------------
JAPAN--29.6%
303,000 Alpine Electronics, Inc.
(Electrical Equipment) 4,785,680
639,000 Daibiru Corp.
(Property Investment) 7,233,010
506,000 Honda Motor Co., Ltd.
(Automobiles & Auto Parts) 12,076,690
400 Japan Associated Finance Co.
(Financial Services) 32,887
475,000 JGC Corp.
(Construction) 5,001,536
76,000 Keyence Corp.
(Electronic Components &
Instruments) 8,802,703
49,000 Kokusai Denshin Denwa Co., Ltd.
(Utilities-Telephones) 4,235,072
1,708,000 Mitsui Fudosan Co., Ltd.
(Property Investment) 21,131,751
118,200 Namco Ltd.
(Recreation & Other Consumer
Goods) 3,536,717
282,000 Nichiei Construction Co., Ltd.
(Property Development) 2,415,057
781,000 Nichirei Corp.
(Miscellaneous Industrial) 4,666,880
899,000 Nippon Express Co., Ltd.
(Transportation-Road & Rail) 7,296,758
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements
B-34
<PAGE>
PORTFOLIO OF INVESTMENTS
AS OF OCTOBER 31, 1996 PRUDENTIAL PACIFIC GROWTH FUND, INC.
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------------
JAPAN--(CONT'D.)
51,800 Nippon Television Network
(Broadcasting & Publishing) $ 14,999,342
550,000 Nissan Chemical Industries
(Chemicals) 3,238,275
638,000 Nissan Motor Co., Ltd.
(Automobiles & Auto Parts) 4,820,059
60 Nissen Co., Ltd.
(Retail) 500
523,000 Onward Kashiyama & Co., Ltd.
(Textiles & Apparel) 7,296,714
311,000 Sony Corp.
(Appliances & Household Durables) 18,638,442
385,000 Toyota Motor Corp.
(Automobiles & Auto Parts) 9,087,439
140,600 World Co., Ltd.
(Textiles & Apparel) 5,860,132
-------------
145,155,644
- ----------------------------------------------------------------
MALAYSIA--9.6%
4,608,000 Berjaya Capital Berhad
(Insurance) 4,468,474
4,682,000 IJM Corporation Berhad
(Construction) 10,192,361
4,565,500 Kuala Lumpur Kepong Berhad
(Misc. Materials & Commodities) 11,474,738
9,115,000 Renong Berhad
(Multi-Industry) 14,358,876
1,134,000 Resorts World Berhad
(Leisure & Tourism) 6,508,213
-------------
47,002,662
- ----------------------------------------------------------------
THE PHILIPPINES--1.0%
900,000 C & P Homes, Inc.
(Property Development) 410,959
4,897,800 Filinvest Land, Inc.
(Property Development) 1,658,692
13,129,600 Solid Group, Inc.(a)
(Electrical Equipment) 2,697,863
-------------
4,767,514
- ----------------------------------------------------------------
SINGAPORE--8.7%
1,069,000 City Developments, Ltd.
(Property Development) $ 8,424,494
240,750 First Capital Corp.
(Property Development) 557,221
2,661,000 Hong Leong Finance, Ltd.
(Financial Services) 8,123,749
2,427,000 Marco Polo Developments, Ltd.
(Leisure & Tourism) 4,514,547
550,600 Overseas Chinese Banking Corp., Ltd.
(Banking) 6,293,688
940,000 Overseas Union Bank
(Banking) 6,406,816
1,604,750 Sembawang Maritime, Ltd.
(Energy Equipment & Services) 4,238,317
173,160 Singapore Finance, Ltd.
(Financial Services) 248,337
1,537,000 Wing Tai Holdings
(Property Development) 3,775,662
-------------
42,582,831
-------------
Total common stocks
(cost $407,474,285) 439,029,170
WARRANTS(a)--0.5%
- ----------------------------------------------------------------
MALAYSIA--0.1%
932,375 Renong Berhad
expiring Nov. '00 @ MYR4.10
(Multi-Industry) 380,109
- ----------------------------------------------------------------
SINGAPORE--0.4%
190,200 Hong Leong Finance, Ltd.
expiring Sept.'98 @ SGD3.25
(Financial Services) 107,355
605,600 United Overseas Bank, Ltd.
expiring June '97 @ SGD3.34
(Banking) 2,149,805
-------------
2,257,160
-------------
Total warrants
(cost $2,938,339) 2,637,269
-------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements
B-35
<PAGE>
PRUDENTIAL PACIFIC GROWTH FUND, INC.
PORTFOLIO OF INVESTMENTS AS OF OCTOBER 31, 1996
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ----------------------------------------------------------------
CONVERTIBLE BOND--0.6%
- ----------------------------------------------------------------
THE PHILIPPINES--0.6%
$2,970 Filinvest Capital Cayman Islands,
Ltd.
3.75%, 2/1/02
(Property Development)
(cost $2,972,700) $ 2,925,450
CONVERTIBLE LOAN STOCK--0.1%
SHARES
- ----------------------------------------------------------------
SINGAPORE--0.1%
631,000 Sembawang Maritime, Ltd.
(Energy Equipment & Services)
(cost $402,347) 551,033
- ----------------------------------------------------------------
TOTAL INVESTMENTS--90.7%
(Cost $413,787,671; Note 4) 445,142,922
Other assets in excess of
liabilities--9.3% 45,404,745
-------------
Net Assets--100% $ 490,547,667
-------------
-------------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
GDR--Global Depository Receipt.
- -------------------------------------------------------------------------------
See Notes to Financial Statements
B-36
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES PRUDENTIAL PACIFIC GROWTH FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS October 31, 1996
----------------
<S> <C>
Investments, at value (cost $413,787,671)................................................................. $445,142,922
Foreign currency, at value (cost $5,462,957).............................................................. 5,472,281
Receivable for Fund shares sold........................................................................... 49,720,420
Dividends and interest receivable......................................................................... 1,063,865
Receivable for investments sold........................................................................... 444,856
Deferred expenses and other assets........................................................................ 42,012
----------------
Total assets........................................................................................... 501,886,356
----------------
LIABILITIES
Bank overdraft............................................................................................ 8,229,150
Payable for Fund shares reacquired........................................................................ 1,630,173
Accrued expenses and other liabilities.................................................................... 488,500
Distribution fees payable................................................................................. 302,269
Management fee payable.................................................................................... 295,119
Payable for investments purchased......................................................................... 273,835
Withholding taxes payable................................................................................. 119,643
----------------
Total liabilities...................................................................................... 11,338,689
----------------
NET ASSETS................................................................................................ $490,547,667
----------------
----------------
Net assets were comprised of:
Common stock, at par................................................................................... $ 31,569
Paid-in capital in excess of par....................................................................... 448,970,212
----------------
449,001,781
Accumulated net realized gains on investments and foreign currency transactions........................ 10,192,578
Net unrealized appreciation on investments and foreign currencies...................................... 31,353,308
----------------
Net assets, October 31, 1996.............................................................................. $490,547,667
----------------
----------------
Class A:
Net asset value and redemption price per share
($113,584,733 DIVIDED BY 7,160,434 shares of common stock issued and outstanding)................... $15.86
Maximum sales charge (5.00% of offering price)......................................................... .83
----------------
Maximum offering price to public....................................................................... $16.69
----------------
----------------
Class B:
Net asset value, offering price and redemption price per share
($327,315,059 DIVIDED BY 21,259,940 shares of common stock issued and outstanding).................. $15.40
----------------
----------------
Class C:
Net asset value, offering price and redemption price per share
($12,360,064 DIVIDED BY 802,558 shares of common stock issued and outstanding)...................... $15.40
----------------
----------------
Class Z:
Net asset value, offering price and redemption price per share
($37,287,811 DIVIDED BY 2,346,031 shares of common stock issued and outstanding).................... $15.89
----------------
----------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements
B-37
<PAGE>
PRUDENTIAL PACIFIC GROWTH FUND, INC.
STATEMENT OF OPERATIONS
- --------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
NET INVESTMENT INCOME OCTOBER 31, 1996
----------------
<S> <C>
Income
Dividends (net of foreign withholding
taxes of $739,922)................... $ 7,795,122
Interest (net of foreign withholding
taxes of $840)....................... 654,062
----------------
Total income......................... 8,449,184
----------------
Expenses
Management fee.......................... 3,692,994
Distribution fee--Class A............... 265,371
Distribution fee--Class B............... 3,575,481
Distribution fee--Class C............... 64,016
Transfer agent's fees and expenses...... 889,000
Custodian's fees and expenses........... 370,000
Reports to shareholders................. 250,000
Registration fees....................... 131,000
Audit fees and expenses................. 48,000
Directors' fees......................... 42,000
Amortization of organizational
expense.............................. 40,000
Legal fees and expenses................. 20,000
Miscellaneous........................... 23,705
----------------
Total expenses....................... 9,411,567
----------------
Net investment loss........................ (962,383)
----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS
Net realized gain on:
Investment transactions (net of Thailand
capital gains taxes of $6,359)....... 28,262,057
Foreign currency transactions........... 7,036,241
----------------
35,298,298
----------------
Net change in unrealized appreciation on:
Investments (net of deferred Thailand
capital gains tax $26,771)........... (10,053,777)
Foreign currencies...................... (7,868,187)
----------------
(17,921,964)
----------------
Net gain on investments and foreign
currencies.............................. 17,376,334
----------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.................. $ 16,413,951
----------------
----------------
</TABLE>
PRUDENTIAL PACIFIC GROWTH FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
INCREASE (DECREASE) -----------------------------------
IN NET ASSETS 1996 1995
--------------- ----------------
<S> <C> <C>
Operations
Net investment loss....... $ (962,383) $ (1,766,039)
Net realized gain (loss)
on investment and
foreign currency
transactions........... 35,298,298 (14,948,681)
Net change in unrealized
appreciation on
investments and foreign
currencies............. (17,921,964) (17,348,093)
--------------- ----------------
Net increase (decrease) in
net assets resulting
from operations........ 16,413,951 (34,062,813)
--------------- ----------------
Net equalization credits..... -- 5,303
--------------- ----------------
Distributions in excess of
net investment income
Class A................... (1,382,063) --
Class B................... (4,236,951) --
Class C................... (58,010) --
Class Z................... (3,873) --
--------------- ----------------
(5,680,897) --
--------------- ----------------
Distributions from net
realized gains
Class A................... -- (575,474)
Class B................... -- (2,780,214)
Class C................... -- (5,693)
--------------- ----------------
-- (3,361,381)
--------------- ----------------
Fund share transactions (net
of share conversions)
(Note 5)
Net proceeds from shares
sold................... 2,354,962,543 1,087,055,048
Net asset value of shares
issued in reinvestment
of distributions....... 5,385,091 3,169,310
Cost of shares
reacquired............. (2,326,287,193) (1,166,639,139)
--------------- ----------------
Net increase (decrease) in
net assets from Fund
share transactions..... 34,060,441 (76,414,781)
--------------- ----------------
Total increase (decrease).... 44,793,495 (113,833,672)
NET ASSETS
Beginning of year............ 445,754,172 559,587,844
--------------- ----------------
End of year.................. $ 490,547,667 $ 445,754,172
--------------- ----------------
--------------- ----------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements
B-38
<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
LLC ("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 currency
gains (losses) are included in the reported net realized gains on investment
transactions.
Net realized gains on foreign currency transactions of $7,036,241 represent net
foreign exchange gains from forward currency contracts, disposition of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on security transactions, and the difference between the amounts of
interest, dividends and foreign taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid. Net currency gains and
losses from valuing foreign currency denominated assets and liabilities at
fiscal 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-39
<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. There were no forward currency contracts outstanding at October 31,
1996.
SECURITIES TRANSACTIONS AND NET 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. Expenses are recorded on the accrual basis which
may require the use of certain estimates by management.
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.
EQUALIZATION: Effective November 1, 1995, the Fund discontinued the accounting
practice of equalization. Equalization is a practice whereby a portion of the
proceeds from sales and costs of repurchases of capital shares, equivalent on a
per share basis to the amount of distributable net investment income on the date
of the transaction, is credited or charged to undistributed net investment
income. The balance of $5,303 of undistributed net investment income at October
31, 1995, resulting from equalization was transferred to paid-in capital in
excess of par. Such reclassification has no effect on net assets, results of
operations, or net asset value per share.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' 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 of applying
this statement was to increase undistributed net investment income by $970,112,
increase paid-in capital in excess of par by $4,863,161 and decrease accumulated
net realized gains by $5,833,273 for differences in the treatment for book and
tax purposes of certain transactions involving foreign securities, currencies
and withholding taxes. 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 had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. ("PMFD"), which acted as the distributor of the Class A shares of the
Fund through January 1, 1996. Effective January 2, 1996 Prudential Securities
Incorporated ("PSI") became the distributor of the Class A shares of the Fund
and is serving the Fund under the same terms and conditions as under the
arrangement with PMFD. PSI is also distributor of the Class B, Class C and Class
Z shares of the Fund. The Fund compensated PMFD and PSI for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the "Class A, B and C Plans"), regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
B-40
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL PACIFIC GROWTH FUND, INC.
- --------------------------------------------------------------------------------
Pursuant to the Class A, B and C Plans, the Fund compensates PSI, and PMFD for
the period November 1, 1995 through January 1, 1996 with respect to Class A
shares, 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 year ended October 31, 1996.
PMFD has advised the Fund that it has received approximately $363,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended October 31, 1996. From these fees, PMFD and PSI paid such sales charges to
Pruco Securities Corporation, an affiliated broker-dealer, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the year ended October 31, 1996, it received
approximately $1,167,000 and $6,000 in contingent deferred 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,
1996, the Fund incurred fees of approximately $753,000 for the services of PMFS.
As of October 31, 1996, approximately $60,000 of such fees were due to PMFS.
Transfer agent fees and expenses in the statement of operations include certain
out-of-pocket expenses paid to non-affiliates.
For the year ended October 31, 1996, PSI earned aproximately $85,700 in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
- --------------------------------------------------------------------------------
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term investments,
for the year ended October 31, 1996 were $423,958,631 and $430,325,749,
respectively.
The United States federal income tax basis of the Fund's investments at October
31, 1996 was $415,028,626 and accordingly, net unrealized appreciation for
federal income tax purposes was $30,114,296 (gross unrealized
appreciation--$52,019,585; gross unrealized depreciation--$21,905,289).
For federal income tax purposes, the Fund utilized its capital loss carryforward
of approximately $17,227,000 to partially offset the Fund's net taxable gains
realized and recognized in the year ended October 31, 1996.
- --------------------------------------------------------------------------------
NOTE 5. CAPITAL
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending 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 exchange privilege is also available for shareholders who
qualified to purchase Class A shares at net asset value. Effective March 1, 1996
the Fund commenced offering Class Z shares. Class Z shares are not subject to
any sales or redemption charge and are offered exclusively for sale to a limited
group of investors.
The Fund has authorized 2 billion shares of common stock at $.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. Of the
31,568,963 shares of common stock issued and outstanding at October 31, 1996,
PMF owned 5,000 Class A shares and 5,000 Class B shares.
B-41
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL PACIFIC GROWTH FUND, INC.
- --------------------------------------------------------------------------------
Transactions in shares of common stock for the years ended October 31, 1996 and
1995 were as follows:
<TABLE>
<CAPTION>
CLASS A SHARES AMOUNT
- --------------------------------- ----------- ---------------
<S> <C> <C>
Year ended October 31, 1996:
Shares sold...................... 72,006,368 $ 1,167,807,248
Shares issued in reinvestment of
distributions.................. 81,750 1,304,673
Shares reacquired................ (69,901,383) (1,140,331,551)
----------- ---------------
Net increase in shares
outstanding before
conversion..................... 2,186,735 28,780,370
Shares issued upon conversion
from Class B................... 414,180 6,572,012
Shares reacquired upon conversion
into Class Z................... (1,727,041) (28,514,067)
----------- ---------------
Net increase in shares
outstanding.................... 873,874 $ 6,838,315
----------- ---------------
----------- ---------------
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
----------- ---------------
----------- ---------------
<CAPTION>
CLASS B
- ---------------------------------
Year ended October 31, 1996:
Shares sold...................... 53,304,965 $ 842,080,515
Shares issued in reinvestment of
distributions.................. 258,053 4,020,465
Shares reacquired................ (54,287,368) (859,471,344)
----------- ---------------
Net decrease in shares
outstanding before
conversion..................... (724,350) (13,370,364)
Shares reacquired upon conversion
into Class A................... (402,952) (6,572,012)
----------- ---------------
Net decrease in shares
outstanding.................... (1,127,302) $ (19,942,376)
----------- ---------------
----------- ---------------
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)
----------- ---------------
----------- ---------------
<CAPTION>
CLASS C Shares Amount
- --------------------------------- ----------- ---------------
<S> <C> <C>
Year ended October 31, 1996:
Shares sold...................... 17,074,079 $ 268,732,474
Shares issued in reinvestment of
distributions.................. 3,599 56,081
Shares reacquired................ (16,433,961) (259,854,693)
----------- ---------------
Net increase in shares
outstanding.................... 643,717 $ 8,933,862
----------- ---------------
----------- ---------------
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
----------- ---------------
----------- ---------------
CLASS Z
- ---------------------------------
March 1, 1996(a) through
October 31, 1996
Shares sold...................... 4,714,608 $ 76,342,306
Shares issued in reinvestment of
distributions.................. 228 3,872
Shares reacquired................ (4,095,846) (66,629,605)
----------- ---------------
Net increase in shares
outstanding before
conversion..................... 618,990 9,716,573
Shares issued upon conversion
from Class A................... 1,727,041 28,514,067
----------- ---------------
Net increase in shares
outstanding.................... 2,346,031 $ 38,230,640
----------- ---------------
----------- ---------------
</TABLE>
- ---------------
(a) Commencement of offering of Class Z shares.
- ------------------------------------------------------------
NOTE 6. DISTRIBUTIONS
On December 10, 1996 the Board of Directors of the Fund declared a distribution
from long-term capital gains to Class A, B, C and Z shareholders of $.348 per
share, payable on December 19, 1996 to shareholders of record on December 16,
1996.
B-42
<PAGE>
FINANCIAL HIGHLIGHTS PRUDENTIAL PACIFIC GROWTH FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------
JULY 24,
1992(a)
YEAR ENDED OCTOBER 31, THROUGH
--------------------------------------------- OCTOBER 31,
1996(c) 1995(c) 1994(c) 1993(c) 1992
-------- -------- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 15.75 $ 16.90 $ 16.10 $ 10.65 $ 10.00
-------- -------- ------- ------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss)............ .07 .04 (.08) (.01) (.02)
Net realized and unrealized gain (loss)
on investment and foreign currency
transactions......................... .23 (1.09) 1.15 5.48 .67
-------- -------- ------- ------- -----------
Total from investment operations..... .30 (1.05) 1.07 5.47 .65
-------- -------- ------- ------- -----------
LESS DISTRIBUTIONS
Distributions in excess of net
investment income.................... (.19) -- (.06) (.02) --
Distributions from net realized gains... -- (.10) (.21) -- --
-------- -------- ------- ------- -----------
Total distributions.................. (.19) (.10) (.27) (.02) --
-------- -------- ------- ------- -----------
Net asset value, end of period.......... $ 15.86 $ 15.75 $ 16.90 $ 16.10 $ 10.65
-------- -------- ------- ------- -----------
-------- -------- ------- ------- -----------
TOTAL RETURN(d)......................... 1.97% (6.23)% 6.67% 51.39% 6.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $113,585 $ 98,998 $98,921 $64,353 $13,918
Average net assets (000)................ $106,148 $101,920 $92,233 $26,264 $12,884
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.37% 1.46% 1.57% 1.63% 2.72%(b)
Expenses, excluding distribution
fees.............................. 1.12% 1.21% 1.33% 1.43% 2.52%(b)
Net investment income (loss)......... .44% .26% (.50)% (.04)% (.75)%(b)
For Class A, B, C and Z shares:
Portfolio turnover................... 91% 54% 56% 44% 0%
Average commission rate paid per
share............................. $ .0209 N/A N/A N/A N/A
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Calculated based upon weighted average shares outstanding during the period.
(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.
- -------------------------------------------------------------------------------
See Notes to Financial Statements
B-43
<PAGE>
FINANCIAL HIGHLIGHTS PRUDENTIAL PACIFIC GROWTH FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C
CLASS B ----------
----------------------------------------------------------------
JULY 24, YEAR ENDED
1992(a) OCTOBER
YEAR ENDED OCTOBER 31, THROUGH 31,
------------------------------------------------ OCTOBER 31, ----------
1996(c) 1995(c) 1994(c) 1993(c) 1992 1996(c)
-------- -------- -------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 15.38 $ 16.62 $ 15.94 $ 10.63 $ 10.00 $ 15.38
-------- -------- -------- -------- ----------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss)............ (.04) (.08) (.21) (.10) (.04) (.04)
Net realized and unrealized gain (loss)
on investment and foreign currency
transactions......................... .25 (1.06) 1.13 5.43 .67 .25
-------- -------- -------- -------- ----------- ----------
Total from investment operations..... .21 (1.14) .92 5.33 .63 .21
-------- -------- -------- -------- ----------- ----------
LESS DISTRIBUTIONS
Distributions in excess of net
investment income.................... (.19) -- (.03) (.02) -- (.19)
Distributions from net realized gains... -- (.10) (.21) -- -- --
-------- -------- -------- -------- ----------- ----------
Total distributions.................. (.19) (.10) (.24) (.02) -- (.19)
-------- -------- -------- -------- ----------- ----------
Net asset value, end of period.......... $ 15.40 $ 15.38 $ 16.62 $ 15.94 $ 10.63 $ 15.40
-------- -------- -------- -------- ----------- ----------
-------- -------- -------- -------- ----------- ----------
TOTAL RETURN(d)......................... 1.36% (6.82)% 5.79% 50.17% 6.30% 1.36%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $327,315 $344,313 $459,949 $250,997 $20,050 $ 12,360
Average net assets (000)................ $357,548 $368,771 $404,506 $ 74,590 $16,025 $ 6,402
Ratios to average net assets:
Expenses, including distribution
fees.............................. 2.12% 2.21% 2.33% 2.37% 3.52%(b) 2.12%
Expenses, excluding distribution
fees.............................. 1.12% 1.21% 1.33% 1.37% 2.52%(b) 1.12%
Net investment income (loss)......... (.25)% (.55)% (1.27)% (.83)% (1.55)%(b) (.25)%
<CAPTION>
CLASS C CLASS Z
---------------------------- -----------
AUGUST 1, MARCH 1,
YEAR 1994(e) 1996(f)
ENDED THROUGH THROUGH
OCTOBER 31, OCTOBER 31, OCTOBER 31,
1995(c) 1994(c) 1996(c)
----------- ----------- -----------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 16.62 $ 16.68 $ 16.57
----- ----- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss)............ (.08) (.06) .11
Net realized and unrealized gain (loss)
on investment and foreign currency
transactions......................... (1.06) -- (.79)
----- ----- -----------
Total from investment operations..... (1.14) (.06) (.68)
----- ----- -----------
LESS DISTRIBUTIONS
Distributions in excess of net
investment income.................... -- -- --
Distributions from net realized gains... (.10) -- --
----- ----- -----------
Total distributions.................. (.10) -- --
----- ----- -----------
Net asset value, end of period.......... $ 15.38 $ 16.62 $ 15.89
----- ----- -----
----- ----- -----
TOTAL RETURN(d)......................... (6.82)% (.36)% (4.09)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $ 2,443 $ 718 $37,288
Average net assets (000)................ $ 1,624 $ 458 $33,868
Ratios to average net assets:
Expenses, including distribution
fees.............................. 2.21% 3.00%(b) 1.12%(b)
Expenses, excluding distribution
fees.............................. 1.21% 2.00%(b) 1.12%(b)
Net investment income (loss)......... (.43)% (1.64)%(b) .68%(b)
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Calculated based upon weighted average shares outstanding during the period.
(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) Commencement of offering of Class C shares.
(f) Commencement of offering of Class Z shares.
- -------------------------------------------------------------------------------
See Notes to Financial Statements
B-44
<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, 1996, the related statements of operations for the year then ended
and of changes in net assets for each of the two years in the period then ended,
and the financial highlights for each of the four 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, 1996 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, 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, 1996, 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 12, 1996
B-45
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, 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 II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the
rate of inflation.
Source: Prudential Investment Corporation based on data from Ibbotson
Associates' EnCORR Software, Chicago, Illinois. Used with permission. This chart
is for illustrative purposes only and is not indicative of the past, present, or
future performance of any portfolio.
Generally, stock returns are attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile than
bond prices over the long-term.
Small stock returns for 1926-1989 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P 500 Composite index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.
Long-term government bond returns are represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. At the beginning of each year
a new bond with a then-current coupon replaces the old bond. Treasury bill
returns are for a one-month bill. Treasuries are guaranteed by the government as
to the timely payment of principal and interest; equities are not. Inflation is
measured by the consumer price index (CPI).
IMPACT OF INFLATION. The "real" rate of investment return is that which exceeds
the rate of inflation. The percentage change in the value of consumer goods and
the general cost of living. A common goal of long-term investors is to outpace
the erosive impact of inflation on investment returns.
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
through 1995. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Fund Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
<TABLE>
<CAPTION>
'87 '88 '89 '90 '91 '92 '93 '94 '95
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4%
U.S. GOVERNMENT
MORTGAGE
SECURITIES(2) 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8%
U.S. INVESTMENT GRADE
CORPORATE
BONDS(3) 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3%
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2%
WORLD
GOVERNMENT
BONDS(5) 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 18.6%
DIFFERENCE BETWEEN
HIGHEST
AND LOWEST RETURN PERCENT 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5
</TABLE>
1 LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over 150
public issues of the U.S. Treasury having maturities of at least one year.
2 LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of
the Government National Mortgage Association (GNMA), Federal National
Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation
(FHLMC).
3 LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign
governments, municipalities, governmental agencies or international agencies.
All bonds in the index have maturities of at least one year.
4 LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or
Fitch Investors Service). All bonds in the Index have maturities of at least
one year.
5 SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
Ap-III
<PAGE>
This chart illustrates the performance of major world stock markets for the
period from 1986 through 1995. It does not represent the performance of any
Prudential Mutual Fund.
AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS (1985-1995)(IN U.S.
DOLLARS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
HONG KONG 23.8%
<S> <C>
Belgium 20.7%
Sweden 19.4%
Netherland 19.3%
Spain 17.9%
Switzerland 17.1%
France 15.3%
U.K. 15.0%
U.S. 14.8%
Japan 12.8%
Austria 10.9%
Germany 10.7%
</TABLE>
Source: Morgan Stanley Capital International (MSCI). Used with permission.
Morgan Stanley Country indices are unmanaged indices which include those stocks
making up the largest two-thirds of each country's total stock market
capitalization. Returns reflect the reinvestment of all distributions. This
chart is for illustrative purposes only and is not indicative of the past,
present or future performance of any specific investment. Investors cannot
invest directly in stock indices.
This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 stock index with and without reinvested
dividends.
[capital appreciation chart to come]
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is used for illustrative
purposes only and is not intended to represent the past, present or future
performance of any Prudential Mutual Fund. Common stock total return is based on
the Standard & Poor's 500 Stock Index, a market-value-weighted index made up of
500 of the largest stocks in the U.S. based upon their stock market value.
Investors cannot invest directly in indices.
Ap-IV
<PAGE>
WORLD STOCK MARKET CAPITALIZATION BY REGION
WORLD TOTAL: $12.4 TRILLION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CANADA 2.2%
<S> <C>
U.S. 40.8%
Pacific
Basin 28.7%
Europe 28.3%
</TABLE>
Source: Morgan Stanley Capital International, December 1995. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of 1579 companies
in 22 countries (representing approximately 60% of the aggregate market value of
the stock exchanges). This chart is for illustrative purposes only and does not
represent the allocation of any Prudential Mutual Fund.
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
[waiting for new chart]
Source: Stocks, Bonds, Bills, and Inflation 1996 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 1926-1995. Yields represent that
of an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes and should not
be construed to represent the yields of any Prudential Mutual Fund.
Ap-V
<PAGE>
APPENDIX III--INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "How the Fund Is Managed--Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1995 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1995. Its primary business is to offer a full range of products and services in
three areas: insurance, investments and home ownership for individuals and
families; health-care management and other benefit programs for employees of
companies and members of groups; and asset management for institutional clients
and their associates. Prudential (together with its subsidiaries) employs more
than 92,000 persons worldwide, and maintains a sales force of approximately
13,000 agents and 5,600 financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the Rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.
INSURANCE. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to more than 50 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of individual life insurance, the Prudential has 19 million life
insurance policies in force today with a face value of $1 trillion. Prudential
has the largest capital base ($11.4 billion) of any life insurance company in
the United States. The Prudential provides auto insurance for more than 1.7
million cars and insures more than 1.4 million homes.
MONEY MANAGEMENT. The Prudential is one of the largest pension fund managers
in the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k) plans.
In July 1995, INSTITUTIONAL INVESTOR ranked Prudential the fifth largest
institutional money manager of the 300 largest money management organizations in
the United States as of December 31, 1995. As of December 31, 1995, Prudential
had more than $314 billion in assets under management. Prudential's Investments,
a business group of Prudential (of which Prudential Mutual Funds is a key part)
manages over $190 billion in assets of institutions and individuals.
REAL ESTATE. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 34,000 brokers and
agents and more than 1,100 offices in the United States.(2)
HEALTHCARE. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 5 million
Americans receive healthcare from a Prudential managed care membership.
FINANCIAL SERVICES. The Prudential Bank, a wholly-owned subsidiary of the
Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
Prudential Mutual Fund Management is one of the seventeen largest mutual
fund companies in the country, with over 2.5 million shareholders invested in
more than 50 mutual fund portfolios and variable annuities with more than 3.7
million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
- ---------------
(1)Prudential Mutual Fund Investment Management, a unit of PIC, serves as the
Subadviser to substantially all of the Prudential Mutual Funds. Wellington
Management Company serves as the subadviser to Global Utility Fund, Inc.,
Nicholas-Applegate Capital Management as subadviser to Nicholas-Applegate Fund,
Inc., Jennison Associates Capital Corp. as the subadviser to Prudential Jennison
Series Fund, Inc. and Prudential Active Balanced Fund a portfolio of Prudential
Dryden Fund and Mercator Asset Management, L.P. as subadviser to International
Stock Series a portfolio of Prudential World Fund, Inc. and BlackRock Financial
Management, Inc. as subadviser to The BlackRock Government Income Trust. There
are multiple subadvisers for The Target Portfolio Trust.
(2)As of December 31, 1994.
(3)As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
Ap-VI
<PAGE>
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
THE WALL STREET JOURNAL, THE NEW YORK TIMES, BARRON'S and USA TODAY.
EQUITY FUNDS. FORBES magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. FORBES considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Growth Fund, a growth-style
equity fund managed by Jennison Associates Capital Corp., a premier
institutional equity manager and a subsidiary of Prudential.
HIGH YIELD FUNDS. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of its
kind in the country) along with 100 or so other high yield bonds, which may be
considered for purchase.(3) Non-investment grade bonds, also known as junk bonds
or high yield bonds, are subject to a greater risk of loss of principal and
interest including default risk than higher-rated bonds. Prudential high yield
portfolio managers and analysts meet face-to-face with almost every bond issuer
in the High Yield Fund's portfolio annually, and have additional telephone
contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential mutual
fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).
TRADING DATA.(4) On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.(5) Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities.(6)
- ---------------
(4)Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios of
the Prudential Series Fund and institutional and non-U.S. accounts managed by
Prudential Mutual Fund Investment Management, a division of PIC, for the year
ended December 31, 1995.
(5)Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate U.S.
Government, Short Investment Grade Debt, Intermediate Investment Grade Debt,
General U.S. Treasury, General U.S. Government and Mortgage funds.
(6)As of December 31, 1994.
Ap-VII
<PAGE>
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services, Inc., the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI.(7)
Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university," which
provides advanced education in a wide array of investment areas. Prudential
Securities is the only Wall Street firm to have its own in-house Certified
Financial Planner (CFP) program. In the December 1995 issue of Registered Rep,
an industry publication, Prudential Securities' Financial Advisor training
programs received a grade of A-(compared to an industry average of B+).
In 1995, Prudential Securities' equity research team ranked 8th in
INSTITUTIONAL INVESTOR magazine's 1995 "All America Research Team" survey. Five
Prudential Securities' analysts were ranked as first-team finishers.(8)
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial ArchitectSM, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
(7)As of December 31, 1994.
(8)On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research directors,
asking them to evaluate analysts in 76 industry sectors. Scores are produced by
taking the number of votes awarded to an individual analyst and weighting them
based on the size of the voting institution. In total, the magazine sends its
survey to approximately 2,000 institutions and a group of European and Asian
institutions.
Ap-VIII
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS:
(1)Financial Statements included in the Prospectus constituting Part A of
this Registration Statement:
Financial Highlights
(2)Financial Statements included in the Statement of Additional Information
constituting Part B of this Registration Statement:
Portfolio of Investments at October 31, 1996.
Statement of Assets and Liabilities at October 31, 1996.
Statement of Operations for the year ended October 31, 1996.
Statement of Changes in Net Assets for the years ended October 31, 1996
and 1995.
Notes to Financial Statements (Part B).
Financial Highlights
Independent Auditors' Report.
(B) EXHIBITS
1.(a) Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit 1 to Post-Effective Amendment No. 5 to the
Registration Statement on Form N-1A (File No. 33-42391) filed via EDGAR
on January 3, 1995.
(b) Articles Supplementary, incorporated by reference to Exhibit 1(b) to
Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A
(File No. 33-42391) filed via EDGAR on December 9, 1995.
2.By-Laws of the Registrant, incorporated by reference to Exhibit 2 to
Post-Effective Amendment No. 3 to the Registration Statement on Form N-1A
(File No. 33-42391) filed via EDGAR.
3.Not Applicable.
4.(a) Specimen stock certificate (Class A Shares), incorporated by
reference to Exhibit No. 4(a) to the Registration Statement on Form N-1A
(file No. 33-42391) filed on August 20, 1991.
(b) Specimen stock certificate (Class B Shares), incorporated by
reference to Exhibit No. 4(b) to the Registration Statement on Form N-1A
(file No. 33-42391) filed on August 20, 1991.
(c) Instruments defining rights of shareholders, incorporated by
reference to Exhibit 4(c) to Post-Effective Amendment No. 2 to the
Registration Statement on form N-1A filed via EDGAR on December 30, 1993
(file No. 33-42391).
5.(a) Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc., incorporated by reference to Exhibit No. 5(a) to
Post-Effective Amendment No. 1 to the Registration Statement on Form N-1A
(file No. 33-42391) filed on December 31, 1992.
(b) Subadvisory Agreement between Prudential Mutual Fund Management, Inc.
and The Prudential Investment Corporation, incorporated by reference to
Exhibit No. 5(b) to Post-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (file No. 33-42391) filed on December 31, 1992.
6.Distribution Agreement between the Registrant and Prudential Securities
Incorporated.*
7.Not Applicable.
C-1
<PAGE>
8.(a) Custodian Contract between the Registrant and State Street Bank and
Trust Company, incorporated by reference to Exhibit No. 8 to
Post-Effective Amendment No. 1 to the Registration Statement on Form N-1A
(file No. 33-42391) filed on December 31, 1992.
(b) Form of Amendment to Custodian Contract, incorporated by reference to
Exhibit No. 8(b) to Post-Effective Amendment No. 6 to the Registration
Statement on Form N-1A (file No. 33-42391) filed on November 2, 1995.
9.Transfer Agency and Service Agreement between Registrant and Prudential
Mutual Fund Services, Inc., incorporated by reference to Exhibit No. 9 to
Post-Effective Amendment No. 1 to the Registration Statement on Form N-1A
(file No. 33-42391) filed on December 31, 1992.
10.(a) Opinion of Shereff, Friedman, Hoffman & Goodman, incorporated by
reference to Exhibit No. 10 to Amendment No. 1 to the Registration
Statement on Form N-1A (file No. 33-42391) filed on May 8, 1992.
(b) Opinion of Shereff, Friedman, Hoffman & Goodman, LLP.*
11.Consent of Independent Accountants.*
12.Not Applicable.
14.Not Applicable.
15.(a)(i) Distribution and Service Plan for Class A shares dated July 1,
1993, incorporated by reference to Exhibit 15(a)(ii) to Post-Effective
Amendment No. 2 to the Registration Statement on form N-1A filed via
EDGAR on December 30, 1993 (file No. 33-42391).
(b)(i) Distribution and Service Plan for Class B shares dated July 1,
1993, incorporated by reference to Exhibit 15(b)(ii) to Post-Effective
Amendment No. 2 to the Registration Statement on form N-1A filed via
EDGAR on December 30, 1993 (file No. 33-42391).
(c) Distribution and Service Plan for Class A shares, incorporated by
reference to Exhibit No. 15(c) to Post-Effective Amendment No. 5 to the
Registration Statement on Form N-1A (file no. 33-42391) filed via EDGAR
on January 3, 1995.
(d) Distribution and Service Plan for Class B shares, incorporated by
reference to Exhibit No. 15(d) to Post-Effective Amendment No. 5 to the
Registration Statement on Form N-1A (file no. 33-42391) filed via EDGAR
on January 3, 1995.
(e) Distribution and Service Plan for Class C shares, incorporated by
reference to Exhibit No. 15(e) to Post-Effective Amendment No. 5 to the
Registration Statement on Form N-1A (file no. 33-42391) filed via EDGAR
on January 3, 1995.
16.(a) Schedule of Computation of Performance Quotations, incorporated by
reference to Exhibit No 16 to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (file No. 33-42391) filed on December
31, 1992.
17.Financial Data Schedules, filed as exhibit 27 for electronic purposes.*
18.Rule 18f-3 Plan, incorporated by reference to Exhibit No. 18 to
Post-Effective Amendment No. 6 to the Registration Statement on Form N-1A
(file No. 33-42391) filed on November 2, 1995.
- ------------------------
* Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of December 6, 1996, there were 14,220, 48,213, 664 and 3,646 record
holders of Class A, Class B, Class C and Class Z shares, respectively, of common
stock, $.001 par value per share, of the Registrant.
C-2
<PAGE>
ITEM 27. INDEMNIFICATION
As permitted by Section 17(h) and (i) of the Investment Company Act of 1940
(the 1940 Act) and pursuant to Article VII of the Fund's By-Laws (Exhibit 2 to
the Registration Statement), officers, directors, employees and agents of the
Registrant will not be liable to the Registrant, any stockholder, officer,
director, employee, agent or other person for any action or failure to act,
except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Section 2-418 of Maryland General Corporation Law permits indemnification of
directors who acted in good faith and reasonably believed that the conduct was
in the best interest of the Registrant. As permitted by Section 17(i) of the
1940 Act, pursuant to Section 10 of each Distribution Agreement (Exhibits 6(a)
and 6(b) to the Registration Statement), the Distributor of the Registrant may
be indemnified against liabilities which may incur, except liabilities arising
from bad faith, gross negligence, willful misfeasance or reckless disregard of
duties.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (Securities Act) may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1940 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such director,
officer or controlling person in connection with the shares being registered,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1940 Act and will be governed by the final adjudication of such
issue.
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and directors under certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Mutual Fund
Management, Inc. (PMF) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from reckless
disregard by them of their respective obligations and duties under the
agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and each Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretation of Section 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a)Prudential Mutual Fund Management LLC.
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PMF are listed in
Schedules A and D of Form ADV of PMF as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
The business and other connections of PMF's directors and principal executive
officers are set forth below. Except as otherwise indicated, the address of each
person is Gateway Center Three, Newark, New Jersey 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PMF PRINCIPAL OCCUPATIONS
- ----------------------- ----------------------------------- -------------------------------------------
<S> <C> <C>
Brian Storms President President, PMF
</TABLE>
C-3
<PAGE>
(b)The Prudential Investment Corporation (PIC)
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Prudential Plaza, Newark, NJ 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ----------------------- ----------------------------------- -------------------------------------------
<S> <C> <C>
E. Michael Caulfield Chairman of the Board, President Chief Executive Officer of Prudential
and Chief Executive Officer and Investments
Director
Jonathan M. Greene Senior Vice President and Director President--Investment Management of
Prudential Investments
John R. Strangfeld Vice President and Director President of Private Assets Management
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a)(i) Prudential Securities Incorporated
Prudential Securities Incorporated is distributor for Prudential Government
Securities Trust (Short-Intermediate Term Series), Prudential Jennison Series
Fund, Inc., The Target Portfolio Trust, The BlackRock Government Income Trust,
Global Utility Fund, Inc., Nicholas Applegate Fund, Inc. (Nicholas-Applegate
Growth Equity Fund), Prudential Allocation Fund, Prudential California Municipal
Fund (California Income Series and California Series), Prudential Distressed
Securities Fund, Inc., Prudential Diversified Bond Fund, Inc., Prudential Dryden
Fund, Prudential Emerging Growth Fund, Inc., Prudential Equity Fund, Inc.,
Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc., Prudential
Global Genesis Fund, Inc., Prudential Global Limited Maturity Fund, Inc.,
Prudential Natural Resources Fund, Inc., Prudential Government Income Fund,
Inc., Prudential Growth Opportunity Fund, Inc., Prudential High Yield Fund,
Inc., Income Vertible Fund, Inc., Prudential Intermediate Global Income Fund,
Inc., Prudential Mortgage, Prudential Multi-Sector Fund, Inc., Prudential
Municipal Bond Fund, Prudential Municipal Series Fund (except Connecticut Money
Market Series, Massachusetts Money Market Series, New York Money Market Series
and New Jersey Money Market Series), Prudential National Municipals Fund, Inc.,
Prudential Pacific Growth Fund, Inc., Prudential Special Money Market Fund,
Inc., Prudential Structured Maturity Fund, Inc., Prudential Tax-Free Money Fund,
Inc., Prudential U.S. Government Fund and Prudential Utility Fund, Inc., and
Prudential World Fund, Inc. Prudential Securities is also a depositor for the
following unit investment trusts:
Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
C-4
<PAGE>
(b)Information concerning the directors and officers of Prudential
Securities Incorporated is set forth below.
<TABLE>
<CAPTION>
POSITIONS
POSITIONS AND AND
OFFICES WITH OFFICES WITH
NAME (1) UNDERWRITER REGISTRANT
- --------------------------- --------------------------------------------- ------------
<S> <C> <C>
Robert Golden.............. Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Alan D. Hogan.............. Executive Vice President, Chief None
Administrative Officer and Director
George A. Murray........... Executive Vice President and Director None
Leland B. Paton............ Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Martin Pfinsgraff.......... Executive Vice President, Chief Financial None
Officer and Director
Vincent T. Pica, II........ Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Hardwick Simmons........... Chief Executive Officer, President and None
Director
Lee B. Spencer Jr.......... Executive Vice President, Secretary, General None
Counsel and Director
</TABLE>
- ------------------------
(1) The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
(c)Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171. The Prudential Investment Corporation, Prudential Plaza,
745 Broad Street, Newark, New Jersey 07102, the Registrant, Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102, and Prudential Mutual Fund
Services, Inc., Raritan Plaza One, Edison, New Jersey 08837. Documents required
by Rules 31a-1(b)(5), (6), (7), (9), (10) and (11) and 31a-1(f) will be kept at
Three Gateway Center, documents required by Rules 31a-1(b)(4) and (11) and
31a-1(d) at One Seaport Plaza and the remaining accounts, books and other
documents required by such other pertinent provisions of Section 31(a) and the
Rules promulgated thereunder will be kept by State Street Bank and Trust Company
and Prudential Mutual Fund Services, Inc.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund is
Managed--Manager" and "How the Fund is Managed-- Distributor" in the Prospectus
and the captions "Manager" and "Distributor" in the Statement of Additional
Information, constituting Parts A and B, respectively, of this Registration
Statement, Registrant is not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS
The Registrant undertakes to furnish to each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly caused
this Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Newark, and
State of New Jersey, on the 27th day of December, 1996.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
By /s/ RICHARD A. REDEKER
------------------------------------------
(Richard A. Redeker, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ EDWARD D. BEACH
- ------------------------------ Director December 27, 1996
Edward D. Beach
/s/ STEPHEN C. EYRE
- ------------------------------ Director December 27, 1996
Stephen C. Eyre
/s/ DELAYNE D. GOLD
- ------------------------------ Director December 27, 1996
Delayne D. Gold
/s/ ROBERT F. GUNIA
- ------------------------------ Vice President and December 27, 1996
Robert F. Gunia Director
/s/ DON G. HOFF
- ------------------------------ Director December 27, 1996
Don G. Hoff
/s/ ROBERT E. LABLANC
- ------------------------------ Director December 27, 1996
Robert E. LaBlanc
/s/ MENDEL A. MELZER
- ------------------------------ Director December 27, 1996
Mendel A. Melzer
/s/ RICHARD A. REDEKER
- ------------------------------ President and Director December 27, 1996
Richard A. Redeker
/s/ ROBIN B. SMITH
- ------------------------------ Director December 27, 1996
Robin B. Smith
/s/ STEPHEN STONEBURN
- ------------------------------ Director December 27, 1996
Stephen Stoneburn
/s/ NANCY H. TEETERS
- ------------------------------ Director December 27, 1996
Nancy H. Teeters
/s/ EUGENE S. STARK Treasurer, Principal
- ------------------------------ Financial and Accounting December 27, 1996
Eugene S. Stark Officer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE NO.
- ----------- ----------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
1. (a) Amended and Restated Articles of Incorporation incorporated by reference to Exhibit No. 1
to Post-Effective Amendment No. 5 to the Registration Statement on Form N-1A (file No.
33-42391) filed via EDGAR on January 3, 1995.
(b) Articles Supplementary, incorporated by reference to Exhibit 1(b) to Post-Effective
Amendment No. 7 to the Registration Statement on Form N-1A (File No. 33-42391) filed via EDGAR
on December 29, 1995.
2. By-Laws of the Registrant, incorporated by reference to Exhibit 2 to Post-Effective Amendment
No. 3 to the Registration Statement on Form N-1A (File No. 33,42391) filed via EDGAR.
3. Not Applicable.
4. (a) Specimen stock certificate (Class A Shares), incorporated by reference to Exhibit No. 4(a)
to the Registration Statement on Form N-1A (file No. 33-42391) filed on August 20, 1991.
(b) Specimen stock certificate (Class B Shares), incorporated by reference to Exhibit No. 4(b)
to the Registration Statement on Form N-1A (file No. 33-42391) filed on August 20, 1991.
(c) Instruments defining rights of shareholders, incorporated by reference to Exhibit 4(c) to
Post-Effective Amendment No. 2 to the Registration Statement on form N-1A filed via EDGAR on
December 30, 1993 (file No. 33-42391).
5. (a) Management Agreement between the Registrant and Prudential Mutual Fund Management, Inc.,
incorporated by reference to Exhibit No. 5(a) to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (file No. 33-42391) filed on December 31, 1992.
(b) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and The Prudential
Investment Corporation, incorporated by reference to Exhibit No. 5(b) to Post-Effective
Amendment No. 1 to the Registration Statement on Form N-1A (file No. 33-42391) filed on
December 31, 1992.
6. Distribution Agreement between the Registrant and Prudential Securities Incorporated.*
7. Not Applicable.
8. (a) Custodian Contract between the Registrant and State Street Bank and Trust Company,
incorporated by reference to Exhibit No. 8 to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (file No. 33-42391) filed on December 31, 1992.
(b) Form of Amendment to Custodian Contract, incorporated by reference to Exhibit No. 8(b) to
Post-Effective Amendment No. 6 to the Registration Statement on Form N-1A (file No. 33-42391)
filed on November 2, 1995.
9. Transfer Agency and Service Agreement between Registrant and Prudential Mutual Fund Services,
Inc., incorporated by reference to Exhibit No. 9 to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (file No. 33-42391) filed on December 31, 1992.
10. (a) Opinion of Shereff, Friedman, Hoffman & Goodman, incorporated by reference to Exhibit No.
10 to Amendment No. 1 to the Registration Statement on Form N-1A (file No. 33-42391) filed on
May 8, 1992.
(b) Opinion of Shereff, Friedman, Hoffman & Goodman, LLP.*
11. Consent of Independent Accountants.*
12. Not Applicable.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE NO.
- ----------- ----------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
14. Not Applicable.
15. (a)(i) Distribution and Service Plan for Class A shares, dated July 1, 1993 incorporated by
reference to Exhibit 15(a)(ii) to Post-Effective Amendment No. 2 to the Registration Statement
on form N-1A filed via EDGAR on December 30, 1993 (file No. 33-42391).
(b)(i) Amended and Restated Distribution and Service Plan for Class B shares dated July 1,
1993, incorporated by reference to Exhibit 15(b)(ii) to Post-Effective Amendment No. 2 to the
Registration Statement on form N -1A filed via EDGAR on December 30, 1993 (file No. 33-42391).
(c) Distribution and Service Plan for Class A shares, incorporated by reference to Exhibit
No.15(c) to Post-Effective Amendment No. 5 to the Registration Statement on Form N-1A (file no.
33-42391) filed via EDGAR on January 3, 1995.
(d) Distribution and Service Plan for Class B shares, incorporated by reference to Exhibit
No.15(d) to Post-Effective Amendment No. 5 to the Registration Statement on Form N-1A (file no.
33-42391) filed via EDGAR on January 3, 1995.
(e) Distribution and Service Plan for Class C shares, incorporated by reference to Exhibit
No.15(e) to Post-Effective Amendment No. 5 to the Registration Statement on Form N-1A (file no.
33-42391) filed via EDGAR on January 3, 1995.
16. (a) Schedule of Computation of Performance Quotations, incorporated by reference to Exhibit No
16 to Post-Effective Amendment No. 1 to the Registration Statement on Form N-1A (file No.
33-42391) filed on December 31, 1992.
17. Financial Data Schedules, filed as exhibit 27 for electronic purposes.*
18. Rule 18f-3 Plan, incorporated by reference to Exhibit No. 18 to Post-Effective Amendment No. 6
to the Registration Statement on Form N-1A (file No. 33-42391) filed on November 2, 1995.
</TABLE>
- ------------
* Filed herewith.
<PAGE>
PRUDENTIAL PACIFIC GROWTH FUND, INC.
DISTRIBUTION AGREEMENT
Agreement made as of April 11, 1996 between Prudential Pacific Growth
Fund, Inc., a Maryland corporation (the Fund), and Prudential Securities
Incorporated, a Delaware corporation (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
shares for sale continuously;
WHEREAS, the shares of the Fund may be divided into classes and/or
series (all such shares being referred to herein as Shares) and the Fund
currently is authorized to offer Class A, Class B, Class C and Class Z Shares;
WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other, with respect to the continuous offering of the Fund's Shares
from and after the date hereof in order to promote the growth of the Fund and
facilitate the distribution of its Shares; and
WHEREAS, upon approval by the holders of the respective classes and/or
series of Shares of the Fund it is contemplated that the Fund will adopt a plan
(or plans) of distribution pursuant to Rule 12b-1 under the Investment Company
Act with respect to certain of its classes and/or series of Shares (the Plans)
authorizing payments by the Fund to the Distributor with respect to the
distribution of such classes and/or series of Shares and the maintenance of
related shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR
The Fund hereby appoints the Distributor as the principal underwriter
and distributor of the Shares of the Fund to sell Shares to the public on behalf
of the Fund and the Distributor
<PAGE>
Fund hereby agrees during the term of this Agreement to sell Shares of the
Fund through the Distributor on the terms and conditions set forth below.
Section 2. EXCLUSIVE NATURE OF DUTIES
The Distributor shall be the exclusive representative of the Fund to
act as principal underwriter and distributor of the Fund's Shares, except that:
2.1 The exclusive rights granted to the Distributor to sell Shares of
the Fund shall not apply to Shares of the Fund issued in connection with the
merger or consolidation of any other investment company or personal holding
company with the Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding shares of any such company by
the Fund.
2.2 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to reinvestment of dividends or capital gains distributions or
through the exercise of any conversion feature or exchange privilege.
2.3 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to the reinstatement privilege afforded redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases made through
the Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean
the Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. PURCHASE OF SHARES FROM THE FUND
3.1 The Distributor shall have the right to buy from the Fund on
behalf of investors the Shares needed, but not more than the Shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Shares placed with the Distributor by investors or registered and qualified
securities dealers and other financial institutions (selected dealers).
3.2 The Shares shall be sold by the Distributor on behalf of the Fund
and delivered by the Distributor or selected
2
<PAGE>
dealers, as described in Section 6.4 hereof, to investors at the offering price
as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of any or all
classes and/or series of its Shares at times when redemption is suspended
pursuant to the conditions in Section 4.3 hereof or at such other times as may
be determined by the Board of Directors. The Fund shall also have the right to
suspend the sale of any or all classes and/or series of its Shares if a banking
moratorium shall have been declared by federal or New York authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Shares received by
the Distributor. Any order may be rejected by the Fund; provided, however, that
the Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Shares. The Fund (or its agent) will confirm
orders upon their receipt, will make appropriate book entries and upon receipt
by the Fund (or its agent) of payment therefor, will deliver deposit receipts
for such Shares pursuant to the instructions of the Distributor. Payment shall
be made to the Fund in New York Clearing House funds or federal funds. The
Distributor agrees to cause such payment and such instructions to be delivered
promptly to the Fund (or its agent).
Section 4. REPURCHASE OR REDEMPTION OF SHARES BY THE FUND
4.1 Any of the outstanding Shares may be tendered for redemption at
any time, and the Fund agrees to repurchase or redeem the Shares so tendered in
accordance with its Articles of Incorporation as amended from time to time, and
in accordance with the applicable provisions of the Prospectus. The price to be
paid to redeem or repurchase the Shares shall be equal to the net asset value
determined as set forth in the Prospectus. All payments by the Fund hereunder
shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
on or before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Shares shall be
paid by the Fund as follows: (i) in the case of Shares subject to a contingent
deferred sales charge, any applicable contingent deferred sales charge shall be
paid to the Distributor, and the balance shall be paid to or for the account of
the redeeming shareholder, in each case in accordance with applicable provisions
of the Prospectus; and (ii) in the case of all other Shares, proceeds shall be
paid to or for the account of the redeeming shareholder, in each case in
accordance with applicable provisions of the Prospectus.
3
<PAGE>
4.3 Redemption of any class and/or series of Shares or payment may be
suspended at times when the New York Stock Exchange is closed for other than
customary weekends and holidays, when trading on said Exchange is restricted,
when an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or during any
other period when the Securities and Exchange Commission, by order, so permits.
Section 5. DUTIES OF THE FUND
5.1 Subject to the possible suspension of the sale of Shares as
provided herein, the Fund agrees to sell its Shares so long as it has Shares of
the respective class and/or series available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Shares, and this shall
include one certified copy, upon request by the Distributor, of all financial
statements prepared for the Fund by independent public accountants. The Fund
shall make available to the Distributor such number of copies of its Prospectus
and annual and interim reports as the Distributor shall reasonably request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Board of Directors and the shareholders, all necessary
action to fix the number of authorized Shares and such steps as may be necessary
to register the same under the Securities Act, to the end that there will be
available for sale such number of Shares as the Distributor reasonably may
expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Shares for sales under the
securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Articles of
Incorporation or By-Laws to comply with the laws of any state, to maintain an
office in any state, to change the terms of the offering of its Shares in any
state from the terms set forth in its Registration Statement, to qualify as a
foreign corporation in any state or to consent to service of process in any
state other than with respect to claims arising out of the offering of its
Shares. Any such qualification
4
<PAGE>
may be withheld, terminated or withdrawn by the Fund at any time in its
discretion. As provided in Section 9 hereof, the expense of qualification and
maintenance of qualification shall be borne by the Fund. The Distributor shall
furnish such information and other material relating to its affairs and
activities as may be required by the Fund in connection with such
qualifications.
Section 6. DUTIES OF THE DISTRIBUTOR
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Shares, but shall not be obligated to sell any specific number of
Shares. Sales of the Shares shall be on the terms described in the Prospectus.
The Distributor may enter into like arrangements with other investment
companies. The Distributor shall compensate the selected dealers as set forth
in the Prospectus.
6.2 In selling the Shares, the Distributor shall use its best efforts
in all respects duly to conform with the requirements of all federal and state
laws relating to the sale of such securities. Neither the Distributor nor any
selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of the National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected
dealer agreements with registered and qualified securities dealers and other
financial institutions of its choice for the sale of Shares, provided that the
Fund shall approve the forms of such agreements. Within the United States, the
Distributor shall offer and sell Shares only to such selected dealers as are
members in good standing of the NASD. Shares sold to selected dealers shall be
for resale by such dealers only at the offering price determined as set forth in
the Prospectus.
Section 7. PAYMENTS TO THE DISTRIBUTOR
7.1 With respect to classes and/or series of Shares which impose a
front-end sales charge, the Distributor shall receive and may retain any portion
of any front-end sales charge which is imposed on such sales and not reallocated
to selected dealers as set forth in the Prospectus, subject to the limitations
of Article III, Section 26 of the NASD Rules of Fair Practice.
5
<PAGE>
Payment of these amounts to the Distributor is not contingent upon the adoption
or continuation of any applicable Plans.
7.2 With respect to classes and/or series of Shares which impose a
contingent deferred sales charge, the Distributor shall receive and may retain
any contingent deferred sales charge which is imposed on such sales as set forth
in the Prospectus, subject to the limitations of Article III, Section 26 of the
NASD Rules of Fair Practice. Payment of these amounts to the Distributor is not
contingent upon the adoption or continuation of any Plan.
Section 8. PAYMENT OF THE DISTRIBUTOR UNDER THE PLAN
8.1 The Fund shall pay to the Distributor as compensation for
services under any Plans adopted by the Fund and this Agreement a distribution
and service fee with respect to the Fund's classes and/or series of Shares as
described in each of the Fund's respective Plans and this Agreement.
8.2 So long as a Plan or any amendment thereto is in effect, the
Distributor shall inform the Board of Directors of the commissions and account
servicing fees with respect to the relevant class and/or series of Shares to be
paid by the Distributor to account executives of the Distributor and to
broker-dealers and financial institutions which have dealer agreements with the
Distributor. So long as a Plan (or any amendment thereto) is in effect, at the
request of the Board of Directors or any agent or representative of the Fund,
the Distributor shall provide such additional information as may reasonably be
requested concerning the activities of the Distributor hereunder and the costs
incurred in performing such activities with respect to the relevant class and/or
series of Shares.
Section 9. ALLOCATION OF EXPENSES
The Fund shall bear all costs and expenses of the continuous offering
of its Shares (except for those costs and expenses borne by the Distributor
pursuant to a Plan and subject to the requirements of Rule 12b-1 under the
Investment Company Act), including fees and disbursements of its counsel and
auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and all amendments and supplements thereto, and preparing
and mailing annual and periodic reports and proxy materials to shareholders
(including but not limited to the expense of setting in type any such
Registration Statements, Prospectuses, annual or periodic reports or proxy
materials). The Fund shall also bear the cost of expenses of qualification of
the Shares for sale, and, if necessary or advisable in connection therewith, of
qualifying the Fund as a broker or dealer, in such states of the United States
or other
6
<PAGE>
jurisdictions as shall be selected by the Fund and the Distributor pursuant to
Section 5.4 hereof and the cost and expense payable to each such state for
continuing qualification therein until the Fund decides to discontinue such
qualification pursuant to Section 5.4 hereof. As set forth in Section 8 above,
the Fund shall also bear the expenses it assumes pursuant to any Plan, so long
as such Plan is in effect.
Section 10. INDEMNIFICATION
10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and directors and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
reasonable counsel fees incurred in connection therewith) which the Distributor,
its officers, directors or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, except insofar as such claims,
demands, liabilities or expenses arise out of or are based upon any such untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with information furnished in writing by the Distributor
to the Fund for use in the Registration Statement or Prospectus; provided,
however, that this indemnity agreement shall not inure to the benefit of any
such officer, director, trustee or controlling person unless a court of
competent jurisdiction shall determine in a final decision on the merits, that
the person to be indemnified was not liable by reason of willful misfeasance,
bad faith or gross negligence in the performance of its duties, or by reason of
its reckless disregard of its obligations under this Agreement (disabling
conduct), or, in the absence of such a decision, a reasonable determination,
based upon a review of the facts, that the indemnified person was not liable by
reason of disabling conduct, by (a) a vote of a majority of a quorum of
directors or trustees who are neither "interested persons" of the Fund as
defined in Section 2(a)(19) of the Investment Company Act nor parties to the
proceeding, or (b) an independent legal counsel in a written opinion. The Fund's
agreement to indemnify the Distributor, its officers and directors or trustees
and any such controlling person as aforesaid is expressly conditioned upon the
Fund's being promptly notified of any action brought against the Distributor,
its officers or directors or trustees, or any such controlling person, such
notification to be given by letter or telegram addressed to the Fund at its
principal business office. The Fund agrees promptly to notify the Distributor
of the commencement of any litigation or proceedings against it or any of
7
<PAGE>
its officers or directors in connection with the issue and sale of any Shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Directors and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any reasonable counsel fees incurred in connection therewith) which the
Fund, its officers and Directors or any such controlling person may incur under
the Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its Directors or officers or
such controlling person resulting from such claims or demands shall arise out of
or be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon any
alleged omission to state a material fact in connection with such information
required to be stated in the Registration Statement or Prospectus or necessary
to make such information not misleading. The Distributor's agreement to
indemnify the Fund, its officers and Directors and any such controlling person
as aforesaid, is expressly conditioned upon the Distributor's being promptly
notified of any action brought against the Fund, its officers and Directors or
any such controlling person, such notification being given to the Distributor at
its principal business office.
Section 11. DURATION AND TERMINATION OF THIS AGREEMENT
11.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Board of Directors of the Fund, or by the vote of a
majority of the outstanding voting securities of the applicable class and/or
series of the Fund, and (b) by the vote of a majority of those Directors who are
not parties to this Agreement or interested persons of any such parties and who
have no direct or indirect financial interest in this Agreement or in the
operation of any of the Fund's Plans or in any agreement related thereto
(Independent Directors), cast in person at a meeting called for the purpose of
voting upon such approval.
11.2 This Agreement may be terminated at any time, without the payment
of any penalty, by a majority of the Independent Directors or by vote of a
majority of the outstanding voting securities of the applicable class and/or
series of the Fund, or by the Distributor, on sixty (60) days' written notice to
the other party. This Agreement shall automatically terminate in the event of
its assignment.
8
<PAGE>
11.3 The terms "affiliated person," "assignment," "interested
person" and "vote of a majority of the outstanding voting securities", when
used in this Agreement, shall have the respective meanings specified in the
Investment Company Act.
Section 12. AMENDMENTS TO THIS AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Board of Directors of the Fund, or by the vote
of a majority of the outstanding voting securities of the applicable class
and/or series of the Fund, and (b) by the vote of a majority of the Independent
Directors cast in person at a meeting called for the purpose of voting on such
amendment.
Section 13. SEPARATE AGREEMENT AS TO CLASSES AND/OR SERIES
The amendment or termination of this Agreement with respect to any
class and/or series shall not result in the amendment or termination of this
Agreement with respect to any other class and/or series unless explicitly so
provided.
Section 14. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Securities Incorporated
By: /s/ Robert F. Gunia
-----------------------
Robert F. Gunia
Senior Vice President
Prudential Pacific Growth Fund, Inc.
By: /s/ Richard A. Redeker
-----------------------
Richard A. Redeker
President
10
<PAGE>
EXHIBIT 10(b)
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP
919 Third Avenue
New York, New York 10022
December 27, 1996
Prudential Pacific Growth Fund, Inc.
Gateway Center Three
100 Mulberry Street, 9th Floor
Newark, New Jersey 07102-4077
Gentlemen and Ladies:
Prudential Pacific Growth Fund, Inc. (the "Fund"), is filing with the
Securities and Exchange Commission Post-Effective Amendment No. 8 to its
Registration Statement under the Securities Act of 1933, as amended (the "1933
Act") on Form N-1A (File Nos. 33-42391 and 811-6391), relating to the
registration under the 1933 Act of 1,913,759 additional shares of its Common
Stock, par value $.001 per share (the "Additional Shares"), which are to be
offered and sold by the Fund in the manner and on the terms set forth in the
prospectus of the Fund current and effective under the 1933 Act at the time of
sale. Of the Additional Shares, 1,892,345 are previously outstanding shares of
the Fund's Common Stock, par value $.001 per share, which were redeemed by the
Fund during its fiscal year ended October 31, 1996. According to Post-Effective
Amendment No. 8 to the Fund's Registration Statement, none of the Additional
Shares have been used by the Fund for reduction pursuant to paragraph (a) of
Rule 24e-2 under the Investment Company Act of 1940, as amended (the "1940
Act"), in previous filings of post-effective amendments to the Fund's
Registration Statement during the current fiscal year, or for the reduction
pursuant to paragraph (c) of Rule 24f-2 under the 1940 Act during the Fund's
current fiscal year, of the registration fee payable by the Fund for the
registration of shares for sale under the 1933 Act.
We have, as counsel, participated in various proceedings relating to the
Fund and to the proposed issuance of the Additional Shares. We have examined
copies, either certified or otherwise proven to our satisfaction to be genuine,
of the Fund's Articles of Incorporation and By-laws, as currently in effect, and
a certificate dated December 18, 1996, issued by the State Department of
Assessments and Taxation of the State of Maryland, certifying the existence and
good standing of the Fund. We are generally familiar with the corporate affairs
of the Fund.
Based upon the foregoing, it is our opinion that:
1. The Fund has been duly organized and is validly existing under the
laws of the State of Maryland.
<PAGE>
Prudential Pacific Growth Fund, Inc.
December 27, 1996
Page 2
2. The Fund is authorized to issue two billion (2,000,000,000) shares of
Common Stock, par value $.001 per share. Under Maryland law, (a) the number of
authorized shares may be increased or decreased by action of the Board of
Directors and (b) shares which are issued and subsequently redeemed by the Fund
are, by virtue of such redemption, restored to the status of authorized and
unissued shares.
3. Subject to the effectiveness of the above-mentioned Post-Effective
Amendment No. 8 to the Fund's Registration Statement and compliance with
applicable state securities laws, upon the issuance of the Additional Shares for
a consideration not less than the par value thereof as required by the laws of
Maryland, and not less than the net asset value thereof as required by the 1940
Act and in accordance with the terms of the Registration Statement, such shares
will be legally issued and outstanding and fully paid and non-assessable.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as a part of the above-mentioned Post-Effective Amendment
No. 8 to the Registration Statement and with any state securities commission
where such filing is required. In giving this consent we do not admit that we
come within the category of persons whose consent is required under Section 7 of
the 1933 Act.
We are members of the Bar of the State of New York and do not hold
ourselves out as being conversant with the laws of any jurisdiction other than
those of the United States of America and the State of New York. We note that
we are not licensed to practice law in the State of Maryland, and to the extent
that any opinion herein involves the laws of the State of Maryland, such opinion
should be understood to be based solely upon our review of the documents
referred to above, the published statutes of the State of Maryland and, where
applicable, published cases, rules or regulations of regulatory bodies of that
State.
Very truly yours,
/s/ Shereff, Friedman, Hoffman & Goodman, LLP
Shereff, Friedman, Hoffman & Goodman, LLP
SFH&G:MKN:JLS:GNB:ne
<PAGE>
Exhibit 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 8 to Registration
Statement No. 33-42391 of Prudential Pacific Growth Fund, Inc. of our report
dated December 12, 1996, appearing in the Statement of Additional Information,
which is a part of such Registration Statement, and to the references to us
under the headings "Financial Highlights" in the Prospectus, which is a part of
such Registration Statement, and "Custodian, Transfer and Dividend Disbursing
Agent and Independent Accountants" in the Statement of Additional Information.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
New York, New York
December 23, 1996
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<NET-INVESTMENT-INCOME> (962,383)
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<PER-SHARE-NAV-BEGIN> 15.38
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