As filed with the Securities and Exchange Commission on April 4, 1997
Registration Nos. 33-48066
811-6677
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 | |
POST-EFFECTIVE AMENDMENT NO. 8 |X|
AND
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 | |
AMENDMENT NO. 9 |X|
(CHECK APPROPRIATE BOX OR BOXES)
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PRUDENTIAL DRYDEN FUND
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 225-1852
S. JANE ROSE
GATEWAY CENTER THREE
NEWARK, NEW JERSEY 07102-4077
(Name and Address of Agent for Service)
COPIES TO:
PAUL H. DYKSTRA
GARDNER, CARTON & DOUGLAS
321 N. CLARK STREET
CHICAGO, ILLINOIS 60610-4795
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of the Registration Statement.
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)
| | 60 days after filing pursuant to paragraph (a)
| | on (date) pursuant to paragraph (a) of Rule 485
|X| 75 days after filing pursuant to paragraph (a)(ii)
| | on (date) pursuant to paragraph (a)(ii) of Rule 485.
If appropriate, check the following box:
| | this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant
has previously registered an indefinite number of shares of beneficial interest,
par value $.001 per share. The Registrant filed a notice under such Rule for its
fiscal year ended September 30, 1996 on November 27, 1996.
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<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
LOCATION IN PRUDENTIAL ACTIVE BALANCED
N-1A ITEM NO. FUND PROSPECTUS
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PART A
<S> <C> <C>
Item 1. Cover Page ...................................................... Cover Page
Item 2. Synopsis ........................................................ Fund Highlights; Fund Expenses
Item 3. Condensed Financial Information ................................. Fund Expenses; Financial Highlights;
How the Fund Calculates Performance
Item 4. General Description of Registrant ............................... Cover Page; Fund Highlights; General
Information; How the Fund Invests
Item 5. Management of the Fund .......................................... Fund Highlights; How the Fund is
Managed
Item 5A. Management's Discussion of Fund Performance ..................... Financial Highlights
Item 6. Capital Stock and Other Securities .............................. Fund Highlights; How the Fund is
Managed; Taxes, Dividends and
Distributions; General Information
Item 7. Purchase of Securities Being Offered ............................ How the Fund is Managed; How the
Fund Values its Shares; Shareholder
Guide
Item 8. Redemption or Repurchase ........................................ Shareholder Guide
Item 9. Pending Legal Proceedings ....................................... Not Applicable
LOCATION IN PROSPECTUS OF PRUDENTIAL STOCK
INDEX FUND, PRUDENTIAL SMALL-CAP INDEX
FUND, PRUDENTIAL BOND MARKET INDEX FUND,
PRUDENTIAL PACIFIC INDEX FUND AND PRUDENTIAL
EUROPE INDEX FUND
N-1A ITEM NO.
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PART A
Item 1. Cover Page ...................................................... Cover Page
Item 2. Synopsis ........................................................ Fund Highlights; Fund Expenses
Item 3. Condensed Financial Information ................................. Fund Expenses; Financial Highlights;
How Each Fund Calculates Performance
Item 4. General Description of Registrant ............................... Cover Page; Fund Highlights; General
Information; How the Funds Invest
Item 5. Management of the Fund .......................................... Fund Highlights; How the Funds are
Managed
Item 5A. Management's Discussion of Fund Performance ..................... Financial Highlights
Item 6. Capital Stock and Other Securities .............................. Fund Highlights; How the Funds are
Managed; Taxes, Dividends and
Distributions; General Information
Item 7. Purchase of Securities Being Offered ............................ How the Funds are Managed; How Each
Fund Values its Shares; Shareholder
Guide
Item 8. Redemption or Repurchase ........................................ Shareholder Guide
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 Policies .............................. Investment Objectives and Policies;
Investment Restrictions
Item 14. Management of the Fund .......................................... Trustees and Officers; Manager and
Subadvisers
Item 15. Control Persons and Principal Holders of Securities ............. Trustees and Officers
Item 16. Investment Advisory and Other Services .......................... Manager and Subadvisers; Distributor;
Custodian, Transfer and Dividend
Disbursing Agent
Item 17. Brokerage Allocation and Other Practices ........................ Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities .............................. Purchase and Redemption of Fund Shares
Item 19. Purchase, Redemption and Pricing of Securities Being Offered .... Purchase and Redemption of Fund
Shares
Item 20. Tax Status ...................................................... Taxes
Item 21. Underwriters .................................................... Distributor
Item 22. Calculation of Performance Data ................................. Performance and Yield Information
Item 23. Financial Statements ............................................ Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
The Prospectus of Prudential Active Balanced Fund dated November 29, 1996, is
incorporated herein by reference in its entirety from the 497 filing made on
December 7, 1996 (File No. 33-48066). This Registration Statement is not
intended to amend the Prospectus of Prudential Active Balanced Fund dated
November 29, 1996, except as indicated by the enclosed supplement.
<PAGE>
PRUDENTIAL ACTIVE BALANCED FUND
Supplement dated __________, 1997 to
Prospectus dated November 29, 1996
THE FOLLOWING INFORMATION SUPPLEMENTS "GENERAL INFORMATION--DESCRIPTION OF
SHARES" IN THE PROSPECTUS:
On February 19, 1997, the Company's Board of Trustees authorized four additional
series: Prudential Small-Cap Index Fund, Prudential Bond Market Index Fund,
Prudential Pacific Index Fund and Prudential Europe Index Fund, each of which
offers Class Z shares. The Trustees also authorized Class I shares for
Prudential Stock Index Fund.
THE STATEMENT OF ADDITIONAL INFORMATION WHICH IS INCORPORATED BY REFERENCE INTO
THE PROSPECTUS IS DATED _________, 1997. IT RELATES TO ALL SIX OF THE FUNDS.
<PAGE>
Prudential Stock Index Fund
Prudential Small-Cap Index Fund
Prudential Bond Market Index Fund
Prudential Pacific Index Fund
Prudential Europe Index Fund
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PROSPECTUS DATED , 1997
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Prudential Dryden Fund (the Company) is a diversified, open-end, management
investment company comprised of six separate portfolios, or series (the Funds).
This Prospectus relates to the following Funds: Prudential Stock Index Fund,
Prudential Small-Cap Index Fund, Prudential Bond Market Index Fund, Prudential
Pacific Index Fund and Prudential Europe Index Fund (each a Fund and
collectively, the Funds). Each Fund and its corresponding investment objective
is described below:
<TABLE>
<CAPTION>
FUND INVESTMENT OBJECTIVE
---- --------------------
<S> <C>
Prudential Stock Seeks to provide investment results that correspond to the price and yield
Index Fund performance of the Standard & Poor's 500 Composite Stock Price Index.
Prudential Small-Cap Seeks to provide investment results that correspond to the price and yield
Index Fund performance of the Standard & Poor's 600 Small Capitalization Stock Index.
Prudential Bond Market Seeks to provide investment results that correspond to the total return
Index Fund performance of the Lehman Brothers Aggregate Index.
Prudential Pacific Seeks to provide investment results that correspond to the price and yield
Index Fund performance of the Morgan Stanley Capital International Pacific Index.
Prudential Europe Seeks to provide investment results that correspond to the price and yield
Index Fund performance of the Morgan Stanley Capital International Europe Index.
</TABLE>
There can be no assurance that the investment objective of any Fund will be
achieved. See "How the Funds Invest--Investment Objectives and Policies." The
Funds' address is Gateway Center Three, Newark, New Jersey 07102-4077, and their
telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Funds that a
prospective investor should know before investing. Additional information about
the Funds has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated , 1997, which information is
incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Funds at the
address or telephone number noted above.
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Investors are advised to read this Prospectus and retain it for future
reference.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
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FUND HIGHLIGHTS
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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.
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WHAT IS EACH FUND?
The Company is comprised of six portfolios or series (the Funds), five of
which are the following: Prudential Stock Index Fund, Prudential Small-Cap Index
Fund, Prudential Bond Market Index Fund, Prudential Pacific Index Fund and
Prudential Europe Index Fund. Technically, the Company is a diversified,
open-end, management investment company comprised of separate series, each of
which operates as a separate 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.
WHAT IS THE INVESTMENT OBJECTIVE OF EACH FUND?
The investment objective of Prudential Stock Index Fund is to seek to
provide investment results that correspond to the price and yield performance of
the Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index). The
investment objective of Prudential Small-Cap Index Fund is to seek to provide
investment results that correspond to the price and yield performance of the
Standard & Poor's 600 Small Capitalization Stock Index (S&P 600 Index). The
investment objective of Prudential Bond Market Index Fund is to seek to provide
investment results that correspond to the total return performance of the Lehman
Brothers Aggregate Index. The investment objective of Prudential Pacific Index
Fund is to seek to provide investment results that correspond to the price and
yield performance of the Morgan Stanley Capital International Pacific Index
(MSCI-Pacific Index). The investment objective of Prudential Europe Index Fund
is to seek to provide investment results that correspond to the price and yield
performance of the Morgan Stanley Capital International Europe Index
(MSCI-Europe Index). There can be no assurance that the investment objective of
any Fund will be achieved. See "How the Funds Invest--Investment Objectives and
Policies" at page 6.
WHAT ARE THE FUNDS' RISK FACTORS AND SPECIAL CHARACTERISTICS?
The Funds' performance will not precisely correspond to the performance of
the index whose performance each Fund seeks to replicate. Prudential Stock Index
Fund will attempt to achieve a correlation between its performance and that of
the S&P 500 Index of at least 0.95, without taking into account expenses.
Prudential Small-Cap Index Fund will attempt to achieve a correlation between
its performance and that of the S&P 600 Index of at least 0.90, without taking
into account expenses. Prudential Bond Market Index Fund will attempt to achieve
a correlation between its performance and that of the Lehman Brothers Aggregate
Index of at least 0.90, without taking into account expenses. Prudential Pacific
Index Fund will attempt to achieve a correlation between its performance and
that of the MSCI-Pacific Index of at least 0.90, without taking into account
expenses. Prudential Europe Index Fund will attempt to achieve a correlation
between its performance and that of the MSCI-Europe Index of at least 0.90,
without taking into account expenses. Potential tracking differences, brokerage
and other transaction costs and other Fund expenses may cause a Fund's return to
be lower than the return of the index whose performance the Fund seeks to
replicate. See "How the Funds Invest--Investment Objectives and Policies" at
page 6.
Each Fund may engage in various hedging and return enhancement strategies
and invest in derivative securities. See "How the Funds Invest--Hedging and
Return Enhancement Strategies--Risks of Hedging and Return Enhancement
Strategies" at page 15. As with an investment in any mutual fund, an investment
in a Fund can decrease in value and you can lose money.
WHO MANAGES THE FUNDS?
Prudential Mutual Fund Management LLC (PMF or the Manager) is the manager
of the Company and is compensated for its services at an annual rate of .30 of
1% of average daily net assets of Prudential Stock Index Fund, .30 of 1% of
average daily net assets of Prudential Small-Cap Index Fund, .25 of 1% of
average daily net assets of Prudential Bond Market Index Fund, .40 of 1% of
average daily net assets of Prudential Pacific Index Fund and .40 of 1% of
average
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2
<PAGE>
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daily net assets of Prudential Europe Index Fund. As of , 1997, PMF served as
manager or administrator to investment companies, including mutual funds, with
aggregate assets of approximately $ billion. The Prudential Investment
Corporation, which does business under the name of Prudential Investments (PI,
the Subadviser or the investment adviser), furnishes investment advisory
services in connection with the management of the Funds under Subadvisory
Agreements with PMF. See "How the Funds are Managed--Manager" at page and "How
the Funds are Managed--Subadviser" at page .
WHO DISTRIBUTES THE FUNDS' SHARES?
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Funds' shares. Prudential Securities incurs the expense of
distributing the Funds' shares under a Distribution Agreement with the Company,
none of which is reimbursed or paid for by the Funds. See "How the Funds are
Managed--Distributor" at page .
WHAT IS THE MINIMUM INVESTMENT?
There is no minimum initial or subsequent investment requirement for
investors who qualify to purchase shares. See "Shareholder Guide--How to Buy
Shares of the Funds" at page and "Shareholder Guide--Shareholder Services" at
page .
HOW DO I PURCHASE SHARES?
You may purchase shares of the Funds through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Funds, through their
transfer agent, Prudential Mutual Fund Services LLC (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. Shares of
the Funds are offered to (i) investors who purchase $1 million or more of shares
of the Funds (or who already own $1 million of shares of other Prudential Mutual
Funds); (ii) participants in any fee-based program sponsored by Prudential
Securities (or one of its affiliates) which includes mutual funds as investment
options and for which a Fund is an available option; (iii) pension,
profit-sharing or other employee benefit plans with at least $50 million in
defined contribution assets, and (iv) for Prudential Stock Index Fund only,
investors who were, or who executed a letter of intent to become, shareholders
of any series of the Company on or before one or more series of the Company
reorganized or who on that date had investments in certain products for which
the Company provided exchangeability. Participants in programs sponsored by
Prudential Retirement Services should contact their client representative for
more information about purchasing shares of the Funds. See "How Each Fund Values
its Shares" at page and "Shareholder Guide--How to Buy Shares of the Funds" at
page .
WHAT ARE MY PURCHASE ALTERNATIVES?
Prudential Stock Index Fund offers two classes of shares, Class Z and
Class I shares, sold without an initial or contingent deferred sales charge to a
limited group of investors. Class I shares must be held in an ominibus account
and are subject to nominal transfer agency fees or expenses. Each of the other
Funds offers one class of shares (Class Z shares), sold without an initial or
contingent deferred sales charge to a limited group of investors. Shares of the
Funds are not subject to any ongoing service- or distribution-related expenses.
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.
Participants in programs sponsored by Prudential Retirement Services should
contact their client representative for more information about selling their
shares. See "Shareholder Guide--How to Sell Your Shares" at page .
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
Each Fund expects to pay dividends of net investment income, if any, and
distributions of any net capital gains at least annually. Dividends and
distributions of a Fund will be automatically reinvested in additional shares of
that 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 .
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3
<PAGE>
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FUND EXPENSES
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Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases ............................... None
Maximum Deferred Sales Load ........................................... None
Maximum Sales Load Imposed on Reinvested Dividends .................... None
Redemption Fees ....................................................... None
Exchange Fee .......................................................... None
<TABLE>
<CAPTION>
Annual Fund Operating Expenses*
(as a percentage of average net assets) Prudential Prudential Prudential Prudential Prudential
Stock Small-Cap Bond Market Pacific Europe
Index Fund Index Fund Index Fund Index Fund Index Fund
---------------- ---------- ----------- ---------- ----------
Class Z Class I
Shares Shares
------- -------
<S> <C> <C> <C> <C> <C> <C>
Management Fees ................... .30% .30% .30% .25% .40% .40%
12b-1 Fees ........................ None None None None None None
Other Expenses (After
Reimbursement).................. .10% .00% .20% .15% .20% .20%
--- --- --- --- --- ---
Total Fund Operating Expenses
(After Reimbursement) ............ .40% .30% .50% .40% .60% .60%
=== === === === === ===
</TABLE>
Example 1 3 5 10
Year Years Years Years
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
Prudential Stock Index Fund
Class Z ................................. $9 $13 $22 $73
Class I ................................. $3 $10 $17 $38
Prudential Small-Cap Index Fund
Class Z ................................. $5 $16 $28 $63
Prudential Bond Market Index Fund
Class Z ................................. $4 $13 $22 $51
Prudential Pacific Index Fund
Class Z ................................. $6 $19 $33 $75
Prudential Europe Index Fund
Class Z ................................. $6 $19 $33 $75
The above example is based on expenses expected to be incurred during the
current fiscal year as reduced by the Manager's expense reimbursed. THE EXAMPLES
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the
various types of costs and expenses that an investor in a Fund will bear,
whether directly or indirectly. For more complete descriptions of the various
costs and expenses, see "How the Funds are Managed." "Other Expenses" includes
actual operating expenses for Prudential Stock Index Fund for the fiscal year
ended September 30, 1996 and estimated operating expenses of the other Funds for
the fiscal year ending September 30, 1997, such as Trustees' and professional
fees, registration fees, reports to shareholders and transfer agency and
custodian fees.
- ----------
* The Manager has agreed to reimburse each Fund so that Total Fund Operating
Expenses do not exceed .40% and .30%, respectively, for Class Z and Class I
shares of Prudential Stock Index Fund and .50%, .40%, .60% and .60% of the
average net assets of Prudential Small-Cap Index Fund, Prudential Bond
Market Index Fund, Prudential Pacific Index Fund and Prudential Europe
Index Fund, respectively. Total Fund Operating Expenses before
reimbursement are estimated to be .48% and .38%, respectively, of the
average net assets of Class Z and Class I shares of Prudential Stock Index
Fund and .38%, .48%, 1.11% and 1.11% of the average net assets of
Prudential Small-Cap Index Fund, Prudential Bond Market Index Fund,
Prudential Pacific Index Fund and Prudential Europe Index Fund,
respectively, for the current fiscal year.
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4
<PAGE>
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FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the indicated periods)
(Prudential Stock Index Fund)
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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 Z share of beneficial
interest 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." During
these periods, there were no Class I shares of Prudential Stock Index Fund
outstanding, nor were there any shares outstanding of Prudential Small-Cap Index
Fund, Prudential Bond Market Index Fund, Prudential Pacific Index Fund or
Prudential Europe Index Fund.
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<TABLE>
<CAPTION>
CLASS Z SHARES
-------------------------------------------
NOVEMBER 5,
YEAR ENDED 1992(A)
SEPTEMBER 30, THROUGH
---------------------------- SEPTEMBER
1996 1995 1994 30,1993
---- ---- ---- ----------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C> <C>
Net asset value, beginning of period ................... $14.22 $11.27 $11.12 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income(b) ............................... .25 .23 .26 .23
Net realized and unrealized gain (loss) on investment
and foreign currency transactions ..................... 2.44 2.97 .11 .94
Total from investment operations ...................... 2.69 3.20 .37 1.17
LESS DISTRIBUTIONS:
Dividends from net investment income ................... (.28) (.22) (.18) (.05)
Distributions from net realized income ................. (.57) (.03) (.04) --
Total distributions ................................... (.85) (.25) (.22) (.05)
Net asset value, end of period ......................... $16.06 $14.22 $11.27 $11.12
TOTAL RETURN(D): ....................................... 19.72% 29.02% 3.33% 11.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ........................ $184,379 $101,945 $50,119 $27,142
Average net assets (000) ............................... $142,540 $ 71,711 $38,098 $18,807
Ratios to average net assets(b):
Expenses .............................................. .60% .60% .60% .60%(c)
Net investment income ................................. 1.92% 2.55% 2.34% 2.41%(c)
Portfolio turnover rate ................................ 2% 11% 2% 1%
Average commission rate paid per share ................. $ 0.0250 N/A N/A N/A
</TABLE>
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(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) 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 other distributions. Total return for
periods of less than a full year are not annualized. Total return includes
the effect of expense subsidies.
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5
<PAGE>
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HOW THE FUNDS INVEST
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INVESTMENT OBJECTIVE AND POLICIES
THE COMPANY IS COMPRISED OF SIX SEPARATE SERIES. SHARES OF THE FOLLOWING
FIVE SERIES (EACH A FUND AND COLLECTIVELY, THE FUNDS) ARE OFFERED THROUGH THIS
PROSPECTUS: PRUDENTIAL STOCK INDEX FUND, PRUDENTIAL SMALL-CAP INDEX FUND,
PRUDENTIAL BOND MARKET INDEX FUND, PRUDENTIAL PACIFIC INDEX FUND AND PRUDENTIAL
EUROPE INDEX FUND. THE INVESTMENT OBJECTIVE OF PRUDENTIAL STOCK INDEX FUND IS TO
SEEK TO PROVIDE INVESTMENT RESULTS THAT CORRESPOND TO THE PRICE AND YIELD
PERFORMANCE OF THE S&P 500 INDEX.
THE INVESTMENT OBJECTIVE OF PRUDENTIAL SMALL-CAP INDEX FUND IS TO SEEK TO
PROVIDE INVESTMENT RESULTS THAT CORRESPOND TO THE PRICE AND YIELD PERFORMANCE OF
A BROAD-BASED INDEX OF SMALL CAP STOCKS. THE PRUDENTIAL SMALL-CAP INDEX FUND
CURRENTLY USES THE S&P 600 INDEX FOR THAT PURPOSE.
THE INVESTMENT OBJECTIVE OF PRUDENTIAL BOND MARKET INDEX FUND IS TO SEEK
TO PROVIDE INVESTMENT RESULTS THAT CORRESPOND TO THE TOTAL RETURN PERFORMANCE OF
A BROAD-BASED INDEX OF FIXED-INCOME SECURITIES. THE PRUDENTIAL BOND MARKET INDEX
FUND CURRENTLY USES THE LEHMAN BROTHERS AGGREGATE INDEX FOR THAT PURPOSE.
THE INVESTMENT OBJECTIVE OF PRUDENTIAL PACIFIC INDEX FUND IS TO SEEK TO
PROVIDE INVESTMENT RESULTS THAT CORRESPOND TO THE PRICE AND YIELD PERFORMANCE OF
A BROAD-BASED INDEX OF SECURITIES OF ISSUERS IN THE PACIFIC REGION. THE
PRUDENTIAL PACIFIC INDEX CURRENTLY USES THE MSCI-PACIFIC INDEX FOR THAT PURPOSE.
THE INVESTMENT OBJECTIVE OF PRUDENTIAL EUROPE INDEX FUND IS TO SEEK TO
PROVIDE INVESTMENT RESULTS THAT CORRESPOND TO THE PRICE AND YIELD PERFORMANCE OF
A BROAD-BASED INDEX OF SECURITIES OF EUROPEAN ISSUERS. THE PRUDENTIAL EUROPE
INDEX FUND CURRENTLY USES THE MSCI-EUROPE INDEX FOR THAT PURPOSE.
THERE CAN BE NO ASSURANCE THAT THE OBJECTIVE OF ANY FUND WILL BE ACHIEVED.
See "Investment Objectives and Policies" in the Statement of Additional
Information. As with an investment in any mutual fund, an investment in any of
the Funds can decrease in value and you can lose money.
[EACH 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 (THE INVESTMENT COMPANY ACT).] INVESTMENT POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE BOARD OF TRUSTEES OF THE COMPANY (TRUSTEES).
THE BROAD-BASED INDICES USED BY THE FUNDS (EXCEPT PRUDENTIAL STOCK INDEX FUND)
MAY BE CHANGED FROM TIME TO TIME AT THE DISCRETION OF THE PORTFOLIO MANAGER
UNDER THE SUPERVISION OF THE TRUSTEES.
The Funds are not managed according to traditional methods of "active"
investment management, which involve the buying and selling of securities based
upon economic, financial and market analysis and investment judgment. Instead,
the Funds, utilizing a "passive" or indexing investment approach, attempt to
approximate the investment performance of their respective indexes by holding a
portfolio of stocks or bonds selected through statistical procedures. The funds
are managed without regard to tax ramifications. Each Fund pursues its objective
through the investment policies described below. While each Fund will seek to
achieve its objective, the Funds will differ with respect to the degree of risk
that they involve.
PRUDENTIAL STOCK INDEX FUND
Prudential Stock Index Fund seeks to provide investment results that
correspond to the price and yield performance of the S&P 500 Index. The
S&P 500 Index is an unmanaged, market-weighted index of 500 stocks selected
by Standard &
6
<PAGE>
Poor's Corporation (S&P) on the basis of their market size, liquidity and
industry group representation. Inclusion in the S&P 500 Index in no way implies
an opinion by S&P as to a stock's attractiveness as an investment. The S&P 500
Index, composed of stocks representing more than 70% of the total market value
of all publicly traded U.S. common stocks, is widely regarded as representative
of the performance of the U.S. stock market as a whole. "Standard & Poor's(r)",
"S&P(r)", "S&P 500(r)", "Standard & Poor's 500", and "500" are trademarks of
McGraw-Hill, Inc. and have been licensed for use by The Prudential Insurance
Company of America (Prudential) and its affiliates and subsidiaries. Prudential
Stock Index Fund is not sponsored, endorsed, sold or promoted by S&P and S&P
makes no representation regarding the advisability of investing in the Fund. See
"Investment Objectives and Policies--Investment Policies Applicable to
Prudential Stock Index Fund" in the Statement of Additional Information
regarding certain additional disclaimers and limitations of liability on behalf
of S&P.
To achieve its investment objective, the Fund will purchase equity
securities that as a group reflect the price and yield performance of the S&P
500 Index. Prudential Stock Index Fund intends to purchase all 500 stocks
included in the S&P 500 Index in approximately the same proportions as they are
represented in the S&P 500 Index. In addition, from time to time adjustments may
be made in the Fund's holdings due to changes in the composition of the S&P 500
Index or due to receipt of distributions of securities of companies spun off
from S&P 500 companies. Prudential Stock Index Fund will not adopt a temporary
defensive investment posture in times of generally declining market conditions,
and investors in the Fund therefore will bear the risk of such market
conditions.
Prudential Stock Index Fund intends that at least 80% of the value of its
total assets will be invested in securities included in the S&P 500 Index. The
Fund may invest the balance of its assets in: (i) other equity-related
securities; (ii) money market instruments, including obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities; (iii) put
and call options on securities and stock indices; and (iv) futures contracts on
stock indices and options thereon.
PRUDENTIAL SMALL-CAP INDEX FUND
Prudential Small-Cap Index Fund seeks to provide investment results that
correspond to the price and yield performance of a broad-based index of small
cap stocks. The Prudential Small-Cap Index Fund currently uses the S&P 600 Index
for that purpose. The S&P 600 Index is an unmanaged capitalization weighted
index of 600 smaller company U.S. common stocks that cover all industry sectors.
Inclusion in the S&P 600 Index in no way implies an opinion by S&P as to a
stock's attractiveness as an investment. The S&P 600 Index currently measures
the performance of selected U.S. stocks with a market capitalization of no
greater than $1.5 billion. "S&P" 600(R)," "Standard & Poor's 600" and "600" are
trademarks of McGraw-Hill, Inc. and have been licensed for use by Prudential and
its affiliates and subsidiaries. Prudential Small-Cap Index Fund is not
sponsored, endorsed, sold or promoted by S&P and S&P makes no representation
regarding the advisability of investing in the Fund. See "Investment Objectives
and Policies--Investment Policies Applicable to Prudential Small-Cap Index Fund"
in the Statement of Additional Information regarding certain additional
disclaimers and limitations of liability on behalf of S&P.
To achieve its investment objective, Prudential Small-Cap Index Fund will
purchase equity securities that as a group reflect the price and yield
performance of the S&P 600 Index. The Fund intends to purchase all 600 stocks
included in the S&P 600 Index in approximately the same proportions as they are
represented in the S&P 600 Index. In addition, from time to time adjustments may
be made in the holdings of the Fund due to changes in the composition of the S&P
600 Index or due to receipt of distributions of securities of companies spun off
from S&P 600 companies. Prudential Small-Cap Index Fund will not adopt a
temporary defensive investment posture in times of generally declining market
conditions, and investors in the Fund therefore will bear the risk of such
market conditions.
Prudential Small-Cap Index Fund intends to invest at least 80% of the
value of its total assets in securities included in the S&P 600 Index. The Fund
may invest the balance of its assets in money market instruments and stock
futures contracts and options thereon.
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PRUDENTIAL BOND MARKET INDEX FUND
Prudential Bond Market Index Fund seeks to provide investment results that
correspond to the total return performance of a broad-based index of
fixed-income securities. The Prudential Bond Market Index Fund currently uses
the Lehman Brothers Aggregate Index for that purpose. The Lehman Brothers
Aggregate Index is an unmanaged index that measures the total return (capital
change plus income) provided by a universe of fixed income securities, weighted
by market value. The Fund is neither sponsored by nor affiliated with Lehman
Brothers. See "Investment Objectives and Policies--Investment Policies
Applicable to Prudential Bond Market Index Fund" in the Statement of Additional
Information.
To achieve its investment objective, Prudential Bond Market Index Fund will
purchase securities that as a group reflect the performance of the Lehman
Brothers Aggregate Index. The Fund intends to hold securities that reflect the
three major classes of fixed-income investments in the Lehman Brothers Aggregate
Index: U.S. Treasury and Government agency securities, corporate debt
obligations and mortgage-backed securities. The securities included in the index
generally have an outstanding market value of at least $100 million. In
addition, from time to time adjustments may be made in the holdings of the Fund
due to changes in the composition of the Lehman Brothers Aggregate Index.
Prudential Bond Market Index Fund will not adopt a temporary defensive
investment posture in times of generally declining market conditions, and
investors in the Fund therefore will bear the risk of such market conditions.
Prudential Bond Market Index Fund intends to invest at least 80% of the
value of its total assets in the types of securities included in the Lehman
Brothers Aggregate Index. The Fund may invest the balance of its assets in money
market instruments and bond futures contracts and options thereon.
PRUDENTIAL PACIFIC INDEX FUND
Prudential Pacific Index Fund seeks to provide investment results that
correspond to the price and yield performance of a broad-based index of
securities of issuers in the Pacific Region. The Prudential Pacific Index Fund
currently uses the MSCI-Pacific Index for that purpose. The MSCI-Pacific Index
is an unmanaged, diversified, capitalization weighted index currently consisting
of 416 securities listed on the stock exchanges of Australia, Japan, Hong Kong,
New Zealand, Singapore and Malaysia. The Fund is neither sponsored by nor
affiliated with Morgan Stanley Capital International. See "Investment Objectives
and Policies--Investment Policies Applicable to Prudential Pacific Index Fund"
in the Statement of Additional Information.
To achieve its investment objective, Prudential Pacific Index Fund will
purchase securities that as a group reflect the performance of the MSCI-Pacific
Index. The Fund intends to purchase all 416 securities included in the
MSCI-Pacific Index in approximately the same proportions as they are represented
in the MSCI-Pacific Index. In addition, from time to time adjustments may be
made in the holdings of the Fund due to changes in the composition of the
MSCI-Pacific Index. Prudential Pacific Index Fund will not adopt a temporary
defensive investment posture in times of generally declining market conditions,
and investors in the Fund therefore will bear the risk of such market
conditions.
Prudential Pacific Index Fund intends to invest at least 80% of the value
of its total assets in securities included in the MSCI-Pacific Index. The Fund
may invest the balance of its assets in money market instruments and financial
futures contracts on stocks and currencies and options thereon.
PRUDENTIAL EUROPE INDEX FUND
Prudential Europe Index Fund seeks to provide investment results that
correspond to the price and yield performance of a broad-based index of
securities of European issuers. The Prudential Europe Index Fund currently uses
the MSCI-Europe Index for that purpose. The MSCI-Europe Index is an unmanaged
diversified weighted index currently
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consisting of 619 companies located in 14 developed European countries. These
countries are: Austria, Belgium, Denmark, Finland, France, Germany, Ireland,
Italy, Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom.
The Fund is neither sponsored by nor affiliated with Morgan Stanley Capital
International. See "Investment Objectives and Policies--Investment Policies
Applicable to Prudential Europe Index Fund" in the Statement of Additional
Information.
To achieve its investment objective, Prudential Europe Index Fund will
purchase securities that as a group reflect the price and yield performance of
the MSCI-Europe Index. The Fund intends to purchase all stocks included in the
MSCI-Europe Index in approximately the same proportions as they are represented
in that Index. In addition, from time to time adjustments may be made in the
holdings of the Fund due to changes in the composition of the MSCI-Europe Index.
Prudential Europe Index Fund will not adopt a temporary defensive investment
posture in times of generally declining market conditions, and investors in the
Fund therefore will bear the risk of such market conditions.
Prudential Europe Index Fund intends to invest at least 80% of the value
of its total assets in securities included in the MSCI-Europe Index. The Fund
may invest the balance of its assets in money market instruments and financial
futures contracts on stocks and currencies and options thereon.
PI believes that its investment approach with regard to each Fund will
provide an effective method of tracking the performance of the relevant index.
Nevertheless, PI does not expect that a Fund's performance will precisely
correspond to the performance of its respective index. Each Fund will attempt to
achieve a correlation between its performance and that of its respective index
of at least 0.90, except that Prudential Stock Index Fund will attempt to
achieve a correlation between its performance and that of the S&P 500 Index of
at least 0.95, in each case without taking into account expenses. A correlation
of 1.00 would indicate perfect correlation, which would be achieved when a
Fund's net asset value, including the value of its dividends and capital gains
distributions, increases or decreases in exact proportion to changes in its
respective index. PI will, of course, attempt to minimize any tracking
differential (i.e., the statistical measure of the difference between the
investment results of a Fund and that of its respective index). Tracking will be
monitored at least on a monthly basis. All tracking maintenance activities will
be reviewed regularly to determine whether any changes in policies or techniques
are necessary. However, in addition to potential tracking differences, brokerage
and other transaction costs, as well as other expenses, are likely to cause a
Fund's return to be lower than the return of its respective index. Consequently,
there can be no assurance as to how closely a Fund's performance will correspond
to the performance of its respective index.
Options, futures contracts, and options on futures contracts are used, if
at all, primarily to invest uncommitted cash balances, to maintain liquidity to
meet redemptions, to facilitate tracking, to reduce transaction costs or to
hedge a Fund's portfolio.
In order to invest uncommitted cash balances, maintain liquidity to meet
redemptions, or for incidental return enhancement purposes, the Funds may also
(i) enter into repurchase agreements, when-issued, delayed delivery and forward
commitment transactions; and (ii) lend their portfolio securities.
INVESTMENT POLICIES APPLICABLE TO EACH FUND
EQUITY SECURITIES
EACH FUND OTHER THAN PRUDENTIAL BOND MARKET INDEX FUND INVESTS PRIMARILY
IN EQUITY SECURITIES, AND THE VALUE OF THESE FUNDS' INVESTMENTS WILL GO UP AND
DOWN WITH THE PERFORMANCE OF THE STOCKS IN THE APPLICABLE INDEX. INVESTMENT BY
PRUDENTIAL SMALL-CAP INDEX FUND IN SMALL COMPANIES INVOLVES GREATER RISK THAN IS
CUSTOMARILY ASSOCIATED WITH MORE ESTABLISHED COMPANIES. These companies often
have sales and earnings growth rates which
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exceed those of large companies; however, smaller companies often have limited
operating histories, product lines, markets or financial resources, and may lack
management depth. These companies may be subject to intense competition from
larger entities, and the securities of these companies may have limited
marketability and may be subject to more abrupt or erratic movements in price
than securities of larger companies or the market averages in general.
EQUITY-RELATED SECURITIES
The Funds other than Prudential Bond Market Index Fund may invest in
equity-related securities. Equity-related securities are common stocks,
preferred stocks, rights, warrants and debt securities or preferred stocks which
are convertible or exchangeable for common stocks or preferred stocks. See
"Investment Objectives and Policies--Investment Policies Applicable to Each of
the Funds--Convertible Securities, Warrants and Rights" in the Statement of
Additional Information.
SECURITIES OF FOREIGN ISSUERS
PRUDENTIAL PACIFIC INDEX FUND AND PRUDENTIAL EUROPE INDEX FUND WILL INVEST
PRIMARILY IN EQUITY SECURITIES OF FOREIGN COMPANIES. FOREIGN SECURITIES INVOLVE
CERTAIN RISKS WHICH SHOULD BE CONSIDERED CAREFULLY BY AN INVESTOR IN EITHER OF
THESE FUNDS. 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. Foreign 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, with respect to certain foreign countries, there is a possibility of
expropriation, confiscatory taxation or diplomatic developments which could
affect investment in those countries.
Shareholders should be aware that investing in the equity markets of
developing countries 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 risks associated with investments in foreign
securities may be greater with respect to investments in developing countries.
IF A 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 a Fund's securities
denominated in that currency. Such changes also will affect the Fund's income
and distributions to shareholders. In addition, although Prudential Pacific
Index Fund and Prudential Europe Index Fund will receive income in such
currencies, the two Funds will be required to compute and distribute their
income in U.S. dollars. Therefore, if the exchange rate for any such currency
declines after the Funds' income has been accrued and translated into U.S.
dollars, the Funds could be required to liquidate portfolio securities to make
such distributions, particularly in instances in which the amount of income the
Funds are required to distribute is not immediately reduced by the decline in
such currency. Similarly, if an exchange rate declines between the time a 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. Prudential Pacific
Index Fund and Prudential Europe Index Fund may, but need not, enter into
futures contracts on foreign currencies, forward foreign currency exchange
contracts and options on foreign currencies for
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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.
The Funds may invest a portion of their assets in equity securities of
foreign issuers denominated in U.S. currency. The Funds may purchase American
Depositary Receipts (ADRs), which are U.S. dollar-denominated certificates
issued by a United States bank or trust company and represent the right to
receive securities of a foreign issuer deposited in a domestic bank or foreign
branch of a U.S. bank and traded on a U.S. exchange or in an over-the-counter
market. Generally, ADRs are in registered form. There are no fees imposed on the
purchase or sale of ADRs when purchased from the issuing bank or trust company
in the initial underwriting, although the issuing bank or trust company may
impose charges for the collection of dividends and the conversion of ADRs into
the underlying securities. Investment in ADRs has certain advantages over direct
investment in the underlying foreign securities since: (i) ADRs are U.S.
dollar-denominated investments that are registered domestically, easily
transferable, and for which market quotations are readily available; and (ii)
issuers whose securities are represented by ADRs are usually subject to
comparable auditing, accounting and financial reporting standards as domestic
issuers.
FIXED-INCOME OBLIGATIONS
Prudential Bond Market Index Fund will invest primarily in fixed-income
securities including U.S. Treasury obligations and securities issued or
guaranteed by U.S. government agencies and instrumentalities, investment-grade
corporate debt obligations, and mortgage-backed securities.
U.S. Treasury securities, including bills, notes and bonds, 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
and the lengths of their maturities. Obligations issued or guaranteed by
agencies of the U.S. Government or instrumentalities established or sponsored by
the U.S. Government may or may not be backed by the "full faith and credit" of
the United States.
The Fund may invest in debt securities of U.S. issuers that have
securities outstanding that are rated at the time of purchase at least BBB by
Standard & Poor's Ratings Group (S&P Ratings) or Baa by Moody's Investors
Service (Moody's) or comparably rated by a similar nationally recognized
statistical rating organization (NRSRO) or, if not rated, of comparable quality
in the opinion of the investment adviser. Securities rated Baa by Moody's are
considered to be investment grade, although they have speculative
characteristics. Changes in economic or other circumstances are more likely to
lead to a weakened capacity of issuers whose securities are rated BBB or Baa to
pay interest or repay principal than is the case for issuers of higher rated
securities. See "Description of Ratings" in the Statement of Additional
Information.
Mortgage-backed securities represent undivided ownership interests in
pools of mortgages. The issuer 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. These securities are in most cases
"pass-through" instruments, through which the holders receive a share of all
interest and principal payments from the mortgages underlying the securities,
net of certain fees. As a result of the pass-through of prepayments of principal
on the underlying securities, mortgage-backed securities are often subject to
more rapid prepayment of principal than their stated maturity would indicate.
MONEY MARKET INSTRUMENTS
The Funds may invest in high quality money market instruments, including
commercial paper of a U.S. or non-U.S. company, foreign government securities,
certificates of deposit, bankers' acceptances and time deposits of domestic and
foreign banks, and obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities. These obligations will be U.S. dollar
denominated. Money market instruments typically have a maturity of one year or
less as measured from the date of purchase. The Funds may invest in money market
instruments without limit for
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temporary defensive and cash management purposes. To the extent the Funds
otherwise invest in money market instruments, they are subject to the
limitations described above.
OTHER INVESTMENTS AND POLICIES
BORROWING
Each 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 to take advantage
of investment opportunities, for temporary, extraordinary or emergency purposes
or for the clearance of transactions. Each Fund may pledge up to 20% of its
total assets to secure these borrowings. If a Fund's asset coverage for
borrowings falls below 300%, the Fund will take prompt action to reduce its
borrowings. No Fund will purchase portfolio securities when borrowings exceed 5%
of the value of its total assets. See "Investment Objectives and
Policies--Investment Policies Applicable to Each of the Funds--Borrowing" in the
Statement of Additional Information.
ILLIQUID SECURITIES
Each Fund may hold up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities markets
either within or outside of the United States. Restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933, as amended
(the Securities Act) and privately placed commercial paper that have a readily
available market are not considered illiquid for purposes of this limitation.
The investment adviser will monitor the liquidity of such restricted securities
under the supervision of the Trustees. A Fund's investment in Rule 144A
securities could have the effect of increasing illiquidity to the extent that
qualified institutional buyers become, for a limited time, uninterested in
purchasing Rule 144A securities. See "Investment Restrictions" in the Statement
of Additional Information. Repurchase agreements subject to demand are deemed to
have a maturity equal to the applicable notice period.
REPURCHASE AGREEMENTS
Each Fund may 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. A
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 that has entered into the repurchase agreement
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. Each Fund may
participate in a joint repurchase account managed by PI. See "Investment
Objectives and Policies--Investment Policies Applicable to Each of the
Funds--Repurchase Agreements" in the Statement of Additional Information.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Funds may purchase or sell securities (including equity securities) on
a when-issued or delayed delivery basis. When-issued or delayed delivery
transactions arise when securities are purchased or sold by a Fund with payment
and delivery taking place 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 Funds will only purchase securities on a when-issued
or delayed delivery basis with the intention of acquiring the securities, the
Funds may sell the securities before the settlement date, if it is deemed
advisable. At the time a Fund makes the commitment to purchase securities on a
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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 Funds' Custodian will maintain,
in a segregated account of the Fund, cash or liquid assets, having a value equal
to or greater than the Funds' purchase commitments. Subject to this requirement,
each Fund may purchase securities on such basis without limit. See "Investment
Objectives and Policies--Investment Policies Applicable to Each of the
Funds--When-Issued and Delayed Delivery Securities" in the Statement of
Additional Information.
SECURITIES LENDING
Each 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 that
has loaned its portfolio securities an amount equivalent to any dividend or
interest paid on such securities and that 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,
a Fund cannot lend more than 30% of the value of its total assets. See
"Investment Objectives and Policies--Investment Policies Applicable to Each of
the Funds--Securities Lending" in the Statement of Additional Information. The
Fund may pay reasonable administration and custodial fees in connection with a
loan.
SEGREGATED ACCOUNTS. Each Fund will establish a segregated account with
its Custodian, State Street Bank and Trust Company (State Street), in which it
will maintain cash, U.S. Government securities, equity securities or other
liquid, unencumbered assets equal in value to its obligations in respect of
potentially leveraged transactions, including forward contracts, when-issued and
delayed delivery securities, repurchase agreements, futures contracts, written
options and options on futures contracts (unless otherwise covered). The assets
deposited in the segregated account will be marked-to-market daily.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE FUNDS MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES TO REDUCE
CERTAIN RISKS OF THEIR INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN. A FUND, AND
THUS THE INVESTOR, MAY LOSE MONEY THROUGH THE UNSUCCESSFUL USE OF THESE
STRATEGIES. These strategies currently include the use of derivatives, such as
options, futures contracts and options thereon. A 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 Objectives and Policies" and "Taxes" in the Statement
of Additional Information. PI does not intend to buy all of these instruments or
use all of these strategies to the full extent permitted unless it believes that
doing so will help a Fund achieve its objective. New financial products and risk
management techniques continue to be developed and each Fund may use these new
investments and techniques to the extent consistent with its investment
objective and policies.
OPTIONS TRANSACTIONS
EACH FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON ANY
SECURITIES IN WHICH IT MAY INVEST OR OPTIONS ON ANY SECURITIES INDEX BASED ON
SECURITIES IN WHICH IT MAY INVEST. THESE OPTIONS ARE TRADED ON U.S. EXCHANGES OR
IN THE OVER-THE-COUNTER MARKET TO HEDGE ITS PORTFOLIO. Each 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
securities 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
it intends to purchase. Each Fund may also purchase put and call options to
offset
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previously written put and call options of the same series. See
"Investment Objectives and Policies--Investment Policies Applicable to Each of
the Funds--Options on Securities and Securities Indices" 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 SECURITY OR SECURITIES IN
THE INDEX 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 a Fund writes a call
option, it gives up the potential for gain on the underlying securities in
excess of the exercise price of the option during the period that the option is
open.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR
A SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES 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 underlying the option at the exercise price. A Fund
might, therefore, be obligated to purchase the underlying securities for more
than their current market price.
EACH FUND WILL WRITE ONLY "COVERED" OPTIONS. A written option is covered
if, as long as a Fund is obligated under the option, it (i) owns an offsetting
position in the underlying security or (ii) maintains in a segregated account,
cash liquid assets in an amount equal to or greater than its obligation under
the option. Under the first circumstance, a Fund's losses are limited because it
owns the underlying security or currency; under the second circumstance, in the
case of a written call option, a Fund's losses are potentially unlimited. See
"Investment Objectives and Policies--Other Investments and Policies--Options on
Securities and Securities Indices" in the Statement of Additional Information.
There is no limitation on the amount of options the Funds may write.
Each Fund may also write a call option, which can serve as a limited short
hedge because decreases in value of the hedged investment would be offset to the
extent of the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised and the Fund will be obligated to
sell the security at less than its market value.
Each Fund may purchase and sell put and call options on securities
indices. Securities index options are designed to reflect price fluctuations in
a group of securities or segment of the securities market rather than price
fluctuations in a single security. Options on securities indices are similar to
options on securities, except that the exercise of securities index options
requires cash payments and does not involve the actual purchase or sale of
securities. When purchasing or selling securities index options, each Fund is
subject to the risk that the value of its portfolio securities may not change as
much as or more than the index because the Fund's investments generally will not
match the composition of the index. See "Investment Objectives and
Policies--Investment Policies Applicable to Each of the Funds--Options on
Securities and Securities Indices" and "Taxes" in the Statement of Additional
Information.
FUTURES CONTRACTS AND OPTIONS THEREON
EACH 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 FUNDS,
AND THUS THE INVESTOR, MAY LOSE MONEY THROUGH THE UNSUCCESSFUL USE OF THESE
STRATEGIES. These futures contracts and related options will be on securities
indices. A futures contract is an agreement to purchase or sell an agreed amount
of securities 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. A Fund may purchase and sell futures contracts or related options as a
hedge against changes in market conditions.
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A 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. A 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 a Fund's portfolio.
Futures contracts and related options are generally subject to segregation
and coverage requirements of the CFTC or the SEC. If a Fund does not hold the
security 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.
A FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND RELATED OPTIONS IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements in the
price of a futures contract and the movements in the index is imperfect and
there is a risk that the value of the indices 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 each Fund's ability to
purchase or sell certain futures contracts or related options on any particular
day.
A Fund's ability to enter into or close out futures contracts and options
thereon is limited by the requirements of the Internal Revenue Code for
qualification as a regulated investment company. See "Investment Objectives and
Policies" and "Taxes" in the Statement of Additional Information.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS INVOLVES INVESTMENT RISKS
AND TRANSACTION COSTS TO WHICH A FUND WOULD NOT BE SUBJECT ABSENT THE USE OF
THESE STRATEGIES. A FUND, AND THUS THE INVESTOR, MAY LOSE MONEY THROUGH THE
UNSUCCESSFUL USE OF THESE STRATEGIES. Risks inherent in the use of options,
futures contracts and options on futures contracts include (1) imperfect
correlation between the price of options and futures contracts and options
thereon and movements in the prices of the securities being hedged; (2) the fact
that skills needed to use these strategies are different from those needed to
select portfolio securities; (3) the possible absence of a liquid secondary
market for any particular instrument at any time; (4) the possible need to defer
closing out certain hedged positions to avoid adverse tax consequences; and (5)
the possible inability of a 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
a 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.
Each 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; a
Fund will generally purchase OTC options only if the investment adviser believes
that the other party to 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 a
Fund's ability to effectively hedge its portfolio. There is also the risk of
loss by a 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.
INVESTMENT RESTRICTIONS
Each 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 FUNDS ARE MANAGED
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THE COMPANY HAS A BOARD OF TRUSTEES WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUNDS' MANAGER, SUBADVISER AND DISTRIBUTOR, DECIDES UPON MATTERS
OF GENERAL POLICY. THE FUNDS' MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF EACH FUND. THE FUNDS' SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
Each Fund is responsible for the payment of certain fees and expenses
including, among others, the following: (i) management fees; (ii) the fees of
unaffiliated Trustees; (iii) the fees of the Funds' Custodian and Transfer and
Dividend Disbursing Agent; (iv) the fees of the Funds' legal counsel and
independent accountants; (v) brokerage commissions incurred in connection with
portfolio transactions; (vi) all taxes and charges of governmental agencies,
including registration fees; (vii) the reimbursement of organization expenses;
and (viii) expenses related to shareholder communications including all expenses
of shareholders' and Board of Trustees' meetings and of preparing, printing and
mailing reports, proxy statements and prospectuses to shareholders.
For the fiscal year ended September 30, 1996, total expenses as a
percentage of Prudential Stock Index Fund's average net assets were .60% for
Class Z shares.
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT LLC (PMF OR THE MANAGER), GATEWAY CENTER
THREE, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER OF THE COMPANY AND IS
COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .30 OF 1% OF AVERAGE DAILY NET
ASSETS OF PRUDENTIAL STOCK INDEX FUND, .30 OF 1% OF AVERAGE DAILY NET ASSETS OF
PRUDENTIAL SMALL-CAP INDEX FUND, .25 OF 1% OF AVERAGE DAILY NET ASSETS OF
PRUDENTIAL BOND MARKET INDEX FUND, .40 OF 1% OF AVERAGE DAILY NET ASSETS OF
PRUDENTIAL PACIFIC INDEX FUND AND .40 OF 1% OF AVERAGE DAILY NET ASSETS OF
PRUDENTIAL EUROPE INDEX FUND. PMF was established as a New York limited
liability company in 1996. See "Manager and Subadvisers" in the Statement of
Additional Information. Prior to October 30, 1996, the manager of Prudential
Stock Index Fund was Prudential Institutional Fund Management, Inc. It was
compensated for its services at an annual rate of .40 of 1% of average daily net
assets of Prudential Stock Index Fund.
As of ____________, 1997, PMF served as the manager to open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to ______ closed-end investment companies with aggregate assets of
approximately $ billion.
Under the Management Agreements with the Company, PMF manages the
investment operations of the Funds and also administers the Company's business
affairs. See "Manager and Subadvisers" in the Statement of Additional
Information.
SUBADVISER
THE PRUDENTIAL INVESTMENT CORPORATION (PIC), 751 BROAD STREET, NEWARK, NEW
JERSEY 07102, SERVES AS SUBADVISER TO EACH FUND.
PURSUANT TO THE SUBADVISORY AGREEMENTS WITH PMF, PIC, DOING BUSINESS AS
PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER OR THE INVESTMENT ADVISER), FURNISHES
INVESTMENT ADVISORY SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE COMPANY
AND IS REIMBURSED FOR ALL REASONABLE COSTS AND EXPENSES INCURRED BY PI.
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Under each Subadvisory Agreement, PI, subject to the supervision of PMF,
is responsible for managing the assets of each Fund in accordance with its
investment objective, investment program and policies. PI determines what
securities and other instruments are purchased and sold for each Fund and is
responsible for obtaining and evaluating financial data relevant to each Fund.
Prudential Investments Quantitative Management, a unit of PI, is
responsible for the day-to-day management of Prudential Stock Index Fund,
Prudential Small-Cap Index Fund, Prudential Pacific Index Fund and Prudential
Europe Index Fund, employing a team approach to the management of these Funds.
The Global Fixed Income Group of Prudential Investments is responsible as a team
for the day-to-day management of Prudential Bond Market Index Fund.
PMF and PIC are wholly owned subsidiaries of Prudential, a major
diversified insurance and financial services company.
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE
SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE
LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE SHARES OF
EACH FUND. IT IS AN INDIRECT, WHOLLY OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER A DISTRIBUTION AGREEMENT (THE DISTRIBUTION AGREEMENT), PRUDENTIAL
SECURITIES (ALSO THE DISTRIBUTOR) INCURS THE EXPENSES OF DISTRIBUTING EACH
FUND'S SHARES, 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 Pruco Securities Corporation
(Prusec), an affiliated broker-dealer, commissions and account servicing fees
paid to, or on account of, other broker-dealers or financial institutions (other
than national banks) which have entered into agreements with the Distributor,
advertising expenses, the cost of printing and mailing prospectuses to potential
investors and indirect and overhead costs of Prudential Securities and Prusec
associated with the sale of each Fund's shares, including lease, utility,
communications and sales promotion expenses.
The Manager (or one of its affiliates) may make payments to dealers and
other persons which distribute shares of the Funds. Such payments may be
calculated by reference to the net asset value of shares sold by such persons or
otherwise.
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 National
Association of Securities Dealers, Inc. (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 $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 purposes 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 Company 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 assets of each Fund which are held by State Street, an
independent custodian, are separate and distinct from PSI.
FEE WAIVERS AND SUBSIDY
For the fiscal year ending September 30, 1997, PMF has agreed to subsidize
the operating expenses of Prudential Stock Index Fund, Prudential Small-Cap
Index Fund, Prudential Bond Market Index Fund, Prudential Pacific Index Fund and
Prudential Europe Index Fund so that total Fund operating expenses do not exceed
.40% and .30% for Class Z and Class I shares of Prudential Stock Index Fund and
.50%, .40%, .60% and .60%, respectively, of each other Fund's average net
assets. Thereafter 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 a
Fund. Fee waivers and expense subsidies will increase a Fund's total return. See
"Performance and Yield Information" in the Statement of Additional Information
and "Fund Expenses" above.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant
for the Funds 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 each Fund's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting books
and records pursuant to an agreement with the Company.
Prudential Mutual Fund Services LLC (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 Funds. 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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<PAGE>
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HOW EACH FUND VALUES ITS SHARES
- --------------------------------------------------------------------------------
A 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. THE TRUSTEES FIXED THE SPECIFIC TIME OF DAY FOR
THE COMPUTATION OF EACH FUND'S NAV TO BE AS OF 4:15 P.M., EASTERN TIME.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Company's Trustees. See "Net Asset Value" in the Statement of
Additional Information.
Each 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.
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HOW EACH FUND CALCULATES PERFORMANCE
- --------------------------------------------------------------------------------
FROM TIME TO TIME A FUND MAY ADVERTISE ITS TOTAL RETURN (INCLUDING
"AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) AND YIELD IN
ADVERTISEMENTS OR SALES LITERATURE. These figures are based on historical
earnings and are not intended to indicate future performance. The "total return"
shows how much an investment in a 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. 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 a 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. A 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., and other industry publications, business periodicals and
market indices. See "Performance and Yield Information" in the Statement of
Additional Information. Further performance information will be contained in
each Fund's annual and semi-annual reports to shareholders, which may be
obtained without charge. See "Shareholder Guide--Shareholder Services--Reports
to Shareholders."
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TAXES, DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
TAXATION OF THE FUND
PRUDENTIAL STOCK INDEX HAS ELECTED TO QUALIFY (AND EACH OTHER FUND INTENDS
TO ELECT TO QUALIFY) AND EACH FUND INTENDS TO REMAIN QUALIFIED AS A REGULATED
INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
INTERNAL REVENUE CODE). ACCORDINGLY, THE FUNDS WILL NOT BE SUBJECT TO FEDERAL
INCOME TAXES ON THEIR NET INVESTMENT INCOME AND CAPITAL GAINS, IF ANY, THAT THEY
DISTRIBUTES TO THEIR SHAREHOLDERS.
In addition, under the Internal Revenue Code, special rules apply to the
treatment of certain options and futures contracts (Section 1256 contracts). At
the end of each year, such investments held by each Fund will be required to be
"marked-to-market" for federal income tax purposes; that is, treated as having
been sold at market value. Sixty percent of any gain or loss recognized on these
"deemed sales" and on actual dispositions may be treated as long-term capital
gain or loss, and the remainder will be treated as short-term capital gain or
loss. See "Taxes" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
All dividends out of net investment income, together with distributions of
net short-term capital gains, will be taxable as ordinary income to the
shareholder whether or not reinvested. Certain gains or losses from fluctuations
in exchange rates (Section 988 gains or losses) will affect the amount of
ordinary income a Fund will be able to pay as dividends. See "Dividends and
Distributions" in the Statement of Additional Information. Any net long-term
capital gains distributed to shareholders will be taxable as such to the
shareholder, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum long-term capital gains
rate for corporate shareholders is currently the same as the maximum tax rate
for ordinary income. The maximum long-term capital gains rate for individual
shareholders is currently 28% and the maximum tax rate for ordinary income is
39.6%.
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 such loss, however, on shares
that are held for six months or less, will be treated as a long-term capital
loss to the extent of any capital gain distributions received by the
shareholder.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, each Fund is required to withhold and
remit to the U.S. Treasury 31% of dividend, capital gain income and redemption
proceeds, payable on the accounts of those shareholders who fail to furnish
their tax identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of
certain foreign shareholders) with the required certifications regarding the
shareholder's status under the federal income tax law.
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.
DIVIDENDS AND DISTRIBUTIONS
EACH FUND EXPECTS TO PAY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY, AND
TO MAKE DISTRIBUTIONS OF ANY CAPITAL GAINS IN EXCESS OF NET LONG-TERM CAPITAL
LOSSES AT LEAST ANNUALLY. SEE "HOW EACH FUND VALUES ITS SHARES."
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<PAGE>
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES, BASED
ON THE NAV ON THE RECORD DATE OR SUCH OTHER DATE AS THE TRUSTEES 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 LLC, Attn:
Account Maintenance Unit, P.O. Box 15015, New Brunswick, New Jersey 08906-5015.
A 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 adviser to elect to receive
dividends and distributions in cash.
WHEN A 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 WHEN MAKING YOUR PURCHASES.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
DESCRIPTION OF SHARES
THE COMPANY WAS ESTABLISHED AS A DELAWARE BUSINESS TRUST ON MAY 11, 1992.
THE COMPANY IS AUTHORIZED TO ISSUE AN UNLIMITED NUMBER OF SHARES OF BENEFICIAL
INTEREST, $.001 PAR VALUE PER SHARE, DIVIDED INTO THE FOLLOWING SIX SERIES OR
PORTFOLIOS: PRUDENTIAL STOCK INDEX FUND, PRUDENTIAL SMALL-CAP INDEX FUND,
PRUDENTIAL BOND MARKET INDEX FUND, PRUDENTIAL PACIFIC INDEX FUND, PRUDENTIAL
EUROPE INDEX FUND AND PRUDENTIAL ACTIVE BALANCED FUND (WHOSE SHARES ARE OFFERED
THROUGH A SEPARATE PROSPECTUS). Each Fund described in this Prospectus other
than Prudential Stock Index Fund offers one class of shares. Prudential Stock
Index Fund offers two classes of shares and in accordance with the Company's
Declaration of Trust, the Trustees may authorize the creation of additional
series of beneficial interest and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
The Company's expenses generally are allocated among the Funds on the
basis of relative net assets at the time of allocation, except that expenses
directly attributable to a particular Fund or class of a Fund are charged to
that Fund or Class.
The Trustees may increase or decrease the number of authorized shares
without the approval of shareholders. Shares of a 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 a Fund under certain
circumstances as described under "Shareholder Guide--How to Sell Your Shares."
The Company's shares do not have cumulative voting rights for the election of
Trustees.
THE COMPANY DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE COMPANY WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES 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 COMPANY'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF
ONE OR MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
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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 Company 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.
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SHAREHOLDER GUIDE
- --------------------------------------------------------------------------------
HOW TO BUY SHARES OF A FUND
YOU MAY PURCHASE SHARES OF A FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. PARTICIPANTS IN PROGRAMS
SPONSORED BY PRUDENTIAL RETIREMENT SERVICES SHOULD CONTACT THEIR CLIENT
REPRESENTATIVE FOR MORE INFORMATION ABOUT PURCHASING SHARES OF THE FUND. The
offering price is the NAV next determined following receipt of an order by the
Transfer Agent or Prudential Securities. Shares of each Fund are offered to a
limited group of investors at net asset value without any sales charge. See "How
Each Fund Values its Shares."
There is no minimum subsequent investment requirement for shares of the
Funds. See "Shareholder Services."
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a share 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 share
certificates.
The Funds reserve the right to reject any purchase order (including an
exchange into a Fund) or to suspend or modify the continuous offering of their
shares. See "How to Sell Your Shares."
Your dealer is responsible for forwarding payment promptly to the
applicable 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.
ELIGIBLE PURCHASERS
Class Z shares of each Fund are available for purchase by (i) investors
who purchase $1 million or more of shares (or who already own $1 million of
shares of other Prudential Mutual Funds), including those described under
"Benefit Plans" and "PruArray and SmartPath Plans" below; (ii) participants in
any fee-based program sponsored by Prudential Securities, The Prudential Savings
Bank, F.S.B. (or any affiliate) which includes mutual funds as investment
options and for which a Fund is an available option; (iii) certain participants
in the MEDLEY Program (group variable annuity contracts) sponsored by Prudential
for whom Class Z shares of the Prudential Mutual Funds are an available
investment option; (iv) Benefit Plans for which Prudential Retirement Services
serves as record keeper and as of September 20, 1996, (a) were Class Z
shareholders of the prudential Mutual Funds, or (b) executed a letter of intent
to purchase Class Z shares of the Prudential Mutual Funds; (v) current and
former Directors/Trustees of the Prudential Mutual Funds (including the
Company); and (vi) employees of Prudential and/or Prudential Securities who
participate in a Prudential-sponsored employee savings plan.
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<PAGE>
In addition, shares of a Fund may be purchased through Prudential
Securities or the Transfer Agent by the following persons: (a) 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 of the Transfer Agent, (b) employees of subadvisers of the Prudential
Mutual Funds provided that the purchases at NAV are permitted by such person's
employer, and (c) Prudential, 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.
Class I shares of Prudential Stock Index Fund are available for purchase
by pension, profit-sharing or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code and defined compensation and annuity
plans under Sections 457 or 403(b)(7) of the Internal Revenue Code
(collectively, Benefit Plans), provided that the Benefit Plan has at least $150
million in defined contribution assets and $50 million of such assets are
invested in Prudential Mutual Funds.
In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates will pay dealers, financial advisers and other persons that
distribute shares a finders' fee based on a percentage of the net asset value of
shares sold by such persons.
PURCHASE BY WIRE. For an initial purchase of shares of a 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,
Boston, Massachusetts, Custody and Shareholder Services Division, Attention:
Prudential Dryden Fund, specifying on the wire the account number assigned by
PMFS and your name and identifying the Fund and the applicable class if
purchasing shares of Prudential Stock Index Fund.
If you arrange for receipt by State Street of federal funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the
applicable Fund as of that day.
In making a subsequent purchase order by wire, you should wire State
Street directly and should be sure that the wire specifies Prudential Dryden
Fund, the Fund whose shares you are purchasing, 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 PRUDENTIAL STOCK INDEX FUND OFFERS TWO
CLASSES OF SHARES, CLASS Z AND CLASS I SHARES (ALTERNATIVE PURCHASE PLAN).
The two classes of shares represent an interest in the same portfolio of
investments of Prudential Stock Index Fund and have the same rights and
obligations, except that (i) 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; and (ii)
Class I shares, which are held in a single omnibus account, are subject to
nominal transfer agency fees and expenses. The two classes also have separate
exchange privileges. See "How to Exchange Your Shares" below.
RIGHT OF ACCUMULATION. Shares of a 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 eligibility. See
"Purchase and Redemption of Fund Shares" in the Statement of Additional
Information.
BENEFIT PLANS. Shares of a Fund may be purchased by a Benefit Plan
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
23
<PAGE>
Prudential Securities does individual account recordkeeping (Direct Account
Benefit Plans) and Benefit Plans sponsored by PSI or its subsidiaries (PSI or
Subsidiary PrototypeBenefit Plans), shares may be purchased by participants who
are repaying loans made from such plans to the participant.
PRUARRAY AND SMARTPATH PLANS. Shares of a Fund may be purchased by certain
savings, retirement and deferred compensation plans, qualified or non-qualified
under the Internal Revenue Code, including pension, profit-sharing, stock-bonus
or other employee benefit plans under Section 401 of the Internal Revenue Code
and deferred compensation and annuity plans under Sections 457 or 403(b)(7) of
the Internal Revenue Code that participate in the Transfer Agent's PruArray and
SmartPath Programs (benefit plan recordkeeping services) (hereafter referred to
as a PruArray or SmartPath Plan); provided that the plan has at least $1 million
in existing assets or 250 eligible employees or participants. The term "existing
assets" for this purpose includes stock issued by a PruArray or SmartPath Plan
sponsor, shares of non-money market Prudential Mutual Funds and shares of
certain unaffiliated non-money market mutual funds that participate in the
PruArray or SmartPath Program (Participating Funds). "Existing assets" also
include shares of money market funds acquired by exchange from a Participating
Fund, monies invested in The Guaranteed Interest Account (GIA), a group annuity
insurance product issued by Prudential, and units of The Stable Value Fund, an
unaffiliated bank collective fund.
PRUARRAY ASSOCIATION BENEFIT PLANS. Shares are also offered to Benefit
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 may purchase shares of a Fund without regard to the assets or
number of participants in the individual employer's qualified Plan(s) so long as
the employers in the Association (i) have retirement plan assets in the
aggregate of at least $1 million and 250 participants in the aggregate and (ii)
maintain their accounts with the Fund's transfer agent.
PRUARRAY SAVINGS PROGRAM. Shares of each Fund are also offered 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
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.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM SHARES OF A 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 Each Fund Values its Shares."
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 NAMES(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
whose shares you are redeeming in care of its Transfer Agent, Prudential Mutual
Fund Services LLC, 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,
24
<PAGE>
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. In the
case of redemptions from a PruArray or SmartPath Plan, if the proceeds of the
redemption are invested in another investment option of the plan, in the name of
the record holder and at the same address as reflected in the Transfer Agent's
records, a signature guarantee is not required.
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 a Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for a 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
A 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 Trustees determines that it would be
detrimental to the best interests of the remaining shareholders of a 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 Each Fund Values its Shares." If your
shares are redeemed in kind, you would incur transaction costs in converting the
assets into cash. The Company has, however, elected to be governed by Rule 18f-1
under the Investment Company Act, under which a 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 a 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of each Fund, the
Trustees 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 Funds will give
any such shareholder 60 days' prior written notice in which to purchase
sufficient additional shares to avoid such redemption.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF A FUND YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE COMPANY AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE
OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE MINIMUM INVESTMENT
REQUIREMENTS OF SUCH FUNDS. SHAREHOLDERS WHO ARE OTHERWISE ELIGIBLE TO PURCHASE
CLASS Z SHARES HAVE THE ABILITY TO EXCHANGE THEIR CLASS Z SHARES OF A FUND FOR
CLASS Z SHARES OF ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV. SHAREHOLDERS
WHO ARE OTHERWISE ELIGIBLE TO PURCHASE CLASS A SHARES HAVE THE ABILITY TO
EXCHANGE THEIR SHARES OF A FUND FOR CLASS A SHARES OF ANOTHER FUND ON THE BASIS
OF THE RELATIVE NAV. CLASS I SHAREHOLDERS HAVE THE ABILITY TO EXCHANGE THEIR
CLASS I SHARES OF PRUDENTIAL STOCK INDEX FUND FOR CLASS Z SHARES OF ANOTHER FUND
ON THE BASIS OF THE RELATIVE NAV. An exchange will be treated as a redemption
and purchase for tax purposes.
25
<PAGE>
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
Company 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 FUNDS NOR THEIR AGENTS WILL BE LIABLE FOR ANY LOSS,
LIABILITY OR COST WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY
BELIEVED TO BE GENUINE UNDER THE FOREGOING PROCEDURES. All exchanges will be
made on the basis of the relative NAV of the two funds next determined after the
request is received in good order. The exchange privilege is available only in
states where the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE
OF SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
Each 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 on 60 days' notice to shareholders.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in a Fund, you can
take advantage of the following additional services and privileges:
o AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTION. For your
convenience, all dividends and distributions are automatically reinvested in
full and fractional shares of the Funds at NAV. 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.
o TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from
26
<PAGE>
Prudential Securities or the Transfer Agent. If you are considering adopting
such a plan, you should consult with your own legal or tax adviser with respect
to the establishment and maintenance of such a plan.
o SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders, which provides for monthly or quarterly checks. See also
"Shareholder Investment Account--Systematic Withdrawal Plan" in the Statement of
Additional Information.
o REPORTS TO SHAREHOLDERS. The Funds 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, each 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, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data are available upon request from each Fund.
o SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Funds at
Gateway Center Three, 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.
27
<PAGE>
[This page intentionally left blank]
<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 Fundat
(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 Small-Cap Index Fund
Prudential Bond Market Index Fund
Prudential Pacific Index Fund
Prudential Europe Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
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
- ------------------------------
o Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
o Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
o Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
o Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
- --------------------------------------------------------------------------------
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
================================================================================
TABLE OF CONTENTS
PAGE
----
FUND HIGHLIGHTS ............................................................ 2
What are the Funds' Risk Factors and
Special Characteristics? ................................................. 2
FUND EXPENSES .............................................................. 4
FINANCIAL HIGHLIGHTS ....................................................... 5
HOW THE FUNDS INVEST ....................................................... 6
Investment Objective and Policies ......................................... 6
Other Investments and Policies ............................................ 11
Hedging and Return Enhancement Strategies ................................. 13
Investment Restrictions ................................................... 15
HOW THE FUNDS ARE MANAGED ................................................. 16
Manager ................................................................... 16
Subadviser ................................................................ 16
Distributor ............................................................... 17
Fee Waivers and Subsidy ................................................... 18
Portfolio Transactions .................................................... 18
Custodian and Transfer and
Dividend Disbursing Agent ................................................ 18
HOW EACH FUND VALUES ITS SHARES ............................................ 19
HOW EACH FUND CALCULATES PERFORMANCE ....................................... 19
TAXES, DIVIDENDS AND DISTRIBUTIONS ......................................... 20
GENERAL INFORMATION ........................................................ 21
Description of Shares ..................................................... 21
Additional Information .................................................... 22
SHAREHOLDER GUIDE .......................................................... 22
How to Buy Shares of a Fund ............................................... 22
How to Sell Your Shares ................................................... 24
How to Exchange Your Shares ............................................... 25
Shareholder Services ...................................................... 28
THE PRUDENTIAL MUTUAL FUND FAMILY .......................................... A-1
================================================================================
MF174A
- --------------------------------------------------------------------------------
CUSIP Nos.: Prudential Stock Index Fund
Class Z: 74431F209
Class I:
Prudential Small-Cap Index Fund:
Class Z:
Prudential Bond Market Index Fund:
Class Z:
Prudential Pacific Index Fund:
Class Z:
Prudential Europe Index Fund:
Class Z:
- --------------------------------------------------------------------------------
Prudential
Stock
Index Fund
- --------------------
Prudential
Small-Cap
Index Fund
- --------------------
Prudential
Bond Market
Index Fund
- --------------------
Prudential
Pacific
Index Fund
- --------------------
Prudential
Europe
Index Fund
- --------------------
PROSPECTUS
,1997
- --------------------
[LOGO] PRUDENTIAL
INVESTMENTS
<PAGE>
PRUDENTIAL ACTIVE BALANCED FUND
PRUDENTIAL STOCK INDEX FUND
PRUDENTIAL SMALL-CAP INDEX FUND
PRUDENTIAL BOND MARKET INDEX FUND
PRUDENTIAL PACIFIC INDEX FUND
PRUDENTIAL EUROPE INDEX FUND
Statement of Additional Information
dated _____________, 1997
Prudential Active Balanced Fund, Prudential Stock Index Fund, Prudential
Small-Cap Index Fund, Prudential Bond Market Index Fund, Prudential Pacific
Index Fund and Prudential Europe Index Fund (each a Fund and collectively, the
Funds) are each a series of Prudential Dryden Fund (the Company).
The investment objective of Prudential Active Balanced Fund is to seek to
achieve total returns approaching equity returns, while accepting less risk than
an all-equity portfolio, through an actively-managed portfolio of equity
securities, fixed income securities and money market instruments.
The investment objective of Prudential Stock Index Fund is to seek to
provide investment results that correspond to the price and yield performance of
the Standard & Poor's 500 Composite Stock Price Index.
The investment objective of Prudential Small-Cap Index Fund is to seek to
provide investment results that correspond to the price and yield performance of
a broad-based index of small-cap stocks. The Prudential Small-Cap Index Fund
currently uses the Standard & Poor's 600 Small Capitalization Stock Index for
that purpose.
The investment objective of Prudential Bond Market Index Fund is to seek
to provide investment results that correspond to the total return performance of
a broad-based index of fixed income securities. The Prudential Bond Market Index
Fund currently uses the Lehman Brothers Aggregate Index for that purpose.
The investment objective of Prudential Pacific Index Fund is to seek to
provide investment results that correspond to the price and yield performance of
a broad-based index of securities of issuers in the Pacific Region. The
Prudential Pacific Index Fund currently uses the Morgan Stanley Capital
International Pacific Index for that purpose.
The investment objective of Prudential Europe Index Fund is to seek to
provide investment results that correspond to the price and yield performance of
a broad-based index of securities of European issuers. The Prudential Europe
Index Fund currently uses the Morgan Stanley Capital International Europe Index
for that purpose.
There can be no assurance that a Fund's investment objective will be
achieved. See "Investment Objectives and Policies."
The Company's address is Gateway Center Three, 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 Prospectus of Prudential Active Balanced Fund,
dated November 29, 1996 and the Prospectus of Prudential Stock Index Fund,
Prudential Small-Cap Index Fund, Prudential Bond Market Index Fund, Prudential
Pacific Index Fund and Prudential Europe Index Fund, dated , 1997, copies of
which may be obtained from the Company upon request.
B-1
<PAGE>
TABLE OF CONTENTS
PAGE
----
General Information ..................................................... B-2
Investment Objectives and Policies ...................................... B-2
Investment Restrictions ................................................. B-16
Trustees and Officers ................................................... B-17
Manager and Subadvisers ................................................. B-23
Distributor ............................................................. B-26
Portfolio Transactions and Brokerage .................................... B-28
Purchase and Redemption of Fund Shares .................................. B-29
Shareholder Investment Account .......................................... B-32
Net Asset Value ......................................................... B-36
Taxes ................................................................... B-37
Performance and Yield Information ....................................... B-39
Custodian, Transfer and Dividend Disbursing Agent
and Independent Accountants ............................................ B-41
Financial Statements .................................................... B-42
Appendix--Description of Ratings ........................................ A-1
Appendix I--Historical Performance Data ................................. I-1
Appendix II--General Investment Information ............................. II-1
Appendix III--Information Relating to The Prudential .................... III-1
B-2
<PAGE>
GENERAL INFORMATION
The Company changed its name from The Prudential Institutional Fund to
Prudential Dryden Fund effective October 30, 1996. In addition, Active Balanced
Fund changed its name to Prudential Active Balanced Fund and Stock Index Fund
changed its name to Prudential Stock Index Fund at the same time. On February
19, 1997, the Trustees approved the addition of the following four Funds to the
Company: Prudential Small-Cap Index Fund, Prudential Bond Market Index Fund,
Prudential Pacific Index Fund and Prudential Europe Index Fund.
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT POLICIES APPLICABLE TO PRUDENTIAL ACTIVE BALANCED FUND
FORWARD ROLLS AND DOLLAR ROLLS
Forward roll and dollar roll transactions involve the risk that the market
value of the securities sold by Prudential Active Balanced Fund may decline
below the repurchase price of those securities. At the time the Fund enters into
a forward roll transaction, it will place in a segregated account with its
Custodian cash or liquid assets, having a value equal to the repurchase price
(including accrued interest). "Liquid assets," as used in the Funds' Prospectus
and this Statement of Additional Information, include U.S. Government
securities, equity securities, investment grade debt obligations or other
liquid, unencumbered assets.
MORTGAGE-RELATED SECURITIES
Mortgage-backed securities may be classified as private, governmental or
government related, depending on the issuer or guarantor. Private
mortgage-backed securities represent pass-through pools consisting principally
of conventional residential mortgage loans created by non-governmental issuers,
such as commercial banks, savings and loan associations and private mortgage
insurance companies. Governmental mortgage-backed securities are backed by the
full faith and credit of the United States. Government National Mortgage
Association (GNMA), the principal U.S. guarantor of such securities, is a wholly
owned corporate instrumentality of the United States within the Department of
Housing and Urban Development. Pass-through securities issued by the Federal
National Mortgage Association (FNMA) are guaranteed as to timely payment of
principal and interest by FNMA, which guarantee is not backed by the full faith
and credit of the U.S. Government. The Federal Home Loan Mortgage Corporation
(FHLMC) is a corporate instrumentality of the United States, the stock of which
is owned by the Federal Home Loan Banks. Participation certificates representing
interests in mortgages from FHLMC's national portfolio are guaranteed as to the
timely payment of interest and ultimate, but generally not timely, collection of
principal by FHLMC. The obligations of the FHLMC under its guarantee are
obligations solely of FHLMC and are not backed by the full faith and credit of
the U.S. Government.
Prudential Active Balanced Fund expects that private and governmental
entities may create mortgage loan pools offering pass-through investments in
addition to those described above. The mortgages underlying these securities may
be alternative mortgage instruments, that is, mortgage instruments whose
principal or interest payments may vary or whose terms to maturity may be
shorter than previously customary. As new types of mortgage-backed securities
are developed and offered to investors, the Fund, consistent with its investment
objective and policies, will consider making investments in those new types of
securities.
The Fund may also invest in pass-through securities backed by adjustable
rate mortgages that have been issued by GNMA, FNMA and FHLMC or private issuers.
These securities bear interest at a rate that is adjusted monthly, quarterly or
annually. The prepayment experience of the mortgages underlying these securities
may vary from that for fixed rate mortgages.
The average maturity of pass-through pools of mortgage-related securities
varies with the maturities of the underlying mortgage instruments. In addition,
a pool's stated maturity may be shortened by unscheduled payments on the
underlying mortgages. Factors affecting mortgage prepayments include the level
of interest rates, general economic and social conditions, the location of the
mortgaged property and age of the mortgage. Because prepayment rates of
individual pools vary widely, it is not possible to predict accurately the
average life of a particular pool. Common practice is to assume that prepayments
will result in an average life ranging from two to ten years for pools of fixed
rate 30-year mortgages. Pools of mortgages with other maturities or different
characteristics will have varying average life assumptions.
B-3
<PAGE>
Because prepayments of principal generally occur when interest rates are
declining, it is likely that the Fund will have to reinvest the proceeds of
prepayments at lower interest rates than those at which the assets were
previously invested. If this occurs, the Fund's yield will correspondingly
decline. Thus, mortgage-related securities may have less potential for capital
appreciation in periods of falling interest rates than other fixed income
securities of comparable maturity, although these securities may have a
comparable risk of decline in market value in periods of rising interest rates.
To the extent that the Fund purchases mortgage-related securities at a premium,
unscheduled prepayments, which are made at par, will result in a loss equal to
any unamortized premium.
Government stripped mortgage-related interest only (IOs) and principal
only (POs) securities are currently traded in an over-the-counter market
maintained by several large investment banking firms. There can be no assurance
that the Fund will be able to effect a trade of IOs or POs at a time when it
wishes to do so. The Fund will acquire IOs and POs only if, in the opinion of
the Fund's Subadviser, a secondary market for the securities exists at the time
of acquisition, or is subsequently expected. The Fund will treat IOs and POs
that are not U.S. Government securities as illiquid and will limit its
investments in these securities, together with other illiquid investments, in
order not to hold more than 10% of its net assets in illiquid securities. With
respect to IOs and POs that are issued by the U.S. Government, the Subadviser,
subject to the supervision of the Trustees, may determine that such securities
are liquid, if it determines the securities can be disposed of promptly in the
ordinary course of business at a value reasonably close to that used in the
calculation of net asset value per share.
Investing in IOs and POs involves the risks normally associated with
investing in government and government agency mortgage-related securities. In
addition, the yields on IOs and POs are extremely sensitive to the prepayment
experience on the mortgage loans underlying the certificates collateralizing the
securities. If a decline in the level of prevailing interest rates results in a
rate of principal prepayments higher than anticipated, distributions of
principal will be accelerated, thereby reducing the yield to maturity on IOs and
increasing the yield to maturity on POs. Sufficiently high prepayment rates
could result in the Fund not fully recovering its initial investment in an IO.
COLLATERALIZED MORTGAGE OBLIGATIONS
Prudential Active Balanced Fund also may invest in, among other things,
parallel pay Collateralized Mortgage Obligations (CMOs), and Planned
Amortization Class CMOs (PAC Bonds). Parallel pay CMOs are structured to provide
payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds always are
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
In reliance on Securities and Exchange Commission (SEC) rules and orders,
the Fund's investments in certain qualifying CMOs, including CMOs that have
elected to be treated as Real Estate Mortgage Investment Conduits (REMICs), are
not subject to the limitations of the Investment Company Act of 1940 (Investment
Company Act) on acquiring interests in other investment companies. In order to
be able to rely on the SEC's interpretation, the CMOs and REMICs must be
unmanaged, fixed-asset issuers that (i) invest primarily in mortgage-backed
securities, (ii) do not issue redeemable securities, (iii) operate under general
exemptive orders exempting them from all provisions of the Investment Company
Act, and (iv) are not registered or regulated under the Investment Company Act
as investment companies. To the extent that the Fund selects CMOs or REMICs that
do not meet the above requirements, the Fund may not invest more than 10% of its
assets in all such entities and may not acquire more than 3% of the voting
securities of any single such entity.
ASSET-BACKED SECURITIES
The value of these securities may change because of changes in the
market's perception of the creditworthiness of the servicing agent for the pool,
the originator of the pool, or the financial institution providing credit
enhancement for the pool.
CUSTODIAL RECEIPTS
Prudential Active Balanced Fund may acquire custodial receipts or
certificates, such as CATS, TIGRs and FICO Strips, underwritten by securities
dealers or banks, that evidence ownership of future interest payments, principal
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payments or both on certain notes or bonds issued by the U.S. Government, its
agencies or instrumentalities. The underwriters of these certificates or
receipts purchase a U.S. Government security and deposit the security in an
irrevocable trust or custodial account with a custodian bank, which then issues
receipts or certificates that evidence ownership of the periodic unmatured
coupon payments and the final principal payment on the U.S. Government
security. Custodial receipts evidencing specific coupon or principal payments
have the same general attributes as zero coupon U.S. Government securities.
There are a number of risks associated with investments in custodial
receipts. Although typically under the terms of a custodial receipt, the Fund is
authorized to assert its rights directly against the issuer of the underlying
obligation, the Fund may be required to assert through the custodian bank such
rights as may exist against the underlying issuer. Thus, in the event the
underlying issuer fails to pay principal and/or interest when due, the Fund may
be subject to delays, expenses and risks that are greater than those that would
have been involved if the Fund had purchased a direct obligation of the issuer.
In addition, in the event that the trust or custodial account in which the
underlying security has been deposited is determined to be an association
taxable as a corporation, instead of a non-taxable entity, the yield on the
underlying security would be reduced in respect of any taxes paid.
LIQUIDITY PUTS
Prudential Active Balanced Fund may purchase instruments together with the
right to resell the instruments at an agreed-upon price or yield, within a
specified period prior to the maturity date of the instruments. This instrument
is commonly known as a "put bond" or a "tender option bond."
Consistent with its investment objective, the Fund may purchase a put so
that it will be fully invested in securities while preserving the necessary
liquidity to purchase securities on a when-issued basis, to meet unusually large
redemptions and to purchase at a later date securities other than those subject
to the put. The Fund will generally exercise the puts or tender options on their
expiration date when the exercise price is higher than the current market price
for the related fixed income security. Puts or tender options may be exercised
prior to the expiration date in order to fund obligations to purchase other
securities or to meet redemption requests. These obligations may arise during
periods in which proceeds from sales of Fund shares and from recent sales of
portfolio securities are insufficient to meet such obligations or when the funds
available are otherwise allocated for investment. In addition, puts may be
exercised prior to the expiration date in the event the Subadviser for the Fund
revises its evaluation of the creditworthiness of the issuer of the underlying
security. In determining whether to exercise puts or tender options prior to
their expiration date and in selecting which puts or tender options to exercise
in such circumstances, the Fund's Subadviser considers, among other things, the
amount of cash available to the Fund, the expiration dates of the available puts
or tender options, any future commitments for securities purchases, the yield,
quality and maturity dates of the underlying securities, alternative investment
opportunities and the desirability of retaining the underlying securities in the
Fund.
These instruments are not deemed to be "put options" for purposes of the
Fund's investment restriction.
FOREIGN CURRENCY FORWARD CONTRACTS, OPTIONS AND FUTURES TRANSACTIONS
There is no limitation on the value of forward contracts into which
Prudential Active Balanced Fund may enter. However, the Fund's transactions 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 securities
and accruals of interest or dividends receivable and Fund expenses. Position
hedging is the sale of a foreign currency with respect to security positions
denominated or quoted in that currency. The Fund may not position hedge with
respect to a particular currency for an amount greater than the aggregate market
value (determined at the time of making any sale of a forward contract) of
securities, denominated or quoted in, or currently convertible into, such
currency. A forward contract generally has no deposit requirements, and no
commissions are charged for such trades.
The Fund may enter into a forward contract to hedge against risk in the
following circumstances: (i) during the time period when the Fund contracts for
the purchase or sale of a security denominated in a foreign currency, or (ii)
when the Fund anticipates the receipt in a foreign currency of dividends or
interest payments on a security which it holds. 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 transaction, the Fund will be able
to protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the subject foreign currency during
the period between the date on which the security is purchased or sold, or on
which the dividend or interest payment is declared, and the
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date on which such payments are made or received. Additionally, when the Fund's
Subadviser 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 securities of the Fund denominated
in such foreign currency. Further, the Fund may enter into a forward contract in
one foreign currency, or basket of currencies, to hedge against the decline or
increase in value in another foreign currency. Use of a different currency or
basket of currencies magnifies the risk that movements in the price of the
forward contract will not correlate or will correlate unfavorably with the
foreign currency being hedged.
Forward currency contracts (i) are traded in an interbank market conducted
directly between currency traders (typically commercial banks or other financial
institutions) and their customers, (ii) generally have no deposit requirements
and (iii) are typically consummated without payment of any commissions. Failure
by the Fund's contra party to make or take delivery of the underlying currency
at the maturity of the forward contract would result in the loss to the Fund of
any expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures, by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the contra party. Thus, there can be no assurance
that the Fund will in fact be able to close out a forward currency contract at a
favorable price prior to maturity. In addition, in the event of insolvency of
the contra party, the Fund might be unable to close out a forward currency
contract at any time prior to maturity. In either event, the Fund would continue
to be subject to market risk with respect to the position, and would continue to
be required to maintain a position in the securities or currencies that are the
subject of the hedge or to maintain cash or securities in a segregated account.
Prudential Active Balanced Fund may purchase and write put and call
options on foreign currencies traded on securities exchanges or boards of trade
(foreign and domestic) and OTC options for hedging purposes in a manner similar
to that in which forward foreign currency exchange contracts and futures
contracts on foreign currencies will be employed. Options on foreign currencies
are similar to options on securities, except that the Fund has the right to take
or make delivery of a specified amount of foreign currency, rather than
securities.
Generally, the OTC foreign currency options used by the Fund are
European-style options. This means that the option is only exercisable
immediately prior to its expiration. This is in contrast to American-style
options, which are exercisable at any time prior to the expiration date of the
option.
If the Fund's Subadviser anticipates purchasing a foreign security and
also anticipates a rise in the value of such foreign currency (thereby
increasing the cost of such security), the Fund may purchase call options or
write put options on the foreign currency. The Fund could also enter into a long
forward contract or a long futures contract on such currency, or purchase a call
option, or write a put option, on a currency futures contract. The use of such
instruments could offset, at least partially, the effects of the adverse
movements of the exchange rates.
FOREIGN CURRENCY STRATEGIES--SPECIAL CONSIDERATIONS
Prudential Active Balanced Fund may use options on foreign currencies,
futures on foreign currencies, options on futures on foreign currencies and
forward currency contracts, to hedge against movements in the values of the
foreign currencies in which the Fund's securities are denominated. Such currency
hedges can protect against price movements in a security that the Fund owns or
intends to acquire that are attributable to changes in the value of the currency
in which it is denominated. Such hedges do not, however, protect against price
movements in the securities that are attributable to other causes.
The Fund might seek to hedge against changes in the value of a particular
currency when no futures contract, forward contract or option involving that
currency is available or one of such contracts is more expensive than certain
other contracts. In such cases, the Fund may hedge against price movements in
that currency by entering into a contract on another currency or basket of
currencies, the values of which the Fund's Subadviser believes will have a
positive correlation to the value of the currency being hedged. The risk that
movements in the price of the contract will not correlate perfectly with
movements in the price of the currency being hedged is magnified when this
strategy is used.
The value of futures contracts, options on futures contracts, forward
contracts and options on foreign currencies depends on the value of the
underlying currency relative to the U.S. dollar. Because foreign currency
transactions
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occurring in the interbank market might involve substantially larger amounts
than those involved in the use of futures contracts, forward contracts or
options, the Fund could be disadvantaged by dealing in the odd lot market
(generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirements that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the futures contracts or options until they
reopen.
Settlement of futures contracts, forward contracts and options involving
foreign currencies might be required to take place within the country issuing
the underlying currency. Thus, the Fund might be required to accept or make
delivery of the underlying foreign currency in accordance with any U.S. or
foreign regulations regarding the maintenance of foreign banking arrangements by
U.S. residents and might be required to pay any fees, taxes and charges
associated with such delivery assessed in the issuing country.
COVERED FORWARD CURRENCY CONTRACTS, FUTURES CONTRACTS AND OPTIONS
Transactions using forward currency contracts, futures contracts and
options (other than options that the Fund has purchased) expose the Fund to an
obligation to another party. Prudential Active Balanced Fund will not enter into
any such transactions unless it owns either (1) an offsetting ("covered")
position in securities, currencies, or other options, forward currency contracts
or futures contracts, or (2) liquid assets with a value sufficient at all times
to cover its potential obligations not covered as provided in (1) above.
Prudential Active Balanced Fund will comply with SEC guidelines regarding cover
for these instruments and, if the guidelines so require, set aside cash or
liquid assets in a segregated account with its Custodian in the prescribed
amount.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding forward currency contract, futures contract or
option is open, unless they are replaced with similar assets. As a result, the
commitment of a large portion of the Fund's assets to cover or segregated
accounts could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
INVESTMENT POLICIES APPLICABLE TO PRUDENTIAL STOCK INDEX FUND
If net cash outflows from Prudential Stock Index Fund are anticipated, the
Fund may sell stocks (in proportion to their weighting in the Standard & Poor's
500 Composite Stock Price Index (S&P 500 Index)) in amounts in excess of those
needed to satisfy the cash outflows and hold the balance of the proceeds in
short-term investments if such a transaction appears, taking into account
transaction costs, to be more efficient than selling only the amount of stocks
needed to meet the cash requirements. The Fund will not increase its holdings of
cash in anticipation of any decline in the value of the S&P 500 Index or of the
stock markets generally. If Prudential Stock Index Fund does hold un-hedged
short-term investments as a result of the patterns of cash flows to and from the
Fund, such holdings may cause its performance to differ from that of the S&P 500
Index.
THE FUND IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY S&P. S&P MAKES NO
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, TO THE SHAREHOLDERS OF THE FUND
OR ANY MEMBER OF THE PUBLIC REGARDING THE ADVISABILITY OF INVESTING IN
SECURITIES GENERALLY OR IN THE FUND PARTICULARLY OR THE ABILITY OF THE S&P 500
INDEX TO TRACK GENERAL STOCK MARKET PERFORMANCE. S&P'S ONLY RELATIONSHIP TO
PRUDENTIAL MUTUAL FUND MANAGEMENT LLC (MANAGER) AND ITS AFFILIATES IS THE
LICENSING OF CERTAIN TRADEMARKS AND TRADE NAMES OF S&P AND OF THE S&P 500 INDEX
WHICH IS DETERMINED, COMPOSED AND CALCULATED BY S&P WITHOUT REGARD TO THE
MANAGER OR THE FUND. S&P HAS NO OBLIGATION TO TAKE THE NEEDS OF THE MANAGER OR
THE SHAREHOLDERS INTO CONSIDERATION IN DETERMINING, COMPOSING OR CALCULATING THE
S&P 500 INDEX. S&P IS NOT RESPONSIBLE FOR AND HAS NOT PARTICIPATED IN THE
DETERMINATION OF THE PRICES AND AMOUNT OF THE FUND OR THE TIMING OF THE ISSUANCE
OR SALE OF THE SHARES OF THE FUND. S&P HAS NO OBLIGATION OR LIABILITY IN
CONNECTION WITH THE ADMINISTRATION, MARKETING OR TRADING OF THE FUND.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS
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THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE RESULTS TO BE
OBTAINED BY THE MANAGER, SHAREHOLDERS, OR ANY OTHER PERSON OR ENTITY FROM THE
USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR
IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY
DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL
S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL
DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH
DAMAGES.
INVESTMENT POLICIES APPLICABLE TO PRUDENTIAL SMALL-CAP INDEX FUND
If net cash outflows from Prudential Small-Cap Index Fund are anticipated,
the Fund may sell stocks (in proportion to their weighting in the Standard &
Poor's 600 Small Capitalization Stock Index (S&P 600 Index)) in amounts in
excess of those needed to satisfy the cash outflows and hold the balance of the
proceeds in short-term investments if such a transaction appears, taking into
account transaction costs, to be more efficient than selling only the amount of
stocks needed to meet the cash requirements. The Fund will not increase its
holdings of cash in anticipation of any decline in the value of the S&P 600
Index or of the stock markets generally. If Prudential Small-Cap Index Fund does
hold un-hedged short-term investments as a result of the patterns of cash flows
to and from the Fund, such holdings may cause its performance to differ from
that of the S&P 600 Index.
THE FUND IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY S&P. S&P MAKES NO
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, TO THE SHAREHOLDERS OF THE FUND
OR ANY MEMBER OF THE PUBLIC REGARDING THE ADVISABILITY OF INVESTING IN
SECURITIES GENERALLY OR IN THE FUND PARTICULARLY OR THE ABILITY OF THE S&P 600
INDEX TO TRACK GENERAL STOCK MARKET PERFORMANCE. S&P'S ONLY RELATIONSHIP TO THE
MANAGER AND ITS AFFILIATES IS THE LICENSING OF CERTAIN TRADEMARKS AND TRADE
NAMES OF S&P AND OF THE S&P 600 INDEX WHICH IS DETERMINED, COMPOSED AND
CALCULATED BY S&P WITHOUT REGARD TO THE MANAGER OR THE FUND. S&P HAS NO
OBLIGATION TO TAKE THE NEEDS OF THE MANAGER OR THE SHAREHOLDERS INTO
CONSIDERATION IN DETERMINING, COMPOSING OR CALCULATING THE S&P 600 INDEX. S&P IS
NOT RESPONSIBLE FOR AND HAS NOT PARTICIPATED IN THE DETERMINATION OF THE PRICES
AND AMOUNT OF THE FUND OR THE TIMING OF THE ISSUANCE OR SALE OF THE SHARES OF
THE FUND. S&P HAS NO OBLIGATION OR LIABILITY IN CONNECTION WITH THE
ADMINISTRATION, MARKETING OR TRADING OF THE FUND.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 600
INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO THE RESULTS TO BE OBTAINED BY THE MANAGER, SHAREHOLDERS, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 600 INDEX OR ANY DATA INCLUDED
THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE S&P 600 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY
OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL,
PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
INVESTMENT POLICIES APPLICABLE TO PRUDENTIAL BOND MARKET INDEX FUND
If net cash outflows from Prudential Bond Market Index Fund are
anticipated, the Fund may sell securities (in proportion to their weighting in
the Lehman Brothers Aggregate Index) in amounts in excess of those needed to
satisfy the cash outflows and hold the balance of the proceeds in short-term
investments if such a transaction appears, taking into account transaction
costs, to be more efficient than selling only the amount of securities needed to
meet the cash requirements. The Fund will not increase its holdings of cash in
anticipation of any decline in the value of the Lehman Brothers Aggregate Index
or of the bond markets generally. If Prudential Bond Market Fund does hold
un-hedged short-term investments as a result of the patterns of cash flows to
and from the Fund, such holdings may cause its performance to differ from that
of the Lehman Brothers Aggregate Index.
The Fund is not sponsored, endorsed, sold or promoted by Lehman Brothers.
MORTGAGE-RELATED SECURITIES
Mortgage-backed securities may be classified as private, governmental or
government related, depending on the issuer or guarantor. Private
mortgage-backed securities represent pass-through pools consisting principally
of
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conventional residential mortgage loans created by non-governmental issuers,
such as commercial banks, savings and loan associations and private mortgage
insurance companies. Governmental mortgage-backed securities are backed by the
full faith and credit of the United States. Government National Mortgage
Association (GNMA), the principal U.S. guarantor of such securities, is a wholly
owned corporate instrumentality of the United States within the Department of
Housing and Urban Development. Pass-through securities issued by the Federal
National Mortgage Association (FNMA) are guaranteed as to timely payment of
principal and interest by FNMA, which guarantee is not backed by the full faith
and credit of the U.S. Government. The Federal Home Loan Mortgage Corporation
(FHLMC) is a corporate instrumentality of the United States, the stock of which
is owned by the Federal Home Loan Banks. Participation certificates representing
interests in mortgages from FHLMC's national portfolio are guaranteed as to the
timely payment of interest and ultimate, but generally not timely, collection of
principal by FHLMC. The obligations of the FHLMC under its guarantee are
obligations solely of FHLMC and are not backed by the full faith and credit of
the U.S. Government.
Prudential Bond Market Index Fund expects that private and governmental
entities may create mortgage loan pools offering pass-through investments in
addition to those described above. The mortgages underlying these securities may
be alternative mortgage instruments, that is, mortgage instruments whose
principal or interest payments may vary or whose terms to maturity may be
shorter than previously customary. As new types of mortgage-backed securities
are developed and offered to investors, the Fund, consistent with its investment
objective and policies, will consider making investments in those new types of
securities.
The Fund may also invest in pass-through securities backed by adjustable
rate mortgages that have been issued by GNMA, FNMA and FHLMC or private issuers.
These securities bear interest at a rate that is adjusted monthly, quarterly or
annually. The prepayment experience of the mortgages underlying these securities
may vary from that for fixed rate mortgages.
The average maturity of pass-through pools of mortgage-related securities
varies with the maturities of the underlying mortgage instruments. In addition,
a pool's stated maturity may be shortened by unscheduled payments on the
underlying mortgages. Factors affecting mortgage prepayments include the level
of interest rates, general economic and social conditions, the location of the
mortgaged property and age of the mortgage. Because prepayment rates of
individual pools vary widely, it is not possible to predict accurately the
average life of a particular pool. Common practice is to assume that prepayments
will result in an average life ranging from two to ten years for pools of fixed
rate 30-year mortgages. Pools of mortgages with other maturities or different
characteristics will have varying average life assumptions.
Because prepayments of principal generally occur when interest rates are
declining, it is likely that the Fund will have to reinvest the proceeds of
prepayments at lower interest rates than those at which the assets were
previously invested. If this occurs, the Fund's yield will correspondingly
decline. Thus, mortgage-related securities may have less potential for capital
appreciation in periods of falling interest rates than other fixed income
securities of comparable maturity, although these securities may have a
comparable risk of decline in market value in periods of rising interest rates.
To the extent that the Fund purchases mortgage-related securities at a premium,
unscheduled prepayments, which are made at par, will result in a loss equal to
any unamortized premium.
Government stripped mortgage-related interest only (IOs) and principal
only (POs) securities are currently traded in an over-the-counter market
maintained by several large investment banking firms. There can be no assurance
that the Fund will be able to effect a trade of IOs or POs at a time when it
wishes to do so. The Fund will acquire IOs and POs only if, in the opinion of
the Fund's Subadviser, a secondary market for the securities exists at the time
of acquisition, or is subsequently expected. The Fund will treat IOs and POs
that are not U.S. Government securities as illiquid and will limit its
investments in these securities, together with other illiquid investments, in
order not to hold more than 10% of its net assets in illiquid securities. With
respect to IOs and POs that are issued by the U.S. Government, the Subadviser,
subject to the supervision of the Trustees, may determine that such securities
are liquid, if it determines the securities can be disposed of promptly in the
ordinary course of business at a value reasonably close to that used in the
calculation of net asset value per share.
Investing in IOs and POs involves the risks normally associated with
investing in government and government agency mortgage-related securities. In
addition, the yields on IOs and POs are extremely sensitive to the prepayment
experience on the mortgage loans underlying the certificates collateralizing the
securities. If a decline in the level of prevailing interest rates results in a
rate of principal prepayments higher than anticipated, distributions of
principal will be accelerated, thereby reducing the yield to maturity on IOs and
increasing the yield to maturity on POs. Sufficiently high prepayment rates
could result in the Fund not fully recovering its initial investment in an IO.
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INVESTMENT POLICIES APPLICABLE TO PRUDENTIAL PACIFIC INDEX FUND
If net cash outflows from Prudential Pacific Index Fund are anticipated,
the Fund may sell stocks (in proportion to their weighting in the Morgan Stanley
Capital International Pacific Index (MSCI-Pacific Index)) in amounts in excess
of those needed to satisfy the cash outflows and hold the balance of the
proceeds in short-term investments if such a transaction appears, taking into
account transaction costs, to be more efficient than selling only the amount of
stocks needed to meet the cash requirements. The Fund will not increase its
holdings of cash in anticipation of any decline in the value of the MSCI-Pacific
Index or of the stock markets generally. If Prudential Pacific Index Fund does
hold un-hedged short-term investments as a result of the patterns of cash flows
to and from the Fund, such holdings may cause its performance to differ from
that of the MSCI-Pacific Index.
The Fund is not sponsored, endorsed, sold or promoted by Morgan Stanley
Capital International.
INVESTMENT POLICIES APPLICABLE TO PRUDENTIAL EUROPE INDEX FUND
If net cash outflows from Prudential Europe Index Fund are anticipated,
the Fund may sell stocks (in proportion to their weighting in the Morgan Stanley
Capital International Europe Index (MSCI-Europe Index)) in amounts in excess of
those needed to satisfy the cash outflows and hold the balance of the proceeds
in short-term investments if such a transaction appears, taking into account
transaction costs, to be more efficient than selling only the amount of stocks
needed to meet the cash requirements. The Fund will not increase its holdings of
cash in anticipation of any decline in the value of the MSCI-Europe Index or of
the stock markets generally. If Prudential Europe Index Fund does hold un-hedged
short-term investments as a result of the patterns of cash flows to and from the
Fund, such holdings may cause its performance to differ from that of the
MSCI-Europe Index.
The Fund is not sponsored, endorsed, sold or promoted by Morgan Stanley
Capital International.
INVESTMENT POLICIES APPLICABLE TO EACH OF THE FUNDS
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. Government or one of its
agencies, authorities or instrumentalities in which the Funds may invest include
debt obligations of varying maturities issued by the U.S. Treasury or issued or
guaranteed by an agency or instrumentality of the U.S. Government, including the
Federal Housing Administration, Farmers Home Administration, Export-Import Bank
of the U.S., Small Business Administration, GNMA, General Services
Administration, Central Bank for Cooperatives, Federal Farm Credit Banks,
Federal Home Loan Banks, FHLMC, Federal Intermediate Credit Banks, Federal Land
Banks, FNMA, Maritime Administration, Tennessee Valley Authority, District of
Columbia Armory Board, Student Loan Marketing Association and Resolution Trust
Corporation. Direct obligations of the U.S. Treasury include a variety of
securities that differ in their interest rates, maturities and dates of
issuance. Because the U.S. Government is not obligated by law to provide support
to an instrumentality that it sponsors, a Fund will invest in obligations issued
by an instrumentality of the U.S. Government only if the Fund's investment
adviser determines that the instrumentality's credit risk does not render its
securities unsuitable for investment by the Fund.
CONVERTIBLE SECURITIES, WARRANTS AND RIGHTS
A convertible security is a bond, debenture, corporate note, preferred
stock or other similar security that may be converted into or exchanged for a
prescribed amount of common stock or other equity securities of the same or a
different issuer within a particular period of time at a specified price or
formula. A warrant or right entitles the holder to purchase equity securities at
a specific price for a specific period of time. 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.
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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.
In recent years, convertibles have been developed which combine higher or
lower current income with options and other features. The Funds may invest in
these types of convertible securities.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Prudential Active Balanced Fund may enter into in repurchase and reverse
repurchase agreements. Prudential Stock Index Fund, Prudential Small-Cap Index
Fund, Prudential Bond Market Index Fund, Prudential Pacific Index Fund and
Prudential Europe Index Fund may enter into repurchase agreements. Each Fund may
enter into such agreements with banks and securities dealers which meet the
creditworthiness standards established by the Company's Trustees (Qualified
Institutions). The investment adviser will monitor the continued
creditworthiness of Qualified Institutions, subject to the oversight of the
Company's Trustees. The resale price of the securities purchased reflects the
purchase price plus an agreed upon market rate of interest which is unrelated to
the coupon rate or date of maturity of the purchased security. The Funds receive
collateral equal to the resale price, which is marked-to-market daily. These
agreements permit each Fund to keep all its assets earning interest while
retaining "overnight" flexibility to pursue investments of a longer-term nature.
The use of repurchase agreements and reverse repurchase agreements involve
certain risks. For example, if the seller of securities under a repurchase
agreement defaults on its obligation to repurchase the underlying securities, as
a result of its bankruptcy or otherwise, a Fund will seek to dispose of such
securities, which action could involve costs or delays. If the seller becomes
insolvent and subject to liquidation or reorganization under applicable
bankruptcy or other laws, the Fund's ability to dispose of the underlying
securities may be restricted. Finally, it is possible that a Fund may not be
able to substantiate its interest in the underlying securities. To minimize this
risk, the securities underlying the agreement will be held by the Custodian at
all times in an amount at least equal to the repurchase price, including accrued
interest. If the counterparty fails to resell or repurchase the securities, a
Fund may suffer a loss to the extent proceeds from the sale of the underlying
collateral are less than the repurchase price. Reverse repurchase agreements
involve the risk that the market value of the securities retained in lieu of
sale by Prudential Active Balanced Fund may decline below the price of the
securities the Fund has sold but is obligated to repurchase.
FIXED INCOME SECURITIES
In general, the ratings of Moody's Investors Service, Inc. (Moody's),
Standard & Poor's Ratings Group (S&P Ratings), Duff and Phelps, Inc. (Duff &
Phelps) and other nationally recognized statistical rating organizations
(NRSROs) represent the opinions of those organizations as to the quality of debt
obligations that they rate. These ratings are relative and subjective, are not
absolute standards of quality and do not evaluate the market risk of securities.
These ratings will be among the initial criteria used for the selection of
portfolio securities. Among the factors that the rating agencies consider are
the long-term ability of the issuer to pay principal and interest and general
economic trends.
Subsequent to its purchase by a Fund, an issue of debt obligations may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Fund. Neither event will require the sale of the debt obligation
by the Fund, but the Fund's Subadviser will consider the event in its
determination of whether the Fund should continue to hold the obligation. In
addition, to the extent that the ratings change as a result of changes in rating
organizations or their
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rating systems or owing to a corporate restructuring of Moody's, S&P Ratings,
Duff & Phelps or another NRSRO, the Fund will attempt to use comparable ratings
as standards for its investments in accordance with its investment objectives
and policies. An Appendix to this Statement of Additional Information contains
further information concerning the ratings of Moody's, S&P Ratings and Duff &
Phelps and their significance.
Prudential Active Balanced Fund may invest, to a limited extent, in
medium, lower-rated and unrated debt securities. Debt securities rated in the
lowest category of investment grade debt (i.e., Baa by Moody's) may have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds.
Non-investment grade fixed income securities are rated lower than Baa (or
the equivalent rating or, if not rated, determined by the relevant Subadviser to
be of comparable quality to securities so rated) and are commonly referred to as
high risk or high yield securities or "junk" bonds. High yield securities are
generally riskier than higher quality securities and are subject to more credit
risk, including risk of default, and the prices of such securities are more
volatile than higher quality securities. Such securities may also have less
liquidity than higher quality securities. Prudential Active Balanced Fund is not
authorized to invest in excess of 5% of its net assets in non-investment grade
fixed income securities.
The markets in which medium and lower-rated securities (or unrated
securities that are equivalent to medium and lower-rated securities) are traded
are generally more limited than those in which higher-rated securities are
traded. The existence of limited markets may make it more difficult for the Fund
to obtain accurate market quotations for purposes of valuing its portfolio and
calculating its net asset value. Moreover, the lack of liquid trading market may
restrict the availability of debt securities for the Prudential Active Balanced
Fund to purchase and may also have the effect of limiting the ability of the
Fund to sell debt securities at their fair value either to meet redemption
requests or to respond to changes in the economy or the financial markets.
Lower-rated fixed income securities present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Prudential
Active Balanced Fund may have to replace the security with a lower-yielding
security, resulting in a decreased return for investors. Also, as the principal
value of fixed income securities moves inversely with movements in interest
rates, in the event of rising interest rates, the value of the securities held
by the Fund may decline proportionately more than the Fund consisting of
higher-rated securities. Investments in zero coupon bonds may be more
speculative and subject to greater fluctuations in value due to changes in
interest rates than bonds that pay interest currently. If the Fund experiences
unexpected net redemptions, it may be forced to sell its higher-rated bonds,
resulting in a decline in the overall credit quality of the securities held by
the Fund and increasing the exposure of the Fund to the risks of lower-rated
securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
To secure prices deemed advantageous at a particular time, each Fund may
purchase securities on a when-issued or delayed delivery basis, in which case
delivery of the securities occurs beyond the normal settlement period; payment
for or delivery of the securities would be made at the same time or prior to the
reciprocal delivery or payment by the other party to the transaction. A Fund
will enter into when-issued or delayed delivery transactions for the purpose of
acquiring securities and not for the purpose of leverage. When-issued securities
purchased by a Fund may include securities purchased on a "when, as and if
issued" basis under which the issuance of the securities depends on the
occurrence of a subsequent event, such as approval of a merger, corporate
reorganization or debt restructuring.
Securities purchased on a when-issued or delayed delivery basis may expose
a Fund to risk because the securities may experience fluctuations in value prior
to their actual delivery. A Fund does not accrue income with respect to a
when-issued or delayed delivery security prior to its stated delivery date.
Purchasing securities on a when-issued or delayed delivery basis may involve the
additional risk that the yield available in the market when the delivery takes
place may be higher than that obtained in the transaction itself.
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SECURITIES LENDING
A Fund will enter into securities lending transactions only with Qualified
Institutions. A Fund will comply with the following conditions whenever it lends
securities: (i) the Fund must receive at least 100% cash collateral or
equivalent securities from the borrower; (ii) the value of the loan is "marked
to market" on a daily basis; (iii) the Fund must be able to terminate the loan
at any time; (iv) the Fund must receive reasonable interest on the loan, as well
as any dividends, interest or other distributions on the loaned securities and
any increase in market value; (v) the Fund may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower except that, if a material event adversely
affecting the investment in the loaned securities occurs, the Fund must
terminate the loan and regain the right to vote the securities. A Fund may pay
reasonable finders', administrative and custodial fees in connection with a loan
of its securities. In these transactions, there are risks of delay in recovery
and in some cases even of loss of rights in the collateral should the borrower
of the securities fail financially.
BORROWING
Each Fund may borrow from time to time, at its Subadviser's discretion, to
take advantage of investment opportunities, when yields on available investments
exceed interest rates and other expenses of related borrowing, or when, in the
Subadviser's opinion, unusual market conditions otherwise make it advantageous
for the Fund to increase its investment capacity. A Fund will only borrow when
there is an expectation that it will benefit the Fund after taking into account
considerations such as interest income and possible losses upon liquidation.
Borrowing by a Fund creates an opportunity for increased net income but, at the
same time, creates risks, including the fact that leverage may exaggerate
changes in the net asset value of Fund shares and in the yield on the Fund. A
Fund may also borrow for temporary, extraordinary or emergency purposes and for
the clearance of transactions.
SECURITIES OF FOREIGN ISSUERS
The value of a Fund's foreign investments may be significantly affected by
changes in currency exchange rates. The dollar value of a foreign security
generally decreases when the value of the dollar rises against the foreign
currency in which the security is denominated and tends to increase when the
value of the dollar falls against such currency. In addition, the value of the
Fund's assets may be affected by losses and other expenses incurred in
converting between various currencies in order to purchase and sell foreign
securities and by currency restrictions and exchange control regulation.
The economies of many of the countries in which a Fund may invest are not
as developed as the economy of the U.S. and may be subject to significantly
different forces. Political or social instability, expropriation or confiscatory
taxation, and limitations on the removal of funds or other assets, could also
adversely affect the value of investments.
Foreign companies are generally not subject to the regulatory controls
imposed on U.S. issuers and, in general, there is less publicly available
information about foreign securities than is available about domestic
securities. Many foreign companies are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to domestic companies. Income from foreign
securities owned by a Fund may be reduced by a withholding tax at the source
which would reduce dividend income payable to shareholders.
Brokerage commission rates in foreign countries, which are generally fixed
rather than subject to negotiation as in the U.S. are likely to be higher. The
securities markets in many of the countries in which a Fund may invest will have
substantially less trading volume than the principal U.S. markets. As a result,
the securities of some companies in these countries may be less liquid and more
volatile than comparable U.S. securities. There is generally less government
regulation and supervision of foreign stock exchanges, brokers and issuers which
may make it difficult to enforce contractual obligations.
OPTIONS ON SECURITIES AND SECURITIES INDICES
A number of risk factors are associated with options transactions. There
is no assurance that a liquid secondary market on an options exchange will exist
for any particular option, at any particular time. If a Fund is unable to effect
a
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closing purchase transaction with respect to covered options it has written, a
Fund will not be able to sell the underlying securities or dispose of assets
held in a segregated account until the options expire or are exercised.
Similarly, if a Fund is unable to effect a closing sale transaction with respect
to options it has purchased, it would have to exercise the options in order to
realize any profit and may incur transaction costs upon the purchase or sale of
underlying securities. The ability to terminate over-the-counter (OTC) option
positions is more limited than the ability to terminate exchange-traded option
positions because a Fund would have to negotiate directly with a contra party.
In addition, with OTC options, there is a risk that the contra party in such
transactions will not fulfill its obligations.
A Fund pays brokerage commissions or spreads in connection with its
options transactions, as well as for purchases and sales of underlying
securities. The writing of options could result in significant increases in a
Fund's turnover rate. A Fund's transactions in options may be limited by the
requirements of the Internal Revenue Code of 1986, as amended (the Internal
Revenue Code) for qualification as a regulated investment company.
The risks of investment in index options may be greater than options on
securities. Because index options are settled in cash, when a Fund writes a call
option on an index it cannot provide in advance for its potential settlement
obligations by acquiring and holding the underlying securities. A Fund can
offset some of the risk of writing a call index option position by holding a
diversified portfolio of securities similar to those on which the underlying
index is based. However, the Fund cannot, as a practical matter, acquire and
hold a portfolio containing exactly the same securities as underlie the index
and, as a result, bears a risk that the value of the securities held will vary
from the value of the index.
Even if a Fund could assemble a securities portfolio that exactly
reproduced the composition of the underlying index, it still would not be fully
covered from a risk standpoint because of the "timing risk" inherent in writing
index options. When an index option is exercised, the amount of cash that the
holder is entitled to receive is determined by the difference between the
exercise price and the closing index level on the date when the option is
exercised. As with other kinds of options, the Fund as the call writer will not
know that it has been assigned until the next business day at the earliest. The
time lag between exercise and notice of assignment poses no risk for the writer
of a covered call on a specific underlying security, such as a common stock,
because there the writer's obligation is to deliver the underlying security, not
to pay its value as of a fixed time in the past. So long as the writer already
owns the underlying security, it can satisfy its settlement obligations by
simply delivering it, and the risk that its value may have declined since the
exercise date is borne by the exercising holder. In contrast, even if the writer
of an index call holds securities that exactly match the composition of the
underlying index, it will not be able to satisfy its assignment obligations by
delivering those securities against payment of the exercise price. Instead, it
will be required to pay cash in an amount based on the closing index value on
the exercise date; and by the time it learns that it has been assigned, the
index may have declined, with a corresponding decline in the value of its
securities portfolio. This "timing risk" is an inherent limitation on the
ability of index call writers to cover their risk exposure by holding securities
positions.
If a Fund has purchased an index option and exercises it before the
closing index value for that day is available, it runs the risk that the level
of the underlying index may subsequently change. 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.
A Fund will not purchase put options or call options if, after any such
purchase, the aggregate premiums paid for such options would exceed 20% of the
Fund's net assets. The aggregate value of the obligations underlying put options
will not exceed 25% of a Fund's net assets.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
A futures contract on securities or currency is an agreement to buy and
sell securities or currency at a specified price at a designated date. Futures
contracts and options thereon may be entered into for hedging purposes and for
the other purposes described in each Fund's Prospectus. A Fund may enter into
futures contracts in order to hedge against changes in interest rates, stock
market prices or currency exchange rates.
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<PAGE>
The purchase of futures or call options thereon can serve as a long hedge,
and the sale of futures or the purchase of put options thereon can serve as a
short hedge. Writing call options on futures contracts can serve as a limited
short hedge, and writing put options on futures contracts can serve as a limited
long hedge.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract, a Fund is required to deposit "initial margin,"
consisting of cash or U.S. Government securities, in an amount generally equal
to 10% or less of the contract value. Margin must also be deposited when writing
a call or put option on a futures contract, in accordance with applicable
exchange rules. Unlike margin in securities transactions, initial margin does
not represent a borrowing, but rather is in the nature of a performance bond or
good-faith deposit that is returned to the Fund at the termination of the
transaction if all contractual obligations have been satisfied. Under certain
circumstances, such as periods of high volatility, a Fund may be required by an
exchange to increase the level of its initial margin payment.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of a Fund's obligations to or from a futures
broker. When a Fund purchases an option on a future, the premium paid plus
transaction costs are all that is at risk. In contrast, when a Fund purchases or
sells a futures contract or writes a call or put option thereon, it is subject
to daily variation margin calls that could be substantial in the event of
adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
Each Fund intends to enter into futures and options on futures transactions only
on exchanges or boards of trade where there appears to be a liquid secondary
market. However, there can be no assurance that such a market will exist for a
particular contract at a particular time.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or option on a futures contract can
vary from the previous day's settlement price; once that limit is reached, no
trades may be made that day at a price beyond the limit. Daily price limits do
not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If a Fund were unable to liquidate a futures or option on a futures
contract position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position. In addition,
except in the case of purchased options, the Fund would continue to be required
to make daily variation margin payments and might be required to maintain the
position being hedged by the future or option or to maintain cash or securities
in a segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or options on futures contracts
might not correlate perfectly with movements in the prices of the investments
being hedged. For example, all participants in the futures and options on
futures contracts markets are subject to daily variation margin calls and might
be compelled to liquidate futures or options on futures contract positions whose
prices are moving unfavorably to avoid being subject to further calls. These
liquidations could increase price volatility of the instruments and distort the
normal price relationship between the futures or options and the investments
being hedged. Also, because initial margin deposit requirements in the futures
market are less onerous than margin requirements in the securities markets,
there might be increased participation by speculators in the futures markets.
This participation also might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities markets involving
arbitrage, "program trading" and other investment strategies might result in
temporary price distortions.
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<PAGE>
ILLIQUID SECURITIES
Each of the Funds may hold up to 15% of its net assets in illiquid
securities. Illiquid securities include repurchase agreements which have a
maturity of longer than seven days and securities that are illiquid by virtue of
the absence of a readily available market 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 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 and
commercial paper for which there is a readily available market will not be
deemed illiquid. The Subadvisers will monitor the liquidity of such restricted
securities, subject to the supervision of the Trustees. In reaching liquidity
decisions, Subadvisers will consider, among other things, 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 NRSROs, or if only one NRSRO rates the securities, by
that NRSRO, or, if unrated, be of comparable quality in the view of the
investment adviser, and (ii) it must not be "traded flat" (i.e., without accrued
interest) or in default as to principal or interest. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
The staff of the SEC has taken the position that purchased 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
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<PAGE>
securities used as "cover" as liquid. The Fund will also treat non-U.S.
Government IOs and POs as illiquid so long as the staff of the SEC maintains its
position that such securities are illiquid.
OTHER INVESTMENT TECHNIQUES
Each Fund may take advantage of opportunities in the area of options and
futures contracts and any other derivative instruments that are not presently
contemplated for use by such Fund or that are not currently available but that
may be developed, to the extent such opportunities are both consistent with its
investment objective and legally permissible for the Fund. Before entering into
such transactions or making any such investment, the Fund will provide
appropriate disclosure in its Prospectus.
INVESTMENT RESTRICTIONS
The investment restrictions listed below have been adopted by the Company
as fundamental policies of the Funds, except as otherwise indicated. Under the
Investment Company Act, a fundamental policy of a Fund may not be changed
without the vote of a majority of the outstanding voting securities of the Fund.
As defined in the Investment Company Act, a "majority of a Fund's outstanding
voting securities" means the lesser of (i) 67% of the shares represented at a
meeting at which more than 50% of the outstanding shares are present in person
or represented by proxy or (ii) more than 50% of the outstanding shares. For
purposes of the following limitations: (i) all percentage limitations apply
immediately after a purchase or initial investment; and (ii) any subsequent
change in any applicable percentage resulting from market fluctuations does not
require elimination of any asset from the Fund.
A Fund may not:
1. Purchase any security if, as a result, with respect to 75% of the
Fund's total assets, more than 5% of the value of its total assets (determined
at the time of investment) would then be invested in the securities of any one
issuer.
2. Purchase a security if more than 10% of the outstanding voting
securities of any one issuer would be held by the Fund.
3. Purchase a security if, as a result, 25% or more of the value of its
total assets (determined at the time of investment) would be invested in
securities of one or more issuers having their principal business activities in
the same industry. This restriction does not apply to obligations issued or
guaranteed by the United States Government, its agencies or instrumentalities.
4. Purchase or sell real estate or interests therein (including limited
partnership interests), although a Fund may purchase securities of issuers which
engage in real estate operations and securities which are secured by real estate
or interests therein.
5. Purchase or sell commodities or commodity futures contracts, except
that a Fund may purchase and sell financial futures contracts and options
thereon and that forward contracts are not deemed to be commodities or commodity
futures contracts.
6. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that a Fund may invest in the
securities of companies which operate, invest in or sponsor such programs.
7. Issue senior securities, borrow money or pledge its assets, except that
each Fund may borrow from banks or through forward rolls, dollar rolls or
reverse repurchase agreements up to 20% of the value of its total assets to take
advantage of investment opportunities, for temporary, extraordinary or emergency
purposes, or for the clearance of transactions and 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; the purchase and sale of options, financial futures
contracts and options thereon; the entry into repurchase agreements and
collateral and margin arrangements with respect to any of the foregoing, will
not be deemed to be a pledge of assets nor the issuance of senior securities.
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<PAGE>
8. Make loans except by the purchase of fixed income securities in which a
Fund may invest consistently with its investment objective and policies or by
use of reverse repurchase and repurchase agreements, forward rolls, dollar rolls
and securities lending arrangements.
9. Make short sales of securities.
10. Purchase securities on margin, except for such short-term loans as are
necessary for the clearance of purchases of portfolio securities. (For the
purpose of this restriction, the deposit or payment by any Fund of initial or
maintenance margin in connection with financial futures contracts is not
considered the purchase of a security on margin.)
11. 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 no limit with respect to
investments in restricted securities.
Whenever any fundamental investment policy or investment restriction
states a maximum percentage of a 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 a Fund's asset
coverage for borrowings falls below 300%, the Fund will take prompt action to
reduce its borrowings, as required by applicable law.
TRUSTEES AND OFFICERS
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POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) COMPANY DURING PAST FIVE YEARS
- ------------------------ ------- ----------------------
Edward D. Beach (72) Trustee 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.; Member of the
Board of Trustees of Mars Hill
College; Director of The High
Yield Income Fund, Inc.
Delayne Dedrick Gold (58) Trustee Marketing and Management
Consultant; Director of the
High Yield Income Fund, Inc.
* Robert F. Gunia (50) Trustee Comptroller, Prudential
Investments (since May 1996);
Executive Vice President and
Treasurer (since December
1996), Prudential Mutual Fund
Management LLC (PMF); Senior
Vice President (since March
1987) of Prudential Securities
Incorporated (Prudential
Securities); formerly Chief
Administrative Officer (July
1990-September 1996), Director
(January 1989-September 1996)
and 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); Director of The High
Yield Income Fund, Inc.
B-18
<PAGE>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) COMPANY DURING PAST FIVE YEARS
- ------------------------ ------- ----------------------
Donald D. Lennox (78) Trustee Chairman (since February 1990)
and Director (since April 1989)
of International Imaging
Materials, Inc. (thermal
transfer ribbon manufacturer);
Retired Chairman, Chief
Executive Officer and Director
of Schlegel Corporation
(industrial manufacturing)
(March 1987-February 1989);
Director of Gleason
Corporation, Personal Sound
Technologies, Inc. and The High
Yield Income Fund, Inc.
Douglas H. McCorkindale (57) Trustee Vice Chairman, Gannett Co. Inc.
(publishing and media) (since
March 1984); Director of
Gannett Co. Inc., Frontier
Corporation and Continental
Airlines, Inc.
* Mendel A. Melzer, CFA (35) Trustee Chief Investment Officer (since
751 Broad St. October 1996) of Prudential
Newark, NJ 07102 Mutual Funds; formerly Chief
Financial Officer (November
1995-September 1996) of
Prudential Investments, Senior
Vice President and Chief
Financial Officer (April
1993-November 1995) of
Prudential Preferred Financial
Services, Managing Director
(April 1991-April 1993) of
Prudential Investment Advisors
and Senior Vice President (July
1989-April 1991) of Prudential
Capital Corporation; Chairman
and Director of Prudential
Series Fund, Inc.; Director of
The High Yield Income Fund,
Inc.
Thomas T. Mooney (55) Trustee President of the Greater
Rochester Metro Chamber of
Commerce; former Rochester City
Manager; Trustee of Center for
Governmental Research, Inc.;
Director of Blue Cross of
Rochester, Monroe County Water
Authority, Rochester Jobs,
Inc., Executive Service Corps
of Rochester, Monroe County
Industrial Development
Corporation, Northeast Midwest
Institute, The Business Council
of New York State, First
Financial Fund, Inc., The High
Yield Income Fund, Inc. and The
High Yield Plus Fund, Inc.
Stephen P. Munn (54) Trustee Chairman (since January 1994),
Director and President (since
1988) and Chief Executive
Officer (1988-December 1993) of
Carlisle Companies Incorporated
(manufacturer of industrial
products).
B-19
<PAGE>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) COMPANY DURING PAST FIVE YEARS
- ------------------------ ------- ----------------------
* Richard A. Redeker (53) Trustee Employee of Prudential
751 Broad St. Investments; formerly
Newark, NJ 07102 President, Chief Executive
Officer and Director (October
1993-September 1996),
Prudential Mutual Fund
Management, Inc., Executive
Vice President, Director and
Member of the Operating
Committee (October
1993-September 1996),
Prudential Securities, Director
(October 1993-September 1996)
of Prudential Securities Group,
Inc., Executive Vice President,
The Prudential Investment
Corporation (PIC) (January
1994-September 1996), Director
(January 1994-September 1996)
of Prudential Mutual Fund
Distributors, Inc. and
Prudential Mutual Fund
Services, Inc. and Senior
Executive Vice President and
Director of Kemper Financial
Services, Inc. (September
1978-September 1993); President
and Director of The High Yield
Income Fund, Inc.
Robin B. Smith (57) Trustee Chairman and Chief Executive
Officer (since August 1996), of
Publishers Clearing House;
formerly President and Chief
Executive Officer (January
1988-August 1996) and President
and Chief Operating Officer
(September 1981-December 1988)
of Publishers Clearing House;
Director of BellSouth
Corporation, The Omnicom Group,
Inc., Texaco Inc., Spring
Industries Inc. and Kmart
Corporation.
Louis A Weil, III (55) Trustee Publisher and Chief Executive
Officer (since January 1996)
and Director (since September
1991) of Central Newspapers,
Inc.; Chairman of the Board
(since January 1996), Publisher
and Chief Executive Officer
(August 1991-December 1995) of
Phoenix Newspapers, Inc.;
formerly Publisher of Time
Magazine (May 1989-March 1991),
President, Publisher & CEO of
The Detroit News (February
1986-August 1989), member of
the Advisory Board, Chase
Manhattan Bank-Westchester;
Director of The High Yield
Income Fund, Inc.
Clay T. Whitehead (58) Trustee President, National Exchange Inc.
(new business development firm)
(since May 1983).
Eugene S. Stark (38) Treasurer First Vice President (since
December 1996) of PMF.;
formerly First Vice President
(January 1990-September 1996)
of Prudential Mutual Fund
Management, Inc.
B-20
<PAGE>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) COMPANY DURING PAST FIVE YEARS
- ------------------------ ------- ----------------------
S. Jane Rose (51) Secretary Senior Vice President (since
December 1996), PMF; formerly
Senior Vice President (January
1991-September 1996) and Senior
Counsel (June 1987-December
1990) of Prudential Mutual Fund
Management, Inc.; Senior Vice
President and Senior Counsel of
Prudential Securities (since
July 1992); formerly Vice
President and Associate General
Counsel of Prudential
Securities.
Stephen M. Ungerman (43) Assistant Tax Director (since March 1996)
Treasurer of Prudential Investments
and the Private Asset
Group of The Prudential
Insurance Company of America
(Prudential); formerly First
Vice President of Prudential
Mutual Fund Management, Inc.
(February 1993-September 1996);
prior thereto, Senior Tax
Manager of Price Waterhouse
(1981-January 1993).
Marguerite E.H. Morrison (40) Assistant Vice President (since December
Secretary 1996) of PMF; formerly Vice
President and Associate
General Counsel (June
1991-September 1996) of
Prudential Mutual Fund
Management, Inc.; Vice
President and Associate
General Counsel of Prudential
Securities.
- ----------
(1) Unless otherwise stated, the address is c/o Prudential Mutual Fund
Management LLC, Gateway Center Three, Newark, New Jersey 07102-4077.
* "Interested" Trustee, as defined in the Investment Company Act, by reason
of his affiliation with Prudential, PMF or Prudential Securities.
Trustees and officers of the Funds are also trustees, directors and
officers of some or all of the other investment companies distributed by
Prudential Securities.
The officers conduct and supervise the daily business operations of the
Funds, while the Trustees, in addition to their functions set forth under
"Manager and Subadvisers" and "Distributor," review such actions and decide on
general policy.
The Trustees have adopted a retirement policy which calls for the
retirement of Trustees on December 31 of the year in which they reach the age of
72, except that retirement is being phased in for Trustees who were age 68 or
older as of December 31, 1993. Under this phase-in provision, Messrs. Lennox and
Beach are scheduled to retire on December 31, 1997 and 1999, respectively.
B-21
<PAGE>
As of March 21, 1997, the Trustees and officers of the Company as a group
owned beneficially less than 1% of the shares of beneficial interest of the
Company. As of March 21, 1997, each of the following entities owned more than 5%
of the outstanding voting securities of each of the Funds indicated:
<TABLE>
<CAPTION>
PORTFOLIO SHARES
- --------- ------
<S> <C> <C> <C>
Prudential Active Balanced Fund
Class Z shares Pru Defined Contribution SVSC 4,877,025 (41.7%)
FBO Pru-DC Qualified Clients
Attn: John Surdy
30 Scranton Office Park
Moosic, PA 18507-1774
Prudential Trust Company 6,278,372 (53.7%)
FBO Pru-DC clients
Attn: John Surdy
30 Scranton Office Park
Moosic, PA 18507-1774
Prudential Stock Index Fund
Class Z shares Prudential Employee Savings Plan 7,850,793 (54.6%)
71 Hanover Road
Florham Park, NJ 07932-1502
</TABLE>
The Prudential Insurance Company of America (Prudential) is a mutual life
insurance company incorporated in 1873 under the laws of the state of New
Jersey. The Prudential Employee Savings Plan is a defined contribution
retirement plan.
As of March 21, 1997, Prudential Securities was the record holder for
other beneficial owners of 163 Class A shares (or 9.15% of the outstanding Class
A shares), 2,089 Class B shares (or 98.4% of the outstanding Class B shares),
___ Class C shares (or 0% of the outstanding Class C shares) and 0 Class Z
shares (or 0% of the outstanding Class Z shares) of the Prudential Active
Balanced Fund and 114,843 Class Z shares (.78% of the outstanding Class Z
shares) of Prudential Stock Index Fund. In the event of any meeting of
shareholders, Prudential Securities will forward or cause the forwarding of
proxy materials to the beneficial owners for which it is the record owner.
The Company pays each of its Trustees who is not an affiliated person of
the investment adviser annual compensation of $2,500. The amount of annual
compensation paid to each Trustee may change as a result of the introduction of
additional funds upon which the Trustee will be asked to serve.
Trustees may receive their Trustees' fees pursuant to a deferred fee
agreement with the Company. Under the terms of the agreement, the Company
accrues daily the amount of such Trustees' fee 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 Company. Payment of the interest so accrued
is also deferred and accruals become payable at the option of the Trustee. The
Company's obligation to make payments of deferred Trustees' fees, together with
interest thereon, is a general obligation of the Company.
The interested Trustees serve without compensation. The following table
sets forth the aggregate compensation paid by the Company to the Trustees who
were not affiliated with the Manager for the fiscal year ended September 30,
1996 and the aggregate compensation paid to such Trustees for service on the
Company's Board and that of all other funds managed by Prudential Mutual Fund
Management LLC (Fund Complex) for the year ended December 31, 1996.
B-22
<PAGE>
COMPENSATION TABLE
------------------
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION
BENEFITS ACCRUED ESTIMATED FROM COMPANY
AGGREGATE AS PART OF ANNUAL AND FUND
COMPENSATION COMPANY BENEFITS UPON COMPLEX PAID
NAME AND POSITION FROM COMPANY EXPENSES RETIREMENT TO TRUSTEES
- ----------------- ------------ -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Edward D. Beach--Trustee -- NONE N/A $166,000(21/39)**
Mark R. Fetting--Trustee+/++ -- NONE N/A --
David A. Finley--Trustee++ $21,000 NONE N/A 21,000(1/7)**
William E. Fruhan, Jr.--Trustee++ 21,000 NONE N/A 21,000(1/7)**
Delayne D. Gold--Trustee -- NONE N/A 175,308(21/42)**
Robert F. Gunia--Trustee+ -- NONE N/A --
Donald D. Lennox--Trustee -- NONE N/A 90,000(10/22)**
Douglas H. McCorkindale--Trustee+++ -- NONE N/A 71,208(10/13)**
Mendel A. Melzer--Trustee+ -- NONE N/A --
Thomas T. Mooney--Trustee+++ -- NONE N/A 135,375(18/36)**
Stephen P. Munn--Trustee -- NONE N/A 49,125(6/8)**
August G. Olsen--Trustee*/++ 21,000 NONE N/A 21,000(1/7)**
Richard A. Redeker--Trustee+ -- NONE N/A --
Robin B. Smith--Trustee+++ -- NONE N/A 89,957(11/20)**
Herbert G. Stolzer--Trustee*/++ 21,000 NONE N/A 21,000(1/7)**
Louis A. Weil, III--Trustee -- NONE N/A 91,250(13/18)**
Clay T. Whitehead--Trustee -- NONE N/A 38,292(5/7)**
</TABLE>
- ----------
* All of the compensation from the Company for the fiscal year ended
September 30, 1996 represents deferred compensation. Aggregate compensation
from the Company and the Fund Complex for the fiscal year ended September
30, 1996, including accrued income and appreciation, amounted to
approximately $24,000 for Mr. Olsen and approximately $24,500 for Mr.
Stolzer.
** Indicates number of Funds/portfolios in Fund Complex to which aggregate
compensation relates.
+ Mark R. Fetting, Robert F. Gunia, Mendel A. Melzer and Richard A. Redeker,
who are or were interested Trustees, do not receive compensation from the
Company or any fund in the Fund Complex.
++ Indicates Trustee who did not stand for reelection.
+++ Total compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1996, includes amounts deferred at the
election of Trustees under the Funds' deferred compensation plans.
Including accrued interest, total compensation amounted to $71,034,
$139,869 and $109,294 for Messrs. McCorkindale and Mooney and Ms. Smith,
respectively.
B-23
<PAGE>
MANAGER AND SUBADVISERS
The manager of the Company is Prudential Mutual Fund Management LLC (PMF
or the Manager), Gateway Center Three, Newark, New Jersey 07102-4077. PMF serves
as manager to all of the other investment companies that, together with the
Funds, comprise the Prudential Mutual Funds. See "How the Fund is
Managed--Manager" in the Prospectus of each Fund. As of , 1997, PMF
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $ billion. According to the
Investment Company Institute, as of , 1997, the Prudential Mutual
Funds were the th largest family of mutual funds in the United States.
PMF is a subsidiary of Prudential Securities and Prudential. Prudential
Mutual Fund Services LLC (PMFS or the Transfer Agent), a wholly-owned subsidiary
of PMF, 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 two Management Agreements with the Company (individually, the
Management Agreement and collectively, the Management Agreements), PMF, subject
to the supervision of the Company's Board of Trustees and in conformity with the
stated policies of each Fund, manages both the investment operations of each
Fund and the composition of each Fund's portfolio, including the purchase,
retention, disposition and loan of securities and other assets. In connection
therewith, PMF is obligated to keep certain books and records of the Company.
PMF also administers the Company's corporate affairs and, in connection
therewith, furnishes the Company with office facilities, together with those
ordinary clerical and bookkeeping services which are not being furnished by
State Street Bank and Trust Company, the Funds' custodian (the Custodian), and
PMFS, the Funds' transfer and dividend disbursing agent. The management services
of PMF for the Funds are not exclusive under the terms of the Management
Agreements and PMF is free to, and does, render management services to others.
For its services, PMF receives, pursuant to the Management Agreements, a
fee at an annual rate of .65 of 1% of Prudential Active Balanced Fund's average
daily net assets, .30 of 1% of Prudential Stock Index Fund's average daily net
assets, .30 of 1% of Prudential Small-Cap Index Fund's average daily net assets,
.25 of 1% of Prudential Bond Market Index Fund's average daily net assets, .40
of 1% of Prudential Pacific Index Fund's average daily net assets and .40 of 1%
of Prudential Europe Index Fund's average daily net assets. The fee is computed
daily and payable monthly. Each Management Agreement also provides that, in the
event the expenses of a 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. No such reductions were required during the fiscal year
ended September 30, 1996. No jurisdiction currently limits the Funds' expenses.
In connection with its management of the business affairs of the Company,
the Manager bears the following expenses:
(i) the salaries and expenses of all of its and the Company's personnel
except the fees and expenses of Trustees who are not affiliated persons of the
Manager or the Funds' Subadvisers;
(ii) all expenses incurred by the Manager or by the Company in connection
with managing the ordinary course of the Company's business, other than those
assumed by the Company as described below; and
(iii) the costs and expenses or fees payable to The Prudential Investment
Corporation, doing business as Prudential Investments (PI), and Jennison
Associates Capital Corp. (Jennison) (collectively, the Subadvisers) pursuant to
the subadvisory agreements between the Manager and the Subadvisers
(collectively, the Subadvisory Agreements).
B-24
<PAGE>
Under the terms of the Management Agreements, the Company is responsible
for the payment of the following expenses: (i) the fees payable to the Manager,
(ii) the fees and expenses of Trustees who are not affiliated persons of the
Manager or the Funds' Subadvisers, (iii) 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 Company, pricing the Funds' shares and the
cashiering function, (iv) the charges and expenses of legal counsel and
independent accountants for the Company, (v) brokerage commissions and any issue
or transfer taxes chargeable to the Company in connection with its securities
and futures transactions, (vi) all taxes and corporate fees payable by the
Company to governmental agencies, (vii) the fees of any trade associations of
which the Company may be a member, (viii) the cost of stock certificates
representing shares of Funds of the Company, if any, (ix) the cost of fidelity
and liability insurance, (x) the fees and expenses involved in registering and
maintaining registration of the Company and of its shares with the SEC,
registering the Company and qualifying its shares under state securities laws,
including the preparation and printing of the Company's registration statements
and prospectuses for such purposes, (xi) licensing fees, if any, (xii) allocable
communications expenses with respect to investor services and all expenses of
shareholders' and Trustees' meetings and of preparing, printing and mailing
reports, proxy statements and prospectuses to shareholders in the amount
necessary for distribution to the shareholders and (xiii) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Company's business.
The Management Agreements provides that PMF will not be liable for any
error of judgment or for any loss suffered by the Company in connection with the
matters to which the Management Agreements relate, except a loss resulting from
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
Each 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. Each Management
Agreement will continue in effect for a period of more than two years from the
date of execution only so long as such continuance is specifically approved at
least annually in conformity with the Investment Company Act. The Management
Agreement for Prudential Active Balanced Fund and Prudential Stock Index Fund
was last approved by the Trustees of the Company, including all of the Trustees
who are not parties to the contract or interested persons of any such party as
defined in the Investment Company Act, on May 17, 1996 and by the shareholders
of Prudential Stock Index Fund and Prudential Active Balanced Fund on October
30, 1996. The Management Agreement for Prudential Small-Cap Index Fund,
Prudential Bond Market Index Fund, Prudential Pacific Index Fund and Prudential
Europe Index Fund was approved by the Trustees of the Company, including all of
the Trustees who are not parties to the contract or interested persons of any
such party as defined in the Investment Company Act, on February 19, 1997 and by
the initial shareholder of each such Fund on ,1997. The Manager
received, before any reduction due to the subsidy by the Manager of certain
expenses of Prudential Stock Index Fund and Prudential Active Balanced Fund, the
following management fees from each Fund, expressed both as a dollar amount and
as a percentage of each Fund's average daily net assets:
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 SEPTEMBER 30, 1994
------------------ ------------------ ------------------
FUND AMOUNT RATE AMOUNT RATE AMOUNT RATE
Stock Index $570,160 .40% $286,843 .40% $152,392 .40%
Active Balanced 994,182 .70 733,748 .70 412,941 .70
During the same period the Manager subsidized certain expenses of these Funds.
See "How the Fund is Managed--Fee Waivers and Subsidy" in the Prudential Active
Balanced Fund Prospectus and "How the Funds are Managed--Fee Waivers and
Subsidy" in the Prospectus for the other Funds.
The Manager has entered into Subadvisory Agreements with the Subadvisers.
The Subadvisory Agreements provide that the Subadvisers furnish investment
advisory services in connection with the management of their respective
B-25
<PAGE>
Funds. For its service as Subadviser, Jennison is paid at an annual rate of .30
of 1% of Prudential Active Balanced Fund's average daily net assets up to and
including $300 million and .25 of 1% of the Fund's average daily net assets in
excess of $300 million. PI is reimbursed by the Manager for the reasonable costs
and expenses incurred in furnishing its service. In connection therewith, the
Subadvisers are obligated to keep certain books and records of the respective
Funds to which they provide advisory services. The Manager continues to have
responsibility for all investment advisory services to all the Funds pursuant to
the Management Agreements and supervises the Subadvisers' performance of such
services.
Jennison is the Subadviser for the Prudential Active Balance Fund.
Acquired by the Prudential in 1985, Jennison has been engaged in the equity
investment management business since 1969. As of September 30, 1996, Jennison
managed $31.3 billion in assets for 177 clients, including approximately $3.5
billion (11.3%) in mutual funds. Of the $31.3 billion in assets, $1.8 billion
were in actively managed balance portfolios (including the Fund) and $17.3
billion in assets were in equity portfolios. Approximately 40% of Jennison's
equity clients are "Fortune 500" companies (as defined by Fortune Magazine in
the issue dated April 29, 1996). Many of these companies have retained
Jennisons' asset management services for more than ten years, some for more than
25 years as of September 30, 1996. As of September 30, 1996, Jennison also
managed $2.8 billion in international equity portfolios, and $9.5 billion in
fixed income portfolios.
Bradley Goldberg, a senior portfolio manager at Jennison, oversees the
Prudential Active Balanced Fund. He has more than 25 years of investment
experience. Mr. Goldberg combines successful stock and bond investing with an
active asset allocation strategy to generate equity-like results with less risk
than a pure equity portfolio. When selecting stocks for the Fund, Mr. Goldberg
draws on the growth investing expertise of Jennison and modifies the style to
identify undervalued companies with attractive earnings growth prospects.
PI advises Prudential Stock Index Fund through Prudential Diversified
Investment Strategies (PDI). PDI is dedicated to equity index and balanced fund
investing for institutional clients. Founded in 1975, PDI is among the oldest
quantitatively-oriented balanced managers in the country. PDI currently manages
close to $ billion in balanced and indexed assets.
Prudential Investments Quantitative Management, a unit of PI, advises
Prudential Small-Cap Index Fund, Prudential Pacific Index Fund and Prudential
Europe Index Fund.
PI also manages short-term assets and cash for Prudential Active Balanced
Fund and invests available cash balances for the Fund through a joint repurchase
agreement account. PI is reimbursed by PMF for reasonable costs and expenses
incurred by it in furnishing such services.
The Subadvisory Agreements for Prudential Active Balanced Fund and
Prudential Stock Index Fund were last approved by the Trustees, including a
majority of the Trustees who are not parties to the Agreements or interested
persons of any such party as defined in the Investment Company Act, on May 17,
1996, and by the shareholders of each such Fund on October 30, 1996. The
Subadvisory Agreement for Prudential Small-Cap Index Fund, Prudential Bond
Market Index Fund, Prudential Pacific Index Fund and Prudential Europe Index
Fund was approved by the Trustees, including a majority of the Trustees who are
not parties to the Agreement or interested persons of any such party as defined
in the Investment Company Act on February 19, 1997 and by the initial
shareholder of each such Fund on , 1997.
Each 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 Agreements. Each Subadvisory Agreement may be
terminated by the Company, the Manager or the relevant Subadviser upon not more
than 60 days', nor less than 30 days', written notice. Each 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.
B-26
<PAGE>
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, acts as the distributor of the Class Z
shares of Prudential Small-Cap Index Fund, Prudential Bond Market Index Fund,
Prudential Pacific Index Fund, and Prudential Europe Index Fund, the Class Z and
Class I shares of Prudential Stock Index Fund and the Class A, Class B, Class C
and Class Z shares of Prudential Active Balanced Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the
Company 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 Prudential Active Balanced
Fund's Class A, Class B and Class C shares. Prudential Securities serves as the
Distributor of shares of Prudential Stock Index Fund, Prudential Small-Cap Index
Fund, Prudential Bond Market Index Fund, Prudential Pacific Index Fund,
Prudential Europe Index Fund and the Class Z shares of Prudential Active
Balanced Fund and incurs the expenses of distributing the shares under a
Distribution Agreement with the Company, none of which are reimbursed by or paid
for by the Funds. See "How the Fund is Managed--Distributor" in the Prospectus
of Prudential Active Balanced Fund and "How the Funds are Managed--Distributor"
in the Prospectus of the other Funds.
On May 17, 1996, the Board of Trustees, including a majority of the
Trustees who are not interested persons of the Company and who have no direct or
indirect financial interest in the operation of the Class A, Class B or Class C
Plan or in any agreement related to the Plans (the Rule 12b-1 Trustees), at a
meeting called for the purpose of voting on each Plan, approved the Plans with
respect to Prudential Active Balanced Fund and the Distribution Agreement. The
Class A Plan provides that (i) .25 of 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1%. The Class B and Class C
Plans provide that (i) .25 of 1% of the average daily net assets of the Class B
and Class C shares, respectively, may be paid as a service fee and (ii) .75 of
1% (not including the service fee) may be paid for distribution-related expenses
with respect to the Class B and Class C shares, respectively (asset-based sales
charge). The Plans were each approved by the sole shareholder of the Class A,
Class B and Class C shares of Prudential Active Balanced Fund on October 30,
1996.
The Class A, Class B and Class C Plans for Prudential Active Balanced Fund
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 Trustees, including a
majority vote of the Rule 12b-1 Trustees, 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 Trustees
or by the vote of the holders of a majority of the outstanding shares of the
applicable class on not more than 60 days', nor less 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, and all material
amendments are required to be approved by the Board of Trustees in the manner
described above. Each Plan will automatically terminate in the event of its
assignment. Prudential Active Balanced Fund will not be obligated to pay
expenses incurred under any Plan if it is terminated or not continued.
Pursuant to each Plan, the Board of Trustees will review at least
quarterly a written report of the distribution expenses incurred on behalf of
each class of shares of Prudential Active Balanced Fund by the Distributor. The
report will include an itemization of the distribution expenses and the purposes
of such expenditures. In addition, as long as the Plans remain in effect, the
selection and nomination of Rule 12b-1 Trustees shall be committed to the Rule
12b-1 Trustees.
Pursuant to the Distribution Agreement, the Company has agreed to
indemnify Prudential Securities to the extent permitted by applicable law
against certain liabilities under the Securities Act.
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
B-27
<PAGE>
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the safety, potential returns
and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSI's
conduct violated the federal securities laws and that an order issued by the SEC
in 1986 requiring PSI to adopt, implement and maintain certain supervisory
procedures had not been complied with; (ii) directed PSI to cease and desist
from violating the federal securities laws and imposed a $10 million civil
penalty; and (iii) required PSI to adopt certain remedial measures including the
establishment of a Compliance Committee of its Board of Directors. Pursuant to
the terms of the SEC settlement, PSI established a settlement fund in the amount
of $330,000,000 and procedures, overseen by a court approved Claims
Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and
a Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend solicitation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Texas 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 shall report any allegations or instances of criminal conduct and
material improprieties to the new director. The new director submits compliance
reports which identify any such allegations or instances of criminal conduct and
material improprieties every three months for a three-year period.
NASD MAXIMUM SALES CHARGE RULE
Pursuant to rules of the NASD, the Distributor is required to limit
aggregate initial sales charges, deferred sales charges and asset-based sales
charges to 6.25% of total gross sales of each class of shares of Prudential
Active Balanced Fund. In the case of Class B shares, interest charges 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 with respect to Class B and Class C shares of Prudential Active
Balanced Fund may not exceed .75 of 1%. 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-28
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
PORTFOLIO TURNOVER
There are no limitations on the length of time that securities must be
held by the Funds and the Funds' annual portfolio turnover rate may vary
significantly from year to year. A portfolio turnover rate in excess of 100% may
exceed that of other investment companies with similar objectives. High
portfolio turnover (over 100%) may involve correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by the
Funds. 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."
Decisions to buy and sell assets for a Fund are made by the Fund's
Subadviser, subject to the overall review of the Manager and the Trustees.
Although investment decisions for the Funds are made independently from those of
the other accounts managed by a Subadviser, investments of the type that the
Funds may make also may be made for those other accounts. When a Fund and one or
more other accounts managed by a Subadviser are prepared to invest in, or desire
to dispose of, the same security, available investments or opportunities for
sales will be allocated in a manner believed by the Subadviser to be equitable
to each. In some cases, this procedure may adversely affect the price paid or
received by a Fund or the size of the position obtained or disposed of by a
Fund.
Transactions on U.S. stock exchanges and some foreign stock exchanges
involve the payment of negotiated brokerage commissions. On exchanges on which
commissions are negotiated, the cost of transactions may vary among different
brokers. On most foreign exchanges, commissions are generally fixed. No stated
commission is generally applicable to securities traded in U.S. OTC markets, but
the prices of those securities includes commissions or mark-ups. The cost of
securities purchased from underwriters includes an underwriting commission or
concession and the prices at which securities are purchased from and sold to
dealers include a dealer's mark-up or mark-down. U.S. Government securities
generally are purchased from underwriters or dealers, although certain
newly-issued U.S. Government securities may be purchased directly from the U.S.
Treasury or from the issuing agency or instrumentality.
In selecting brokers or dealers to execute securities transactions on
behalf of a Fund, its Subadviser seeks the best overall terms available. The
Funds have no obligation to do business with any broker-dealer or group of
broker-dealers in executing transactions in securities. In placing orders, the
Subadvisers are subject to the Company's policy to seek the most favorable price
and efficient execution taking into account such factors as price (including the
applicable commission or dealer spread), size, type, and difficulty of the
transaction, and the firm's general execution and operating facilities. In
assessing the best overall terms available for any transaction, the Subadviser
will consider the factors that it deems relevant, including the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis. In
addition, the Subadvisers, subject to seeking best price and execution, are
authorized to cause a Fund to pay broker-dealers that furnish brokerage and
research services (as defined by Section 28(e) of the Securities Exchange Act of
1934, as amended (1934 Act)), a higher commission than another broker-dealer
that does not furnish such brokerage and research services might charge. The
Subadvisers must regard such higher commissions as reasonable in relation to the
brokerage and research services provided, viewed in terms of each Subadviser's
responsibilities to the Fund or other accounts, if any, as to which it exercises
investment discretion. The fees under the Management Agreement and the Advisory
Agreements, respectively, are not reduced by reason of a Fund's Subadviser
receiving brokerage and research services. The Trustees of the Company will
periodically review the commissions paid by a Fund to determine if the
commissions paid over representative periods of time were reasonable in relation
to the benefits inuring to the Fund. OTC purchases and sales by a Fund are
transacted directly with principal market makers except in those cases in which
better prices and executions may be obtained elsewhere.
To the extent consistent with applicable provisions of the Investment
Company Act and the rules and exemptions adopted by the SEC under the Investment
Company Act, the Trustees have determined that transactions for a Fund may be
executed through Prudential Securities and other affiliated broker-dealers if,
in the judgment of the Subadviser, the use of an affiliated broker-dealer is
likely to result in price and execution at least as favorable as those of other
qualified broker-dealers, and if, in the transaction, the affiliated
broker-dealer charges the Fund a fair and reasonable rate. Furthermore, the
Trustees of the Company, including a majority of the Trustees who are not
"interested" Trustees, have adopted procedures which are reasonably designed to
provide that any commissions, fees or other remuneration paid to PSI are
consistent with the foregoing standard. In accordance with Section 11(a) of the
1934 Act, Prudential Securities may not retain compensation for effecting
transactions on a national securities exchange for the Funds unless a Fund has
expressly authorized the retention of such compensation in a written contract
executed by the Fund and Prudential Securities. Section 11(a) provides that
Prudential Securities must furnish to the Funds at least annually a
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<PAGE>
statement setting forth the total amount of all compensation retained by
Prudential Securities from transactions effected for a Fund during the
applicable period. Brokerage transactions with PSI also are subject to such
fiduciary standards as may be imposed by applicable law.
The Funds may use PSI and other affiliated broker-dealers as a futures
commission merchant in connection with entering into futures contracts and
options on futures contracts if, in the judgment of a Fund's Subadviser, the
affiliated broker-dealer charges the Fund a fair and reasonable rate. This
standard would allow PSI to receive no more than the remuneration which would be
expected to be received by an unaffiliated broker in a commensurate arm's-length
transaction.
The Company does not market its shares through intermediary brokers or
dealers; therefore, it is not the Company's practice to allocate brokerage or
principal business on the basis of sales of its shares which may be made through
such firms. However, the Subadvisers may place portfolio orders with qualified
broker-dealers who recommend the Company to clients, and may, when a number of
brokers and dealers can provide best price and execution on a particular
transaction, consider such recommendations by a broker or dealer in selecting
among broker-dealers.
Transactions in options and futures by a Fund will be subject to
limitations established by each of the exchanges and boards of trade governing
the maximum position which may be written or held by a single investor or group
of investors acting in concert, regardless of whether the options and futures
are written or held on the same or different exchanges or are written or held in
one or more accounts or though one or more brokers. Thus, the number of options
and futures which a Fund may write or hold may be affected by options and
futures written or held by the Subadviser and other investment advisory clients
of the Subadviser. An exchange or board of trade may order the liquidation of
positions found to be in excess of these limits, and it may impose certain other
sanctions.
The Funds will not purchase any security, including U.S. Government
securities, during the existence of any underwriting or selling group relating
thereto of which PSI is a member, except to the extent permitted by SEC rules.
During the years ended September 30, 1996, 1995 and 1994, the Company paid
$0, $965 and $3,247, respectively, in brokerage commissions to Prudential
Securities.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of Prudential Active Balanced 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 Prudential Active Balanced Fund and shares of
Prudential Stock Index Fund, Prudential Small-Cap Index Fund, Prudential Bond
Market Index Fund, Prudential Pacific Index Fund and Prudential Europe Index
Fund are offered to a limited group of investors at net asset value without any
sales charges. See "Shareholder Guide--How to Buy Shares of the Fund" in the
Prospectus of Prudential Active Balanced Fund and "Shareholder Guide--How to Buy
Shares of a Fund" in the Prospectus of Prudential Stock Index Fund, Prudential
Small-Cap Index Fund, Prudential Bond Market Index Fund, Prudential Pacific
Index Fund and Prudential Europe Index Fund.
Each class of Prudential Active Balanced Fund represents an interest in
the same assets of the Fund and is identical in all respects except that (i)
each class is subject to different sales charges and distribution and/or service
expenses (except for Class Z shares which are not subject to any sales charge or
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 arrangements 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."
Each class of Prudential Stock Index Fund represents an interest in the
same assets of the Fund and is identical in all respects except that (i) 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 the other class, (ii) Class I shares are not subject to transfer
agency fees or expenses, (iii) Class I shares are held in a single omnibus
account and (iv) each class has a different exchange privilege. See "Shareholder
Investment Account--Exchange Privilege."
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<PAGE>
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Company and the
Distributor, for Prudential Active Balanced Fund, Class A shares are sold with a
maximum sales charge of 5% and Class B*, Class C* and Class Z shares are sold at
net asset value. For Prudential Stock Index Fund, Class Z and Class I*** shares
are sold at net asset value. Using the net asset values of Prudential Active
Balanced Fund and Prudential Stock Index Fund at September 30, 1996, the maximum
offering price of each Fund's shares is as follows:
<TABLE>
<CAPTION>
PRUDENTIAL ACTIVE PRUDENTIAL STOCK
BALANCED FUND INDEX FUND
------------- ----------
<S> <C> <C>
CLASS A**
Net asset value and redemption price per Class A share ........................... $13.01
Maximum sales charge (5% of offering price) ...................................... .68 N/A
Offering price to public ......................................................... $13.69
CLASS B**
Net asset value, redemption price and offering price per Class B share* .......... $13.01 N/A
CLASS C**
Net asset value, redemption price and offering price per Class C share* .......... $13.01 N/A
CLASS Z
Net asset value, redemption price and offering price per Class Z share ........... $13.01 $16.06
CLASS I***
Net asset value, redemption price and offering price per Class I share ........... N/A N/A
</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 of Prudential
Active Balanced Fund.
** Class A, Class B and Class C shares of Prudential Active Balanced Fund
were not offered on September 30, 1996.
*** Class I shares did not exist at September 30, 1996.
REDUCTION AND 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 Prudential
Active Balanced 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 of Prudential
Active Balanced Fund.
An eligible group of related Fund investors includes any combination of
the following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account
(IRA);
(d) any company controlled by the individual (a person, entity or
group that holds 25% or more of the outstanding voting securities of a
company will be deemed to control the company, and a partnership will be
deemed to be controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which
are the individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act
account created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
B-31
<PAGE>
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in
pension, profit-sharing or other employee benefit plans qualified under Section
401 of the Internal Revenue Code and deferred compensation and annuity plans
under Sections 457 and 403(b)(7) of the Internal Revenue Code.
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
Prudential Active Balanced 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. 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 of Prudential Active Balanced Fund. 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 Prudential Active Balanced Fund and shares
of other Prudential Mutual Funds. (Investment Letter of Intent). Retirement and
group plans also qualify to purchase Class A shares at net asset value by
entering into a Letter of Intent whereby they agree to enroll, within a thirteen
month period, a specified number of eligible employees or participants
(Participant Letter of Intent).
For purposes of the Investment Letter of Intent, all shares of Prudential
Active Balanced 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 goal over a thirteen-month period. Each investment made during the
period will receive the reduced sales charge applicable to the amount
represented by the goal, as if it were a single investment, except in the case
of retirement and group plans where the employer or plan sponsor will be
responsible for paying any applicable sales charge. 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. 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 Company 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 Prudential Active Balanced 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.
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<PAGE>
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge is waived under circumstances
described in the Prospectus of Prudential Active Balanced Fund. See "Shareholder
Guide--How to Sell Your Shares--Waiver of Contingent Deferred Sales
Charges--Class B Shares" in the Prudential Active Balanced Fund Prospectus. In
connection with these waivers, the Transfer Agent will require you to submit the
supporting documentation set forth below.
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
- ------------------ ----------------------
Death A copy of the shareholder's death
certificate or, in the case of a trust, a
copy of the grantor's death certificate,
plus a copy of the trust agreement
identifying the grantor.
Disability--An individual will be A copy of the Social Security
considered disabled if he or she is Administration award letter or a letter
unable to engage in any that from a physician on the physician's
substantial gainful activity by letterhead stating the shareholder (or, in
reason of any medically the case of a trust, the grantor) is
determinable physical or mental permanently disabled. The letter must also
impairment which can be expected to indicate the date of disability.
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 Account custodial firm indicating (i) the date of
birth of the shareholder and (ii) that the
shareholder is over age 591 @2 and is
taking a normal distribution--signed by
the shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the
reason for the distribution.
Excess Contributions A letter from the shareholder (for an IRA)
or the plan administrator/trustee on
company letterhead indicating the amount
of the excess and whether or not taxes
have been paid.
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which a record of the shares held is
maintained by the Transfer Agent. If a share 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. Each 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 applicable 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 Company makes available to its shareholders the privilege of
exchanging their shares of a 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 a Fund. All
exchanges are made on the basis of relative net asset value next determined
after
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<PAGE>
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 Prudential Active Balanced Fund may exchange
their Class A shares for shares of certain other Prudential Mutual Funds, shares
of Prudential Government Securities Trust (Short-Intermediate Term Series) and
shares of the money market funds specified below. No fee or sales load will be
imposed upon the exchange. Shareholders of money market funds who acquired such
shares upon exchange of Class A shares may use the Exchange Privilege only to
acquire Class A shares of the Prudential Mutual Funds participating in the
Exchange Privilege.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New York Money Market Series)
(New Jersey Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A shares)
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of Prudential Active Balanced 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. No contingent deferred sales charge (CDSC) will
be payable upon such exchange, but a CDSC may be payable upon the redemption of
the Class B and Class C shares acquired as a result of 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 Prudential Active Balanced Fund may also be
exchanged for shares of Prudential Special Money Market Fund, Inc. without
imposition of any CDSC at the time of exchange. Upon subsequent redemption from
such money market fund or after re-exchange into the Fund, such shares will be
subject to the CDSC calculated without regard to the time such shares were held
in the money market fund. In order to minimize the period of time in which
shares are subject to a CDSC, shares exchanged out of the money market fund will
be exchanged on the basis of their remaining holding periods, with the longest
remaining holding periods being transferred first. In measuring the time period
shares are held in a money market fund and "tolled" for purposes of calculating
the CDSC holding period, exchanges are deemed to have been made on the last day
of the month. Thus, if shares are exchanged into Prudential Active Balanced 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.
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.
CLASS I. Class I 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 a Fund, or the Distributor, has the right
to reject any exchange application relating to such fund's shares.
B-34
<PAGE>
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.(1)
The following chart shows how much you would need in monthly investments
to achieve specified lump sums to finance your investment goals.(2)
PERIOD OF MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- ------------------------------- --------- -------- --------- --------
25 Years ........................ $ 110 $ 165 $ 220 $ 275
20 Years ........................ 176 264 352 440
15 Years ........................ 296 444 592 740
10 Years ........................ 555 833 1,110 1,388
5 Years ........................ 1,371 2,057 2,742 3,428
- ----------
(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 a 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.
See "Automatic Savings Accumulation Plan."
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of a 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 a 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 of Prudential
Active Balanced Fund.
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 Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or
income. If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
B-35
<PAGE>
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the sales charges applicable to (i) the purchase of Class
A shares and (ii) the withdrawal of Class B and Class C shares. Each shareholder
should consult his or her own tax adviser with regard to the tax consequences of
the plan, particularly if used in connection with a retirement plan.
TAX-DEFERRED RETIREMENT PLANS
Various qualified retirement plans, including a 401(k) plan, self-directed
individual retirement accounts and "tax-deferred accounts" under Section
403(b)(7) of the Internal Revenue Code are available through the Distributor.
These plans are for use by both self-employed individuals and corporate
employers. These plans permit either self-direction of accounts by participants,
or a pooled account arrangement. Information regarding the establishment of
these plans, and the administration, custodial fees and other details are
available from Prudential Securities or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, an 8% rate of return and a 39.6% federal income tax bracket
and shows how much more retirement income can accumulate within an IRA as
opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING(1)
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
10 years ...................................... $ 26,165 $ 31,291
15 years ...................................... 44,676 58,649
20 years ...................................... 68,109 98,846
25 years ...................................... 97,780 157,909
30 years ...................................... 135,346 244,692
- ----------
(1) The chart is for illustrative purposes only and does not represent the
performance of a 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 Company (or a Fund of the Company) 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. A Fund may waive or reduce the minimum initial investment requirements in
connection with such a program.
The mutual funds in the program may be purchased individually or as a part
of a program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, investors should consult their Prudential
Securities Financial Advisor 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.
B-36
<PAGE>
NET ASSET VALUE
Portfolio securities of each Fund are generally valued as follows: (1)
Securities for which the primary market is on an exchange are valued at the last
sale price on such exchange on the day of valuation or, if there was no sale on
such day, at the average of readily available closing bid and asked prices on
such day; (2) Securities that are actively traded in the OTC market, including
listed securities for which the primary market is believed to be
over-the-counter, are valued at the average of the most recently quoted bid and
asked prices provided by a principal market maker; (3) Securities issued in
private placements are valued at the mean between the bid and asked prices
provided by primary market dealers or, if no primary dealers are able to provide
a market value, at fair value determined by a valuation committee of Trustees
(the Valuation Committee); (4) U.S. Government securities for which market
quotations are available are valued at a price provided by an independent
broker/dealer or pricing service; (5) Short-term debt securities, including
bonds, notes, debentures and other debt securities, and money market instruments
such as certificates of deposit, commercial paper, bankers' acceptances and
obligations of domestic and foreign banks, with remaining maturities of more
than 60 days for which reliable market quotations are readily available, are
valued at current market quotations as provided by an independent broker/dealer
or pricing service; (6) Short-term investments with remaining maturities of 60
days or less are valued at cost with interest accrued or discount amortized to
the date of maturity, unless the Trustees determine that such valuation does not
represent fair value; (7) Options on securities that are listed on an exchange
are valued at the last sales price at the close of trading on such exchange or,
if there was no sale on the applicable options exchange on such day, at the
average of the quoted bid and asked prices as of the close of such exchange; (8)
Futures contracts and options thereon traded on a commodities exchange or board
of trade are valued at the last sale price at the close of trading on such
exchange or board of trade or, if there was no sale on the applicable
commodities exchange or board of trade on such day, at the average of quoted bid
and asked prices as of the close of such exchange or board of trade; (9)
Quotations of foreign securities in a foreign currency shall be converted to
U.S. dollar equivalents at the current rate obtained from a recognized bank or
dealer; (10) Forward currency exchange contracts are valued at the current cost
of covering or offsetting such contracts; (11) OTC options are valued at the
mean between bid and asked prices provided by a dealer, with additional prices
obtained for comparison, monthly and as indicated by monitoring of the
underlying securities; (12) Securities for which market quotations are not
available, other than private placements, are valued at a price supplied by a
pricing agent approved by the Trustees; (13) Securities for which reliable
market quotations are not available or for which the pricing agent or principal
market maker does not provide a valuation or provides a valuation that, in the
judgment of the applicable Subadviser, does not represent fair value, are valued
by the Valuation Committee on the basis of cost of the security, transactions in
comparable securities, relationships among various securities and other factors
determined by the Subadviser to materially affect the value of the security. The
Company may engage pricing services to obtain any prices.
Portfolio securities traded on more than one U.S. national securities
exchange or foreign securities exchange are valued at the last sale price on the
business day as of which such value is being determined at the close of the
exchange representing the principal market for such securities. The value of all
assets and liabilities expressed in foreign currencies will be converted into
U.S. dollar values at the current rate obtained from a recognized bank or
dealer. If such quotations are not available, the rate of exchange will be
determined in good faith by or under procedures established by the Trustees of
the Company.
Trading in securities on European and Far Eastern securities exchanges and
OTC markets is normally completed well before the close of business on each
business day in New York (i.e., a day on which the NYSE is open for trading). In
addition, European or Far Eastern securities trading generally or in a
particular country or countries may not take place on all business days in New
York. Furthermore, trading takes place in Japanese markets on certain Saturdays
and in various foreign markets on days which are not business days in New York
and on which the Funds' net asset values are not calculated. Such calculation
does not take place contemporaneously with the determination of the prices of
the majority of the portfolio securities used in such calculation. Events
affecting the values of portfolio securities that occur between the time their
prices are determined and the close of the regular trading on the NYSE will not
be reflected in a Fund's calculation of net asset values unless, pursuant to
procedures adopted by the Trustees, the Subadviser deems that the particular
event would materially affect net asset value, in which case an adjustment will
be made.
The proceeds received by each Fund for each issue or sale of its shares,
and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to such Fund and constitute the underlying assets of that Fund. The underlying
assets of each Fund will be segregated on the books of account, and will be
charged with the liabilities in respect to such Fund and with a share of the
general liabilities of the Company. Expenses with respect to any two or more
Funds are to be allocated in proportion to the net asset values of the
respective Funds except where allocations of direct expenses can otherwise be
fairly made.
B-37
<PAGE>
TAXES
The following is a brief summary of some of the more important tax
considerations affecting the Company, the Funds and their shareholders. No
attempt is made to present a detailed explanation of all federal, state, local,
and foreign income tax considerations. Neither this discussion nor the tax
discussion in the Prospectuses is intended to substitute for careful individual
tax planning. Accordingly, potential investors are urged to consult their own
tax advisers with specific reference to their own tax situation.
TAX CONSEQUENCES TO THE FUNDS
As a separate entity for federal tax purposes, each Fund intends to
qualify or continue to qualify separately for tax treatment as a regulated
investment company (RIC) under subchapter M of the Internal Revenue Code. If so
qualified, each Fund will not be subject to federal income tax with respect to
its net investment income and net realized capital gains, if any, that are
distributed to its shareholders. In order to qualify for treatment as a RIC,
each Fund will have to meet income diversification, distribution, and certain
other requirements set forth in the Internal Revenue Code. If, in any year, a
Fund should fail to qualify under the Internal Revenue Code for tax treatment as
a RIC, the Fund would incur a regular federal corporate income tax on its
taxable income, if any, for that year.
INCOME AND DIVERSIFICATION REQUIREMENTS. The income tests require each
Fund to derive (i) at least 90% of its gross income in each taxable year from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of stock, securities, or foreign currencies, or
other income (including gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (Income Requirement) and (ii) less than 30% of its gross income in
each taxable year from the sale or other disposition of (A) stock or securities
held for less than three months, (B) options, futures, or forward contracts
(other than those on foreign currencies directly related to the Fund's business
of investing in securities) held for less than three months, and (C) foreign
currencies (or options, futures, or forward contracts on foreign currencies)
held for less than three months but only if such currencies (or options,
futures, or forward contracts) are not directly related to the Fund's principal
business of investing in stock or securities (or options or futures with respect
to stock or securities) ("Short-Short Limitation"). Each Fund also must
diversify its holdings so that, at the end of each quarter of its taxable year,
(i) at least 50% of the value of the Fund's total assets is represented by cash
and cash items, U.S. Government securities, securities of other RICs, and other
securities, with such other securities limited, in respect of any one issuer, to
an amount not greater in value than 5% of the value of the Fund's total assets
and not more than 10% of the outstanding voting securities, and (ii) not more
than 25% of the value of its total assets is invested in the securities of any
one issuer (other than U.S. Government securities or the securities of other
RICs) and (d) the Fund distributes to its shareholders at least 90% of its net
investment income and net short-term gains (i.e. the excess of net short-term
capital gains over net long-term capital losses) in each year.
DISTRIBUTION REQUIREMENT. Each Fund must distribute (or be deemed to have
distributed) 90% or more of its investment company taxable income (generally
consisting of net investment income, net short-term capital gain, and net gains
from certain foreign currency transactions) for each taxable year. Each Fund
also must meet certain other distribution requirements to avoid a 4%
nondeductible excise tax (these requirements are collectively referred to below
as the "RIC distribution requirements").
ZERO COUPON SECURITIES AND ORIGINAL ISSUE DISCOUNT. The Funds may invest
in zero coupon securities and other securities issued with original issue
discount. Such securities generate current income subject to the distribution
requirements without providing cash available for distribution. The Funds do not
anticipate that such investments will adversely affect their ability to meet the
RIC distribution requirements.
FOREIGN INVESTMENTS. If a Fund purchases shares in certain foreign
corporations called "passive foreign investment companies" (PFICs), the Fund may
be subject to U.S. federal income tax on a portion of any "excess distribution"
or gain from the disposition of such shares even if such income is distributed
as a dividend by the Fund to its shareholders. Because a credit for this tax
could not be passed through to shareholders, the tax effectively would reduce
the Fund's economic return from its PFIC investment. Additional charges in the
nature of interest may be imposed on a PFIC investor in respect of deferred
taxes arising from such distributions or gains. If a Fund were to invest in a
PFIC and elected to treat the PFIC as a "qualified electing fund" under the
Internal Revenue Code, then in lieu of the foregoing tax and interest, the Fund
might be required to include in income each year a portion of the ordinary
earnings and net capital gains of the qualified electing fund, even if not
distributed to the Fund, and such amounts would be subject to the RIC
distribution requirements. Management of the Company will consider these
potential tax consequences in evaluating whether to invest in a PFIC.
Net investment income or capital gains earned by a Fund's investments in
foreign securities may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries
B-38
<PAGE>
that entitle the Funds to a reduced rate of tax or exemption from tax on this
related income and gains. It is impossible to determine the effective rate of
foreign tax in advance since the amount and the countries in which the Funds'
assets will be invested are not known. The Funds intend to operate so as to
qualify for treaty-reduced rates of tax where applicable.
CURRENCY FLUCTUATIONS--SECTION 988 GAINS AND LOSSES. Gains or losses
attributable to fluctuations in exchange rates between the time Prudential
Active Balanced Fund accrues dividends, 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, generally will
be treated as ordinary income or loss. Similarly, gains or losses on the
disposition of foreign currencies or debt securities held by the Fund
denominated in a foreign currency, if any, to the extent attributable to
fluctuations in exchange rates between the acquisition and disposition dates,
generally will also be treated as ordinary income or loss. These gains and
losses are referred to under the Internal Revenue Code as "Section 988" gains
and losses.
Furthermore, foreign currency gains and losses attributable to certain
forward contracts, futures contracts that are not "regulated futures contracts,"
equity options and unlisted non-equity options also will be treated as Section
988 gains and losses. (In certain circumstances, however, the Company may elect
capital gain or loss treatment for such transactions.) Section 988 gains and
losses will increase or decrease the amount of the Company's investment company
taxable income available for distribution. The Company does not anticipate that
any Section 988 gains and losses the Fund may realize will adversely affect the
ability of the Fund to qualify as a RIC under the Internal Revenue Code.
OPTION AND FUTURES TRANSACTIONS. The use of hedging strategies, such as
writing (selling) and purchasing options and futures contracts and entering into
forward contracts, involves complex rules that will determine for income tax
purposes the character and timing of recognition of the gains and losses each
Fund realizes in connection therewith. Income from foreign currencies (except
certain gains therefrom that may be excluded by future regulations), and income
from transactions in options, futures, and forward contracts derived by a Fund
with respect to its business of investing in stock, securities, or foreign
currencies, will qualify as permissible income under the Income Requirement.
However, income from the disposition of options and futures contracts (other
than those on foreign currencies) will be subject to the Short-Short Limitation
if they are held for less than three months. Income from the disposition of
foreign currencies, and options, futures, and forward contracts thereon, that
are not directly related to the Funds' principal business of investing in stock
or securities (or options and futures with respect thereto) also will be subject
to the Short-Short Limitation if they are held for less than three months.
If a Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. Each
Fund will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent a Fund does not so qualify, it may be forced
to defer the closing out of certain options, futures, and forward contracts
beyond the time when it otherwise would be advantageous to do so, in order for
the Fund to qualify as a RIC.
Under Section 1256 of the Internal Revenue Code, gain or loss on certain
options, futures contracts, options on futures contracts (Section 1256
contracts), other than Section 1256 contracts that are part of a "mixed
straddle" with respect to which a Fund has made an election not to have the
following rules apply, will be treated as 60% long-term and 40% short-term
capital gain or loss (blended gain or loss). In addition, Section 1256 contracts
held by a Fund at the end of each taxable year will be required to be treated as
sold at fair market value on the last day of such taxable year for federal
income tax purposes and the resulting gain or loss will be treated as blended
gain or loss and will affect the amount of distributions required to be made by
a Fund in order to satisfy the RIC distribution requirements.
Offsetting positions held by a Fund involving certain futures and options
transactions may be considered to constitute "straddles" which are subject to
special rules under the Internal Revenue Code. Under these rules, depending on
different elections which may be made by the Company, the amount, timing and
character of gain and loss realized by the Company and its shareholders may be
affected.
TAX CONSEQUENCES TO SHAREHOLDERS
Ordinarily, distributions of a RIC's investment company taxable income
would be taxable to shareholders as ordinary income to the extent of the
earnings and profits of the RIC. To the extent that a distribution exceeds the
RIC's earnings and profits, it would be treated as a nontaxable return of
capital to the extent of the shareholder's tax basis in the shares of the RIC.
Distributions of net capital gain ordinarily would be taxable as long-term
capital gains. The rules
B-39
<PAGE>
discussed in this paragraph generally would apply regardless of the length of
time a shareholder holds the shares of the RIC.
The Company's present intention is to offer shares of the Funds primarily
to qualified retirement plans and other tax-exempt investors to whom the
foregoing rules do not apply. The Funds intend to satisfy the RIC distribution
requirements by distributions in the form of additional shares to its
shareholders. However, shareholders may redeem their shares, including shares
received as dividends or distributions, at any time for cash. Distributions are
generally not taxable to the participants in the shareholder plans.
Distributions from a qualified retirement plan to a participant or beneficiary
are subject to special rules. Because the effect of these rules varies greatly
with individual situations, potential investors are urged to consult their own
tax advisers.
TAX CONSEQUENCES TO NON-EXEMPT SHAREHOLDERS. Dividends and other
distributions declared by a Fund in October, November or December of any year
and payable to shareholders of record on a date in any of those months are
deemed to have been paid by the Fund and received by the shareholders on
December 31 of that year if the distributions are paid by the Fund during the
following January. Accordingly, those distributions will be taxed to
shareholders that are not tax-exempt entities for the year in which that
December 31 falls.
If shares of a Fund are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received on those shares.
Non-exempt investors also should be aware that if shares are purchased shortly
before the record date for a dividend or other distribution, the purchaser will
receive some portion of the purchase price back as a taxable distribution.
PERFORMANCE AND YIELD INFORMATION
From time to time, the Company may quote a Fund's yield or total return in
advertisements or in advertisements, sales literature, reports and other
communications to shareholders.
AVERAGE ANNUAL TOTAL RETURN
A Fund's "average annual total return" is computed according to a formula
prescribed by the SEC, expressed as follows:
P(1+T)^n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value (ERV) at the end of a 1-, 5- or 10-year
period (or fractional portion thereof) of a hypothetical $1,000
investment made at the beginning of a 1-, 5- or 10-year period
assuming reinvestment of all dividends and distributions and the
effect of the maximum annual fee for participation in the
Company.
The ERV assumes complete redemption of the hypothetical investment at the
end of the measuring period. A Fund's net investment income changes in response
to fluctuations in interest rates and the expenses of the Fund. The Average
Annual Total Return for the year ended September 30, 1996 and for the period
from commencement of each Fund's operations (November 5, 1992 for Prudential
Stock Index Fund, and January 4, 1993 for Prudential Active Balanced Fund)
through September 30, 1996 was: Prudential Active Balanced Fund, 9.1% and 10.1%,
respectively; Prudential Stock Index Fund, 19.7% and 16.0%, respectively. These
amounts are computed by assuming a hypothetical initial payment of $1,000. It
was then assumed that all of the dividends and distributions paid by the Fund
over the relevant time period were reinvested. It was then assumed that at the
end of the time period, the entire amount was redeemed. No Class I shares of
Prudential Stock Index Fund were outstanding during this period.
B-40
<PAGE>
AGGREGATE TOTAL RETURN
A Fund's aggregate total return represents the cumulative change in the
value of an investment in the Fund for the specified period and is computed by
the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1,000.
ERV = Ending Redeemable Value (ERV) at the end of a 1-, 5- or 10-year
period (or fractional portion thereof) of a hypothetical $1,000
investment made at the beginning of a 1-, 5- or 10-year period
assuming reinvestment of all dividends and distributions and the
effect of the maximum annual fee for participation in the
Company.
The ERV assumes complete redemption of the hypothetical investment at the
end of the measuring period.
A Fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of a Fund's performance for any specified period in the future.
In addition, because performance will fluctuate, it may not provide a basis for
comparing an investment in the Fund with certain bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors
comparing a Fund's performance with that of other mutual funds should give
consideration to the quality and maturity of the respective investment
companies' portfolio securities. The aggregate total return for the period from
commencement of each Fund's operations through September 30, 1996 was:
Prudential Active Balanced Fund, 43.4 % and Prudential Stock Index Fund, 78.3%.
No Class I shares of Prudential Stock Index Fund were outstanding during this
period.
From time to time, the performance of a Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long term and the rate of inflation.(1)
[CHART]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C>
Performance
Comparison of
Different
Types of Investments
Over the Long Term
(1/1926-12/1994)
Long-Term Govt.
Common Stocks Bonds Inflation
10.2% 4.8% 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 and Poor's 500 Stock Index, a market-weighted,
unmanaged index of 500 common stock 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-41
<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 Company's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting books
and records pursuant to an agreement with the Company. Subcustodians provide
custodial services for a 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 LLC, Raritan Plaza One, Edison, New Jersey
08837 serves as the Transfer and Dividend Disbursing Agent of each Fund. PMFS is
a wholly owned subsidiary of PMF. PMFS provides customary transfer agency
services to the Company, 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 of
$9.50, a new account set-up fee for each manually established account of $2.00
and a monthly inactive zero balance account fee per shareholder account of
$0.20. PMFS is also reimbursed for its out-of-pocket expenses, including, but
not limited to, postage, stationery, printing, allocable communications expenses
and other costs.
Deloitte & Touche LLP, Two World Financial Center, New York, New York
10281, served as the Company's independent accountants, and in that capacity
audited the annual reports of each then-existing Fund for the fiscal year ended
September 30, 1996. Only two of the Funds included in the financial statements,
Prudential Active Balanced Fund and Prudential Stock Index Fund, currently
exist. Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York
10036, currently serves as the Company's independent accountants and in that
capacity will audit the Funds' annual financial statements.
B-42
<PAGE>
Portfolio of Investments as of THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996 ACTIVE BALANCED FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--79.3%
COMMON STOCKS--46.9%
- ------------------------------------------------------------
Aerospace/Defense--0.3%
5,600 Boeing Co. $ 529,200
- ------------------------------------------------------------
Airlines--2.1%
16,300 AMR Corp.(a) 1,297,887
26,800 Delta Airlines, Inc. 1,929,600
-------------
3,227,487
- ------------------------------------------------------------
Automobiles & Trucks--2.0%
65,500 General Motors Corp. 3,144,000
- ------------------------------------------------------------
Banking--4.2%
19,500 Boatmen's Bancshares 1,089,562
18,400 Chase Manhattan Corp. 1,474,300
48,500 Fleet Financial Group, Inc. 2,158,250
147,000 Hibernia Corp. 1,672,125
-------------
6,394,237
- ------------------------------------------------------------
Business Services--1.4%
23,000 Manpower, Inc. 764,750
49,000 Ryder System, Inc. 1,451,625
-------------
2,216,375
- ------------------------------------------------------------
Chemicals--2.2%
39,100 Betz Laboratories, Inc. 2,052,750
43,100 Dexter Corp. 1,287,612
-------------
3,340,362
- ------------------------------------------------------------
Commercial Services--1.2%
21,850 CUC International, Inc.(a) 871,269
18,900 York International Corp. 914,287
-------------
1,785,556
Computer Software & Services--1.6%
34,700 Geoworks $ 902,200
43,000 Macromedia, Inc.(a) 892,250
13,700 Symbol Technologies, Inc.(a) 630,200
-------------
2,424,650
- ------------------------------------------------------------
Computers--4.0%
29,300 Digital Equipment Corp. 1,047,475
24,000 Hewlett-Packard Co. 1,170,000
31,600 International Business Machines
Corp. 3,934,200
-------------
6,151,675
- ------------------------------------------------------------
Drugs & Medical Supplies--1.3%
15,500 Smithkline Beecham PLC (ADR)
(United Kingdom) 943,563
35,900 Vertex Pharmaceuticals, Inc.(a) 1,059,050
-------------
2,002,613
- ------------------------------------------------------------
Electronics--0.3%
35,600 International Rectifier Corp.(a) 493,950
- ------------------------------------------------------------
Insurance--2.3%
23,400 CIGNA Corp. 2,805,075
14,700 The PMI Group, Inc. 780,938
-------------
3,586,013
- ------------------------------------------------------------
Leisure--0.4%
12,800 ITT Corp. (New) 558,400
- ------------------------------------------------------------
Lodging--0.9%
48,800 Hilton Hotels Corp. 1,384,700
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-43
<PAGE>
Portfolio of Investments as of THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996 ACTIVE BALANCED FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Machinery--1.2%
13,347 Harnischfeger Industries, Inc. $ 503,849
40,500 Kennametal, Inc. 1,392,188
-------------
1,896,037
- ------------------------------------------------------------
Media--7.5%
81,700 Dow Jones & Co., Inc. 3,022,900
13,800 Dun & Bradstreet Corp. 822,825
45,000 McGraw-Hill Companies, Inc. 1,918,125
78,300 New York Times Co. 2,642,625
19,500 Omnicom Group 911,625
9,200 Scholastic Corp.(a) 667,000
19,000 Tribune Co. 1,482,000
-------------
11,467,100
- ------------------------------------------------------------
Mineral Resources--1.0%
32,574 Newmont Mining Corp. 1,539,122
- ------------------------------------------------------------
Miscellaneous Basic Industry--4.2%
80,550 Avalon Properties, Inc. 1,872,787
16,500 Champion International Corp. 756,938
15,400 Mead Corp. 902,825
27,000 Reynolds Metals Co. 1,380,375
85,300 Westinghouse Electric Corp. 1,588,712
-------------
6,501,637
- ------------------------------------------------------------
Office Equipment & Supplies--0.5%
15,200 Alco Standard Corp. 758,100
Petroleum--1.4%
27,900 Amerada Hess Corp. $ 1,475,213
17,300 Unocal Corp. 622,800
-------------
2,098,013
- ------------------------------------------------------------
Petroleum Services--2.5%
25,200 Anadarko Petroleum Corp. 1,408,050
79,900 Dresser Industries, Inc. 2,377,025
-------------
3,785,075
- ------------------------------------------------------------
Railroads--1.1%
22,461 Union Pacific Corp. 1,645,268
- ------------------------------------------------------------
Retail--1.6%
9,800 Harcourt General, Inc. 541,450
103,679 Limited, Inc. 1,982,861
-------------
2,524,311
- ------------------------------------------------------------
Steel - Producers--0.6%
30,100 USX Corp. -U.S. Steel Group 857,850
- ------------------------------------------------------------
Technology--0.4%
33,320 Chiron Corp.(a) 633,080
- ------------------------------------------------------------
Telecommunications--0.7%
41,200 MCI Communications Corp. 1,055,750
-------------
Total common stocks
(cost $61,594,335) 72,000,561
-------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-44
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
ACTIVE BALANCED FUND
Portfolio of Investments as of September 30, 1996
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
DEBT OBLIGATIONS--32.4%
- ------------------------------------------------------------
U.S. Government Securities--32.4%
$3,230 United States Treasury Bond,
7.875%, 2/15/21 $ 3,527,774
United States Treasury Notes,
6,575 8.875%, 11/15/98 6,925,316
5,510 7.50%, 11/15/01 5,748,473
17,435 6.25%, 2/15/03 17,157,086
17,190 5.75%, 8/15/03 16,397,713
-------------
Total debt obligations
(cost $49,168,316) 49,756,362
-------------
Total long-term investments
(cost $110,762,651) 121,756,923
-------------
SHORT-TERM INVESTMENT--20.3%
- ------------------------------------------------------------
Repurchase Agreement--20.3%
31,159 Joint Repurchase Agreement Account,
5.72%, 10/01/96 (Note 4)
(cost $31,159,000) 31,159,000
- ------------------------------------------------------------
Total Investments--99.6%
(cost $141,921,651; Note 3) 152,915,923
Other assets in excess of
liabilities--0.4% 672,374
-------------
Net Assets--100% $ 153,588,297
-------------
-------------
</TABLE>
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-45
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
Statement of Assets and Liabilities ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets September 30, 1996
Investments, at value (cost $141,921,651).............................................................. $152,915,923
Cash................................................................................................... 709
Receivable for investments sold........................................................................ 4,101,702
Interest and dividends receivable...................................................................... 786,652
Receivable for Fund shares sold........................................................................ 200,595
Deferred expenses and other assets..................................................................... 20,549
------------------
Total assets....................................................................................... 158,026,130
------------------
Liabilities
Payable for investments purchased...................................................................... 4,175,455
Payable for Fund shares reacquired..................................................................... 98,648
Management fee payable................................................................................. 83,648
Accrued expenses....................................................................................... 63,447
Administration fee payable............................................................................. 16,635
------------------
Total liabilities.................................................................................. 4,437,833
------------------
Net Assets............................................................................................. $153,588,297
------------------
------------------
Net assets were comprised of:
Shares of beneficial interest, at par............................................................... $ 11,806
Paid-in capital in excess of par.................................................................... 130,668,621
------------------
130,680,427
Undistributed net investment income................................................................. 3,302,693
Accumulated net realized gain on investments........................................................ 8,610,905
Net unrealized appreciation on investments.......................................................... 10,994,272
------------------
Net assets, September 30, 1996......................................................................... $153,588,297
------------------
------------------
Shares of beneficial interest issued and outstanding................................................... 11,806,338
------------------
------------------
Net asset value per share.............................................................................. $13.01
------------------
------------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-46
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
ACTIVE BALANCED FUND
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income September 30, 1996
<S> <C>
Income
Interest.............................. $ 4,497,838
Dividends (net of foreign withholding
taxes of $2,577)................... 1,314,110
------------------
Total income......................... 5,811,948
------------------
Expenses
Management fee........................ 994,182
Administration fee.................... 188,579
Custodian's fees and expenses......... 80,000
Registration fees..................... 40,000
Reports to shareholders............... 34,000
Transfer agent's fees and expenses.... 32,350
Legal fees and expenses............... 15,000
Amortization of organization
expenses........................... 13,249
Audit fee and expenses................ 12,500
Trustees' fees........................ 12,000
Miscellaneous......................... 6,057
------------------
Total expenses....................... 1,427,917
Less: Expense subsidy (Note 2)........... (7,656)
------------------
Net expenses.......................... 1,420,261
------------------
Net investment income.................... 4,391,687
------------------
Realized and Unrealized Gain on
Investment Transactions
Net realized gain on investment
transactions.......................... 9,129,045
Net change in unrealized appreciation on
investments........................... (1,120,181)
------------------
Net gain on investments.................. 8,008,864
------------------
Net Increase in Net Assets
Resulting from Operations................ $ 12,400,551
------------------
------------------
</TABLE>
THE PRUDENTIAL INSTITUTIONAL FUND
ACTIVE BALANCED FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase Year Ended September 30,
<S> <C> <C>
in Net Assets 1996 1995
Operations
Net investment income.......... $ 4,391,687 $ 3,695,777
Net realized gain on
investment.................. 9,129,045 1,585,229
Net change in unrealized
appreciation on
investments................. (1,120,181) 12,809,504
------------ ------------
Net increase in net assets
resulting from operations... 12,400,551 18,090,510
------------ ------------
Dividends and distributions
Dividends to shareholders from
net investment income....... (3,972,955) (2,260,245)
------------ ------------
Distributions to shareholders
from net realized gains..... (1,932,789) (272,788)
------------ ------------
Fund share transactions
Net proceeds from shares
sold........................ 36,454,403 54,908,716
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions........... 5,905,744 2,533,033
Cost of shares redeemed........ (28,618,544) (20,823,769)
------------ ------------
Net increase in net assets from
Fund share transactions..... 13,741,603 36,617,980
------------ ------------
Net increase...................... 20,236,410 52,175,457
Net Assets
Beginning of year................. 133,351,887 81,176,430
------------ ------------
End of year....................... $153,588,297 $133,351,887
------------ ------------
------------ ------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-47
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
Notes to Financial Statements ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
The Prudential Institutional Fund, (the ``Company'') is registered under the
Investment Company Act of 1940 as an open-end, diversified management investment
company. The Company was established as a Delaware business trust on May 11,
1992 and currently consists of two separate funds: Stock Index Fund and Active
Balanced Fund (the ``Fund''). Prior to September 21, 1996 the Company consisted
of seven separate funds, five of which were subsequently reorganized and
combined with existing funds in the Prudential Mutual Funds family of funds (see
Note 6.)
The Company had no operations until July 7, 1992 when 10,000 shares of
beneficial interest of the Company were sold for $100,000 to Prudential
Institutional Fund Management, Inc. (``PIFM''). Investment operations of the
Fund commenced on January 4, 1993. The Fund's investment objective is to achieve
total returns approaching equity returns, while accepting less risk than an
all-equity portfolio, through an actively-managed portfolio of equity
securities, fixed income securities and money market instruments.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund.
Securities Valuation: Securities, including options, warrants, futures contracts
and options thereon, for which the primary market is on a national securities
exchange, commodities exchange or board of trade and NASDAQ national market
equity securities are valued at the last sale price on such exchange or board of
trade on the date of valuation or, if there was no sale on such day, at the
average of readily closing bid and asked prices quoted on such day.
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, shall be valued at the average of the most recently quoted bid
and asked prices provided by a principal market maker or dealer.
U.S. government securities for which market quotations are available shall be
valued at a price provided by an independent broker/dealer or pricing service.
Securities for which reliable market quotations are not available or for which
the pricing agent or principal market maker does not provide a valuation or
provides a valuation that, in the judgement of the subadviser, does not
represent fair value, shall by valued at fair value as determined under
procedures established by the Trustees.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians, as the case may be under
triparty repurchase agreements, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults, and the value of the collateral declines or, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
Dividends and Distributions: Dividends and distributions of the Fund are
declared in cash and automatically reinvested in additional shares of the Fund.
The Fund will declare and distribute its net investment income and net capital
gains, if any, at least annually. Dividends and distributions are recorded on
the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.
Deferred Organizational Expenses: Approximately $450,000 of costs were incurred
in connection with the organization and initial registration of the Company and
have been deferred and are being amortized ratably over the date each of the
Funds' commenced investment operations.
- --------------------------------------------------------------------------------
B-48
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
Notes to Financial Statements ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with PIFM through October 30, 1996. Pursuant
to this agreement, PIFM has responsibility for all investment advisory services
and supervises the subadviser's performance of such services.
PIFM has a subadvisory agreement with Jennison Associates Capital Corp.
(``Jennison'') through October 30, 1996. Jennison furnishes investment advisory
services in connection with the management of the Fund. PIFM will pay for the
costs and expenses attributable to the subadvisory agreements and the salaries
and expenses of all personnel of the Fund except for fees and expenses of
unaffiliated Trustees. The Fund will bear all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .70 of 1% of the average daily net assets of the Fund.
Effective October 31, 1996 the Fund will enter into a management agreement with
Prudential Mutual Fund Management LLC (``PMF''). Pursuant to this agreement PMF
will have responsibility for all investment advisory services. PMF will enter
into a subadvisory agreement with Jennison. Jennison, subject to the supervision
of PMF, will manage the assets of the Fund in accordance with its investment
objectives and policies and in a manner consistent with the previous
arrangement. PMF pays for the compensation of officers of the Fund, occupancy
and certain clerical and bookkeeping costs of the Fund. The Fund will bear all
other costs and expenses.
Effective October 31, 1996 the management fee paid PMF will be computed daily
and payable monthly at an annual rate of .65 of 1% of the average daily net
assets of the Fund. Pursuant to the subadvisory agreement, Jennison is
compensated by PMF for its services at an annual rate of .30 of 1% of the Fund's
average daily net assets up to and including $300 million and .25 of 1% of the
Fund's average daily net assets in excess of $300 million.
PIFM voluntarily agreed to subsidize a portion of the operating expenses of the
Fund until October 30, 1996. Such expenses may be recovered by PIFM through
October 30, 1996 so long as the total expense ratio does not exceed the
predetermined level set forth in the Fund's prospectus of 1.00% per annum. For
the year ended September 30, 1996, PIFM subsidized $7,656 of the expenses of the
Fund (.005% of the average net assets of the Fund/$0.0006 per share).
The Fund has an administration agreement with PMF through October 30, 1996. The
administration fee paid PMF is computed daily and payable monthly, at an annual
rate of .17% of the Company's average daily net assets up to $250 million and
.15% of the Company's average daily net assets in excess of $250 million. PMF
will furnish to the Fund such services as the Fund may require in connection
with the administration of the Fund's business affairs. PMF will also provide
certain transfer agent services through its wholly-owned subsidiary, Prudential
Mutual Fund Services, Inc. (``PMFS''). For such services, PMFS will be paid .03%
of the Company's average daily net assets up to $250 million and .02% of the
Company's average daily net assets in excess of $250 million from the
administration fee paid to PMF. PMFS will enter into a separate transfer agency
agreement directly with the Fund.
Effective October 31, 1996 Prudential Securities Incorporated (``PSI'') will
become the distributor of the Fund's Class A, Class B and Class C shares. PSI
will also incur 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.
Pursuant to plans of distribution (the ``Class A, B and C plans''), the Fund
compensates PSI 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
will be .25%, 1% and 1%, respectively, of the average daily net assets of the
Fund.
PIFM, Jennison, PMF and PSI are indirect wholly-owned subsidiaries of The
Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term investments,
for the year ended September 30, 1996 aggregated $65,518,520 and $59,659,372,
respectively.
The cost basis of investments for federal income tax purposes is $142,086,519 As
of September 30, 1996, net unrealized appreciation for federal income tax
purposes was $10,829,404 (gross unrealized appreciation--$11,585,277, gross
unrealized depreciation--$755,872).
- --------------------------------------------------------------------------------
B-49
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
Notes to Financial Statements ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
Note 4. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. At September 30, 1996, the Fund
had a 3.12% undivided interest in the repurchase agreements in the joint
account. As of such date, each repurchase agreement in the joint account and the
collateral therefore was as follows:
Bear, Stearns & Co., Inc., 5.72%, in the principal amount of $333,000,000,
repurchase price $333,052,910, due 10/1/96. The value of the collateral
including accrued interest was $339,757,925.
J.P. Morgan Securities, Inc., 5.70%, in the principal amount of $109,000,000,
repurchase price $109,017,258, due 10/1/96. The value of the collateral
including accrued interest was $111,181,257.
Goldman, Sachs & Co., Inc., 5.70%, in the principal amount of $333,000,000,
repurchase price $333,052,725, due 10/1/96. The value of the collateral
including accrued interest was $339,860,615.
Smith Barney, Inc., 5.75%, in the principal amount of $224,000,000, repurchase
price $224,035,778, due 10/1/96. The value of the collateral including accrued
interest was $228,481,010.
- ------------------------------------------------------------
Note 5. Capital
The Fund has authorized an unlimited number of shares of beneficial interest at
$.001 par value per share. Transactions in shares of beneficial interest during
the fiscal years ended September 30, 1996 and September 30, 1995 were as
follows:
<TABLE>
<CAPTION>
Year ended September 30,
---------------------------
1996 1995
---------- ----------
<S> <C> <C>
Shares sold.................................. 2,893,381 4,883,689
Shares issued in reinvestment of dividends
and distributions........................... 483,285 242,395
Shares reacquired............................ (2,273,501) (1,856,069)
---------- ----------
Net increase................................. 1,103,165 3,270,015
---------- ----------
---------- ----------
</TABLE>
Of the shares outstanding at September 30, 1996, PIFM and affiliates owned
2,487,564 shares of the Fund.
Note 6. Reorganization
On May 17, 1996, the Trustees of the Company approved an Agreement and a Plan of
Reorganization (the ``Plan of Reorganization'') for the Company. The Plan of
Reorganization was approved by shareholders on September 6, 1996 and October 30,
1996.
Under the Plan of Reorganization, all of the assets and liabilities of the
Growth Stock Fund, Balanced Fund, Income Fund and Money Market Fund (``Series'')
were transferred at net asset value for equivalent value Class Z shares of
Prudential Jennison Fund, Inc., Prudential Allocation Fund--Balanced Portfolio,
Prudential Government Income Fund, Inc. and Prudential MoneyMart Assets, Inc.,
respectively. These Series then ceased operations.
International Stock Fund joined the Prudential Global Fund as separate series of
a newly named Prudential World Fund. Existing shareholders became Class Z
shareholders and the International Stock Fund also began offering Classes A, B
and C shares.
Stock Index Fund and the Fund remained with The Prudential Institutional Fund
(to be renamed the Prudential Dryden Fund) as separate funds. Existing
shareholders of the Fund became Class Z shareholders and the Fund will begin
offering Classes A, B and C shares. Stock Index Fund will offer a single class
of shares. Effective October 31, 1996 these funds will be managed by PMF, PMFS
will provide transfer agency services and PSI will act as distributor.
- --------------------------------------------------------------------------------
B-50
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
Financial Highlights ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 4,
1993(a)
Year Ended September 30, Through
----------------------------------- September 30,
1996 1995 1994 1993
---------- -------- ------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................... $ 12.46 $ 10.92 $ 11.05 $ 10.00
---------- -------- ------- -------
Income from investment operations:
Net investment income(b)........................................... .29 .33 .24 .21
Net realized and unrealized gain (loss) on investment
transactions.................................................... .81 1.54 (.12) .84
---------- -------- ------- -------
Total from investment operations................................ 1.10 1.87 .12 1.05
---------- -------- ------- -------
Less distributions:
Dividends from net investment income............................... (.37) (.29) (.14) --
Distributions from net realized gains.............................. (.18) (.04) (.11) --
---------- -------- ------- -------
Total distributions............................................. (.55) (.33) (.25) --
---------- -------- ------- -------
Net asset value, end of period..................................... $ 13.01 $ 12.46 $ 10.92 $ 11.05
---------- -------- ------- -------
---------- -------- ------- -------
TOTAL RETURN(d).................................................... 9.11% 17.66% 1.07% 10.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................................... $153,588 $133,352 $81,176 $38,786
Average net assets (000)........................................... $142,026 $104,821 $58,992 $12,815
Ratios to average net assets:(b)
Expenses........................................................ 1.00% 1.00% 1.00% 1.00%(c)
Net investment income........................................... 3.09% 3.53% 3.06% 2.68%(c)
Portfolio turnover rate............................................ 51% 30% 40% 47%
Average commission rate paid per share............................. $ .0654 N/A N/A N/A
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total return for periods of
less than a full year are not annualized. Total return includes the effect
of expense subsidies.
N/A--Data not required for these periods.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-51
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
Report to Independent Accountants ACTIVE BALANCED FUND
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
The Prudential Institutional Fund--Active Balanced Fund
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Prudential Institutional Fund--Active
Balanced Fund as of September 30, 1996, the related statements of operations for
the year then ended and of changes in net assets for each of the two years in
the period then ended, and the financial highlights for the three years in the
period then ended and for the period January 4, 1993 (commencement of investment
operations) to September 30, 1993. These financial statements and financial
highlights are the responsibility of the Portfolio'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
September 30, 1996 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Prudential
Institutional Fund--Active Balanced Fund as of September 30, 1996, the results
of its operations, the changes in its net assets and the financial highlights
for the respective stated periods in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
November 13, 1996
B-52
<PAGE>
Portfolio of Investments as of THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996 STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--94.0%
COMMON STOCKS AND EQUIVALENTS--94.0%
- ------------------------------------------------------------
Aerospace/Defense--2.1%
9,400 Allied-Signal, Inc. $ 619,225
11,500 Boeing Co. 1,086,750
2,100 General Dynamics Corp. 144,638
6,630 Lockheed Martin Corp. 597,529
7,300 McDonnell Douglas Corp. 383,250
1,900 Northrop Grumman Corp. 152,475
7,900 Raytheon Co. 439,437
7,200 Rockwell International Corp. 405,900
-------------
3,829,204
- ------------------------------------------------------------
Airlines--0.3%
2,950 AMR Corp.(a) 234,894
2,600 Delta Airlines, Inc. 187,200
4,700 Southwest Airlines Co. 107,512
2,300 USAir Group, Inc.(a) 37,950
-------------
567,556
- ------------------------------------------------------------
Aluminum--0.4%
7,500 Alcan Aluminum Ltd. 225,000
5,800 Aluminum Co. of America 342,200
2,150 Reynolds Metals Co. 109,919
-------------
677,119
- ------------------------------------------------------------
Automobiles & Trucks--2.0%
24,700 Chrysler Corp. 707,038
1,400 Cummins Engine, Inc. 55,125
3,400 Dana Corp. 102,850
2,000 Echlin Inc. 62,750
39,300 Ford Motor Co. 1,228,125
25,100 General Motors Corp. 1,204,800
4,000 Genuine Parts Co. 175,000
1,400 Johnson Controls, Inc. 105,000
2,420 Navistar International Corp.(a) 20,570
1,900 Safety Kleen Corp. 31,350
-------------
3,692,608
Banking--7.1%
15,030 Banc One Corp. $ 616,230
5,100 Bank of Boston Corp. 295,163
12,800 Bank of New York Co., Inc. 376,000
12,100 BankAmerica Corp. 993,712
2,600 Bankers Trust NY Corp. 204,425
6,200 Barnett Banks, Inc. 209,250
5,300 Boatmen's Bancshares 296,138
14,408 Chase Manhattan Corp. 1,154,441
16,100 Citicorp 1,459,062
3,800 Comerica, Inc. 195,700
7,400 CoreStates Financial Corp. 320,050
3,400 Fifth Third Bancorp 197,625
4,600 First Bank System, Inc. 307,625
10,401 First Chicago Corp. 470,645
9,400 First Union Corp. 627,450
8,587 Fleet Financial Group, Inc. 382,122
1,900 Golden West Financial Corp. 110,913
4,600 Great Western Financial Corp. 121,900
3,800 H.F. Ahmanson & Co. 106,400
7,600 KeyCorp 334,400
4,525 Mellon Bank Corp. 268,106
6,200 Morgan (J.P.) & Co., Inc. 551,025
7,400 National City Corp. 311,725
9,900 NationsBank Corp. 860,062
12,300 Norwest Corp. 502,762
11,300 PNC Bank Corp. 377,138
1,800 Republic New York Corp. 124,425
7,500 Suntrust Banks, Inc. 307,500
5,400 U.S. Bancorp 213,300
3,227 Wells Fargo & Co. 838,933
-------------
13,134,227
- ------------------------------------------------------------
Beverages--3.7%
1,200 Adolph Coors Co. 26,325
16,800 Anheuser Busch Cos., Inc. 632,100
2,400 Brown-Forman Corp. 93,900
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-53
<PAGE>
Portfolio of Investments as of THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996 STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Beverages (cont'd.)
82,900 Coca-Cola Co. $ 4,217,537
52,100 PepsiCo, Inc. 1,471,825
12,300 Seagram Co., Ltd. 459,713
-------------
6,901,400
- ------------------------------------------------------------
Chemicals--2.2%
3,700 Air Products & Chemicals, Inc. 215,525
8,300 Dow Chemical Co. 666,075
18,600 du Pont (E.I.) de Nemours & Co. 1,641,450
2,600 Eastman Chemical Co. 151,775
3,600 Hercules, Inc. 197,100
19,400 Monsanto Co. 708,100
2,300 Nalco Chemical Co. 83,375
2,200 Rohm & Haas Co. 144,100
1,700 Sigma-Aldrich 96,900
4,400 Union Carbide Corp. 200,750
-------------
4,105,150
- ------------------------------------------------------------
Chemical-Specialty--0.5%
4,625 Engelhard Corp. 106,375
2,100 Great Lakes Chemical Corp. 119,700
4,900 Morton International, Inc. 194,775
5,100 Praxair, Inc. 219,300
1,500 Raychem Corp. 112,500
3,200 W.R. Grace & Co. 166,400
-------------
919,050
- ------------------------------------------------------------
Commercial Services--0.3%
8,150 CUC International, Inc.(a) 324,981
2,800 Deluxe Corp. 105,700
1,000 Harland (John H.) Co. 30,000
3,300 Moore Corp. Ltd. 60,638
-------------
521,319
- ------------------------------------------------------------
Computer Software & Services--4.6%
5,700 3Com Corp. (a) 342,356
1,500 AutoDesk, Inc. 38,813
9,600 Automatic Data Processing, Inc. $ 418,800
6,200 Bay Networks, Inc.(a) 168,950
2,500 Cabletron Systems, Inc.(a) 170,938
2,200 Ceridian Corp.(a) 110,000
21,500 Cisco Systems, Inc.(a) 1,334,344
12,050 Computer Associates International,
Inc. 719,987
2,450 Computer Sciences Corp.(a) 188,344
2,900 Dell Computer Corp. (a) 225,475
7,800 EMC Corp.(a) 176,475
1,300 Intergraph Corp.(a) 14,300
6,900 Micron Technology Inc. 210,450
19,900 Microsoft Corp.(a) 2,624,312
12,700 Novell, Inc.(a) 139,700
21,875 Oracle Systems Corp.(a) 931,055
3,500 Seagate Technology, Inc.(a) 195,562
5,800 Silicon Graphics Inc.(a) 128,325
6,200 Sun Microsystems Inc.(a) 385,175
3,800 Tandem Computers Inc.(a) 40,850
-------------
8,564,211
- ------------------------------------------------------------
Construction--0.1%
2,800 Fluor Corp. 172,200
1,300 Foster Wheeler Corp. 56,875
1,100 Kaufman & Broad Home Corp. 14,300
900 Pulte Corp. 23,063
-------------
266,438
- ------------------------------------------------------------
Consumer Goods--0.6%
900 Centex Corp. 29,363
1,200 Fleetwood Enterprises, Inc. 36,900
5,800 Lowes Companies, Inc. 237,075
5,200 Masco Corp. 156,000
3,500 Maytag Corp. 68,250
1,800 Owens-Corning Fiberglas Corp.(a) 66,375
2,700 Pioneer Hi-Bred International, Inc. 163,350
3,000 Stanley Works 84,375
2,000 Tupperware Corp. 98,000
2,500 Whirlpool Corp. 126,562
-------------
1,066,250
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-54
<PAGE>
Portfolio of Investments as of THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996 STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Containers--0.1%
1,200 Ball Corp. $ 29,400
1,700 Bemis, Inc. 57,588
4,200 Crown Cork & Seal, Inc.(a) 193,725
-------------
280,713
- ------------------------------------------------------------
Cosmetics & Soaps--2.3%
900 Alberto Culver Co. 39,038
4,400 Avon Products, Inc. 218,350
1,700 Clorox Co. 162,988
4,800 Colgate-Palmolive Co. 417,000
14,700 Gillette Co. 1,060,237
3,650 International Flavors & Fragrances
Inc. 159,231
22,800 Procter & Gamble Co. 2,223,000
-------------
4,279,844
- ------------------------------------------------------------
Diversified Gas--0.2%
3,600 Coastal Corp. 148,500
700 Eastern Enterprises, Inc. 26,425
2,400 Enserch Corp. 50,100
1,700 NICOR Inc. 57,375
900 Oneok Inc. 24,750
-------------
307,150
- ------------------------------------------------------------
Drugs & Medical Supplies--9.1%
26,000 Abbott Laboratories 1,280,500
2,900 ALZA Corp.(a) 77,937
21,100 American Home Products Corp. 1,345,125
8,800 Amgen, Inc.(a) 555,500
1,900 Bard (C.R.), Inc. 59,138
1,800 Bausch & Lomb, Inc. 66,150
9,000 Baxter International, Inc. 420,750
4,200 Becton Dickinson & Co. 185,850
3,800 Biomet, Inc.(a) 62,225
5,900 Boston Scientific Corp.(a) 339,250
16,650 Bristol-Myers Squibb Co. 1,604,644
3,357 Fresenius Medical Care AG (ADR)(a)
(Germany) 78,050
44,300 Johnson & Johnson Co. 2,270,375
18,200 Lilly (Eli) & Co. 1,173,900
8,000 Medtronic, Inc. $ 513,000
40,600 Merck & Co., Inc. 2,857,225
21,400 Pfizer, Inc. 1,693,275
16,955 Pharmacia & Upjohn, Inc. 699,394
12,300 Schering-Plough Corp. 756,450
2,600 St. Jude Medical, Inc.(a) 104,975
2,000 United States Surgical Corp. 85,000
9,000 Warner Lambert Co. 594,000
-------------
16,822,713
- ------------------------------------------------------------
Electronics--4.2%
4,700 Advanced Micro Devices, Inc.(a) 69,325
4,400 Amdahl Corp.(a) 41,525
7,284 AMP Inc. 282,255
4,000 Apple Computer, Inc. 88,750
1,100 Data General Corp.(a) 15,400
5,200 Digital Equipment Corp.(a) 185,900
1,600 EG&G, Inc. 28,600
7,400 Emerson Electric Co. 666,925
4,500 General Instrument Corp.(a) 111,375
1,300 Harris Corp. 84,663
34,000 Hewlett-Packard Co. 1,657,500
27,400 Intel Corp. 2,614,987
4,300 LSI Logic Corp.(a) 99,975
19,700 Motorola, Inc. 1,017,012
4,700 National Semiconductors Corp.(a) 94,588
1,400 Perkin Elmer Corp. 81,025
2,000 Tandy Corp. 80,750
1,000 Tektronix, Inc. 40,875
6,300 Texas Instruments Inc. 347,287
1,300 Thomas & Betts Corp. 53,300
-------------
7,662,017
- ------------------------------------------------------------
Financial Services--2.9%
15,900 American Express Co. 735,375
1,800 Beneficial Corp. 103,500
3,300 Block (H&R), Inc. 98,175
5,458 Dean Witter Discover & Co. 300,190
5,900 Federal Home Loan Mortgage Corp. 577,462
36,200 Federal National Mortgage Assn. 1,262,475
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-55
<PAGE>
Portfolio of Investments as of THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996 STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Financial Services (cont'd.)
7,400 First Data Corp. $ 604,025
4,500 Green Tree Financial Corp. 176,625
3,200 Household International Corp. 263,200
7,425 MBNA Corp. 258,019
5,700 Merrill Lynch & Co., Inc. 374,062
5,000 Morgan Stanley Group, Inc. 248,750
3,500 Salomon, Inc. 159,688
2,250 Transamerica Corp. 157,219
-------------
5,318,765
- ------------------------------------------------------------
Food & Beverage--2.6%
18,035 Archer-Daniels-Midland Co. 347,169
8,300 Campbell Soup Co. 647,400
8,100 ConAgra, Inc. 398,925
4,800 CPC International, Inc. 359,400
1,300 Fleming Cos., Inc. 22,587
5,250 General Mills, Inc. 316,969
2,000 Giant Foods, Inc. 68,000
12,200 Heinz (H.J.) Co. 411,750
5,200 Hershey Foods Corp. 261,300
7,050 Kellogg Co. 485,569
4,500 Quaker Oats Co. 164,812
3,500 Ralston Purina Co. 239,750
16,100 Sara Lee Corp. 575,575
6,000 Sysco Corp. 201,750
3,900 Wrigley (W.M.) Junior Co. 234,975
-------------
4,735,931
- ------------------------------------------------------------
Forest Products--1.5%
1,700 Boise Cascade Corp. 57,800
3,100 Champion International Corp. 142,212
3,050 Georgia Pacific Corp. 241,331
10,017 International Paper Co. 425,717
2,900 James River Corp. 80,113
9,408 Kimberly Clark Corp. 829,080
3,600 Louisiana Pacific Corp. 81,900
1,700 Mead Corp. 99,663
900 Potlatch Corp. 34,875
3,600 Stone Container Corp. 56,250
1,800 Temple Inland Inc. 94,950
2,300 Union Camp Corp. $ 112,413
3,400 Westvaco Corp. 100,725
6,500 Weyerhaeuser Co. 299,812
1,800 Willamette Industries, Inc. 117,900
-------------
2,774,741
- ------------------------------------------------------------
Gas Pipelines--0.7%
5,318 Cinergy Corp. 164,193
1,800 Columbia Gas System, Inc.(a) 100,800
3,100 Consolidated Natural Gas Co. 166,237
8,400 Enron Corp. 342,300
4,700 Noram Energy Corp. 69,913
5,000 PanEnergy Corp. 173,125
1,100 Peoples Energy Corp. 37,400
3,500 Williams Cos., Inc. 178,500
-------------
1,232,468
- ------------------------------------------------------------
Hospital Management--1.0%
3,300 Beverly Enterprises, Inc.(a) 35,888
14,852 Columbia Healthcare Corp. 844,707
1,100 Community Psychiatric Centers 10,313
5,500 Humana, Inc.(a) 111,375
2,100 Manor Care, Inc. 80,588
7,800 Service Corp. International 235,950
900 Shared Medical Systems Corp. 51,300
7,200 Tenet Healthcare Corp.(a) 160,200
6,100 United Healthcare Corp. 253,912
-------------
1,784,233
- ------------------------------------------------------------
Housing Construction
1,200 Armstrong World Industries 74,850
- ------------------------------------------------------------
Insurance--3.7%
4,900 Aetna Life & Casualty Co. 344,838
1,400 Alexander & Alexander Services, Inc. 23,275
14,674 Allstate Corp. 722,694
6,900 American General Corp. 260,475
15,612 American International Group, Inc. 1,572,909
3,600 Aon Corp. 195,300
5,800 Chubb Corp. 266,800
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-56
<PAGE>
Portfolio of Investments as of THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996 STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Insurance (cont'd.)
2,550 CIGNA Corp. $ 305,681
2,700 General Re Corp. 382,725
3,900 ITT Hartford Group Inc. 230,100
2,325 Jefferson-Pilot Corp. 120,319
3,400 Lincoln National Corp. 149,175
2,400 Marsh & McLennan Cos. 233,100
1,900 MGIC Investment Corp. 128,013
3,100 Providian Corp. 133,300
4,400 SAFECO Corp. 154,000
2,700 St. Paul Cos, Inc. 149,850
2,350 Torchmark Corp. 107,806
15,947 Travelers, Inc. 783,372
2,400 UNUM Corp. 153,900
4,000 USF&G Corp. 74,000
1,150 USLIFE Corp. 34,500
5,500 Wachovia Corp. 272,250
-------------
6,798,382
- ------------------------------------------------------------
Leisure--1.2%
1,800 Bally Entertainment Group(a) 51,075
3,100 Brunswick Corp. 74,400
22,492 Disney (Walt) Co. 1,425,430
3,500 Harrahs Entertainment Inc.(a) 65,188
2,800 Hasbro, Inc. 103,950
3,900 ITT Corp. (New) 170,137
1,300 King World Productions, Inc.(a) 47,938
9,287 Mattel, Inc. 240,301
-------------
2,178,419
- ------------------------------------------------------------
Lodging--0.4%
4,000 HFS Inc.(a) 267,500
6,400 Hilton Hotels Corp. 181,600
4,200 Marriott International, Inc.(a) 231,525
-------------
680,625
- ------------------------------------------------------------
Machinery--1.1%
900 Briggs & Stratton Corp. 39,938
2,400 Case Corp. 117,000
6,400 Caterpillar Inc. $ 482,400
1,400 Cincinnati Milacron, Inc. 26,425
3,600 Cooper Industries, Inc. 155,700
8,700 Deere & Co. 365,400
3,700 Dover Corp. 176,675
2,500 Eaton Corp. 150,937
1,000 Giddings & Lewis, Inc. 11,875
1,600 Harnischfeger Industries, Inc. 60,400
3,600 Ingersoll Rand Co. 171,000
1,302 PACCAR Inc. 71,284
2,550 Parker Hannifin Corp. 107,100
1,950 Snap-On Inc. 62,644
1,000 Timken Co. 39,250
-------------
2,038,028
- ------------------------------------------------------------
Media--1.7%
7,750 Comcast Corp. 119,156
5,100 Donnelley (R.R.) & Sons, Co. 164,475
3,300 Dow Jones & Co., Inc. 122,100
5,600 Dun & Bradstreet Corp. 333,900
4,650 Gannett, Inc. 327,244
2,600 Interpublic Group Cos., Inc. 122,850
3,300 Knight-Ridder, Inc. 122,100
3,300 McGraw Hill, Inc. 140,663
900 Meredith Corp. 44,438
3,100 New York Times Co. 104,625
13,000 Time Warner, Inc. 502,125
3,400 Times Mirror Co. 151,300
2,000 Tribune Co. 156,000
15,500 U.S. West Media Group 261,562
12,139 Viacom Inc.(a) 430,934
-------------
3,103,472
- ------------------------------------------------------------
Mineral Resources--0.8%
1,300 ASARCO Inc. 34,613
12,000 Barrick Gold Corp. (ADR) (Canada) 301,500
3,050 Cyprus Amax Minerals Co. 65,575
4,700 Echo Bay Mines, Ltd. 41,419
6,500 Freeport-McMoRan Copper & Gold Inc. 203,125
4,900 Homestake Mining Co. 71,663
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-57
<PAGE>
Portfolio of Investments as of THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996 STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Mineral Resources (cont'd.)
5,600 INCO, Ltd. $ 172,200
3,298 Newmont Mining Corp. 155,830
2,200 Phelps-Dodge Corp. 141,075
7,900 Placer Dome, Inc. 186,637
4,140 Santa Fe Pacific Gold Corp. 51,750
-------------
1,425,387
- ------------------------------------------------------------
Miscellaneous Basic Industry--4.9%
6,100 Applied Materials, Inc.(a) 168,512
7,000 Browning Ferris Industries, Inc. 175,000
1,000 Crane Co. 44,375
2,200 Ecolab, Inc. 74,250
1,250 FMC Corp.(a) 84,844
55,000 General Electric Co. 5,005,000
1,600 General Signal Corp. 70,400
1,700 Grainger (W.W.) Inc. 119,425
4,000 Illinois Tool Works, Inc. 288,500
3,900 ITT Industries Inc. 94,088
3,800 Loews Corp. 294,025
2,500 Mallinckrodt Group Inc. 104,062
1,400 Millipore Corp. 55,300
250 NACCO Industries, Inc. 11,938
3,733 Pall Corp. 105,457
6,200 PPG Industries, Inc. 337,125
2,800 Textron, Inc. 238,000
900 Trinova Corp. 28,350
2,200 TRW Inc. 204,600
5,000 Tyco International Ltd. 215,625
4,000 United Technologies Corp. 480,500
13,900 Westinghouse Electric Corp. 258,887
16,400 WMX Technologies, Inc. 539,150
-------------
8,997,413
- ------------------------------------------------------------
Miscellaneous Consumer Growth--1.9%
2,100 Allergan, Inc. 80,063
2,400 American Greetings Corp. 68,700
2,900 Black & Decker Corp. 120,350
7,800 Corning, Inc. 304,200
11,400 Eastman Kodak Co. $ 894,900
1,500 Jostens, Inc. 31,313
13,900 Minnesota Mining & Manufacturing Co. 971,262
1,500 Polaroid Corp. 66,000
4,900 Rubbermaid, Inc. 120,050
5,300 Unilever N.V. 835,412
3,500 Whitman Corp. 80,938
-------------
3,573,188
- ------------------------------------------------------------
Office Equipment & Supplies--2.3%
4,300 Alco Standard Corp. 214,462
1,700 Avery Dennison Corp. 94,350
9,000 Compaq Computer Corp.(a) 577,125
4,200 Honeywell, Inc. 265,125
17,800 International Business Machines Corp. 2,216,100
4,900 Pitney Bowes, Inc. 257,862
5,300 Unisys Corp.(a) 32,463
10,750 Xerox Corp. 576,469
-------------
4,233,956
- ------------------------------------------------------------
Petroleum--7.6%
3,100 Amerada Hess Corp. 163,913
16,500 Amoco Corp. 1,163,250
2,200 Ashland Oil, Inc. 87,450
5,350 Atlantic Richfield Co. 682,125
4,200 Burlington Resources Inc. 186,375
21,700 Chevron Corp. 1,358,962
41,250 Exxon Corp. 3,434,062
1,600 Kerr-McGee Corp. 97,400
1,100 Louisiana Land & Exploration Co. 57,888
13,100 Mobil Corp. 1,516,325
10,700 Occidental Petroleum Corp. 250,112
1,500 Pennzoil Co. 79,313
8,700 Phillips Petroleum Co. 371,925
17,800 Royal Dutch Petroleum Co. (ADR)
(Netherlands) 2,779,025
2,900 Santa Fe Energy Resources, Inc.(a) 41,325
2,400 Sun Co., Inc. 55,200
5,700 Tenneco, Inc. 285,712
8,800 Texaco Inc. 809,600
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-58
<PAGE>
Portfolio of Investments as of THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996 STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Petroleum (cont'd.)
8,200 Unocal Corp. $ 295,200
9,600 USX Marathon Corp 207,600
1,800 Western Atlas, Inc.(a) 112,050
-------------
14,034,812
- ------------------------------------------------------------
Petroleum Services--0.8%
4,600 Baker Hughes Inc. 139,725
5,900 Dresser Industries, Inc. 175,525
3,800 Halliburton Co. 196,175
900 Helmerich & Payne, Inc. 39,263
1,700 McDermott International, Inc. 36,975
3,400 Oryx Energy Co.(a) 60,350
2,800 Rowan Cos., Inc.(a) 52,150
8,100 Schlumberger, Ltd. 684,450
2,800 Sonat Inc. 123,900
-------------
1,508,513
- ------------------------------------------------------------
Precious Metals
7,500 Battle Mountain Gold Co. 58,125
- ------------------------------------------------------------
Railroads--1.1%
5,065 Burlington Northern Santa Fe 427,359
2,600 Consolidated Rail Corp. 188,175
6,900 CSX Corp. 348,450
4,200 Norfolk Southern Corp. 383,775
8,100 Union Pacific Corp. 593,325
-------------
1,941,084
- ------------------------------------------------------------
Restaurants--0.7%
4,850 Darden Restaurants Inc. 41,831
900 Luby's Cafeterias, Inc. 21,600
23,100 McDonald's Corp. 1,094,362
1,600 Ryan's Family Steak Houses, Inc.(a) 12,200
1,100 Shoney's Inc.(a) 10,038
4,100 Wendy's International, Inc. 88,150
-------------
1,268,181
Retail--5.0%
8,300 Albertsons, Inc. $ 349,637
4,900 American Stores Co. 196,000
3,400 Charming Shoppes, Inc. 20,400
3,200 Circuit City Stores, Inc. 115,600
7,100 Dayton Hudson Corp. 234,300
3,800 Dillard Department Stores, Inc. 122,550
7,000 Federated Department Stores, Inc.(a) 234,500
9,600 Gap, Inc. 277,200
1,200 Great Atlantic & Pacific Tea Inc. 31,050
2,300 Harcourt General, Inc. 127,075
15,966 Home Depot, Inc. 908,066
16,300 Kmart Corp. 167,075
4,100 Kroger Co.(a) 183,475
8,988 Limited, Inc. 171,896
2,400 Liz Claiborne, Inc. 89,400
600 Longs Drug Stores Corp. 26,100
8,300 May Department Stores Co. 403,587
3,500 Melville Corp. 154,438
1,200 Mercantile Stores, Inc. 64,800
5,300 Newell Co. 159,000
4,700 NIKE, Inc. 571,050
2,800 Nordstrom, Inc. 106,400
7,500 Penney (J.C.), Inc. 405,937
2,100 Pep Boys - Manny, Moe & Jack 74,813
6,552 Price Costco, Inc.(a) 134,316
2,400 Reebok International, Ltd. 83,400
2,800 Rite-Aid Corp. 101,500
13,000 Sears Roebuck & Co. 581,750
2,800 Sherwin Williams Co. 129,850
1,100 Stride Rite Corp. 9,900
2,400 Supervalue, Inc. 66,000
2,400 TJX Companies, Inc. 86,100
9,100 Toys 'R' Us Inc.(a) 265,037
76,200 Wal-Mart Stores, Inc. 2,009,775
8,200 Walgreen Co. 303,400
5,000 Winn-Dixie Stores, Inc. 174,375
4,300 Woolworth Corp. 88,688
-------------
9,228,440
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-59
<PAGE>
Portfolio of Investments as of THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996 STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Rubber--0.2%
2,800 Cooper Tire & Rubber $ 60,550
1,800 Goodrich (B.F.) Co. 81,225
5,200 Goodyear Tire & Rubber Co. 239,850
-------------
381,625
- ------------------------------------------------------------
Steel - Producers--0.3%
5,673 Allegheny Teldyne Inc. 128,340
3,800 Armco Inc.(a) 17,100
3,700 Bethlehem Steel Corp.(a) 37,000
1,800 Inland Steel Industries, Inc. 32,175
2,900 Nucor Corp. 147,175
2,900 USX Corp. - U.S. Steel Group 82,650
2,850 Worthington Industries, Inc. 57,000
-------------
501,440
- ------------------------------------------------------------
Telecommunications--1.4%
6,200 ALLTEL Corp. 172,825
1,925 Andrew Corp.(a) 96,009
4,000 DSC Communications Corp.(a) 100,000
23,100 MCI Communications Corp. 591,937
8,600 Northern Telecom Ltd. 496,650
2,400 Scientific Atlanta, Inc. 38,100
14,400 Sprint Corp. 559,800
21,400 Tele-Communications, Inc.(a) 319,663
3,000 Tellabs, Inc.(a) 211,875
-------------
2,586,859
- ------------------------------------------------------------
Textiles--0.2%
2,600 Fruit of the Loom, Inc.(a) 80,600
1,500 National Service Industries, Inc. 52,500
1,200 Russell Corp. 38,700
700 Springs Industries, Inc. 31,150
2,100 VF Corp. 126,263
-------------
329,213
- ------------------------------------------------------------
Tobacco--1.6%
5,700 American Brands Inc. 240,825
27,450 Philip Morris Cos., Inc. $ 2,463,637
6,500 UST, Inc. 192,563
-------------
2,897,025
- ------------------------------------------------------------
Trucking & Shipping--0.2%
1,200 Caliber Systems Inc. 19,350
1,600 Consolidated Freightways, Inc. 39,200
1,900 Federal Express Corp.(a) 150,575
10,100 Laidlaw Inc. 111,100
2,600 Ryder System, Inc. 77,025
800 Yellow Corp. 10,400
-------------
407,650
- ------------------------------------------------------------
Utility Communications--5.7%
16,500 AirTouch Communications(a) 455,813
18,300 Ameritech Corp. 963,037
53,600 AT&T Corp. 2,800,600
14,500 Bell Atlantic Corp. 868,187
33,100 BellSouth Corp. 1,224,700
32,200 GTE Corp. 1,239,700
14,500 NYNEX Corp. 630,750
14,300 Pacific Telesis Group 480,837
20,200 SBC Communications Inc. 972,125
15,900 U.S. West Communications Group 473,025
7,300 Unicom Corp. 183,413
12,900 WorldCom Inc.(a) 275,738
-------------
10,567,925
- ------------------------------------------------------------
Utilities - Electric--2.7%
6,300 American Electric Power, Inc. 255,937
5,000 Baltimore Gas & Electric Co. 130,625
5,100 Carolina Power & Light Co. 175,950
6,900 Central & South West Corp. 179,400
7,900 Consolidated Edison Co. 219,225
6,000 Dominion Resources, Inc. 226,500
4,700 DTE Energy Co. 131,600
6,800 Duke Power Co. 317,050
14,800 Edison International 264,550
7,600 Entergy Corp. 205,200
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-60
<PAGE>
Portfolio of Investments as of THE PRUDENTIAL INSTITUTIONAL FUND
September 30, 1996 STOCK INDEX FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Utilities - Electric (cont'd.)
6,100 FPL Group, Inc. $ 263,825
3,900 General Public Utilities Corp. 119,925
8,800 Houston Industries, Inc. 194,700
4,700 Niagara Mohawk Power Corp. 37,600
2,300 Northern States Power Co. 107,238
4,900 Ohio Edison Co. 94,938
2,700 Pacific Enterprises 81,675
13,800 Pacific Gas & Electric Co. 300,150
9,800 Pacificorp 202,125
7,300 PECO Energy Co. 173,375
5,200 PP & L Resources Inc. 113,750
8,000 Public Service Enterprise Group 214,000
22,400 Southern Co. 506,800
7,500 Texas Utilities Co. 297,187
3,300 Union Electric Co. 121,687
-------------
4,935,012
-------------
Total common stocks
(cost $137,197,051) 173,192,731
- ------------------------------------------------------------
Preferred Stock
Insurance
367 Aetna Life & Casualty Co.
(cost $23,902) 26,745
-------------
Total stocks
(cost $137,220,953) 173,219,476
SHORT-TERM INVESTMENTS--6.0%
- ------------------------------------------------------------
U.S. Government Securities--0.3%
United States Treasury Bills,
$ 100(b) 5.05%, 12/19/96 $ 98,892
400 5.11%, 12/19/96 395,519
-------------
Total U.S. Government Securities
(cost $494,411) 494,411
- ------------------------------------------------------------
Repurchase Agreement--5.7%
10,590 Joint Repurchase Agreement Account,
5.70%, 10/01/96 (Note 4)
(cost $10,590,000) 10,590,000
-------------
Total short-term investments
(cost $11,084,411) 11,084,411
- ------------------------------------------------------------
Total Investments--100.0%
(cost $148,305,364; Note 3) 184,303,887
Other assets in excess of liabilities 74,629
-------------
Net Assets--100% $ 184,378,516
-------------
-------------
</TABLE>
- ---------------
(a) Non-income producing security.
(b) Pledged as initial margin on futures contracts.
ADR--American Depository Receipt.
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-61
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
Statement of Assets and Liabilities STOCK INDEX FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets September 30, 1996
Investments, at value (cost $148,305,364)............................................................... $184,303,887
Cash.................................................................................................... 141
Receivable for Fund shares sold......................................................................... 987,571
Interest and dividends receivable....................................................................... 333,902
Deferred expenses and other assets...................................................................... 52,660
Receivable for investments sold......................................................................... 32,681
------------------
Total assets......................................................................................... 185,710,842
------------------
Liabilities
Payable for investments purchased....................................................................... 842,997
Payable for Fund shares reacquired...................................................................... 331,310
Accrued expenses........................................................................................ 114,637
Management fee payable-net.............................................................................. 23,057
Administration fee payable.............................................................................. 19,475
Due to broker - variation margin........................................................................ 850
------------------
Total liabilities.................................................................................... 1,332,326
------------------
Net Assets.............................................................................................. $184,378,516
------------------
------------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................................ $ 11,480
Paid-in capital in excess of par..................................................................... 144,874,735
------------------
144,886,215
Undistributed net investment income.................................................................. 2,125,171
Accumulated net realized gain on investments......................................................... 1,352,382
Net unrealized appreciation on investments........................................................... 36,014,748
------------------
Net assets, September 30, 1996.......................................................................... $184,378,516
------------------
------------------
Shares of beneficial interest issued and outstanding.................................................... 11,480,178
------------------
------------------
Net asset value per share............................................................................... $16.06
------------------
------------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-62
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
STOCK INDEX FUND
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income September 30, 1996
<S> <C>
Income
Interest................................. $ 444,547
Dividends (net of foreign withholding
taxes of $20,498)..................... 3,154,570
------------------
Total income.......................... 3,599,117
------------------
Expenses
Management fee........................... 570,160
Administration fee....................... 188,037
Custodian's fees and expenses............ 170,000
Reports to shareholders.................. 50,000
Registration fees........................ 42,000
Transfer agent's fees and expenses....... 33,752
Legal fees and expenses.................. 15,000
Amortization of organization expenses.... 13,421
Trustees' fees........................... 12,000
Audit fee and expenses................... 11,500
Miscellaneous............................ 5,624
------------------
Total expenses........................ 1,111,494
Less: Expense subsidy (Note 2).............. (256,185)
------------------
Net expenses.......................... 855,309
------------------
Net investment income....................... 2,743,808
------------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain on:
Investment transactions.................. 685,464
Financial futures contracts.............. 1,106,100
------------------
1,791,564
------------------
Net change in unrealized appreciation
(depreciation) on:
Investments.............................. 20,470,266
Financial futures contracts.............. (177,000)
------------------
20,293,266
------------------
Net gain on investments..................... 22,084,830
------------------
Net Increase in Net Assets
Resulting from Operations................... $ 24,828,638
------------------
------------------
</TABLE>
THE PRUDENTIAL INSTITUTIONAL FUND
STOCK INDEX FUND
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase Year Ended September 30,
<S> <C> <C>
in Net Assets 1996 1995
Operations
Net investment income.......... $ 2,743,808 $ 1,829,951
Net realized gain on investment
transactions................ 1,791,564 4,044,854
Net change in unrealized
appreciation on
investments................. 20,293,266 13,914,900
------------ ------------
Net increase in net assets
resulting from operations... 24,828,638 19,789,705
------------ ------------
Dividends and distributions
Dividends to shareholders from
net investment income....... (2,181,628) (1,015,394)
Distributions to shareholders
from net realized gains..... (4,441,170) (165,297)
------------ ------------
Total dividends and
distributions............... (6,622,798) (1,180,691)
------------ ------------
Fund share transactions
Net proceeds from shares
sold........................ 113,692,034 52,960,096
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions........... 6,622,798 1,180,691
Cost of shares redeemed........ (56,086,722) (20,924,559)
------------ ------------
Net increase in net assets from
Fund shares transactions.... 64,228,110 33,216,228
------------ ------------
Net increase...................... 82,433,950 51,825,242
Net Assets
Beginning of year................. 101,944,566 50,119,324
------------ ------------
End of year....................... $184,378,516 $101,944,566
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-63
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
Notes to Financial Statements STOCK INDEX FUND
- --------------------------------------------------------------------------------
The Prudential Institutional Fund, (the ``Company'') is registered under the
Investment Company Act of 1940 as an open-end, diversified management investment
company. The Company was established as a Delaware business trust on May 11,
1992 and currently consists of two separate funds: Stock Index Fund (the
``Fund'') and Active Balanced Fund. Prior to September 21, 1996 the Company
consisted of seven separate funds, five of which were subsequently reorganized
and combined with existing funds in the Prudential Mutual Funds family of funds
(see Note 6).
The Company had no operations until July 7, 1992 when 10,000 shares of
beneficial interest of the Company were sold for $100,000 to Prudential
Institutional Fund Management, Inc. (``PIFM''). Investment operations of the
Fund commenced on November 5, 1992. The Fund's investment objective seeks to
provide investment results that correspond to the price and yield performance of
Standard & Poor's 500 Composite Stock Price Index.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund.
Securities Valuation: Securities, including options, warrants, futures contracts
and options thereon, for which the primary market is on a national securities
exchange, commodities exchange or board of trade and NASDAQ national market
equity securities are valued at the last sale price on such exchange or board of
trade on the date of valuation or, if there was no sale on such day, at the
average of readily closing bid and asked prices quoted on such day.
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, shall be valued at the average of the most recently quoted bid
and asked prices provided by a principal market maker or dealer.
U.S. Government securities for which market quotations are available shall be
valued at a price provided by an independent broker/dealer or pricing service.
Securities for which reliable market quotations are not available or for which
the pricing agent or principal market maker does not provide a valuation or
provides a valuation that, in the judgement of one of the subadvisers, does not
represent fair value, shall by valued at fair value as determined under
procedures established by the Trustees.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians, as the case may be under
triparty repurchase agreements, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults, and the value of the collateral declines or, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Fund is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the ``initial margin.'' Subsequent payments, known as ``variation
margin,'' are made or received by the Fund each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.
The Fund invests in financial futures contracts in order to hedge their existing
portfolio securities, or securities the Fund intends to purchase, against
fluctuations in value. Under a variety of circumstances, the Fund may not
achieve the anticipated benefits of the financial futures contracts and may
realize a loss. The use of futures transactions involves the risk of imperfect
correlation in movements in the price of futures contracts and the underlying
assets.
Dividends and Distributions: Dividends and distributions of the Fund are
declared in cash and automatically reinvested in additional shares of the Fund.
The Fund will declare and distribute its net investment income and
- --------------------------------------------------------------------------------
B-64
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
Notes to Financial Statements STOCK INDEX FUND
- --------------------------------------------------------------------------------
net capital gains, if any, at least annually. Dividends and distributions are
recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance with
the Fund's understanding of the applicable country's tax rules and rates.
Deferred Organizational Expenses: Approximately $450,000 of costs were incurred
in connection with the organization and initial registration of the Company and
have been deferred and are being amortized ratably over the date each of the
Funds' commenced investment operations.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with PIFM through October 30, 1996. Pursuant
to this agreement, PIFM has responsibility for all investment advisory services
and supervises the subadviser's performance of such services.
PIFM has a subadvisory agreement with The Prudential Investment Corporation
(``PIC'') through October 30, 1996. PIC furnishes investment advisory services
in connection with the management of the Fund. PIFM will pay for the costs and
expenses attributable to the subadvisory agreement and the salaries and expenses
of all personnel of the Fund except for fees and expenses of unaffiliated
Trustees. The Fund will bear all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .40 of 1% of the average daily net assets of the Fund.
Effective October 31, 1996 the Fund will enter a management agreement with
Prudential Mutual Fund Management LLC (``PMF''). Pursuant to this agreement PMF
will have responsibility for all investment advisory services. PMF will enter
into a subadvisory agreement with PIC. PIC, subject to the supervision of PMF,
will manage the assets of the Fund in accordance with its investment objectives
and policies and in a manner consistent with the previous agreement. PMF will
pay for the costs and expenses attributable to the subadvisory agreement and the
salaries and expenses of all personnel of the Fund except for fees and expenses
of unaffiliated Trustees.
Effective October 31, 1996 the management fee paid PMF will be computed daily
and payable monthly at an annual rate of .30 of 1% of the average daily net
assets of the Fund.
PIFM voluntarily agreed to subsidize a portion of the operating expenses of the
Fund until October 30, 1996. Such expenses may be recovered by PIFM through
October 30, 1996 so long as the total expense ratio does not exceed the
predetermined level set forth in the Fund's prospectus of .60% per annum. For
the year ended September 30, 1996, PIFM subsidized $256,185 of the expenses of
the Fund (.18% of the average net assets of the Fund/$.022 per share).
The Fund has an administration agreement with PMF through October 30, 1996. The
administration fee paid PMF will be computed daily and payable monthly, at an
annual rate of .17% of the Company's average daily net assets up to $250 million
and .15% of the Company's average daily net assets in excess of $250 million.
PMF will furnish to the Fund such services as the Fund may require in connection
with the administration of the Fund's business affairs. PMF will also provide
certain transfer agent services through its wholly-owned subsidiary, Prudential
Mutual Fund Services, Inc. (``PMFS''). For such services, PMFS will be paid .03%
of the Company's daily net assets up to $250 million and .02% of the Company's
average daily net assets in excess of $250 million from the administration fee
paid to PMF. Upon termination of the administration agreement, PMFS will enter
into a separate transfer agency agreement directly with the Fund.
Effective October 31, 1996 Prudential Securities Incorporated (``PSI'') will
become the distributor of the Fund's shares. Under the distribution agreement,
PSI will incur the expenses of distributing the Fund's shares, none of which is
reimbursed by or paid for by the Fund.
PIFM, PIC, PMF and PSI are indirect wholly-owned subsidiaries of the Prudential
Insurance Company of America.
- ------------------------------------------------------------
Note 3. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term investments,
for the year ended September 30, 1996 aggregated $71,134,529 and $2,335,704,
respectively.
- --------------------------------------------------------------------------------
B-65
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
Notes to Financial Statements STOCK INDEX FUND
- --------------------------------------------------------------------------------
On September 30, 1996, the Stock Index Fund purchased 16 financial futures
contracts on the S&P 500 Index expiring December, 1996. The cost of such
contracts was $10,700,475. The value of such contracts on September 30, 1996 was
$10,716,700, thereby resulting in an unrealized gain of $16,225.
The cost basis of investments for federal income tax purposes is substantially
the same as for financial reporting purposes and, accordingly, as of September
30, 1996, net unrealized appreciation for federal income tax purposes was
$35,953,398 (gross unrealized appreciation--$38,097,945 gross unrealized
depreciation--$2,144,547).
- ------------------------------------------------------------
Note 4. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. At September 30, 1996, the Fund
had a 1.06% undivided interest in the repurchase agreements in the joint
account. The undivided interest represented $10,590,000 in principal amount. As
of such date, each repurchase agreement in the joint account and the collateral
therefor was as follows:
Bear, Stearns & Co., Inc., 5.72%, in the principal amount of $333,000,000,
repurchase price $333,052,910, due 10/1/96. The value of the collateral
including accrued interest was $339,757,925.
J.P. Morgan Securities, Inc., 5.70%, in the principal amount of $109,000,000,
repurchase price $109,017,258, due 10/1/96. The value of the collateral
including accrued interest was $111,181,257.
Goldman, Sachs & Co., Inc., 5.70%, in the principal amount of $333,000,000,
repurchase price $333,052,725, due 10/1/96. The value of the collateral
including accrued interest was $339,860,615.
Smith Barney, Inc., 5.75%, in the principal amount of $224,000,000, repurchase
price $224,035,778, due 10/1/96. The value of the collateral including accrued
interest was $228,481,010.
- ------------------------------------------------------------
Note 5. Capital
The Fund has authorized an unlimited number of shares of beneficial interest at
$.001 par value per share. Transactions in shares of beneficial interest during
the fiscal years ended September 30, 1996 and September 30, 1995 were as
follows:
<TABLE>
<CAPTION>
Year ended September 30,
---------------------------
1996 1995
---------- ----------
<S> <C> <C>
Shares sold.................................. 7,589,233 4,340,797
Shares issued in reinvestment of dividends
and
distributions............................... 467,712 107,238
Shares reacquired............................ (3,745,568) (1,725,892)
---------- ----------
Net increase................................. 4,311,377 2,722,143
---------- ----------
---------- ----------
</TABLE>
Of the shares outstanding at September 30, 1996, PIFM and affiliates owned
5,017,951 shares of the Fund.
- ------------------------------------------------------------
Note 6. Reorganization
On May 17, 1996, the Trustees of the Company approved an Agreement and a Plan of
Reorganization (the ``Plan of Reorganization'') for the Company. The Plan of
Reorganization was approved by shareholders on September 6, 1996 and October 31,
1996.
Under the Plan of Reorganization, all of the assets and liabilities of the
Growth Stock Fund, Balanced Fund, Income Fund and Money Market Fund (``Series'')
were transferred at net asset value for equivalent value Class Z shares of
Prudential Jennison Fund, Inc., Prudential Allocation Fund--Balanced Portfolio,
Prudential Government Income Fund, Inc. and Prudential MoneyMart Assets, Inc.,
respectively. These Series then ceased operations.
International Stock Fund joined the Prudential Global Fund as separate series of
a newly named Prudential World Fund. Existing shareholders became Class Z
shareholders and the International Stock Fund also began offering Classes A, B
and C shares.
Active Balanced Fund and the Fund remained with The Prudential Institutional
Fund (to be renamed the Prudential Dryden Fund) as separate funds. Existing
shareholders of the Active Balanced Fund became Class Z shareholders and Active
Balanced Fund will begin offering Classes A, B and C shares. The Fund will offer
a single class of shares. Effective October 31, 1996 these funds will be managed
by PMF, PMFS will provide transfer agency services and PSI will act as
distributor.
- --------------------------------------------------------------------------------
B-66
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
Financial Highlights STOCK INDEX FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
November 5,
1992(a)
Year Ended September 30, Through
--------------------------------- September 30,
1996 1995 1994 1993
-------- -------- ------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................. $ 14.22 $ 11.27 $ 11.12 $ 10.00
-------- -------- ------- -------------
Income from investment operations:
Net investment income (b)............................. .25 .23 .26 .23
Net realized and unrealized gain on investment
transactions....................................... 2.44 2.97 .11 .94
-------- -------- ------- -------------
Total from investment operations.................... 2.69 3.20 .37 1.17
-------- -------- ------- -------------
Less distributions:
Dividends from net investment income.................. (.28) (.22) (.18) (.05)
Distributions from net realized gains................. (.57) (.03) (.04) --
-------- -------- ------- -------------
Total distributions................................. (.85) (.25) (.22) (.05)
-------- -------- ------- -------------
Net asset value, end of period........................ $ 16.06 $ 14.22 $ 11.27 $ 11.12
-------- -------- ------- -------------
-------- -------- ------- -------------
TOTAL RETURN(d)....................................... 19.72% 29.02% 3.33% 11.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....................... $184,379 $101,945 $50,119 $ 27,142
Average net assets (000).............................. $142,540 $ 71,711 $38,098 $ 18,807
Ratios to average net assets: (b)
Expenses............................................ .60% .60% .60% .60%(c)
Net investment income............................... 1.92% 2.55% 2.34% 2.41%(c)
Portfolio turnover rate............................... 2% 11% 2% 1%
Average commission rate paid per share................ $ 0.0250 N/A N/A N/A
</TABLE>
- ---------------
<TABLE>
<C> <S>
(a) Commencement of investment operations.
(b) Net of expense subsidy.
(c) Annualized.
(d) Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period
reported and includes reinvestment of dividends and distributions. Total return for periods of less than a full year are
not annualized. Total return includes the effect of expense subsidies.
N/A--Data not required for these periods.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-67
<PAGE>
THE PRUDENTIAL INSTITUTIONAL FUND
Report of Independent Accountants STOCK INDEX FUND
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
The Prudential Institutional Fund--Stock Index Fund
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Prudential Institutional Fund--Stock Index
Fund as of September 30, 1996, the related statements of operations for the year
then ended and of changes in net assets for each of the two years in the period
then ended, and the financial highlights for the three years in the period then
ended and for the period November 5, 1992 (commencement of investment
operations) to September 30, 1993. These financial statements and financial
highlights are the responsibility of the Portfolio'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
September 30, 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 The Prudential
Institutional Fund--Stock Index Fund as of September 30, 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
November 13, 1996
B-68
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX
- --------------------------------------------------------------------------------
S&P RATINGS, MOODY'S AND DUFF & PHELPS RATINGS
S&P RATINGS CORPORATE BOND RATINGS:
AAA-Bonds rated AAA have the highest rating assigned by S&P Ratings to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA-Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A-Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit 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
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC, C-Bonds rated BB, B, CCC, CC, or C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
represents the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
MOODY'S CORPORATE BOND RATINGS:
Aaa-Bonds rated Aaa are judged to be 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 these issues.
Aa-Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be a greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A-Bonds 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 rate 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.
A-1
<PAGE>
Ba-Bonds 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 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 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 rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other market shortcomings.
C-Bonds 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.
Moody's applies the numerical modifiers 1, 2 and 3 in the Aa and A rating
categories. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
DUFF & PHELPS BOND RATINGS:
AAA-Bonds rated AAA by Duff & Phelps are considered to be of the highest
credit quality. The risk factors are negligible, being only slightly more than
for risk-free U.S. Treasury debt.
AA+, AA, AA-Bonds rated AA, AA or AA- are considered to be of high credit
quality. Protection factors are strong. Risk is modest but may vary slightly
from time to time because of economic conditions.
A+, A, A-Bonds rated A+, A or A- have protection factors which are average
but adequate; however, risk factors are more variable and greater in periods of
economic stress.
BBB+, BBB, BBB-Bonds rated BBB, BBB or BBB- have below average protection
factors but are still considered sufficient for prudent investment. These bonds
demonstrate considerable variability in risk during economic cycles.
BB+, BB, BB-Bonds rated BB+, BB or BB- are below investment grade but are
still deemed likely to meet obligations when due. Present or prospective
financial protection factors fluctuate according to industry conditions or
company fortunes. Overall quality may move up or down frequently within this
category.
B+, B B-Bonds rated B+, B or B- are below investment grade and possess the
risk that obligations will not be met when due. Financial protection factors
will fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC-Bonds rated CCC are well below investment grade securities.
Considerable uncertainty exists as to timely payment of principal, interest or
preferred dividends. Protection factors are narrow and risk can be substantial
with unfavorable economic/industry conditions, and/or with unfavorable company
developments.
DD-Bonds rated DD are defaulted debt obligations. The issuer failed to
meet scheduled principal and/or interest payments.
A-2
<PAGE>
S&P COMMERCIAL PAPER RATINGS:
Commercial paper rate A-1 by S&P Ratings indicates that the degree of
safety regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are denoted
A-1+. Capacity for timely payment on commercial paper rated A-2 is strong, but
the relative degree of safety is not as high as for issues designated A-1.
MOODY'S COMMERCIAL PAPER RATINGS:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rated prime-2 (or related supporting institutions) are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics of
issuers rated Prime-1 but to a lesser degree. Earnings trends and coverage
ratios, while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
DUFF & PHELPS COMMERCIAL PAPER RATINGS:
Duff & Phelps commercial paper ratings are divided into three categories,
ranging from "1" for the highest quality obligations to "3" for the lowest. No
ratings are issued for companies whose paper is not deemed investment grade.
Issues assigned the Duff 1 rating are considered top grade. This category is
further divided into three gradations as follows: Duff 1 plus--highest certainty
of timely payment, short-term liquidity, including internal operating factors
and/or ready access to alternative sources of funds, is clearly outstanding and
safety is just below risk-free U.S. Treasury short-term obligations; Duff
1--very high certainty or timely payment liquidity factor are excellent and
supported by strong fundamental protection factors, risk factors are minor; Duff
1 minus-high certainty of timely payment, liquidity factors are strong and
supported by good fundamental protection factors, risk factors are very small.
Issues rated Duff 2 represent a good certainty of timely payment; liquidity
factors and company fundamentals are sound; although ongoing internal funds
needs may enlarge total financing requirements, access to capital markets is
good; risk factors are small. Duff 3 represents a satisfactory grade;
satisfactory liquidity and other protection factors qualify issue as to
investment grade; risk factors are larger and subject to more variation;
nevertheless timely payment is expected.
A-3
<PAGE>
APPENDIX I--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and
the rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY.
[CHART]
<TABLE>
<S> <C>
VALUE OF $1.00 INVESTED ON
1/1/26 THROUGH 12/31/96
Small Stocks $4,495.99
Common Stock $1,370.95
Long-Term Bonds $ 33.73
Treasury Bills $ 13.54
Inflation $ 8.87
</TABLE>
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 due to capital appreciation and reinvesting any
gains. Bond returns are due mainly to reinvesting interest. Also, stock prices
are usually more volatile than bond prices over the long-term.
Small stock returns for 1926-1989 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.
Long-term government bond returns measured using a constant one-bond portfolio
with a maturity of roughly 20 years. 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).
I-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987
through 1995. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Funds or of any sector in which the
Funds invest.
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 each Fund's 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% 19.6%
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.
I-2
<PAGE>
This chart illustrates the performance of major world stock markets for the
period from 1986 through 1995. It does not represent the performance of any
Prudential Mutual Fund.
AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS (1986-1995) (IN U.S.
DOLLARS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Hong Kong 23.8%
Belgium 20.7%
Sweden 19.4%
Netherland 19.3%
Spain 17.9%
Switzerland 17.1%
France 15.3%
U.K. 15.0%
U.S. 14.8%
Japan 12.8%
Austria 10.9%
Germany 10.7%
</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.
[CHART]
1969-1995
Capital Appreciation and Reinvesting Dividends -- $186,208
Capital Appreciation Only -- $66,913
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. This chart is used for illustrative
purposes only and is not intended to represent the past, present or future
performance of any Prudential Mutual Fund. Common stock total return is based on
the Standard & Poor's 500 Stock Index, a market-value-weighted index made up of
500 of the largest stocks in the U.S. based upon their stock market value.
Investors cannot invest directly in indices.
WORLD STOCK MARKET CAPITALIZATION BY REGION
WORLD TOTAL: $9.2 TRILLION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
U.S. 40.8%
Pacific
Basin 28.7%
Europe 28.3%
Canada 2.2%
</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.
I-3
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1995)
(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.
The following chart, although not relevant to share ownership in the
Funds, may provide useful information about the effects of a hypothetical
investment diversified over different asset portfolios. The chart shows the
range of annual total returns for major stock and bond indices for the period
from December 31, 1975 through December 31, 1995. The horizontal "Best Returns
Zone" band shows that a hypothetical blended portfolio constructed of one-third
U.S. stocks (S&P 500), one-third foreign stocks (EAFE Index), and one-third U.S.
bonds (Lehman Index) would have eliminated the "highest highs" and "lowest lows"
of any single asset class.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
THE RANGE OF ANNUAL TOTAL RETURNS FOR MAJOR STOCK &
BOND INDICES OVER THE PAST 20 YEARS
(12/31/75-12/31/95)*
<S> <C> <C> <C>
S&P 500 EAFE Lehman Aggregate
37.6% 69.9% 32.6%
-7.2% -23.2% -2.9%
Best Returns Zone
With a Diversified Blend
1/3 S&P 500 Index
1/3 EAFE Index
1/3 Lehman Aggregate Index
</TABLE>
- ----------
*Source: Prudential Investment Corporation based on data from Lipper Analytical
New Application (LANA). Past performance is not indicative of future results.
The S&P 500 Index is a weighted, unmanaged index comprised of 500 stocks which
provides a broad indication of stock price movements. The Morgan Stanley EAFE
Index is an unmanaged index comprised of 20 overseas stock markets in Europe,
Australia, New Zealand and the Far East. The Lehman Aggregate Index includes all
publicly-issued investment grade debt with maturities over one year, including
U.S. government and agency issues, 15 and 30 year fixed-rate government agency
mortgage securities, dollar denominated SEC registered corporate and government
securities, as well as asset-backed securities. Investors cannot invest directly
in stock or bond market indices.
I-4
<PAGE>
APPENDIX II--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.
II-1
<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 "Management of the Fund--Manager"
in the Prospectus. The data will be used in sales materials relating to the
Prudential Mutual Funds. Unless otherwise indicated, the information is as of
December 31, 1995 and is subject to change thereafter. All information relies on
data provided by The Prudential Investment Corporation (PIC) or from other
sources believed by the Manager to be reliable. Such information has not been
verified by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC(1) are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1995. Its primary business is to offer a full range of products and services in
three areas: insurance, investments and home ownership for individuals and
families; health-care management and other benefit programs for employees of
companies and members of groups; and asset management for institutional clients
and their associates. Prudential (together with its subsidiaries) employs more
than 92,000 persons worldwide, and maintains a sales force of approximately
13,000 agents and 5,600 financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the Rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.
Insurance. Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to more than 50 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of individual life insurance, the Prudential has 19 million life
insurance policies in force today with a face value of $1 trillion. Prudential
has the largest capital base ($11.4 billion) of any life insurance company in
the United States. Prudential provides auto insurance for more than 1.7 million
cars and insures more than 1.4 million homes.
Money Management. 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 1996, 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 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, 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
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 the fifteenth largest mutual fund
company in the country, with over 2.5 million shareholders invested in more than
50 mutual fund portfolios and variable annuities with more than 3.7 million
shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage
over $55 billion in mutual fund and variable annuity assets. Some of
Prudential's portfolio managers have over 20 years of experience managing
investment portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
The Wall Street Journal, The New York Times, Barron's and USA Today.
- ----------
(1) Prudential Investments, a business group 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, Mercator Asset Management LP, as the
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.
III-1
<PAGE>
Equity Funds. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison 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).
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services, Inc., the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
- ----------
(3) As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
(4) Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts
managed by Prudential Mutual Fund Investment Management, a division of
PIC, for the year ended December 31, 1995.
(5) Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment
Grade Debt, General U.S. Treasury, General U.S. Government and Mortgage
funds.
(6) As of December 31, 1994.
III-2
<PAGE>
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI(7).
Prudential Securities has a two-year Financial Advisor training program
plus advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment areas.
Prudential Securities is the only Wall Street firm to have its own in-house
Certified Financial Planner (CFP) program. In the December 1995 issue of
Registered Rep, an industry publication, Prudential Securities' Financial
Advisor training programs received a grade of A- (compared to an industry
average of B+).
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey. Five
Prudential Securities analysts were ranked as first-team finishers(8).
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial ArchitectSM, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ----------
(7) As of December 31, 1994.
(8) On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual
analyst and weighting them based on the size of the voting institution. In
total, the magazine sends its survey to approximately 2,000 institutions
and a group of European and Asian institutions.
III-3
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
1. Financial Statements included in the Prospectuses 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 September 30, 1996.
Statement of Assets and Liabilities at September 30, 1996.
Statement of Operations for the year ended September 30, 1996.
Statements of Changes in Net Assets for the years ended September
30, 1996 and 1995.
Notes to Financial Statements.
Financial Highlights.
Independent Auditors' Report.
(B) EXHIBITS:
1. (a) Certificate of Trust of the Registrant.*
(b) First Amendment to Certificate of Trust of the Registrant.*
(c) Second Amendment to Certificate of Trust of the Registrant.
Incorporated by reference to Exhibit 1(c) to Post-Effective
Amendment No. 7 to the Registration Statement on Form N-1A filed via
EDGAR on November 27, 1996 (File No. 33-48066).
(d) Declaration of Trust of the Registrant.*
(e) First Amendment to Declaration of Trust of the Registrant.*
(f) Second Amendment to Declaration of Trust of the Registrant.
Incorporated by reference to Exhibit 1(f) to Post-Effective
Amendment No. 7 to the Registration Statement on Form N-1A filed via
EDGAR on November 27, 1996 (File No. 33-48066).
2. By-Laws of the Registrant as revised and restated October 5, 1992.*
3. Not Applicable.
4. Instruments defining rights of shareholders. Incorporated by
reference to Exhibits 1 and 2.
5. (a) Management Agreement for Prudential Active Balanced Fund and
Prudential Stock Index Fund with Prudential Mutual Fund Management
LLC. Incorporated by reference to Exhibit 5(e) to Post-Effective
Amendment No. 7 to the Registration Statement on Form N-1A filed via
EDGAR on November 27, 1996 (File No. 33-48066).
(b) Subadvisory Agreement between Prudential Mutual Fund Management
LLC and The Prudential Investment Corporation. Incorporated by
reference to Exhibit 5(f)(i) to Post-Effective Amendment No. 7 to
the Registration Statement on Form N-1A filed via EDGAR on November
27, 1996 (File No. 33-48066).
(c) Cash Management Agreement between Prudential Mutual Fund
Management LLC and The Prudential Investment Corporation for
Prudential Active Balanced Fund. Incorporated by reference to
Exhibit 5(f)(ii) to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed via EDGAR on November 27,
1996 (File No. 33-48066).
(d) Subadvisory Agreement between Prudential Mutual Fund Management
LLC and Jennison Associates Capital Corp. for Prudential Active
Balanced Fund. Incorporated by reference to Exhibit 5(g) to
Post-Effective Amendment No. 7 to the Registration Statement on Form
N-1A filed via EDGAR on November 27, 1996 (File No. 33-48066).
(e) Form of Management Agreement for Prudential Small-Cap Index
Fund, Prudential Bond Market Index Fund, Prudential Pacific Index
Fund and Prudential Europe Index Fund with Prudential Mutual Fund
Management LLC.*
C-1
<PAGE>
(f) Form of Subadvisory Agreement between Prudental Mutual Fund
Management LLC and The Prudential Investment Corporation for
Prudential Small-Cap Index Fund, Prudential Bond Market Index Fund,
Prudential Pacific Index Fund and Prudential Europe index Fund.*
6. Form of Distribution Agreement.*
7. Not Applicable.
8. Custodian Agreement between the Registrant and State Street Bank and
Trust Company.*
9. Transfer Agency and Service Agreement.*
10. (a) Opinion of Arnold & Porter.*
(b) Opinion of Morris, Nichols, Arsht & Tunnell.*
11. Consent of Independent Accountants.*
12. Not Applicable.
13. Not Applicable.
14. Not Applicable.
15. (a) Distribution and Service Plan for Class A shares. Incorporated
by reference to Exhibit 15(a) to Post-Effective Amendment No. 7 to
the Registration Statement on Form N-1A filed via EDGAR on November
27, 1996 (File No. 33-48066).
(b) Distribution and Service Plan for Class B shares. Incorporated
by reference to Exhibit 15(b) to Post-Effective Amendment No. 7 to
the Registration Statement on Form N-1A filed via EDGAR on November
27, 1996 (File No. 33-48066).
(c) Distribution and Service Plan for Class C shares. Incorporated
by reference to Exhibit 15(c) to Post-Effective Amendment No. 7 to
the Registration Statement on Form N-1A filed via EDGAR on November
27, 1996 (File No. 33-48066).
16. Schedule of Computation of Performance Quotations. Incorporated by
reference as Exhibit 16 to Post-Effective Amendment No. 4 to the
Registration Statement on Form N-1A filed via EDGAR on January 30,
1995 (File No. 33-48066).
18. Rule 18f-3 Plan.*
27. Financial Data Schedules. Incorporated by reference to Exhibit 27 to
Post-Effective Amendment No. 7 to the Registration Statement on Form
N-1A filed via EDGAR on November 27, 1996 (File No. 33-48066).
- ----------
* Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of March 21, 1997 there were 2,736 recordholders of Class Z shares of
beneficial interest of Prudential Stock Index Fund, and 3 Class A shareholders,
7 Class B shareholders, 2 Class C shareholders and 9 Class Z shareholders of
shares of beneficial interest of Prudential Active Balanced Fund, $.001 par
value per share, of the Registrant. Certain of these recordholders may be
sponsors of qualified retirement programs.
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 Del. Code Ann. title 12 sec. 3817, a
Delaware business trust may provide in its governing instrument for the
indemnification of its officers and trustees from and against any and all claims
and demands whatsoever. Article VII, Section 2 of the Agreement and Declaration
of Trust states that (i) the Registrant shall indemnify any present trustee or
officer to the fullest extent permitted by law against liability, and all
expenses reasonably incurred by him or her in connection with any claim, action,
suit or proceeding in which he or she is involved by virtue of his or her
service as a trustee, officer or both, and against any amount incurred in
settlement thereof and (ii) all persons extending credit to, contracting with or
having any claim against the Registrant shall look only to the assets of the
appropriate Series (or if no Series has yet been established, only to the assets
of the Registrant). Indemnification will not be provided to a person adjudged by
a court or other adjudicatory body to be liable to the Registrant or its
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his or her duties (collectively "disabling conduct"). In
the event of a settlement, no indemnification may be provided unless there has
been a determination, as specified in the Declaration of Trust, that the officer
or trustee did not engage in disabling conduct. As permitted by Section 17(i) of
the 1940 Act, pursuant to Section 8 of the Distribution Agreement (Exhibit 6 to
the Registration Statement), the Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities arising
from bad faith, gross negligence, willful misfeasance or reckless disregard of
duties.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (Securities Act) may be permitted to trustees, 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 trustee, 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
trustee, 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 intends to purchase an insurance policy insuring its
officers and trustees against liabilities, and certain costs of defending claims
against such officers and trustees, to the extent such officers and trustees 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 trustees under certain circumstances.
Section 9 of the Management Agreements (Exhibits 5(a) and (e) to the
Registration Statement) and Section 4 of the Subadvisory Agreements (Exhibits
5(b, d and f) to the Registration Statement) limit the liability of Prudential
Mutual Fund Management LLC, The Prudential Investment Corporation ("PIC") and
Jennison Associates Capital Corp. ("Jennison"), 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, Declaration of Trust and the 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.
C-3
<PAGE>
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Prudential Mutual Fund Management LLC.
See Management of the Company in the Prospectus constituting Part A of
this Registration Statement and Management of the Company 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, originally filed on November 13, 1987).
The business and other connections of PMF's directors and principal
executive officers are set forth below. The address of each person is Gateway
Center Three, 100 Mulberry Street, 9th Floor, Newark, NJ 07107-4077.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ---------------- ----------------- ---------------------
<S> <C> <C>
Brian M. Storms Officer-In-Charge, Officer-In-Charge, President, Chief Executive Officer and
President, Chief Chief Operating Officer, PMF
Executive Officer and
Chief Operating Officer
Robert F. Gunia Executive Vice President Comptroller, Prudential Investments; Executive Vice
and Treasurer President and Treasurer, PMF; Senior Vice President of Prudential
Securities Incorporated (Prudential Securities)
Thomas A. Early Executive Vice President, Executive Vice President, Secretary and General Counsel,
Secretary and General PMF; Vice President and General Counsel, Prudential
Counsel Retirement Services
Susan C. Cote Executive Vice President, Executive Vice President, Chief Financial Officer, PMF;
Chief Financial Officer Managing Director, Prudential Investments and Vice
President, PIC
Neil A. McGuinness Executive Vice President Executive Vice President, PMF
Robert J. Sullivan Executive Vice President Executive Vice President, PMF
</TABLE>
(b) The Prudential Investment Corporation (PIC)
See "How the Fund is Managed" in the Prospectuses constituting Part A of
this Registration Statement and "Manager and Subadvisers" in the Statement of
Additional Information constituting Part B of this Registration Statement.
The business and other connections of PIC's directors and principal
executive officers are as set forth below. The address of each person is 751
Broad Street, Newark, NJ 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ---------------- ----------------- ---------------------
<S> <C> <C>
E. Michael Caulfield Chairman of the Board, Chief Executive Officer of Prudential Investments
President and Chief
Executive Officer and
Director
Jonathan M. Greene Senior Vice President and President--Investment Management of Prudential
Director Investments
John R. Strangfeld Vice President and Director President of Private Asset Management Group of
Prudential
</TABLE>
(c) Jennison Associates Capital Corp.
C-4
<PAGE>
See "How the Fund is Managed" in the Prudential Active Balanced Fund
Prospectus constituting Part A of this Registration Statement and "Manager and
Subadvisers" in the Statement of Additional Information constituting Part B of
this Registration Statement.
Information as to Jennison's directors and principal executive officers is
included in its Form ADV filed with the Securities and Exchange Commission (File
No. 801-5608) as most recently amended, the text of which is incorporated herein
by reference.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Prudential Securities Incorporated
Prudential Securities Incorporated is distributor for The BlackRock
Government Income Trust, Command Government Fund, Command Money Fund, Command
Tax-Free Fund, The Global Government Plus Fund, Inc., The Global Return Fund,
Inc., Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc.
(Nicholas-Applegate Growth Equity Fund), Prudential Allocation Fund, Prudential
California Municipal Fund, Prudential Diversified Bond Fund, Inc., Prudential
Distressed Securities 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 Government Income
Fund, Inc., Prudential Government Securities Trust, Prudential High Yield Fund,
Inc., Prudential Institutional Liquidity Portfolio, Inc., Prudential
Intermediate Global Income Fund, Inc., Prudential Jennison Series Fund, Inc.,
Prudential MoneyMart Assets, Inc., Prudential Mortgage Income Fund, Inc.,
Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond Fund, Prudential
Municipal Series Fund, Prudential National Municipals Fund, Inc., Prudential
Natural Resources Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential
Small Companies Fund, Inc., Prudential Special Money Market Fund, Inc.,
Prudential Structured Maturity Fund, Inc., Prudential Tax-Free Money Fund, Inc.,
Prudential Utility Fund, Inc., Prudential World Fund, Inc. and The Target
Portfolio Trust. Prudential Securities is also a depositor for the following
unit investment trusts:
The Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
(b) Information concerning directors and officers of Prudential Securities
Incorporated is set forth below.
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ------- ----------- ----------
Robert Golden Executive Vice President and Director None
Alan D. Hogan Executive Vice President and Director None
George A. Murray Executive Vice President and Director None
Leland B. Paton Executive Vice President and Director None
One New York Plaza
New York, NY
Martin Pfinsgraff Executive Vice President, Chief None
Financial Officer and Director
Vincent T. Pica, II Executive Vice President and Director None
One New York Plaza
New York, NY
Hardwick Simmons Chief Executive Officer, President None
and Director
Lee B. Spencer, Jr. Executive Vice President, Secretary None
General Counsel, and Director
(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,
C-5
<PAGE>
Massachusetts, The Prudential Investment Corporation, Prudential Plaza, 751
Broad Street, Newark, New Jersey; the Registrant, 751 Broad Street, Newark, New
Jersey; Prudential Mutual Fund Management LLC, Gateway Center Three, Newark, NJ
07102-4077; and Prudential Mutual Fund Services LLC, Raritan Plaza One, Edison,
New Jersey. Documents required by Rules 31a-1(b)(5), (6), (7), (9), (10) and
(11) and 31a-1(f) will be kept at 751 Broad Street, Newark, New Jersey 07102 and
51 JFK Parkway, Short Hills, New Jersey 07078, for Prudential Stock Index Fund,
and 466 Lexington Avenue, New York, New York 10017, for Prudential Active
Balanced Fund, 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 LLC.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the caption "How the Fund is Managed" in the
Prospectuses and under the caption "Manager and Subadvisers" 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.
The Registrant undertakes to file a post-effective amendment, using
financial statements which need not be certified, within four to six months from
the effective date of Post-Effective Amendment No. 8 to the Registration
Statement.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Post-Effective Amendment No. 8 to the Registration Statement on Form
N-1A to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Newark, and the State of New Jersey, on the 2nd day of April,
1997.
PRUDENTIAL DRYDEN FUND
By /s/ RICHARD A. REDEKER
-------------------------
RICHARD A. REDEKER, PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 8 to the Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ EUGENE S. STARK Treasurer and Principal April 2, 1997
- -------------------------- Financial and Accounting
EUGENE S. STARK Officer
/s/ RICHARD A. REDEKER President and Trustee April 2, 1997
- --------------------------
RICHARD A. REDEKER
/s/ EDWARD D. BEACH Trustee April 2, 1997
- --------------------------
EDWARD D. BEACH
/s/ DELAYNE DEDRICK GOLD Trustee April 2, 1997
- --------------------------
DELAYNE DEDRICK GOLD
/s/ ROBERT F. GUNIA Trustee April 2, 1997
- --------------------------
ROBERT F. GUNIA
/s/ DONALD D. LENNOX Trustee April 2, 1997
- --------------------------
DONALD D. LENNOX
/s/ DOUGLAS H. McCORKINDALE Trustee April 2, 1997
- --------------------------
DOUGLAS H. MCCORKINDALE
/s/ MENDEL A. MELZER Trustee April 2, 1997
- --------------------------
MENDEL A. MELZER
/s/ THOMAS T. MOONEY Trustee April 2, 1997
- --------------------------
THOMAS T. MOONEY
/s/ STEPHEN P. MUNN Trustee April 2, 1997
- --------------------------
STEPHEN P. MUNN
/s/ ROBIN B. SMITH Trustee April 2, 1997
- --------------------------
ROBIN B. SMITH
/s/ LOUIS A. WEIL, III Trustee April 2, 1997
- --------------------------
LOUIS A. WEIL, III
/s/ CLAY T. WHITEHEAD Trustee April 2, 1997
- --------------------------
CLAY T. WHITEHEAD
C-7
<PAGE>
INDEX TO EXHIBITS
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
1. (a) Certificate of Trust of the Registrant.*
(b) First Amendment to Certificate of Trust of the
Registrant.*
(c) Second Amendment to Certificate of Trust of the
Registrant. Incorporated by reference to Exhibit 1(c) to
Post-Effective Amendment No. 7 to the Registration Statement
on Form N-1A filed via EDGAR on November 27, 1996 (File No.
33-48066).
(d) Declaration of Trust of the Registrant.*
(e) First Amendment to Declaration of Trust of the
Registrant.*
(f) Second Amendment to Declaration of Trust of the
Registrant. Incorporated by reference to Exhibit 1(f) to
Post-Effective Amendment No. 7 to the Registration Statement
on Form N-1A filed via EDGAR on November 27, 1996 (File No.
33-48066).
2. By-Laws of the Registrant as revised and restated October 5,
1992.*
3. Not Applicable.
4. Instruments defining rights of shareholders. Incorporated by
reference to Exhibits 1 and 2.
5. (a) Management Agreement for Prudential Active Balanced Fund
and Prudential Stock Index Fund with Prudential Mutual Fund
Management LLC. Incorporated by reference to Exhibit 5(e) to
Post-Effective Amendment No. 7 to the Registration Statement
on Form N-1A filed via EDGAR on November 27, 1996 (File No.
33-48066).
(b) Subadvisory Agreement between Prudential Mutual Fund
Management LLC and The Prudential Investment Corporation.
Incorporated by reference to Exhibit 5(f)(i) to Post-Effective
Amendment No. 7 to the Registration Statement on Form N-1A
filed via EDGAR on November 27, 1996 (File No. 33-48066).
(c) Cash Management Agreement between Prudential Mutual Fund
Management LLC and The Prudential Investment Corporation for
Prudential Active Balanced Fund. Incorporated by reference to
Exhibit 5(f)(ii) to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed via EDGAR on
November 27, 1996 (File No. 33-48066).
(d) Subadvisory Agreement between Prudential Mutual Fund
Management LLC and Jennison Associates Capital Corp. for
Prudential Active Balanced Fund. Incorporated by reference to
Exhibit 5(g) to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed via EDGAR on
November 27, 1996 (File No. 33-48066).
(e) Form of Management Agreement for Prudential Small-Cap
Index Fund, Prudential Bond Market Index Fund, Prudential
Pacific Index Fund and Prudential Europe Index Fund with the
Prudential Mutual Fund Management LLC.*
(f) Form of Subadvisory Agreement between Prudental Mutual
Fund Management LLC and The Prudential Investment Corporation
for Prudential Small-Cap Index Fund, Prudential Bond Market
Index Fund, Prudential Pacific Index Fund and Prudential
Europe Index Fund.*
6. Form of Distribution Agreement.*
7. Not Applicable.
8. Custodian Agreement between the Registrant and State Street
Bank and Trust Company.*
9. Transfer Agency and Service Agreement.*
10. (a) Opinion of Arnold & Porter.*
(b) Opinion of Morris, Nichols, Arsht & Tunnell.*
11. Consent of Independent Accountants.*
12. Not Applicable.
13. Not Applicable.
14. Not Applicable.
<PAGE>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ----
15. (a) Distribution and Service Plan for Class A shares.
Incorporated by reference to Exhibit 15(a) to Post-Effective
Amendment No. 7 to the Registration Statement on Form N-1A
filed via EDGAR on November 27, 1996 (File No. 33-48066).
(b) Distribution and Service Plan for Class B shares.
Incorporated by reference to Exhibit 15(b) to Post-Effective
Amendment No. 7 to the Registration Statement on Form N-1A
filed via EDGAR on November 27, 1996 (File No. 33-48066).
(c) Distribution and Service Plan for Class C shares.
Incorporated by reference to Exhibit 15(c) to Post-Effective
Amendment No. 7 to the Registration Statement on Form N-1A
filed via EDGAR on November 27, 1996 (File No. 33-48066).
16. Schedule of Computation of Performance Quotations.
Incorporated by reference to Exhibit 16 to Post-Effective
Amendment No. 4 to the Registration Statement on Form N-1A
filed via EDGAR on January 30, 1995 (File No. 33-48066).
18. Rule 18f-3 Plan.*
27. Financial Data Schedules. Incorporated by reference to Exhibit
27 to Post-Effective Amendment No. 7 to the Registration
Statement on Form N-1A filed via EDGAR on November 27, 1996
(File No. 33-48066).
- --------
* Filed herewith.
CERTIFICATE OF TRUST
OF
THE PRUDENTIAL INSTITUTIONAL FUND
This Certificate of Trust of The Prudential Institutional Fund, a business
trust (hereafter called the "Business Trust"), executed by the undersigned
trustee and filed under and in accordance with the provisions of the Delaware
Business Trust Act (12 Del. C. ss.ss. 3801 et seq.), sets forth the following:
FIRST: The name of the Business Trust is The Prudential Institutional
Fund.
SECOND: As required by 12 Del. Code ss.ss. 3807(b)(1) and 3807(b)(2), the
name and business address of the Business Trust's Registered Agent for Service
of Process and the address of the Business Trust's Registered Office are:
Address of Business Trust's
Registered Office and
Business Address of
Registered Agent Registered Agent
- ---------------- ------------------------------
The Corporation Trust Company 1209 Orange Street
Wilmington, Delaware 19801
The name and business address of the sole trustee of the Business Trust is
as follows:
Name Business Address
- ---- ----------------
Mark R. Fetting 22 Prudential Plaza
751 Broad Street
Newark, New Jersey
07102
THIRD: The nature of the business or purpose or purposes of the Business
Trust as set forth in its governing instrument is to conduct, operate and carry
on the business of a management investment company registered under the
Investment Company Act of 1940, as amended, through one or more series of shares
of beneficial interest, investing primarily in securities.
<PAGE>
FOURTH: The trustee of the Business Trust, as set forth in its governing
instrument, reserves the right to amend, alter, change or repeal any provision
contained in this Certificate of Trust, in the manner now or hereafter
prescribed by statute.
FIFTH: This Certificate of Trust shall become effective immediately upon
filing with the Office of the Secretary of State of the State of Delaware.
IN WITNESS WHEREOF, the undersigned, being the sole trustee of the
Prudential Institutional Fund, has duly executed this Certificate of Trust as of
this 11th day of May, 1992.
/s/ Mark R. Fetting
-----------------------
Mark R. Fetting
- 2 -
FIRST AMENDMENT
TO
CERTIFICATE OF TRUST
OF
THE PRUDENTIAL INSTITUTIONAL FUND
This First Amendment to the Certificate of Trust (the "Certificate") of
The Prudential Institutional Fund (the "Business Trust") is being executed as of
May 15, 1992, for the purpose of amending the terms of the Certificate, as
originally filed in the Office of the Secretary of the State of Delaware on May
11, 1992, to reflect the addition of a new paragraph SIXTH giving notice of the
limitation of liabilities of series of the Business Trust.
NOW, THEREFORE, the undersigned does hereby certify as follows:
1. The Certificate is hereby amended by adding after current paragraph
FIFTH a new paragraph SIXTH reading as follows:
"SIXTH: Notice is hereby given that the Business Trust is or may
hereafter be constituted a series trust. The debts, liabilities,
obligations and expenses incurred, contracted for or otherwise existing
with respect to any particular series of the Business Trust shall be
enforceable against the assets of such series only, and not against the
assets of the Business Trust generally."
2. Except as amended pursuant to the foregoing paragraph, the Certificate
is hereby ratified and confirmed in all respects.
<PAGE>
IN WITNESS WHEREOF, the undersigned, being the sole Trustee of the
Business Trust, has duly executed this Amendment to the Certificate as of the
day and year first above written.
TRUSTEE
/s/ Mark R. Fetting
-----------------------
Mark R. Fetting
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AGREEMENT AND DECLARATION OF TRUST
of
The Prudential Institutional Fund,
a Delaware Business Trust
Principal Place of Business:
Prudential Plaza
751 Broad Street
Newark, New Jersey 07102-3777
<PAGE>
TABLE OF CONTENTS
AGREEMENT AND DECLARATION OF TRUST
Page
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ARTICLE I Name and Definitions ............................................ 1
1. Name .............................................................. 1
2. Definitions ....................................................... 1
(a) By-Laws ..................................................... 1
(b) Certificate of Trust ........................................ 1
(c) Classes ..................................................... 2
(d) Commission and Principal Underwriter ........................ 2
(e) Declaration of Trust ........................................ 2
(f) Delaware Act ................................................ 2
(g) Interested Person ........................................... 2
(h) Investment Manager or Manager ............................... 2
(i) 1940 Act .................................................... 2
(j) Person ...................................................... 2
(k) Series ...................................................... 2
(1) Shareholder .................................................. 2
(m) Shares ...................................................... 2
(n) Trust ....................................................... 2
(o) Trust Property .............................................. 3
(p) Trustees .................................................... 3
ARTICLE II Purpose of Trust ............................................... 3
ARTICLE III Shares ........................................................ 3
1. Division of Beneficial Interest .................................. 3
2. Ownership of Shares .............................................. 4
3. Transfer of Shares ............................................... 5
4. Investments in the Trust ......................................... 5
5. Status of Shares and Limitation of
Personal Liability ............................................. 5
6. Establishment and Designation of Series .......................... 5
(a) Assets Held with Respect to a
Particular Series ........................................... 6
(b) Liabilities Held with Respect to a
Particular Series ......................................... 7
(c) Dividends, Distributions, Redemptions,
and Repurchases ........................................... 7
(d) Equality .................................................... 8
(e) Fractions ................................................... 8
(f) Exchange Privilege .......................................... 8
(g) Combination of Series ....................................... 8
(h) Elimination of Series ....................................... 8
7. Indemnification of Shareholders .................................. 9
<PAGE>
ARTICLE IV The Board of Trustees............................................ 9
1. Number, Election and Tenure ...................................... 9
2. Effect of Death, Resignation, etc.
of a Trustee ................................................... 10
3. Powers ........................................................... 10
4. Payment of Expenses by the Trust ................................. 15
5. Payment of Expenses by Shareholders .............................. 15
6. Ownership of Assets of the Trust ................................. 15
7. Service Contracts ................................................ 16
8. Trustees and Officers as Shareholders ............................ 18
ARTICLE V Shareholders' Voting Powers and Meetings ......................... 18
1. Voting Powers, Meetings, Notice and
Record Dates ................................................... 18
2. Quorum and Required Vote ......................................... 19
3. Record Dates ..................................................... 19
4. Additional Provisions ............................................ 20
ARTICLE VI Net Asset Value, Distributions and Redemptions ................. 20
1. Determination of Net Asset Value,
Net Income and Distributions ................................... 20
2. Redemptions and Repurchases ...................................... 20
ARTICLE VII Compensation and Limitation of Liability of Trustees .......... 22
1. Compensation ..................................................... 22
2. Indemnification and Limitation of
Liability ...................................................... 22
3. Trustee's Good Faith Action, Expert
Advice, No Bond or Surety ...................................... 23
4. Insurance ........................................................ 23
ARTICLE VIII Miscellaneous ................................................ 24
1. Liability of Third Persons Dealing
with Trustees .................................................. 24
2. Termination of Trust or Series ................................... 24
3. Reorganization ................................................... 25
4. Amendments ....................................................... 26
5. Filing of Copies, References,
Headings ....................................................... 26
6. Applicable Law ................................................... 27
<PAGE>
7. Provisions in Conflict with Law or Regulations ................... 28
8. Business Trust Only .............................................. 28
<PAGE>
AGREEMENT AND DECLARATION OF TRUST
OF
The Prudential Institutional Fund
THIS AGREEMENT AND DECLARATION OF TRUST is made and entered into as of the
date set forth below by the Trustee named hereunder for the purpose of forming a
Delaware business trust in accordance with the provisions hereinafter set forth,
NOW, THEREFORE, the Trustee hereby directs that the Certificate of Trust be
filed with Office of the Secretary of State of the State of Delaware and does
hereby declare that the Trustees will hold IN TRUST all cash, securities and
other assets which the Trust now possesses or may hereafter acquire from time to
time in any manner and manage and dispose of the same upon the following terms
and conditions for the benefit of the holders of Shares in this Trust.
ARTICLE I
Name and Definitions
Section 1. Name. This Trust shall be known as The Prudential Institutional
Fund and the Trustees shall conduct the business of the Trust under that name or
any other name as they may from time to time determine.
Section 2. Definitions. Whenever used herein, unless otherwise required by
the context or specifically provided:
(a) "By-Laws" shall mean the By-Laws of the Trust as amended from time to
time, which By-Laws are expressly herein incorporated by reference as part of
the "governing instrument" within the meaning of the Delaware Act;
(b) "Certificate of Trust" means the certificate of trust, as amended or
restated from time to time, filed by the Trustees in the Office of the Secretary
of State of the State of Delaware in accordance with the Delaware Act;
<PAGE>
(c) "Class" means a class of Shares of a Series of the Trust established in
accordance with the provisions of Article III hereof;
(d) "Commission" and "Principal Underwriter" shall have the meanings given
them in the 1940 Act;
(e) "Declaration of Trust" means this Agreement and Declaration of Trust,
as amended or restated from time to time;
(f) "Delaware Act" means the Delaware Business Trust Act, 12 Del. C. ss.ss.
3801 et seq., as amended from time to time;
(g) "Interested Person" shall have the meaning given it in Section 2(a)
(19) of the 1940 Act;
(h) "Investment Manager" or "Manager" means a party furnishing services to
the Trust pursuant to any contract described in Article IV, Section 7(a) hereof;
(i) "1940 Act" means the Investment Company Act of 1940 and the Rules and
Regulations thereunder, all as amended from time to time;
(j) "Person" means and includes individuals, corporations, partnerships,
trusts, associations, joint ventures, estates and other entities, whether or not
legal entities, and governments and agencies and political subdivisions thereof,
whether domestic or foreign;
(k) "Series" means each Series of Shares established and designated under
or in accordance with the provisions of Article III;
(l) "Shareholder" means a record owner of outstanding Shares;
(m) "Shares" means the shares of beneficial interest into which the
beneficial interest in the Trust shall be divided from time to time and includes
fractions of Shares as well as whole Shares;
(n) "Trust" means the Delaware Business Trust established under the
Delaware Act by this Declaration of Trust and the filing of the Certificate of
Trust in the Office of the Secretary of State of the State of Delaware;
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(o) "Trust Property" means any and all property, real or personal, tangible
or intangible, which is from time to time owned or held by or for the account of
the Trust; and
(p) "Trustees" means the person who has signed this Declaration of Trust
and all other Persons who may from time to time be duly elected or appointed to
serve as Trustees in accordance with the provisions hereof, in each case so long
as such Person shall continue in office in accordance with the terms of this
Declaration of Trust, and reference herein to a Trustee or the Trustees shall
refer to such Person or Persons in his or their capacity as trustees hereunder.
ARTICLE II
Purpose of Trust
The purpose of the Trust is to conduct, operate and carry on the business
of a management investment company registered under the 1940 Act through one or
more Series investing primarily in securities, and to carry on such other
business as the Trustees may from time to time determine pursuant to their
authority under this Declaration of Trust.
ARTICLE III
Shares
Section 1. Division of Beneficial Interest. The beneficial interest in the
Trust shall be divided into one or more Series. Each Series may be divided into
two or more Classes. Subject to the further provisions of this Article III and
any applicable requirements of the 1940 Act, the Trustees shall have full power
and authority, in their sole discretion, and without obtaining any authorization
or vote of the Shareholders of any Series or Class thereof, (i) to divide the
beneficial interest in each Series or Class thereof into Shares, with or without
par value as the Trustee shall determine, (ii) to issue Shares without
limitation as to number (including fractional Shares), to such Persons and for
such amount and type of consideration, subject to any restriction set forth in
the By-Laws, including cash or securities, at such time or times and on such
terms as the Trustees may deem appropriate, (iii) to establish and designate and
to
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<PAGE>
change in any manner any Series or Class thereof and to fix such preferences,
voting powers, rights, duties and privileges and business purpose of each Series
or Class thereof as the Trustees may from time to time determine, which
preferences, voting powers, rights, duties and privileges may be senior or
subordinate to (or in the case of business purpose, different from) any existing
Series or Class thereof and may be limited to specified property or obligations
of the Trust or profits and losses associated with specified property or
obligations of the Trust, (iv) to divide or combine the Shares of any Series or
Class thereof into a greater or lesser number without thereby materially
changing the proportionate beneficial interest of the Shares of such Series or
Class in the assets held with respect to that Series, (v) to classify or
reclassify any issued Shares of any Series or Class thereof into shares of one
or more Series or Classes thereof and (vi) to take such other action with
respect to the Shares as the Trustees may deem desirable.
Subject to the distinctions permitted among Classes of the same Series as
established by the Trustees consistent with the requirements of the 1940 Act,
each Share of a Series of the Trust shall represent an equal beneficial interest
in the net assets of such Series, and each holder of Shares of a Series shall be
entitled to receive such holder's pro rata share of distributions of income and
capital gains, if any, made with respect to such Series. Upon redemption of the
Shares of any Series, the applicable Shareholder shall be paid solely out of the
funds and property of such Series of the Trust.
All references to Shares in this Declaration of Trust shall be deemed to be
Shares of any or all Series or Classes thereof, as the context may require. All
provisions herein relating to the Trust shall apply equally to each Series of
the Trust and each Class thereof, except as the context otherwise requires.
All Shares issued hereunder, including, without limitation, Shares issued
in connection with a dividend in Shares or a split or reverse split of Shares,
shall be fully paid and non-assessable. Except as otherwise provided by the
Trustees, Shareholders shall have no preemptive or other right to subscribe to
any additional Shares or other securities issued by the Trust.
Section 2. Ownership of Shares. The Ownership of Shares shall be recorded
on the books of the Trust or
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<PAGE>
a transfer or similar agent for the Trust, which books shall be maintained
separately for the Shares of each Series (or Class). No certificates certifying
the ownership of Shares shall be issued except as the Board of Trustees may
otherwise determine from time to time. The Trustees may make such rules as they
consider appropriate for the issuance of Share certificates, the transfer of
Shares of each Series (or Class) and similar matters. The record books of the
Trust as kept by the Trust or any transfer or similar agent, as the case may be,
shall be conclusive as to the identity of the Shareholders of each Series (or
Class) and as to the number of Shares of each Series (or Class) held from time
to time by each Shareholder.
Section 3. Transfer of Shares. Except as otherwise provided by the
Trustees, Shares shall be transferable on the books of the Trust only by the
record holder thereof or by his duly authorized agent upon delivery to the
Trustees or the Trust's transfer agent of a duly executed instrument of
transfer, together with a Share certificate if one is outstanding, and such
evidence of the genuineness of each such execution and authorization and of such
other matters as may be required by the Trustees. Upon such delivery, and
subject to any further requirements specified by the Trustees or contained in
the By-Laws, the transfer shall be recorded on the books of the Trust. Until a
transfer is so recorded, the Shareholder of record of Shares shall be deemed to
be the holder of such Shares for all purposes hereunder and neither the Trustees
nor the Trust, nor any transfer agent or registrar or any officer, employee or
agent of the Trust, shall be affected by any notice of a proposed transfer.
Section 4. Investments in the Trust. Investments may be accepted by the
Trust from such Persons, at such times, on such terms, and for such
consideration as the Trustees from time to time may authorize.
Section 5. Status of Shares and Limitation of Personal Liability. Shares
shall be deemed to be personal property giving only the rights provided in this
instrument. Every Shareholder by virtue of having become a Shareholder shall be
held to have expressly assented and agreed to the terms hereof. The death,
incapacity, dissolution, termination or bankruptcy of a Shareholder during the
existence of the Trust shall not operate to terminate the Trust, nor entitle the
representative of any such Shareholder to an accounting
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<PAGE>
or to take any action in court or elsewhere against the Trust or the Trustees,
but entitles such representative only to the rights of such Shareholder under
this Trust. Ownership of Shares shall not entitle the Shareholder to any title
in or to the whole or any part of the Trust Property or right to call for a
partition or division of the same or for an accounting, nor shall the ownership
of Shares constitute the Shareholders as partners. Neither the Trust nor the
Trustees, nor any officer, employee or agent of the Trust shall have any power
to bind personally any Shareholders, nor, except as specifically provided
herein, to call upon any Shareholder for the payment of any sum of money or
assessment whatsoever other than such as the Shareholder may at any time
personally agree to pay.
Section 6. Establishment and Designation of Series. The establishment and
designation of any Series (or Class) of Shares shall be effective upon the
adoption by a majority of the then Trustees of a resolution that sets forth such
establishment and designation and the relative rights and preferences of such
Series (or Class), whether directly in such resolution or by reference to
another document including, without limitation, any registration statement of
Trust, or as otherwise provided in such resolution.
Shares of each Series (or Class) established pursuant to this Article III,
unless otherwise provided in the resolution establishing such Series, shall have
the following relative rights and preferences:
(a) Assets Held with Respect to a Particular Series. All consideration
received by the Trust for the issue or sale of Shares of a particular Series,
together with all assets in which such consideration is invested or reinvested,
all income, earnings, profits, and proceeds thereof from whatever source
derived, including, without limitation, any proceeds derived from the sale,
exchange or liquidation of such assets, and any funds or payments derived from
any reinvestment of such proceeds in whatever form the same may be, shall
irrevocably be held with respect to that Series for all purposes, subject only
to the rights of creditors of such Series, and shall be so recorded upon the
books of account of the Trust. Such consideration, assets, income, earnings,
profits and proceeds thereof, from whatever source derived, including, without
limitation, any proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments
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<PAGE>
derived from any reinvestment of such proceeds, in whatever form the same may
be, are herein referred to as "assets held with respect to" that Series. In the
event that there are any assets, income, earnings, profits and proceeds thereof,
funds or payments which are not readily identifiable as assets held with respect
to any particular Series (collectively "General Assets"), the Trustees shall
allocate such General Assets to, between or among any one or more of the Series
in such manner and on such basis as the Trustees, in their sole discretion, deem
fair and equitable, and any General Assets so allocated to a particular Series
shall be held with respect to that Series. Each such allocation by the Trustees
shall be conclusive and binding upon the Shareholders of all Series for all
purposes. Separate and distinct records shall be maintained for each Series and
the assets held with respect to each Series shall be held and accounted for
separately from the assets held with respect to all other Series and the General
Assets of the Trust not allocated to such Series.
(b) Liabilities Held with Respect to a Particular Series. The assets of the
Trust held with respect to each particular Series shall be charged against the
liabilities of the Trust held with respect to that Series and all expenses,
costs, charges and reserves attributable to that Series. Any general liabilities
of the Trust which are not readily identifiable as being held with respect to
any particular Series shall be allocated and charged by the Trustees to and
among any one or more of the Series in such manner and on such basis as the
Trustees in their sole discretion deem fair and equitable. All liabilities,
expenses, costs, charges, and reserves so charged to a Series are herein
referred to as "liabilities held with respect to" that Series. Each allocation
of liabilities, expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the holders of all Series for all purposes. All
liabilities held with respect to a particular Series shall be enforceable
against the assets held with respect to such Series only and not against the
assets of the Trust generally or against the assets held with respect to any
other Series. Notice of this contractual limitation on the liability of each
Series shall be set forth in the Certificate of Trust or in an amendment thereto
prior to the issuance of any Shares of a Series.
(c) Dividends, Distributions, Redemptions, and Repurchases. Notwithstanding
any other provisions of this Declaration of Trust, including, without
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<PAGE>
limitation, Article VI, no dividend or distribution, including, without
limitation, any distribution paid upon termination of the Trust or of any Series
(or Class) with respect to, nor any redemption or repurchase of, the Shares of
any Series (or Class) shall be effected by the Trust other than from the assets
held with respect to such Series, nor shall any Shareholder of any particular
Series otherwise have any right or claim against the assets held with respect to
any other Series except to the extent that such Shareholder has such a right or
claim hereunder as a Shareholder of such other Series. The Trustees shall have
full discretion, to the extent not inconsistent with the 1940 Act, to determine
which items shall be treated as income and which items as capital; and each such
determination and allocation shall be conclusive and binding upon the
Shareholders.
(d) Equality. All the Shares of each particular Series shall represent an
equal proportionate interest in the assets held with respect to that Series
(subject to the liabilities held with respect to that Series and such rights and
preferences as may have been established and designated with respect to Classes
of Shares within such Series), and each Share of any particular Series shall be
equal to each other Share of that Series.
(e) Fractions. Any fractional Share of a Series shall carry proportionately
all the rights and obligations of a whole Share of that Series, including rights
with respect to voting, receipt of dividends and distributions, redemption of
Shares and termination of the Trust.
(f) Exchange Privilege. The Trustees shall have the authority to provide
that the holders of Shares of any Series shall have the right to exchange said
Shares for Shares of one or more other Series of Shares in accordance with such
requirements and procedures as may be established by the Trustees.
(g) Combination of Series. The Trustees shall have the authority, without
the approval of the Shareholders of any Series unless otherwise required by
applicable law, to combine the assets and liabilities held with respect to any
two or more Series into assets and liabilities held with respect to a single
Series.
(h) Elimination of Series. At any time that there are no Shares outstanding
of any particular Series (or Class) previously established and designated, the
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<PAGE>
Trustees may by resolution of a majority of the then Trustees abolish that
Series (or Class) and rescind the establishment and designation thereof.
Section 7. Indemnification of Shareholders. If any Shareholder or former
Shareholder shall be exposed to liability by reason of a claim or demand
relating to such Person being or having been a Shareholder, and not because of
such Person's acts or omissions, the Shareholder or former Shareholder (or such
Person's heirs, executors, administrators, or other legal representatives or in
the case of a corporation or other entity, its corporate or other general
successor) shall be entitled to be held harmless from and indemnified out of the
assets of the Trust against all loss and expense arising from such claim or
demand, but only out of the assets held with respect to the particular Series of
Shares of which such Person is or was a Shareholder and from or in relation to
which such liability arose.
ARTICLE IV
The Board of Trustees
Section 1. Number, Election and Tenure. The number of Trustees shall
initially be one, who shall be Mark R. Fetting. Hereafter, the number of
Trustees shall at all times be at least one and no more than fifteen as
determined, from time to time, by the Trustees pursuant to Section 3 of this
Article IV. Each Trustee shall serve during the continued lifetime of the Trust
until he or she dies, resigns, is declared bankrupt or incompetent by a court of
appropriate jurisdiction, or is removed, or, if sooner, until the next meeting
of Shareholders called for the purpose of electing Trustees and until the
election and qualification of his or her successor. In the event that less than
the majority of the Trustees holding office have been elected by the
Shareholders, the Trustees then in office shall call a Shareholders' meeting for
the election of Trustees. Any Trustee may resign at any time by written
instrument signed by him and delivered to any officer of the Trust or to a
meeting of the Trustees. Such resignation shall be effective upon receipt unless
specified to be effective at some other time. Except to the extent expressly
provided in a written agreement with the Trust, no Trustee resigning and no
Trustee removed shall have any right to any compensation for any period
following his or her resignation or removal, or any right to damages
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on account of such removal. The Shareholders may elect Trustees at any meeting
of Shareholders called by the Trustees for that purpose. Any Trustee may be
removed at any meeting of Shareholders by a vote of two-thirds of the
outstanding Shares of the Trust.
Section 2. Effect of Death, Resignation, etc. of a Trustee. The death,
declination to serve, resignation, retirement, removal, or incapacity of one or
more Trustees, or all of them, shall not operate to annul the Trust or to revoke
any existing agency created pursuant to the terms of this Declaration of Trust.
Whenever there shall be fewer than the designated number of Trustees, until
additional Trustees are elected or appointed as provided herein to bring the
total number of Trustees equal to the designated number, the Trustees in office,
regardless of their number, shall have all the powers granted to the Trustees
and shall discharge all the duties imposed upon the Trustees by this Declaration
of Trust. As conclusive evidence of such vacancy, a written instrument
certifying the existence of such vacancy may be executed by an officer of the
Trust or by a majority of the Trustees. In the event of the death, declination,
resignation, retirement, removal, or incapacity of all the then Trustees within
a short period of time and without the opportunity for at least one Trustee
being able to appoint additional Trustees to replace those no longer serving,
the Trust's Investment Manager(s) are empowered to appoint new Trustees subject
to the provisions of Section 16(a) of the 1940 Act.
Section 3. Powers. Subject to the provisions of this Declaration of Trust,
the business of the Trust shall be managed by the Trustees, and the Trustees
shall have all powers necessary or convenient to carry out that responsibility
including the power to engage in securities transactions of all kinds on behalf
of the Trust. Without limiting the foregoing, the Trustees may: adopt By-Laws
not inconsistent with this Declaration of Trust providing for the regulation and
management of the affairs of the Trust and may amend and repeal them to the
extent that such By-Laws do not reserve that right to the Shareholders; enlarge
or reduce their number; remove any Trustee with or without cause at any time by
written instrument signed by at least two-thirds of the number of Trustees prior
to such removal, specifying the date when such removal shall become effective,
and fill vacancies caused by enlargement of their number or by the death,
resignation or removal of a Trustee; elect and remove, with or
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without cause, such officers and appoint and terminate such agents as they
consider appropriate; appoint from their own number and establish and terminate
one or more committees consisting of two or more Trustees which may exercise the
powers and authority of the Board of Trustees to the extent that the Trustees
determine; employ one or more custodians of the assets of the Trust and may
authorize such custodians to employ subcustodians and to deposit all or any part
of such assets in a system or systems for the central handling of securities or
with a Federal Reserve Bank, retain a transfer agent or a shareholder servicing
agent, or both; provide for the issuance and distribution of Shares by the Trust
directly or through one or more Principal Underwriters or otherwise; redeem,
repurchase and transfer Shares pursuant to applicable law; set record dates for
the determination of Shareholders with respect to various matters; declare and
pay dividends and distributions to Shareholders of each Series from the assets
of such Series; and in general delegate such authority as they consider
desirable to any officer of the Trust, to any committee of the Trustees and to
any agent or employee of the Trust or to any such custodian, transfer or
Shareholder servicing agent, or Principal Underwriter. Any determination as to
what is in the interests of the Trust made by the Trustees in good faith shall
be conclusive. In construing the provisions of this Declaration of Trust, the
presumption shall be in favor of a grant of power to the Trustees. Unless
otherwise specified herein or in the By-Laws or required by law, any action by
the Trustees shall be deemed effective if approved or taken by a majority of the
Trustees present at a meeting of Trustees at which a quorum of Trustees is
present, within or without the State of Delaware.
Without limiting the foregoing, the Trustees shall have the power and
authority to cause the Trust (or to act on behalf of the Trust):
(a) To invest and reinvest cash, to hold cash uninvested, and to
subscribe for, invest in, reinvest in, purchase or otherwise acquire, own, hold,
pledge, sell, assign, transfer, exchange, distribute, write options on, lend or
otherwise deal in or dispose of contracts for the future acquisition or delivery
of fixed income or other securities, and securities of every nature and kind,
including, without limitation, all types of bonds, debentures, stocks,
negotiable or non-negotiable instruments, obligations, evidences of
indebtedness, certificates of deposit or indebtedness,
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commercial paper, repurchase agreements, bankers' acceptances, and other
securities of any kind, issued, created, guaranteed, or sponsored by any and all
Persons, including, without limitation, states, territories, and possessions of
the United States and the District of Columbia and any political subdivision,
agency, or instrumentality thereof, any foreign government or any political
subdivision of the U.S. Government or any foreign government, or any
international instrumentality, or by any bank or savings institution, or by any
corporation or organization organized under the laws of the United States or of
any state, territory, or possession thereof, or by any corporation or
organization organized under any foreign law, or in "when issued" contracts for
any such securities, to change the investments of the assets of the Trust; and
to exercise any and all rights, powers, and privileges of ownership or interest
in respect of any and all such investments of every kind and description,
including, without limitation, the right to consent and otherwise act with
respect thereto, with power to designate one or more Persons, to exercise any of
said rights, powers, and privileges in respect of any of said instruments;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate, lease, or
write options (including, options on futures contracts) with respect to or
otherwise deal in any property rights relating to any or all of the assets of
the Trust or any Series;
(c) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property; and to execute and deliver
proxies or powers of attorney to such Person or Persons as the Trustees shall
deem proper, granting to such Person or Persons such power and discretion with
relation to securities or property as the Trustees shall deem proper;
(d) To exercise powers and right of subscription or otherwise which in
any manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating any
trust, whether in bearer, unregistered or other negotiable form, or in its own
name or in the name of a custodian or subcustodian or a nominee or nominees or
otherwise;
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(f) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or issuer of any security which is
held in the Trust; to consent to any contract, lease, mortgage, purchase or sale
of property by such corporation or issuer; and to pay calls or subscriptions
with respect to any security held in the Trust;
(g) To join with other security holders in acting through a committee,
depositary, voting trustee or otherwise, and in that connection to deposit any
security with, or transfer any security to, any such committee, depositary or
trustee, and to delegate to them such power and authority with relation to any
security (whether or not so deposited or transferred) as the Trustees shall deem
proper, and to agree to pay, and to pay, such portion of the expenses and
compensation of such committee, depositary or trustee as the Trustees shall deem
proper;
(h) To compromise, arbitrate or otherwise adjust claims in favor of or
against the Trust or any matter in controversy, including, but not limited to,
claims for taxes;
(i) To enter into joint ventures, general or limited partnerships and
any other combinations or associations;
(j) To borrow funds or other property in the name of the Trust
exclusively for Trust purposes and in connection therewith issue notes or other
evidence of indebtedness; and to mortgage and pledge the Trust Property or any
part thereof to secure any or all of such indebtedness;
(k) To endorse or guarantee the payment of any notes or other
obligations of any Person; to make contracts of guaranty or suretyship, or
otherwise assume liability for payment thereof; and to mortgage and pledge the
Trust Property or any part thereof to secure any of or all of such obligations;
(1) To purchase and pay for entirely out of Trust Property such
insurance as the Trustees may deem necessary or appropriate for the conduct of
the business, including, without limitation, insurance policies insuring the
assets of the Trust or payment of distributions and principal on its portfolio
investments, and insurance policies insuring the Shareholders, Trustees,
officers, employees, agents,
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investment advisers, principal underwriters, or independent contractors of the
Trust, individually against all claims and liabilities of every nature arising
by reason of holding Shares, holding, being or having held any such office or
position, or by reason of any action alleged to have been taken or omitted by
any such Person as Trustee, officer, employee, agent, investment adviser,
principal underwriter, or independent contractor, including any action taken or
omitted that may be determined to constitute negligence, whether or not the
Trust would have the power to indemnify such Person against liability;
(m) To adopt, establish and carry out pension, profit-sharing, share
bonus, share purchase, savings, thrift and other retirement, incentive and
benefit plans and trusts, including the purchasing of life insurance and annuity
contracts as a means of providing such retirement and other benefits, for any or
all of the Trustees, officers, employees and agents of the Trust;
(n) To operate as and carry out the business of an investment company,
and exercise all the powers necessary or appropriate to the conduct of such
operations;
(o) To enter into contracts of any kind and description;
(p) To employ one or more banks, trust companies or companies that are
members of a national securities exchange or such other entities as the
Commission may permit as custodians of any assets of the Trust subject to any
conditions set forth in this Declaration or Trust or in the By-Laws;
(q) To interpret the investment policies, practices or limitations of
any Series or Class; and
(r) Subject to the 1940 Act, to engage in any other lawful act or
activity in which a business trust organized under the Delaware Act may engage.
The Trust shall not be limited to investing in obligations maturing
before the possible termination of the Trust or one or more of its Series. The
Trust shall not in any way be bound or limited by any present or future law or
custom in regard to investment by fiduciaries. The Trust shall not be required
to obtain
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any court order to deal with any assets of the Trust or take any other action
hereunder.
Section 4. Payment of Expenses by the Trust. The Trustees are authorized to
pay or cause to be paid out of the principal or income of the Trust, or partly
out of the principal and partly out of income, as they deem fair, all expenses,
fees, charges, taxes and liabilities incurred or arising in connection with the
Trust, or in connection with the management thereof, including, but not limited
to, the Trustees compensation and such expenses and charges for the services of
the Trust's officers, employees, investment adviser or manager, Principal
Underwriter, auditors, counsel, custodian, transfer agent, shareholder servicing
agent, and such other agents or independent contractors and such other expenses
and charges as the Trustees may deem necessary or proper to incur, which
expenses, fees, charges, taxes and liabilities shall be allocated in accordance
with Article III, Section 6 hereof.
Section 5. Payment of Expenses by Shareholders. The Trustees shall have the
power, as frequently as they may determine, to cause each Shareholder, or each
Shareholder of any particular Series, to pay directly, in advance or arrears,
for charges of the Trust's custodian or transfer, Shareholder servicing or
similar agent, an amount fixed from time to time by the Trustees, by setting off
such charges due from such Shareholder from declared but unpaid dividends owed
such Shareholder and/or by reducing the number of Shares in the account of such
Shareholder by that number of full and/or fractional Shares which represents the
outstanding amount of such charges due from such Shareholder.
Section 6. Ownership of Assets of the Trust. Title to all of the assets of
the Trust shall at all times be considered as vested in the Trust, except that
the Trustees shall have power to cause legal title to any Trust Property to be
held by or in the name of one or more of the Trustees, or in the name of the
Trust, or in the name of any other Person as nominee, on such terms as the
Trustees may determine. The right, title and interest of the Trustees in the
Trust Property shall vest automatically in each Person who may hereafter become
a Trustee. Upon the resignation, removal or death of a Trustee, he or she shall
automatically cease to have any right, title or interest in any of the Trust
Property, and the right, title and interest of such Trustee in the Trust
Property shall vest automatically
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in the remaining Trustees. Such vesting and cessation of title shall be
effective whether or not conveyancing documents have been executed and
delivered.
Section 7. Service Contracts
(a) Subject to such requirements and restrictions as may be set forth
under federal and/or state law and in the By-Laws, including, without
limitation, the requirements of Section 15 of the 1940 Act, the Trustees may, at
any time and from time to time, contract for exclusive or nonexclusive advisory,
management and/or administrative services for the Trust or for any Series (or
Class thereof) with any corporation, trust, association or other organization;
and any such contract may contain such other terms as the Trustees may
determine, including, without limitation, authority for the Investment Manager
or administrator to delegate certain or all of its duties under such contracts
to qualified investment advisers and administrations and to determine from time
to time without prior consultation with the Trustees what investments shall be
purchased, held, sold or exchanged and what portion, if any, of the assets of
the Trust shall be held uninvested and to make changes in the Trust's
investments, or such other activities as may specifically be delegated to such
party.
(b) The Trustees may also, at any time and from time to time, contract
with any corporation, trust, association or other organization, appointing it
exclusive or nonexclusive distributor or Principal Underwriter for the Shares of
one or more of the Series (or Classes) or other securities to be issued by the
Trust. Every such contract shall comply with such requirements and restrictions
as may be set forth under federal and/or state law and in the By-Laws,
including, without limitation, the requirements of Section 15 of the 1940 Act;
and any such contract may contain such other terms as the Trustees may
determine.
(c) The Trustees are also empowered, at any time and from time to
time, to contract with any corporations, trusts, associations or other
organizations, appointing it or them the custodian, transfer agent and/or
Shareholder servicing agent for the Trust or one or more of its Series. Every
such contract shall comply with such requirements and restrictions as may be
set forth under federal and/or state law and in the By-Laws or stipulated by
resolution of the Trustees.
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(d) Subject to applicable law, the Trustees are further empowered, at
any time and from time to time, to contract with any entity to provide such
other services to the Trust or one or more of the Series, as the Trustees
determine to be in the best interests of the Trust and the applicable Series.
(e) The fact that:
(i) any of the Shareholders, Trustees, or officers of the Trust
is a shareholder, director, officer, partner, trustee, employee,
Manager, adviser, Principal Underwriter, distributor, or affiliate or
agent of or for any corporation, trust, association, or other
organization, or for any parent or affiliate of any organization with
which an advisory, management or administration contract, or principal
underwriter's or distributor's contract, or transfer, shareholder
servicing or other type of service contract may have been or may
hereafter be made, or that any such organization, or any parent or
affiliate thereof, is a Shareholder or has an interest in the Trust,
or that
(ii) any corporation, trust, association or other organization
with which an advisory, management or administration contract or
principal underwriter's or distributor's contract, or transfer,
shareholder servicing or other type of service contract may have been
or may hereafter be made also has an advisory, management or
administration contract, or principal underwriter's or distributor's
contract, or transfer, shareholder servicing or other service contract
with one or more other corporations, trusts, associations, or other
organizations, or has other business or interests,
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same, or create any liability or accountability to the Trust or its
Shareholders, provided approval of each such contract is made pursuant to the
requirements of the 1940 Act.
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Section 8. Trustees and Officers as Shareholders. Any Trustee, officer or
agent of the Trust may acquire, own and dispose of Shares to the same extent as
if he were not a Trustee, officer or agent; and the Trustees may issue and sell
and cause to be issued and sold Shares to, and redeem such Shares from, any such
Person or any firm or company in which such Person is interested, subject only
to the general limitations contained herein or in the By-Laws relating to the
sale and redemption of such Shares.
ARTICLE V
Shareholders' Voting Powers and Meetings
Section 1. Voting Powers, Meetings, Notice and Record Dates. The
Shareholders shall have power to vote only (i) for the election or removal of
Trustees as provided in Article IV, Section 1, and (ii) with respect to such
additional matters relating to the Trust as may be required by applicable law,
this Declaration of Trust, the By-Laws or any registration of the Trust with the
Commission (or any successor agency) or any state, or as the Trustees may
consider necessary or desirable. Each whole Share shall be entitled to one vote
as to any matter on which it is entitled to vote and each fractional Share shall
be entitled to a proportionate fractional vote. Notwithstanding any other
provision of this Declaration of Trust, on any matter submitted to a vote of the
Shareholders, all Shares of the Trust then entitled to vote shall be voted in
aggregate, except (i) when required by the 1940 Act, Shares shall be voted by
individual Series; (ii) when the matter involves the termination of a Series or
any other action that the Trustees have determined will affect only the
interests of one or more Series, then only Shareholders of such Series shall be
entitled to vote thereon; and (iii) when the matter involves any action that the
Trustees have determined will affect only the interests of one or more Classes,
then only the Shareholders of such Class or Classes shall be entitled to vote
thereon. There shall be no cumulative voting in the election of Trustees. Shares
may be voted in person or by proxy. A proxy may be given in writing. The By-Laws
may provide that proxies may also, or may instead, be given by any electronic or
telecommunications device or in any other manner. Notwithstanding anything else
contained herein or in the By-Laws, in the event a proposal by anyone other than
the officers or Trustees of the Trust is submitted to a vote of the shareholders
of one or more
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Series or Classes thereof or of the Trust, or in the event of any proxy contest
or proxy solicitation or proposal in opposition to any proposal by the officers
or Trustees of the Trust, Shares may be voted only in person or by written proxy
at a meeting. Until Shares are issued, the Trustees may exercise all rights of
Shareholders and may take any action required by law, this Declaration of Trust
or the By-Laws to be taken by the Shareholders. Meeting of the Shareholders
shall be called and notice thereof and record dates therefor shall be given
and set as provided in the By-Laws.
Section 2. Quorum and Required Vote. Except when a larger quorum is
required by applicable law, by the By-Laws or by this Declaration of Trust,
forty percent (40%) of the Shares entitled to vote shall constitute a quorum at
a Shareholders' meeting. When any one or more Series (or Classes) is to vote as
a single Class separate from any other Shares, forty percent (40%) of the Shares
of each such Series (or Classes) entitled to vote shall constitute a quorum at a
Shareholders' meeting of that Series (or Class). Except when a larger vote is
required by any provision of this Declaration of Trust or the By-Laws or by
applicable law, when a quorum is present at any meeting, a majority of the
Shares voted shall decide any questions and a plurality of the Shares voted
shall elect a Trustee, provided that where any provision of law or of this
Declaration of Trust requires that the holders of any Series shall vote as a
Series (or that holders of a Class shall vote as a Class), then a majority of
the Shares of that Series (or Class) voted on the matter (or a plurality with
respect to the election of a Trustee) shall decide that matter insofar as that
Series (or Class) is concerned.
Section 3. Record Dates. For the purpose of determining the Shareholders of
any Series (or Class) who are entitled to receive payment of any dividend or of
any other distribution, the Trustees may from time to time fix a date, which
shall be before the date for the payment of such dividend or such other payment,
as the record date for determining the Shareholders of such Series (or Class)
having the right to receive such dividend or distribution. Without fixing a
record date, the Trustees may for distribution purposes close the register or
transfer books for one or more Series (or Classes) at any time prior to the
payment of a distribution. Nothing in this Section shall be construed as
precluding the Trustees from setting
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different record dates for different Series (or Classes).
Section 4. Additional Provisions. The By-Laws may include further
provisions for Shareholders' votes and meetings and related matters.
ARTICLE VI
Net Asset Value, Distributions and Redemptions
Section 1. Determination of Net Asset Value, Net Income, and Distributions.
Subject to applicable law and Article III, Section 6 hereof, the Trustees, in
their absolute discretion, may prescribe and shall set forth in the By-Laws or
in a duly adopted vote of the Trustees such bases and time for determining the
per Share or net asset value of the Shares of any Series or net income
attributable to the Shares of any Series, or the declaration and payment of
dividends and distributions on the Shares of any Series, as they may deem
necessary or desirable.
Section 2. Redemptions and Repurchases.
(a) The Trust shall purchase such Shares as are offered by any Shareholder
for redemption, upon the presentation of a proper instrument of transfer
together with a request directed to the Trust or a Person designated by the
Trust that the Trust purchase such Shares or in accordance with such other
procedures for redemption as the Trustees may from time to time authorize; and
the Trust will pay therefor the net asset value thereof as determined by the
Trustees (or on their behalf), in accordance with any applicable provisions of
the By-Laws and applicable law. Unless extraordinary circumstances exist,
payment for said Shares shall be made by the Trust to the Shareholder within
seven (7) days after the date on which the request is made in proper form. The
obligation set forth in this Section 2 is subject to the provision that in the
event that any time the New York Stock Exchange (the "Exchange") is closed for
other than weekends or holidays, or if permitted by the rules and regulations or
an order of the Commission during periods when trading on the Exchange is
restricted or during any emergency which makes it impracticable for the Trust to
dispose of the investments of the applicable Series or to determine fairly the
value of the net assets held with respect to such Series or during any other
period permitted by
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order of the Commission for the protection of investors, such obligations may be
suspended or postponed by the Trustees. In the case of a suspension of the right
of redemption as provided herein, a Shareholder may either withdraw the request
for redemption or receive payment based on the net asset value per share next
determined after the termination of such suspension.
(b) The redemption price may in any case or cases be paid wholly or partly
in kind if the Trustees determine that such payment is advisable in the interest
of the remaining Shareholders of the Series for which the Shares are being
redeemed. Subject to the foregoing, the fair value, selection and quantity of
securities or other property so paid or delivered as all or part of the
redemption price may be determined by or under authority of the Trustees. In no
case shall the Trust be liable for any delay of any corporation or other Person
in transferring securities selected for delivery as all or part of any payment
in kind.
(c) If the Trustee shall, at any time and in good faith, determine that
direct or indirect ownership of Shares of any Series has or may become
concentrated in any Person to an extent that would disqualify any Series as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(or any successor statute thereto), then the Trustees shall have the power (but
not the obligation) by such means as they deem equitable (i) to call for the
redemption by any such Person of a number, or principal amount, of Shares
sufficient to maintain or bring the direct or indirect ownership of Shares into
conformity with the requirements for such qualification and (ii) to refuse to
transfer or issue Shares to any Person whose acquisition of the Shares in
question would result in such disqualification. Any such redemption shall be
effected at the redemption price and in the manner provided in this Article VI.
(d) The holders of Shares shall upon demand disclose to the Trustees in
writing such information with respect to direct and indirect ownership of Shares
as the Trustees deem necessary to comply with the provisions of the Internal
Revenue Code of 1986, as amended (or any successor statute thereto), or to
comply with the requirements of any other taxing authority.
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ARTICLE VII
Compensation and Limitation of
Liability of Trustees
Section 1. Compensation. The Trustees as such shall be entitled to
reasonable compensation from the Trust, and they may fix the amount of such
compensation. Nothing herein shall in any way prevent the employment of any
Trustee for advisory, management, legal, accounting, investment banking or other
services and payment for the same by the Trust.
Section 2. Indemnification and Limitation of Liability. A Trustee, when
acting in such capacity, shall not be personally liable to any Person, other
than the Trust or a Shareholder to the extent provided in this Article VII, for
any act, omission or obligation of the Trust, of such Trustee or of any other
Trustee. The Trustees shall not be responsible or liable in any event for any
neglect or wrongdoing of any officer, agent, employee, Manager or Principal
Underwriter of the Trust. The Trust shall indemnify each Person who is, or has
been, a Trustee, officer, employee or agent of the Trust and any Person who is
serving or has served at the Trust's request as a director, officer, trustee,
employee or agent of another organization in which the Trust has any interest as
a shareholder, creditor or otherwise to the extent and in the manner provided in
the By-Laws.
All persons extending credit to, contracting with or having any claim
against the Trust or the Trustees shall look only to the assets of the
appropriate Series, or, if the Trustees have yet to establish Series, of the
Trust for payment under such credit, contract or claim; and neither the Trustees
nor the Shareholders, nor any of the Trust's officers, employees or agents,
whether past, present or future, shall be personally liable therefor.
Every note, bond, contract, instrument, certificate or undertaking and
every other act or thing whatsoever executed or done by or on behalf of the
Trust or the Trustees by any of them in connection with the Trust shall
conclusively be deemed to have been executed or done only in or with respect to
his or their capacity as Trustee or Trustees, and such Trustee or Trustees shall
not be personally liable thereon. At the Trustees' discretion, any note, bond,
contract, instrument, certificate or undertaking made or issued by
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the Trustees or by any officer or officers may give notice that the Certificate
of Trust is on file in the Office of the Secretary of State of the State of
Delaware and that a limitation on liability of Series exists and such note,
bond, contract, instrument, certificate or undertaking may, if the Trustees so
determine, recite that the same was executed or made on behalf of the Trust by a
Trustee or Trustees in such capacity and not individually or by an officer or
officers in such capacity and not individually and that the obligations of such
instrument are not binding upon any of them or the Shareholders individually but
are binding only on the assets and property of the Trust or a Series thereof,
and may contain such further recital as such Person or Persons may deem
appropriate. The omission of any such notice or recital shall in no way operate
to bind any Trustees, officers or Shareholders individually.
Section 3. Trustee's Good Faith Action, Expert Advice, No Bond or Surety.
The exercise by the Trustees of their powers and discretions hereunder shall be
binding upon everyone interested. A Trustee shall be liable to the Trust and to
any Shareholder solely for his or her own willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of the
office of Trustee, and shall not be liable for errors of judgment or mistakes of
fact or law. The Trustees may take advice of counsel or other experts with
respect to the meaning and operation of this Declaration of Trust, and shall be
under no liability for any act or omission in accordance with such advice nor
for failing to follow such advice. The Trustees shall not be required to give
any bond as such, nor any surety if a bond is required.
Section 4. Insurance. The Trustees shall be entitled and empowered to the
fullest extent permitted by law to purchase with Trust assets insurance for
liability and for all expenses reasonably incurred or paid or expected to be
paid by a Trustee, officer, employee or agent of the Trust in connection with
any claim, action, suit or proceeding in which he or she becomes involved by
virtue of his or her capacity or former capacity with the Trust.
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ARTICLE VIII
Miscellaneous
Section 1. Liability of Third Persons Dealing with Trustees. No Person
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees or to see to the
application of any payments made or property transferred to the Trust or upon
its order.
Section 2. Termination of Trust or Series.
(a) Unless terminated as provided herein, the Trust shall continue without
limitation of time. The Trust may be terminated at any time by vote of a
majority of the Shares of each Series entitled to vote, voting separately by
Series, or by the Trustees by written notice to the Shareholders. Any Series of
Shares or Class thereof may be terminated at any time by vote of a majority of
the Shares of such Series or Class entitled to vote or by the Trustees by
written notice to the Shareholders of such Series or Class.
(b) Upon the requisite Shareholder vote or action by the Trustees to
terminate the Trust or any one or more Series of Shares or any Class thereof,
after paying or otherwise providing for all charges, taxes, expenses and
liabilities, whether due or accrued or anticipated, of the Trust or of the
particular Series or any Class thereof as may be determined by the Trustees, the
Trust shall in accordance with such procedures as the Trustees consider
appropriate reduce the remaining assets of the Trust or of the affected Series
or Class to distributable form in cash or Shares (if any Series remain) or other
securities, or any combination thereof, and distribute the proceeds to the
Shareholders of the Series or Classes involved, ratably according to the number
of Shares of such Series or Class held by the several Shareholders of such
Series or Class on the date of distribution. Thereupon, the Trust or any
affected Series or Class shall terminate and the Trustees and the Trust shall be
discharged of any and all further liabilities and duties relating thereto or
arising therefrom, and the right, title and interest of all parties with respect
to the Trust or such Series or Class shall be canceled and discharged.
(c) Upon termination of the Trust, following completion of winding up of
its business, the Trustees
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shall cause a certificate of cancellation of the Trust's Certificate of Trust to
be filed in accordance with the Delaware Act, which certificate of cancellation
may be signed by any one Trustee.
Section 3. Reorganization.
(a) Notwithstanding anything else herein, the Trustees may, without
Shareholder approval unless such approval is required by applicable law, (i)
cause the Trust to merge or consolidate with or into one or more trusts (or
series thereof to the extent permitted by law), partnerships, associations,
corporations or other business entities (including trusts, partnerships,
associations, corporations or other business entities created by the Trustees to
accomplish such merger or consolidation) so long as the surviving or resulting
entity is an open-end management investment company under the 1940 Act, or is a
series thereof, that will succeed to or assume the Trust's registration under
the 1940 Act and that is formed, organized or existing under the laws of the
United States or of a state, commonwealth, possession or colony of the United
States, (ii) cause the Shares to be exchanged under or pursuant to any state or
federal statute to the extent permitted by law or (iii) cause the Trust to
incorporate under the laws of Delaware. Any agreement of merger or consolidation
or exchange or certificate of merger may be signed by a majority of the Trustees
and facsimile signatures conveyed by electronic or telecommunication means shall
be valid.
(b) Pursuant to and in accordance with the provisions of Section 3815(f) of
the Delaware Act, and notwithstanding anything to the contrary contained in this
Declaration of Trust, an agreement of merger or consolidation approved by the
Trustees in accordance with this Section 3 may effect any amendment to the
governing instrument of the Trust or effect the adoption of a new trust
instrument of the Trust if the Trust is the surviving or resulting trust in the
merger or consolidation.
(c) The Trustees may create one or more business trusts to which all or any
part of the assets, liabilities, profits or losses of the Trust or any Series or
Class thereof may be transferred and may provide for the conversion of Shares in
the Trust or any Series or Class thereof into beneficial interests in any such
newly created trust or trusts or any series or classes thereof.
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Section 4. Amendments. Except as specifically provided in this Section, the
Trustees may, without Shareholder vote, restate, amend or otherwise supplement
this Declaration of Trust. Shareholders shall have the right to vote (i) on any
amendment that would affect their right to vote granted in Article V, Section 1
hereof, (ii) on any amendment to this Section 4 of Article VIII, (iii) on any
amendment that may be required by applicable law or by the Trust's registration
statement filed with the Commission and (iv) on any amendment submitted to them
by the Trustees. Any amendment required or permitted to be submitted to the
Shareholders that, as the Trustees determine, shall affect the Shareholders of
one or more Series shall be authorized by a vote of the Shareholders of each
Series affected and no vote of Shareholders of a Series not affected shall be
required. Notwithstanding anything else herein, no amendment hereof shall limit
the rights to insurance provided by Article VII, Section 4 with respect to any
acts or omissions of Persons covered thereby prior to such amendment nor shall
any such amendment limit the rights to indemnification referenced in Article
VII, Section 2 hereof as provided in the By-Laws with respect to any actions or
omissions of Persons covered thereby prior to such amendment. The Trustees may,
without Shareholder vote, restate, amend, or otherwise supplement the
Certificate of Trust as they deem necessary or desirable.
Section 5. Filing of Copies, References, Headings. The original or a copy
of this instrument and of each restatement and/or amendment hereto shall be kept
at the office of the Trust where it may be inspected by any Shareholder. Anyone
dealing with the Trust may rely on a certificate by an officer of the Trust as
to whether or not any such restatements and/or amendments have been made and as
to any matters in connection with the Trust hereunder; and, with the same effect
as if it were the original, may rely on a copy certified by an officer of the
Trust to be a copy of this instrument or of any such restatements and/or
amendments. In this instrument and in any such restatements and/or amendments,
references to this instrument, and all expressions such as "herein", "hereof"
and "hereunder", shall be deemed to refer to this instrument as amended or
affected by any such restatements and/or amendments. Headings are placed herein
for convenience of reference only and shall not be taken as a part hereof or
control or affect the meaning, construction or effect of this instrument.
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Whenever the singular number is used herein, the same shall include the plural;
and the neuter, masculine and feminine genders shall include each other, as
applicable. This instrument may be executed in any number of counterparts each
of which shall be deemed an original.
Section 6. Applicable Law.
(a) The Trust is created under, and this Declaration of Trust is to be
governed by, and construed and enforced in accordance with, the laws of the
State of Delaware. The Trust shall be of the type commonly called a business
trust, and without limiting the provisions hereof, the Trust specifically
reserves the right to exercise any of the powers or privileges afforded to
business trusts or actions that may be engaged in by business trusts under the
Delaware Act, and the absence of a specific reference herein to any such power,
privilege or action shall not imply that the Trust may not exercise such power
or privilege or take such actions.
(b) Notwithstanding the first sentence of Section 6(a) of this Article
VIII, there shall not be applicable to the Trust, the Trustees or this
Declaration of Trust (x) the provisions of Section 3540 of Title 12 of the
Delaware Code or (y) any provisions of the laws (statutory or common) of the
State of Delaware (other than the Delaware Act) pertaining to trusts that relate
to or regulate: (i) the filing with any court or governmental body or agency of
trustee accounts or schedules of trustee fees and charges, (ii) affirmative
requirements to post bonds for trustees, officers, agents or employees of a
trust, (iii) the necessity for obtaining a court or other governmental approval
concerning the acquisition, holding or disposition of real or personal property,
(iv) fees or other sums applicable to trustees, officers, agents or employees of
a trust, (v) the allocation of receipts and expenditures to income or principal,
(vi) restrictions or limitations on the permissible nature, amount or
concentration of trust investments or requirements relating to the titling,
storage or other manner of holding of trust assets, or (vii) the establishment
of fiduciary or other standards or responsibilities or limitations on the acts
or powers of trustees that are inconsistent with the limitations or liabilities
or authorities and powers of the Trustees set forth or referenced in this
Declaration of Trust.
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Section 7. Provisions in Conflict with Law or Regulations.
(a) The provisions of the Declaration of Trust are severable, and if
the Trustees shall determine, with the advice of counsel, that any of such
provisions is in conflict with the 1940 Act, the regulated investment company
provisions of the Internal Revenue Code of 1986, as amended (or any successor
statute thereto), and the regulations thereunder, the Delaware Act or with other
applicable laws and regulations, the conflicting provision shall be deemed never
to have constituted a part of the Declaration of Trust; provided, however, that
such determination shall not affect any of the remaining provisions of the
Declaration of Trust or render invalid or improper any action taken or omitted
prior to such determination.
(b) If any provision of the Declaration of Trust shall be held invalid
or unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of the
Declaration of Trust in any jurisdiction.
Section 8. Business Trust Only. It is the intention of the Trustees to
create a business trust pursuant to the Delaware Act. It is not the intention of
the Trustees to create a general partnership, limited partnership, joint stock
association, corporation, bailment, or any form of legal relationship other than
a business trust pursuant to the Delaware Act. Nothing in this Declaration of
Trust shall be construed to make the Shareholders, either by themselves or with
the Trustees, partners or members of a joint stock association.
[The remainder of this page has been
left blank intentionally.]
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IN WITNESS WHEREOF, the Trustee named below does hereby make and enter into
this Declaration of Trust as of the 11th day of May 1992.
/s/ Mark R. Fetting
---------------------------------------------
Name: Mark R. Fetting
Address: W. W. Scranton Office Park
30 E. D. Preate Drive
Moosic, Pennsylvania 18507-1796
THE PRINCIPAL PLACE OF BUSINESS OF THE TRUST IS:
Prudential Plaza, 751 Broad Street
Newark, New Jersey 07102-3777
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FIRST AMENDMENT
TO
AGREEMENT AND DECLARATION OF TRUST
OF
THE PRUDENTIAL INSTITUTION FUND
This First Amendment to the Agreement and Declaration of Trust (the
"Declaration of Trust") of The Prudential Institutional Fund (the "Trust") is
being executed as of July 7, 1992, for the purpose of making certain technical
amendments to Article VI of the Declaration of Trust.
NOW, THEREFORE, the undersigned does hereby direct that the Declaration of
Trust be amended as follows:
1. Section 1 of Article VI of the Declaration of Trust is hereby amended by
deleting the words "the By-Laws or in" from the fourth line thereof.
2. Section 2 of Article VI of the Declaration of Trust is hereby amended by
deleting the words "any applicable provisions of the By-Laws and" from the tenth
and eleventh lines thereof.
3. Except as amended pursuant to the foregoing paragraphs, the Deciaration
of Trust is hereby ratified and confirmed in all respects.
<PAGE>
IN WITNESS WHEREOF, the undersigned, being the sole Trustee of the Trust,
has duly executed this First Amendment to the Declaration of Trust as of the day
and year first above written.
/s/ Mark R. Fetting
-----------------------------------
Mark R. Fetting
Trustee
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BY-LAWS
OF
THE PRUDENTIAL INSTITUTIONAL FUND
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I - AGREEMENT AND DECLARATION OF TRUST 1
Section 1. Agreement and Declaration
of Trust 1
Section 2. Definitions 1
ARTICLE II - OFFICES 1
Section 1. Principal Office 1
Section 2. Registered Office and Other Office 1
ARTICLE III - SHAREHOLDERS 2
Section 1. Meetings 2
Section 2. Notice of Meetings 2
Section 3. Record Date for Meetings 3
Section 4. Proxies 3
Section 5. Inspection of Books 5
Section 6. Action without Meeting 6
Section 7. Application of this Article 6
ARTICLE IV - TRUSTEES 6
Section 1. Meetings of the Trustees 6
Section 2. Quorum and Manner of Acting 8
ARTICLE V - COMMITTEES 9
Section 1. Executive and Other Committees 9
Section 2. Meetings, Quorum and Manner of Acting 10
ARTICLE VI - OFFICERS 10
Section 1. General Provisions 10
Section 2. Term of Office and Qualifications 11
Section 3. Removal 11
Section 4. Powers and Duties of the Chairman 12
Section 5. Powers and Duties of the President 12
Section 6. Powers and Duties of the Vice
President 13
Section 7. Powers and Duties of the Treasurer 13
Section 8. Powers and Duties of the Secretary 14
Section 9. Powers and Duties of Assistant
Treasurers 14
Section 10. Powers and Duties of Assistant
Secretaries 15
Section 11. Compensation of Officers and
Trustees 15
ARTICLE VII - FISCAL YEAR 16
(i)
<PAGE>
ARTICLE VIII - SEAL 16
ARTICLE IX - WAIVERS OF NOTICE 16
ARTICLE X - CUSTODY OF SECURITIES 17
Section 1. Employment of a Custodian 17
Section 2. Action upon Termination of Custodian Agreement 17
Section 3. Provisions of Custodian Contract 18
Section 4. Central Certificate System 19
ARTICLE XI - INDEMNIFICATION OF TRUSTEES, OFFICERS, EMPLOYEES AND OTHER
AGENTS 20
Section 1. Agents, Proceedings, Expenses 20
Section 2. Indemnification 21
Section 3. Limitations, Settlements 21
Section 4. Insurance, Rights Not
Exclusive 22
Section 5. Advance of Expenses 23
Section 6. Fiduciaries of Employee
Benefit Plan 23
ARTICLE XII - AMENDMENTS 24
(ii)
<PAGE>
BY-LAWS
OF
THE PRUDENTIAL INSTITUTIONAL FUND
ARTICLE I
Agreement and Declaration of Trust
Section 1. Agreement and Declaration of Trust. These By-Laws shall be
subject to the Agreement and Declaration of Trust, as from time to time amended,
supplemented or restated (the "Declaration of Trust") of The Prudential
Institutional Fund (the "Trust").
Section 2. Definitions. Unless otherwise defined herein, the terms used
herein have the respective meanings given them in the Declaration of Trust.
ARTICLE II
Offices
Section 1. Principal Office. The principal office of the Trust shall be
located in the City of Newark, State of New Jersey, or such other location as
the Trustee may from time to time determine.
Section 2. Registered Office and Other Offices. The registered office of
the Trust shall be located in the City of Wilmington, State of Delaware or such
other location within the State of Delaware as the Trustees
<PAGE>
may from time to time determine. The Trust may establish and maintain such other
offices and places of business as the Trustees may from time to time determine.
ARTICLE III
Shareholders
Section 1. Meetings. Meetings of the Shareholders shall be held at the
principal executive offices of the Trust or at such other place within the
United States of America as the Trustees shall designate. Meetings of the
Shareholders shall be called by the Secretary whenever (i) ordered by the
Trustees or (ii) for the purpose of voting on the removal of any Trustee,
requested in writing by Shareholders holding at least ten percent (10%) of the
outstanding Shares entitled to vote. If the Secretary, when so ordered or
requested, refuses or neglects for more than 10 days to call such meetings, the
Trustees or the Shareholders so requesting, may, in the name of the Secretary,
call the meeting by giving notice thereof in the manner required when notice is
given by the Secretary.
Section 2. Notice of Meetings. Notice of all meetings of the Shareholders,
stating the time, place and purposes of the meeting, shall be given by the
Secretary by delivering or mailing, postage prepaid, to
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<PAGE>
each Shareholder at his or her address as recorded on the register of the Trust
at least (10) days and not more than ninety (90) days before the meeting. Only
the business stated in the notice of the meeting shall be considered at such
meeting. Any adjourned meeting may be held as adjourned without further notice.
No notice need be given to any Shareholder who shall have failed to inform the
Trust of his or her current address or if a written waiver of notice, executed
before or after the meeting by the Shareholder or his or her attorney thereunto
authorized, is filed with the records of the meeting.
Section 3. Record Date for Meetings. For the purpose of determining the
Shareholders who are entitled to notice of and to vote at any meeting, the
Trustees may from time to time close the transfer books for such period, not
exceeding thirty (30) days, as the Trustees may determine; or without closing
the transfer books the Trustees may fix a date not more than ninety (90) days
prior to the date of any meeting of Shareholders as a record date for the
determination of the persons to be treated as Shareholders of record for such
purpose.
Section 4. Proxies. At any meeting of Shareholders, any holder of Shares
entitled to vote thereat may vote by proxy, provided that no proxy shall be
voted at any meeting unless it shall have been placed
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<PAGE>
on file with the Secretary, or with such other officer or agent of the Trust as
the Secretary may direct, for verification prior to the time at which such vote
shall be taken; provided, however, that notwithstanding any other provision of
this Section 4 to the contrary, the Trustees may at any time adopt one or more
electronic, telecommunication or other alternatives to execution of a written
instrument that will enable holders of Shares entitled to vote at any meeting
to appoint a proxy to vote such holders' Shares at such meeting. Proxies may be
solicited in the name of one or more Trustees or one or more of the officers of
the Trust. Only Shareholders of record shall be entitled to vote. Each whole
Share shall be entitled to one vote as to any matter on which it is entitled by
the Declaration of Trust to vote, and each fractional Share shall be entitled to
a proportionate fractional vote. When any Share is held jointly by several
persons, any one of them may vote at any meeting in person or by proxy in
respect of such Share, but if more than one of them shall be present at such
meeting in person or by proxy, and such joint owners or their proxies so present
disagree as to any vote to be cast, such vote shall not be received in respect
of such Share. A proxy purporting to be executed by or on behalf of a
Shareholder shall be deemed valid unless challenged at or prior to its
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<PAGE>
exercise, and the burden of proving invalidity shall rest on the challenger. If
the holder of any such Share is a minor or a person of unsound mind, and subject
to guardianship or the legal control of any other person as regards the charge
or management of such Share, he or she may vote by his or her guardian or such
other person appointed or having such control, and such vote may be given in
person or by proxy. At all meetings of the Shareholders, unless the voting is
conducted by inspectors, all questions relating to the qualifications of voters,
the validity of proxies, and the acceptance or rejection of votes shall be
decided by the chairman of the meeting. Except as otherwise provided herein or
in the Declaration of Trust, all matters relating to the giving, voting or
validity of proxies shall be governed by the General Corporation Law of the
State of Delaware relating to proxies, and judicial interpretations thereunder,
as if the Trust were a Delaware corporation and the Shareholders were
shareholders of a Delaware corporation.
Section 5. Inspection of Books. The Trustees shall from time to time
determine whether and to what extent, and at what times and places, and under
what conditions and regulations the accounts and books of the Trust or any of
them shall be open to the inspection of the Shareholders; and no Shareholder
shall have any
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<PAGE>
right to inspect any account or book or document of the Trust except as
conferred by law or otherwise by the Trustees or by resolution of the
Shareholders.
Section 6. Action without Meeting. Any action that may be taken at any
meeting of Shareholders may be taken without a meeting and without prior notice
if a consent in writing setting forth the action so taken is signed by the
holders of outstanding Shares having not less than the minimum number of votes
that would be necessary to authorize or take that action at a meeting at which
all Shares entitled to vote on that action were present and voted. All such
consents shall be filed with the records of Shareholder meetings. Such consents
shall be treated for all purposes as a vote taken at a meeting of Shareholders.
Section 7. Application of this Article. Meetings of Shareholders shall
consist of Shareholders of any Series (or Class thereof) or of all Shareholders,
as determined pursuant to the Declaration of Trust, and this Article shall be
construed accordingly.
ARTICLE IV
Trustees
Section 1. Meetings of the Trustees. The Trustees may in their discretion
provide for regular or stated meetings of the Trustees. Notice of regular or
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<PAGE>
stated meetings need not be given. Meetings of the Trustees other than regular
or stated meetings shall be held whenever called by the Chairman, the President,
or by any two of the Trustees, at the time being in office. Notice of the time
and place of each meeting other than regular or stated meetings shall be given
by the Secretary or an Assistant Secretary or by the officer or Trustees calling
the meeting and shall be delivered or mailed, postage prepaid, to each Trustee
at least two days before the meeting, or shall be telegraphed, cabled, or wired
to each Trustee at his or her business address, or personally delivered to him
or her, at least one day before the meeting. Such notice may, however, be waived
by any Trustees. Notice of a meeting need not be given to any Trustee if a
written waiver of notice, executed by him or her before the meeting, is filed
with the records of the meeting, or to any Trustee who attends the meeting
without protesting prior thereto or at its commencement the lack of notice to
him or her. A notice or waiver of notice need not specify the purpose of any
meeting. The Trustees may meet by means of a telephone conference circuit or
similar communications equipment by means of which all persons participating in
the meeting are connected, which meeting shall be deemed to have been held at a
place designated by the Trustees at the meeting. Participation in a telephone
conference
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<PAGE>
meeting shall constitute presence in person at such meeting. Any action required
or permitted to be taken at any meeting of the Trustees may be taken by the
Trustees without a meeting if a majority of the Trustees then in office (or such
higher number of Trustees as would be required to act on the matter under the
Declaration of Trust, these By-Laws or applicable law if a meeting were held)
consent to the action in writing and the written consents are filed with the
records of the Trustees' meetings. Such consents shall be treated for all
purposes as a vote taken at a meeting of the Trustees. Notwithstanding the
foregoing, all actions of the Trustees shall be taken in compliance with the
provisions of the Investment Company Act of 1940, as amended.
Section 2. Quorum and Manner of Acting. A majority of the Trustees then in
office shall constitute a quorum for the transaction of business. If at any
meeting of the Trustees there shall be less than a quorum present, a majority of
those present may adjourn the meeting from time to time until a quorum shall be
obtained. Notice of an adjourned meeting need not be given. The act of the
majority of the Trustees present of any meeting at which there is a quorum shall
be the act of the Trustees, except as may be otherwise
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<PAGE>
specifically provided by law or by the Declaration of Trust or by these
By-Laws.
ARTICLE V
Committees
Section 1. Executive and Other Committees. The Trustees by vote of a
majority of all the Trustees may elect from their own number an Executive
Committee to consist of not less than three (3) Trustees to hold office at the
pleasure of the Trustees, which shall have the power to conduct the current and
ordinary business of the Trust while the Trustees are not in session, including
the purchase and sale of securities and the designation of securities to be
delivered upon redemption of Shares of the Trust, and such other powers of the
Trustees as the Trustees may, from time to time, delegate to them except those
powers by law, the Declaration of Trust or these By-laws they are prohibited
from delegating. The Trustees may also elect from their own number or otherwise
other Committees from time to time, the number composing such Committees, the
powers conferred upon the same (subject to the same limitations as with respect
to the Executive Committee) and the terms of membership on such Committees to be
determined by the Trustees. The Trustees may designate a chairman of any such
Committee. In the absence of
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<PAGE>
such designation the Committee may elect its own chairman.
Section 2. Meetings, Quorum and Manner of Acting. The Trustee may (1)
provide for stated meetings of any Committees, (2) specify the manner of calling
and notice required for special meeting of any Committee, (3) specify the number
of members of a Committee required to constitute a quorum and the numbers of
members of a Committee required to exercise specified powers delegated to such
Committee, (4) authorize the making of decisions to exercise specified powers by
written assent of the requisite number of members of a Committee without a
meeting, and (5) authorize the members of a Committee to meet by means of a
telephone conference circuit.
The Executive Committee shall keep regular minutes of its meetings and
records of decisions taken without a meeting and cause them to be recorded in a
book designated for that purpose and kept at the principal executive offices of
the Trust.
ARTICLE VI
Officers
Section 1. General Provisions. The officers of the Trust shall be a
President, a Treasurer and a Secretary, who shall be elected by the Trustees.
The
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<PAGE>
Trustees may elect or appoint such other officers or agents as the business of
the Trust may require, including a Chairman of the Board ("Chairman"), one or
more Vice Presidents, one or more Assistant Secretaries, and one or more
Assistant Treasurers. The Trustees may delegate to any officer or Committee the
power to appoint any subordinate officers or agents.
Section 2. Term of Office and Qualifications. Except as otherwise provided
by law, the Declaration of Trust or these By-Laws, the President, the Treasurer
and the Secretary, and all other officers shall hold office at the pleasure of
the Trustees. The Secretary and Treasurer may be the same person. A Vice
President and the Treasurer or a Vice President and the Secretary may be the
same person, but the offices of Vice President, Secretary and Treasurer shall
not be held by the same person. The President shall hold no other office. Except
as above provided, any two offices may be held by the same person. The Chairman,
if there be one, and the President shall each be a Trustee and may but need not
be a Shareholder. Any other officer may be but none need be a Trustee or
Shareholder.
Section 3. Removal. The Trustees, at any regular or special meeting of the
Trustees, may remove any officer with or without cause, by a vote of a majority
of the Trustees then in office. Any officer or
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<PAGE>
agent appointed by an officer or committee may be removed with or without cause
by such appointing officer or committee.
Section 4. Powers and Duties of the Chairman. The Chairman, if such an
officer is elected, shall if present preside at meetings of the Shareholders and
the Trustees, shall be the chief executive officer of the Trust and shall,
subject to the control of the Trustees, have general supervision, direction and
control of the business and the officers of the Trust and exercise and perform
such other powers and duties as may be from time to time assigned to him by the
Trustees or prescribed by the Declaration of Trust or these By-Laws.
Section 5. Powers and Duties of the President. Subject to the powers of the
Chairman, if there be such an officer, the President shall be the principal
executive officer of the Trust. He or she may call meetings of the Trustees and
of any Committee thereof when he or she deems it necessary and, in the absence
of the Chairman, shall preside at all meetings of the Shareholders and the
Trustees. Subject to the control of the Trustees, the Chairman and any
Committees of the Trustees, within their respective spheres, as provided by the
Trustees, the President shall at all times exercise a general supervision and
direction over the affairs of the Trust. The President shall have the
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<PAGE>
power to employ attorneys and counsel for the Trust and to employ such
subordinate officers, agents, clerks and employees as he or she may find
necessary to transact the business of the Trust. He or she shall also have the
power to grant, issue, execute or sign such powers of attorney, proxies or other
documents as may be deemed advisable or necessary in furtherance of the
interests of the Trust. The President shall have such powers and duties as from
time to time may be conferred upon or assigned to him or her by the Trustees.
Section 6. Powers and Duties of the Vice President. In the absence or
disability of the President, the Vice President or, of there be more than one
Vice President, any Vice President designated by the Trustees shall perform all
the duties and may exercise any of the powers of the President, subject to the
control of the Trustees. Each Vice President shall perform such other duties as
may be assigned to him or her from time to time by the Trustees or the
President.
Section 7. Powers and Duties of the Treasurer. The Treasurer shall be the
principal financial and accounting officer of the Trust. The Treasurer shall
deliver all funds of the Trust which may come into his or her hands to such
Custodian as the Trustees may employ pursuant to Article X of these By-Laws. He
or she shall render a statement of condition of the
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<PAGE>
finances of the Trust to the Trustee as often as they shall require the same and
he or she shall in general perform all the duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to him or
her by the Trustees. The Treasurer shall give a bond for the faithful discharge
of his or her duties, if required so to do by the Trustees, in such sum and with
such surety or sureties as the Trustees shall require.
Section 8. Powers and Duties of the Secretary. The Secretary shall keep the
minutes of all meetings of the Trustees and of the Shareholders in proper books
provided for that purpose; he or she shall have custody of the seal of the
Trust; he or she shall have charge of the Share transfer books, lists and
records unless the same are in the charge of the Transfer Agent. The Secretary
shall attend to the giving and serving of all notices by the Trust in accordance
with the provisions of these By-laws and as required by law; and subject to
these By-Laws, he or she shall in general perform all duties incident to the
office of the Secretary and such other duties as from time to time may be
assigned to him or her by the Trustees.
Section 9. Powers and Duties of Assistant Treasurers. In the absence or
disability of the Treasurer, any Assistant Treasurer designated by the
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<PAGE>
Trustees shall perform all the duties, and may exercise any of the powers, of
the Treasurer. Each Assistant Treasurer shall give a bond for the faithful
discharge of his or her duties, if required so to do by the Trustees, in such
sum and with such surety or sureties as the Trustees shall require.
Section 10. Powers and Duties of Assistant Secretaries. In the absence or
disability of the Secretary, any Assistant Secretary designated by the Trustees
shall perform all the duties, and may exercise any of the powers, of the
Secretary. Each Assistant Secretary shall perform such other duties as from time
to time may be assigned to him or her by the Trustees.
Section 11. Compensation of Officers and Trustees. Subject to any
applicable provisions of the Declaration of Trust, the compensation of the
officers and Trustees shall be fixed from time to time by the Trustees or, in
the case of officers, by any Committee or officer upon whom such power may be
conferred by the Trustees. No officer shall be prevented from receiving such
compensation as such officer by reason of the fact that he or she is also a
Trustee.
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<PAGE>
ARTICLE VII
Fiscal Year
The fiscal year of the Trust shall end on such date as the Trustees shall
from time to time determine.
ARTICLE VIII
Seal
The Trustees may adopt a seal which shall be in such form and shall have
such inscription thereon as the Trustees may from time to time prescribe.
ARTICLE IX
Waivers of Notice
Whenever any notice whatever is required to be given by law, the
Declaration of Trust or these By-laws, a waiver thereof in writing, signed by
the person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto. A notice shall be deemed to
have been telegraphed, cabled or wired for the purposes of these By-Laws when it
has been delivered to a representative of any telegraph, cable or wire company
with instructions that it be telegraphed, cabled or wired.
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<PAGE>
ARTICLE X
Custody of Securities
Section 1. Employment of a Custodian. The Trust shall place and at all
times maintain in the custody of a Custodian (including any sub-custodian for
the Custodian) all funds, securities and similar investments included in the
Trust Property. The Custodian (and any sub-custodian) shall be a bank having not
less than $20,000,000 aggregate capital, surplus and undivided profits and shall
be appointed from time to time by the Trustees, who shall fix its remuneration.
Section 2. Action upon Termination of Custodian Agreement. Upon termination
of a Custodian Agreement or inability of the Custodian to continue to serve, the
Trustees shall promptly appoint a successor custodian, but in the event that no
successor custodian can be found who has the required qualifications and is
willing to serve, the Trustees shall call as promptly as possible a special
meeting of the Shareholders to determine whether the Trust shall function
without a custodian or shall be liquidated. If so directed by a vote of holders
of the majority of the outstanding Shares entitled to vote, the Custodian shall
deliver and pay over all Trust Property held by it as specified in such vote.
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<PAGE>
Section 3. Provisions of Custodian Contract. The following provisions shall
apply to the employment of a Custodian and to any contract entered into with the
Custodian so employed: The Trustees shall cause to be delivered to the Custodian
all securities included in the Trust Property or to which the Trust may become
entitled, and shall order the same to be delivered by the Custodian only in
completion of a sale, exchange, transfer, pledge, loan of portfolio securities
to another person, or other disposition thereof, all as the Trustees may
generally or from time to time require or approve or to a successor Custodian;
and the Trustees shall cause all funds included in the Trust Property or to
which it may become entitled to be paid to the Custodian, and shall order the
same disbursed only for investment against delivery of the securities acquired
(including securities acquired under a repurchase agreement), or the return of
cash held as collateral for loans of portfolio securities, or in payment of
expenses, including management compensation, and liabilities of the Trust,
including distributions to Shareholders, or to a successor Custodian.
Notwithstanding anything to the contrary to these By-Laws, upon receipt of
proper instructions, which may be standing instructions, the Custodian may
deliver funds in the following cases. In connection with repurchase
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<PAGE>
agreements, the Custodian shall transmit prior to receipt on behalf of the Fund
of any securities or other property, funds from the Fund's custodian account to
a special custodian approved by the Trustees of the Fund, which funds shall be
used to pay for securities to be purchased by the Fund subject to the Fund's
obligation to sell and the seller's obligation to repurchase such securities. In
such case, the securities shall be held in the custody of the special custodian.
In connection with the Trust's purchase or sale of financial futures contracts,
the Custodian shall transmit, prior to receipt on behalf of the Fund of any
securities or other property, funds from the Trust's custodian account in order
to furnish and to maintain funds with brokers as margin to guarantee the
performance of the Trust's futures obligations in accordance with the applicable
requirements of commodities exchanges and brokers.
Section 4. Central Certificate System. Subject to applicable rules,
regulations and orders adopted by the Commission, the Trustees may direct the
Custodian to deposit all or any part of the securities owned by the Trust in a
system for the central handling of securities established by a national
securities exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934, or such other person as
may be permitted by the Commission,
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<PAGE>
or otherwise in accordance with the 1940 Act, pursuant to which system all
securities of any particular class or series of any issuer deposited within the
system are treated as fungible and may be transferred or pledged by bookkeeping
entry without physical delivery of such securities, provided that all such
deposits shall be subject to withdrawal only upon the order of the Trust.
ARTICLE XI
Indemnification of Trustees, Officers,
Employees and Other Agents
Section 1. Agents, Proceedings, Expenses. For the purpose of this Article,
"agent" means any Person who is or was a Trustee, officer, employee or other
agent of the Trust or is or was serving at the request of the Trust as a
trustee, director, officer, employee or agent of another organization in which
the Trust has any interest as a shareholder, creditor or otherwise; "proceeding"
means any threatened, pending or completed claim, action, suit or proceeding,
whether civil, criminal, administrative or investigative (including appeals);
and "expenses" includes, without limitation, attorneys' fees, costs, judgments,
amounts paid in settlement, fines, penalties and all other liabilities
whatsoever.
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<PAGE>
Section 2. Indemnification. Subject to the exceptions and limitation
contained in Section 3 below, every agent shall be indemnified by the Trust to
the fullest extent permitted by law against all liabilities and against all
expenses reasonably incurred or paid by him or her in connection with any
proceeding in which he or she becomes involved as a party or otherwise by virtue
of his or her being or having been an agent.
Section 3. Limitations, Settlements. No indemnification shall be provided
hereunder to an agent:
(a) who shall have been adjudicated by the court or other body before which
the proceeding was brought to be liable to the Trust or its Shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office (collectively,
"disabling conduct"); or
(b) with respect to any proceeding disposed of (whether by settlement,
pursuant to a consent decree or otherwise) without an adjudication by the court
or other body before which the proceeding was brought that such agent was liable
to the Trust or its Shareholders by reason of disabling conduct, unless there
has been a determination that such agent did not engage in disabling conduct:
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<PAGE>
(i) by the court or other body before which the proceeding was
brought;
(ii) by at least a majority of those Trustees who are neither
Interested Persons of the Trust nor are parties to the proceeding based
upon a review of readily available facts (as opposed to a full trial-type
inquiry); or
(iii) by written opinion of independent legal counsel based upon a
review of readily available facts (as opposed to a full trial-type
inquiry);
provided, however, that indemnification shall be provided hereunder to an agent
with respect to any proceeding in the event of (1) a final decision on the
merits by the court or other body before which the proceeding was brought that
the agent was not liable by reason of disabling conduct, or (2) the dismissal of
the proceeding by the court or other body before which it was brought for
insufficiency of evidence of any disabling conduct with which such agent has
been charged.
Section 4. Insurance, Rights Not Exclusive. The rights of indemnification
herein provided may be insured against by policies maintained by the Trust on
behalf of any agent, shall be severable, shall not be exclusive of or affect any
other rights to which any agent may now or
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<PAGE>
hereafter be entitled and shall inure to the benefit of the heirs, executors and
administrators of any agent.
Section 5. Advance of Expenses. Expenses incurred by an agent in
connection with the preparation and presentation of a defense to any proceeding
may be paid by the Trust from time to time prior to final disposition thereof
upon receipt of an undertaking by or on behalf of such agent that such amount
will be paid over by him or her to the Trust if it is ultimately determined that
he or she is not entitled to indemnification under this Article X; provided,
however, that (a) such agent shall have provided appropriate security for such
undertaking, (b) the Trust is insured against losses arising out of any such
advance payments or (c) either a majority of the Trustees who are neither
Interested Persons of the Trust nor parties to the proceedings, or independent
legal counsel in a written opinion, shall have determined, based upon a review
of readily available facts (as opposed to a trial-type inquiry or full
investigation), that there is reason to believe that such agent will be found
entitled to indemnification under this Article X.
Section 6. Fiduciaries of Employee Benefit Plan. The Article does not
apply to any proceeding against any Trustee, investment manager or other
fiduciary of an employee benefit plan in that person's capacity as such,
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even though that person may also be an agent of this Trust as defined in Section
1 of this Article. Nothing contained in this Article shall limit any right to
indemnification to which such Trustee, investment manager, or other fiduciary
may be entitled by contract or otherwise which shall be enforceable to the
extent permitted by applicable law other than this Article.
ARTICLE XII
Amendments
These By-Laws, or any of them, may be altered, amended or repealed, or new
By-laws may be adopted by (a) a vote of holders of the majority of the
outstanding Shares entitled to vote or (b) by the Trustees, provided, however,
that no By-law may be amended, adopted or repealed by the Trustees if such
amendment, adoption or repeal is required by applicable law, the Declaration of
Trust or these By-Laws, to be submitted to a vote of the Shareholders.
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PRUDENTIAL DRYDEN FUND
(formerly The Prudential Institutional Fund)
MANAGEMENT AGREEMENT
Agreement, made this ____ day of ______________, 1997 between Prudential
Dryden Fund, a Delaware business trust (the Trust), and Prudential Mutual Fund
Management LLC, a New York limited liability company (the Manager).
W I T N E S S E T H
WHEREAS, the Trust is a diversified, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
1940 Act);
WHEREAS, the shares of beneficial interest of the Trust are divided into
separate series or funds (each a Fund), each of which is established pursuant to
a resolution of the Trustees of the Trust, and the Trustees may from time to
time terminate such Funds or establish and terminate additional Funds; and
WHEREAS, the Trust desires to retain the Manager to render or contract to
obtain as hereinafter provided investment advisory services to the Trust, and
the Manager is willing to render such investment advisory services;
<PAGE>
NOW, THEREFORE, the parties agree as follows:
1. The Trust hereby appoints the Manager to act as manager of the Trust
and administrator of its corporate affairs for the period and on the terms set
forth in this Agreement. The Manager accepts such appointment and agrees to
render the services herein described, for the compensation herein provided. The
Manager is authorized to enter into subadvisory agreements for investment
advisory services in connection with the management of the Trust and each Fund
thereof. Any such agreement may be entered into by the Manager on such terms and
in such manner as may be permitted by the 1940 Act and the rules thereunder. The
Manager will continue to have responsibility for all investment advisory
services furnished pursuant to any such investment advisory agreements. The
Manager will review the performance of all subadvisers, as well as the
Distributor, Transfer Agent and Custodian and make recommendations to the
Trustees of the Trust with respect to the retention and renewal of contracts.
2. Subject to the supervision of the Trustees of the Trust, the Manager
shall administer the Fund's corporate affairs and, in connection therewith,
shall furnish the Fund with office facilities and with clerical, bookkeeping and
recordkeeping services at such office facilities and, subject to Section 1
hereof, the Manager shall manage the investment operations of the Trust and each
Fund thereof and the composition of each Fund's portfolio, including the
purchase, retention and disposition thereof, in accordance with the Trust's and
the Fund's investment objectives, policies and restrictions as stated in the
Prospectus (hereinafter defined) and subject to the following understandings:
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<PAGE>
(a) The Manager shall provide supervision of each Fund's investments
and determine from time to time what investments or securities will be
purchased, retained, sold or loaned by each Fund, and what portion of the
assets will be invested or held uninvested as cash.
(b) The Manager, in the performance of its duties and obligations
under this Agreement, shall act in conformity with the Declaration of
Trust, By-Laws and Prospectus (hereinafter defined) of the Trust and with
the instructions and directions of the Trustees of the Trust and will
conform to and comply with the requirements of the 1940 Act and all other
applicable federal and state laws and regulations.
(c) The Manager shall determine the securities and futures contracts
to be purchased or sold by each Fund and will place orders pursuant to its
determinations with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential Securities
Incorporated) in conformity with the policy with respect to brokerage as
set forth in the Trust's Registration Statement and Prospectus
(hereinafter defined) or as the Trustees may direct from time to time. In
providing the Trust with investment supervision, it is recognized that the
Manager will give primary consideration to securing the most favorable
price and efficient execution. Consistent with this policy, the Manager
may consider the financial responsibility, research and investment
information and other services provided by brokers, dealers or futures
commission merchants who may effect or be a party to any such transaction
or other transactions to which other clients of the Manager may be a
party. It is understood that Prudential Securities Incorporated may be
used as principal broker for securities transactions but that
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<PAGE>
no formula has been adopted for allocation of the Trust's investment
transaction business. It is also understood that it is desirable for the
Trust that the Manager have access to supplemental investment and market
research and security and economic analysis provided by brokers or futures
commission merchants and that such brokers may execute brokerage
transactions at a higher cost to the Trust than may result when allocating
brokerage to other brokers or futures commission merchants on the basis of
seeking the most favorable price and efficient execution. Therefore, the
Manager is authorized to pay higher brokerage commissions for the purchase
and sale of securities and futures contracts for the Trust to brokers or
futures commission merchants who provide such research and analysis,
subject to review by the Trustees of the Trust from time to time with
respect to the extent and continuation of this practice. It is understood
that the services provided by such broker or futures commission merchant
may be useful to the Manager in connection with its services to other
clients.
On occasions when the Manager deems the purchase or sale of a
security or a futures contract to be in the best interest of the Trust as
well as other clients of the Manager or the Subadviser, the Manager, to
the extent permitted by applicable laws and regulations, may, but shall be
under no obligation to, aggregate the securities or futures contracts to
be so sold or purchased in order to obtain the most favorable price or
lower brokerage commissions and efficient execution. In such event,
allocation of the securities or futures contracts so purchased or sold, as
well as the expenses incurred in the transaction, will be made by the
Manager or the subadviser in the manner it considers to
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<PAGE>
be the most equitable and consistent with its fiduciary obligations to the
Fund, the Trust and to such other clients.
(d) The Manager shall maintain all books and records with respect to
each Fund's portfolio transactions and shall render to the Trustees of the
Trust such periodic and special reports as the Board may reasonably
request.
(e) The Manager shall be responsible for the financial and
accounting records to be maintained by the Trust (including those being
maintained by the Trust's Custodian).
(f) The Manager shall provide the Trust's Custodian on each business
day with information relating to all transactions concerning the Trust's
assets.
(g) The investment management services of the Manager to the Trust
under this Agreement are not to be deemed exclusive, and the Manager shall
be free to render similar services to others.
3. The Trust has delivered to the Manager copies of each of the following
documents and will deliver to it all future amendments and supplements thereto,
if any:
(a) Agreement and Declaration of Trust, as filed with the Secretary
of State of Delaware (such Agreement and Declaration of Trust, as in
effect on the date hereof and as amended from time to time, are herein
called the "Declaration of Trust");
(b) By-Laws of the Trust (such By-Laws, as in effect on the date
hereof and as amended from time to time, are herein called the "By-Laws");
(c) Certified resolutions of the Trustees of the Trust authorizing
the appointment of the Manager and approving the form of this Agreement;
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<PAGE>
(d) Registration Statement under the 1940 Act and the Securities Act
of 1933, as amended, on Form N-1A (the Registration Statement), as filed
with the Securities and Exchange Commission (the Commission) relating to
the Trust and shares of beneficial interest of the Trust and all
amendments thereto;
(e) Notification of Registration of the Trust under the 1940 Act on
Form N-8A as filed with the Commission and all amendments thereto; and
(f) Prospectus of the Trust (such Prospectus and Statement of
Additional Information, each as currently in effect and as amended or
supplemented from time to time, being herein collectively called the
"Prospectus").
4. The Manager shall authorize and permit any of its directors, officers
and employees who may be elected as Trustees or officers of the Trust to serve
in the capacities in which they are elected. All services to be furnished by the
Manager under this Agreement may be furnished through the medium of any such
directors, officers or employees of the Manager.
5. The Manager shall keep the Trust's books and records required to be
maintained by it pursuant to paragraph 2 hereof. The Manager agrees that all
records which it maintains for the Trust are the property of the Trust and it
will surrender promptly to the Trust any such records upon the Trust's request,
provided however that the Manager may retain a copy of such records. The Manager
further agrees to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act any such records as are required to be maintained by the Manager
pursuant to paragraph 2 hereof.
6. During the term of this Agreement, the Manager shall pay the following
expenses:
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(i) the salaries and expenses of all personnel of the Trust and the
Manager except the fees and expenses of Trustees who are not affiliated
persons of the Manager or the Trust's investment adviser,
(ii) all expenses incurred by the Manager or by the Trust in
connection with managing the ordinary course of the Trust's business other
than those assumed by the Trust herein, and
(iii) the costs and expenses payable pursuant to any subadvisory
agreements. The Trust assumes and will pay the expenses described below:
(a) the fees and expenses incurred by the Trust in connection with
the management of the investment and reinvestment of each Fund's assets,
(b) the fees and expenses of Trustees who are not affiliated persons
of the Manager or a Fund's investment adviser,
(c) the fees and expenses of the Custodian that relate to (i) the
custodial function and the recordkeeping connected therewith, (ii)
preparing and maintaining the general accounting records of the Trust and
the providing of any such records to the Manager useful to the Manager in
connection with the Manager's responsibility for the accounting records of
the Trust pursuant to Section 31 of the 1940 Act and the rules promulgated
thereunder, (iii) the pricing of the shares of the Trust, including the
cost of any pricing service or services which may be retained pursuant to
the authorization of the Trustees of the Fund, and (iv) for both mail and
wire orders, the cashiering function in connection with the issuance and
redemption of the Trust's securities,
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<PAGE>
(d) the fees and expenses of the Trust's Transfer and Dividend
Disbursing Agent, which may be the Custodian, that relate to the
maintenance of each shareholder account,
(e) the charges and expenses of legal counsel and independent
accountants for the Trust,
(f) brokers' commissions and any issue or transfer taxes chargeable
to the Trust in connection with its securities and futures transactions,
(g) all taxes and corporate fees payable by the Trust to federal,
state or other governmental agencies,
(h) the fees of any trade associations of which the Trust may be a
member,
(i) the cost of share certificates representing, and/or
non-negotiable share deposit receipts evidencing, shares of the Trust,
(j) the cost of fidelity, directors and officers and errors and
omissions insurance,
(k) the fees and expenses involved in registering and maintaining
the registration of the Trust and of its shares with the Securities and
Exchange Commission, registering the Trust as a broker or dealer and
qualifying its shares under state securities laws, including the
preparation and printing of the Trust's registration statements,
prospectuses and statements of additional information for filing under
federal and state securities laws for such purposes,
(l) allocable communications expenses with respect to investor
services and all expenses of shareholders' and Trustees' meetings and of
preparing, printing and mailing reports to shareholders in the amount
necessary for distribution to the shareholders, and
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<PAGE>
(m) litigation and indemnification expenses and other extraordinary
expenses not incurred in the ordinary course of the Trust's business, and
(n) any expenses assumed by the Fund pursuant to a Plan of
Distribution adopted in conformity with Rule 12b-1 under the 1940 Act.
7. In the event the expenses of the Trust for any fiscal year (including
the fees payable to the Manager 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 Trust's
business) exceed the lowest applicable annual expense limitation established and
enforced pursuant to the statute or regulations of any jurisdictions in which
shares of the Trust are then qualified for offer and sale, the compensation due
the Manager will be reduced by the amount of such excess, or, if such reduction
exceeds the compensation payable to the Manager, the Manager will pay to the
Trust the amount of such reduction which exceeds the amount of such
compensation.
8. For the services provided and the expenses assumed pursuant to this
Agreement, the Trust will pay to the Manager as full compensation therefor fees
as set forth below. These fees will be computed daily and will be paid to the
Manager monthly. Any reduction in the fees payable and any payments by the
Manager to the Trust pursuant to paragraph 7 shall be made monthly. Any such
reductions or payments are subject to readjustment during the year.
Rate as a percentage of
Name of Fund average daily net assets
- ------------ ------------------------
Prudential Bond Market Index Fund .25 of 1%
Prudential Europe Index Fund .40 of 1%
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<PAGE>
Prudential Pacific Index Fund .40 of 1%
Prudential Small-Cap Index Fund .30 of 1%
9. The Manager shall not be liable for any error of judgment or for any
loss suffered by the Fund in connection with the matters to which this Agreement
relates, except a loss resulting from a breach of fiduciary duty with respect to
the receipt of compensation for services (in which case any award of damages
shall be limited to the period and the amount set forth in Section 36(b)(3) of
the 1940 Act) or loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement.
10. The Trust shall indemnify the Manager and hold it harmless from and
against all damages, liabilities, costs and expenses (including reasonable
attorneys' fees and amounts reasonably paid in settlement) incurred by the
Manager in or by reason of any pending, threatened or completed action, suit,
investigation or other proceeding (including an action or suit by or in the
right of the Trust or its security holders) arising out of or otherwise based
upon any action actually or allegedly taken or omitted to be taken by the
Manager in connection with the performance of any of its duties or obligations
under this Agreement; provided, however, that nothing contained herein shall
protect or be deemed to protect the Manager against or entitle or be deemed to
entitle the Manager to indemnification in respect of any liability to the Trust
or its security holders to which the Manager would otherwise be subject 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 duties and
obligations under this Agreement.
10
<PAGE>
11. This Agreement shall continue in effect for a period of more than two
years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Trust or any
Fund at any time, without the payment of any penalty, by the Trustees of the
Trust or by vote of a majority of the outstanding voting securities (as defined
in the 1940 Act) of a Fund, or by the Manager at any time, without the payment
of any penalty, on not more than 60 days' nor less than 30 days' written notice
to the other party. This Agreement shall terminate automatically in the event of
its assignment (as defined in the 1940 Act).
12. Nothing in this Agreement shall limit or restrict the right of any
director, officer or employee of the Manager who may also be a Trustee, officer
or employee of the Trust to engage in any other business or to devote his or her
time and attention in part to the management or other aspects of any business,
whether of a similar or dissimilar nature, nor limit or restrict the right of
the Manager to engage in any other business or to render services of any kind to
any other corporation, firm, individual or association.
13. Except as otherwise provided herein or authorized by the Trustees of
the Trust from time to time, the Manager shall for all purposes herein be deemed
to be an independent contractor and shall have no authority to act for or
represent the Trust in any way or otherwise be deemed an agent of the Trust.
14. During the term of this Agreement, the Trust agrees to furnish the
Manager at its principal office all prospectuses, proxy statements, reports to
shareholders, sales literature, or other material prepared for distribution to
shareholders of the Trust or the public, which refer in any way to the Manager,
prior to use thereof and not to use such material if the Manager
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<PAGE>
reasonably objects in writing within five business days (or such other time as
may be mutually agreed) after receipt thereof. In the event of termination of
this Agreement, the Trust will continue to furnish to the Manager copies of any
of the above mentioned materials which refer in any way to the Manager. Sales
literature may be furnished to the Manager hereunder by first class or overnight
mail, facsimile transmission equipment or hand delivery. The Trust shall furnish
or otherwise make available to the Manager such other information relating to
the business affairs of the Trust as the Manager at any time, or from time to
time, reasonably requests in order to discharge its obligations hereunder.
15. This Agreement may be amended by mutual consent, but the consent of
the Trust must be obtained in conformity with the requirements of the 1940 Act.
16. Any notice or other communication required to be given pursuant to
this Agreement shall be deemed duly given if delivered or mailed by registered
mail, postage prepaid, (1) to the Manager at Gateway Center Three, Newark, New
Jersey 07102-4071, Attention: Secretary; or (2) to the Trust at Prudential
Plaza, 751 Broad Street, Newark, NJ 07102-3777, Attention: Assistant Secretary.
17. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without reference to choice of law principles
thereof and in accordance with the 1940 Act. In the case of any conflict the
1940 Act shall control.
18. The Trust may use the name "Prudential Dryden Fund" or any name
including the word "Prudential" only for so long as this Agreement or any
extension, renewal or amendment hereof remains in effect, including any similar
agreement with any organization which shall have succeeded to the Manager's
business as Manager or any extension, renewal or amendment thereof
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<PAGE>
remain in effect. At such time as such an agreement shall no longer be in
effect, the Trust will (to the extent that it lawfully can) cease to use such a
name or any other name indicating that it is advised by, managed by or otherwise
connected with the Manager, or any organization which shall have so succeeded to
such businesses. In no event shall the Trust use the name "Prudential Dryden
Fund" or any name including the word "Prudential" if the Manager's function is
transferred or assigned to a company of which The Prudential Insurance Company
of America does not have control.
19. The Trust is a business trust organized under the Delaware Business
Trust Act pursuant to a certificate of trust dated May 11, 1992. The Trust is a
series trust and all debts, liabilities, obligations and expenses of a
particular Fund shall be enforceable only against the assets of that Fund and
not against the assets of any other Fund or of the Trust as a whole. Neither the
Trustees, officers, agents or shareholders of the Trust assume any personal
liability for obligations entered into on behalf of the Trust (or a Fund
thereof).
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IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed by their officers designated below as of the day and year first
above written.
PRUDENTIAL DRYDEN FUND
By________________________________________
Richard A. Redeker
President
PRUDENTIAL MUTUAL FUND MANAGEMENT LLC
By________________________________________
Brian M. Storms
President
14
PRUDENTIAL DRYDEN FUND
(formerly The Prudential Institutional Fund)
(Prudential Bond Market Index Fund)
(Prudential Europe Index Fund)
(Prudential Pacific Index Fund)
(Prudential Small-Cap Index Fund)
SUBADVISORY AGREEMENT
Agreement made as of this _____ day of ___________ 1997, between
Prudential Mutual Fund Management LLC, a New York limited liability company
(PMF or the Manager), and The Prudential Investment Corporation, a New Jersey
Corporation (the Subadviser).
W I T N E S S E T H
WHEREAS, the Manager has entered into a Management Agreement, dated
__________________ ____, 1997 (the Management Agreement), with Prudential Dryden
Fund (formerly The Prudential Institutional Fund) (the Trust), a Delaware
business trust and a diversified, open-end management investment company
registered under the Investment Company Act of 1940 (the 1940 Act), pursuant to
which PMF will act as Manager of the Trust;
WHEREAS, the shares of beneficial interest of the Trust are divided into
separate series or funds, each of which is established pursuant to a resolution
of the Trustees of the Trust, and the Trustees may from time to time terminate
such series or funds or establish and terminate additional series or funds;
<PAGE>
WHEREAS, the Manager desires to retain the Subadviser to provide
investment advisory services to Prudential Bond Market Index Fund, Prudential
Europe Index Fund, Prudential Pacific Index Fund and Prudential Small-Cap Index
Fund (the Funds) in connection with the management of the Trust and the
Subadviser is willing to render such investment advisory services;
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Trustees of
the Trust, the Subadviser shall manage the investment operations of the
Funds and the composition of each Fund's portfolio, including the
purchase, retention and disposition thereof, in accordance with the Funds'
investment objectives, policies and restrictions as stated in the
Prospectus (such Prospectus and Statement of Additional Information as
currently in effect and as amended or supplemented from time to time,
being herein collectively called the "Prospectus") and subject to the
following understandings:
(i) The Subadviser shall provide supervision of each Fund's
investments and determine from time to time what investments and
securities will be purchased, retained, sold or loaned by each Fund,
and what portion of the assets will be invested or held uninvested
as cash.
(ii) In the performance of its duties and obligations under
this Agreement, the Subadviser shall act in conformity with the
Declaration of Trust, By-Laws and Prospectus of each Fund and the
Trust and with the instructions and directions of the Manager and of
the Trustees of the Trust and will conform to and comply with the
requirements of the 1940 Act, the Internal Revenue Code of 1986 and
all other applicable federal and state laws and regulations.
2
<PAGE>
(iii) The Subadviser shall determine securities and futures
contracts to be purchased or sold by each Fund and will place
orders with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential
Securities Incorporated) to carry out the policy with respect to
brokerage as set forth in the Trust's Registration Statement and
Prospectus or as the Trustees may direct from time to time. In
providing each Fund with investment supervision, it is recognized
that the Subadviser will give primary consideration to securing the
most favorable price and efficient execution. Within the framework
of this policy, the Subadviser may consider the financial
responsibility, research and investment information and other
services provided by brokers, dealers or futures commission
merchants who may effect or be a party to any such transaction or
other transactions to which the Subadviser's other clients may be a
party. It is understood that Prudential Securities Incorporated may
be used as principal broker for securities transactions but that no
formula has been adopted for allocation of the Trust's investment
transaction business. It is also understood that it is desirable for
each Fund that the Subadviser have access to supplemental investment
and market research and security and economic analysis provided by
brokers or futures commission merchants who may execute brokerage
transactions at a higher cost to the Funds than may result when
allocating brokerage to other brokers on the basis of seeking the
most favorable price and efficient execution. Therefore, the
Subadviser is authorized to place orders for the
3
<PAGE>
purchase and sale of securities and futures contracts for the Funds
with such brokers or futures commission merchants, subject to review
by the Trustees of the Trust from time to time with respect to the
extent and continuation of this practice. It is understood that the
services provided by such brokers or futures commission merchants
may be useful to the Subadviser in connection with the Subadviser's
services to other clients.
On occasions when the Subadviser deems the purchase or sale of
a security or futures contract to be in the best interest of the
Funds as well as other clients of the Subadviser, the Subadviser, to
the extent permitted by applicable laws and regulations, may, but
shall be under no obligation to, aggregate the securities or futures
contracts to be sold or purchased in order to obtain the most
favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the securities or futures
contracts so purchased or sold, as well as the expenses incurred in
the transaction, will be made by the Subadviser in the manner the
Subadviser considers to be the most equitable and consistent with
its fiduciary obligations to each Fund, the Trust and to such other
clients.
(iv) The Subadviser shall maintain all books and records with
respect to each Fund's portfolio transactions required by
subparagraphs (b)(5), (6), (7), (9), (10) and (11) and paragraph (f)
of Rule 31a-1 under the 1940 Act and shall render to the Trustees of
the Trust such periodic and special reports as the Board may
reasonably request.
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<PAGE>
(v) The Subadviser shall provide the Trust's Custodian on each
business day with information relating to all transactions
concerning each Fund's assets and shall provide the Manager with
such information upon request of the Manager.
(vi) The investment management services provided by the Subadviser
hereunder are not to be deemed exclusive, and the Subadviser shall
be free to render similar services to others.
(b) The Subadviser shall authorize and permit any of its directors,
officers and employees who may be elected as Trustees or officers of the
Trust to serve in the capacities in which they are elected. Services to be
furnished by the Subadviser under this Agreement may be furnished through
the medium of any of such directors, officers or employees.
(c) The Subadviser shall keep the Trust's books and records required to be
maintained by the Subadviser pursuant to paragraph 1(a)(iv) hereof and
shall timely furnish to the Manager all information relating to the
Subadviser's services hereunder needed by the Manager to keep the other
books and records of the Trust required by Rule 31a-1 under the 1940 Act.
The Subadviser agrees that all records which it maintains for the Trust
are the property of the Trust and the Subadviser will surrender promptly
to the Trust any of such records upon the Trust's request, provided
however that the Subadviser may retain a copy of such records. The
Subadviser further agrees to preserve for the periods prescribed by Rule
31a-2 of the Commission under the 1940 Act any such records as are
required to be maintained by it pursuant to paragraph 1(a)(iv) hereof.
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<PAGE>
2. The Manager shall continue to have responsibility for all services to
be provided to the Trust pursuant to the Management Agreement and shall oversee
and review the Subadviser's performance of its duties under this Agreement.
3. The Manager shall reimburse the Subadviser for reasonable costs and
expenses incurred by the Subadviser determined in a manner acceptable to the
Manager in furnishing the services provided in paragraph 1 hereof.
4. The Subadviser shall not be liable for any error of judgment or for any
loss suffered by each Fund or the Manager in connection with the matters to
which this Agreement relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the Subadviser's part in the performance of its
duties or from its reckless disregard of its obligations and duties under this
Agreement.
5. This Agreement shall continue in effect for a period of more than two
years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by each Fund at any
time, without the payment of any penalty, by the Trustees of the Trust or by
vote of a majority of the outstanding voting securities (as defined in the 1940
Act) of each Fund, or by the Manager or the Subadviser at any time, without the
payment of any penalty, on not more than 60 days' nor less than 30 days' written
notice to the other party. This Agreement shall terminate automatically in the
event of its assignment (as defined in the 1940 Act) or upon the termination of
the Management Agreement.
6. Nothing in this Agreement shall limit or restrict the right of any of
the Subadviser's directors, officers, or employees who may also be a Trustee,
officer or employee of
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<PAGE>
the Trust to engage in any other business or to devote his or her time and
attention in part to the management or other aspects of any business, whether of
a similar or a dissimilar nature, nor limit or restrict the Subadviser's right
to engage in any other business or to render services of any kind to any other
corporation, firm, individual or association.
7. During the term of this Agreement, the Manager agrees to furnish the
Subadviser at its principal office all prospectuses, proxy statements, reports
to shareholders, sales literature or other material prepared for distribution to
shareholders of the Funds or the public, which refer to the Subadviser in any
way, prior to use thereof and not to use material if the Subadviser reasonably
objects in writing five business days (or such other time as may be mutually
agreed) after receipt thereof. Sales literature may be furnished to the
Subadviser hereunder by first-class or overnight mail, facsimile transmission
equipment or hand delivery.
8. Any notice or other communication required to be given pursuant to this
Agreement shall be deemed duly given if delivered or mailed by registered mail,
postage prepaid, (1) to the Manager at Gateway Center Three, Newark, New Jersey
07102-4077, Attention: Secretary; or (2) to the Subadviser at Prudential Plaza,
751 Broad Street, Newark, NJ 07102-3777, Attention: President.
9. This Agreement may be amended by mutual consent, but the consent of the
Fund must be obtained in conformity with the requirements of the 1940 Act.
10. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without reference to choice of law principles
thereof and in accordance with the 1940 Act. In the case of any conflict the
1940 Act shall control.
7
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
PRUDENTIAL MUTUAL FUND MANAGEMENT LLC
By ______________________________________________
Brian M. Storms
President
THE PRUDENTIAL INVESTMENT CORPORATION
By ___________________________________________
Jonathan M. Greene
Senior Vice President
8
PRUDENTIAL DRYDEN FUND
(formerly the Prudential Institutional Fund)
Distribution Agreement
Agreement made as of February 19, 1997 between Prudential Dryden Fund,
a Delaware business trust (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, Class Z and Class I
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 tot 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
[1]
<PAGE>
distribution of such classes and/or series of Shares and the maintenance of
related shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
The Fund hereby appoints the Distributor as the principal underwriter
and distributor of the Shares of the Fund to sell Shares to the public on behalf
of the Fund and the Distributor hereby accepts such appointment and agrees to
act hereunder. The Fund hereby agrees during the term of the Agreement to sell
Shares of the Fund through the Distributor on the terms and conditions set forth
below.
Section 2. Exclusive Nature of Duties
The Distributor shall be the exclusive representative of the Fund to
act as principal underwriter and distributor of the Fund's Shares, except that:
2.1 The exclusive rights granted to the Distributor to sell Shares of
the Fund shall not apply to Shares of the Fund issued in connection with the
merger or consolidation of any other investment company or personal holding
company with the Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding shares of any such company by
the Fund.
2.2 Such exclusive rights shall not apply to Shares issued by the Fund
pursuant to reinvestment of dividends or capital gains distributions or through
the exercise of any conversion feature or exchange privilege.
2.3 Such exclusive rights shall not apply to Shares issued by the Fund
pursuant to the reinstatement privilege afforded redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases made through the
Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean the
Prospectus and Statement of Additional Information included as part of the
Fund's
[2]
<PAGE>
Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. Purchase of Shares from the Fund
3.1 The Distributor shall have the right to buy from the Fund on behalf
of investors the Shares needed, but not more than the Shares needed (except for
clerical errors in transmission) to fill unconditional orders for Shares placed
with the Distributor by investors or registered and qualified securities dealers
and other financial institutions (selected dealers).
3.2 The Shares shall be sold by the Distributor on behalf of the Fund
and delivered by the Distributor or selected dealers, as described in Section
6.4 hereof, to investors at the offering price as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of any or all
classes and/or series of its Shares at times when redemption is suspended
pursuant to the conditions in Section 4.3 hereof or at such other times as may
be determined by the Trustees. The Fund shall also have the right to suspend the
sale of any or all classes and/or series of its Shares if a banking moratorium
shall have been declared by federal or New York authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Shares received by
the Distributor. Any order may be rejected by the Fund; provided, however, that
the Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Shares. The Fund (or its agent) will confirm
orders upon their receipt, will make appropriate book entries and upon receipt
by the Fund (or its agent) of payment therefor, will deliver deposit receipts
for such Shares pursuant to the instructions of the Distributor. Payment shall
be made to the Fund in New York Clearing House funds or federal funds. The
[3]
<PAGE>
Distributor agrees to cause such payment and such instructions to be delivered
promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Shares by the Fund
4.1 Any of the outstanding Shares may be tendered for redemption at any
time, and the Fund agrees to repurchase or redeem the Shares so tendered in
accordance with Declaration of Trust as amended from time to time, and in
accordance with the applicable provisions of the Prospectus. The price to be
paid to redeem or repurchase the Shares shall be equal to the net asset value
determined as set forth in the Prospectus. All payments by the Fund hereunder
shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
on or before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Shares shall be
paid by the Fund as follows: (i) in the case of Shares subject to a contingent
deferred sales charge, any applicable contingent deferred sales charge shall be
paid to the Distributor, and the balance shall be paid to or for the account of
the redeeming shareholder, in each case in accordance with applicable provisions
of the Prospectus; and (ii) in the case of all other Shares, proceeds shall be
paid to or for the account of the redeeming shareholder, in each case in
accordance with applicable provisions of the Prospectus.
4.3 Redemption of any class and/or series of Shares or payment may be
suspended at times when the New York Stock Exchange is closed for other than
customary weekends and holidays, when trading on said Exchange is restricted,
when an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or during any
other period when the Securities and Exchange Commission, by order, so permits.
Section 5. Duties of the Fund
[4]
<PAGE>
5.1 Subject to the possible suspension of the sale of Shares as
provided herein, the Fund agrees to sell its Shares so long as it has Shares of
the respective class and/or series available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Shares, and this shall
include one certified copy, upon request by the Distributor, of all financial
statements prepared for the Fund by independent public accountants. The Fund
shall make available to the Distributor such number of copies of its Prospectus
and annual and interim reports as the Distributor shall reasonably request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Trustees 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 the 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 Declaration of Trust
or By-Laws to comply with the laws of any state, to maintain an office in any
state, to change the terms of the offering of its Shares in any state from the
terms set forth in its Registration Statement, to qualify as a foreign
corporation in any state or to consent to service of process in any state other
than with respect to claims arising out of the offering of its Shares. Any such
qualification may be withheld, terminated or withdrawn by the Fund at any time
in its discretion. As provided in Section 9 hereof, the expense of qualification
and maintenance of
[5]
<PAGE>
qualification shall be borne by the Fund. The Distributor shall furnish such
information and other material relating to its affairs and activities as may be
required by the Fund in connection with such qualifications.
Section 6. Duties of the Distributor
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Shares, but shall not be obligated to sell any specific number of
Shares. Sales of the Shares shall be on the terms described in the Prospectus.
The Distributor may enter into like arrangements with other investment
companies. The Distributor shall compensate the selected dealers as set forth in
the Prospectus.
6.2 In selling the Shares, the Distributor shall use its best efforts
in all respects duly to conform with the requirements of all federal and state
laws relating to the sale of such securities. Neither the Distributor nor any
selected dealer nor any other person is authorized by the Fund to give any
information or make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of the National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected dealer
agreements with registered and qualified securities dealers and other financial
institutions of its choice for the sale of Shares, provided that the Fund shall
approve the forms of such agreements. Within the United States, the Distributor
shall offer and sell Shares only to such selected dealers as are members in good
standing of the NASD. Shares sold to selected dealers shall be for resale by
such dealers only at the offering price determined as set forth in the
Prospectus.
Section 7. Payments to the Distributor
[6]
<PAGE>
7.1 With respect to classes and/or series of Shares which impose a
front-end sales charge, the Distributor shall receive and may retain any portion
of any front-end sales charge which is imposed on such sales and not reallocated
to selected dealers as set forth in the Prospectus, subject to the limitations
of Article III, Section 26 of the NASD Rules of Fair Practice. Payment of these
amounts to the Distributor is not contingent upon the adoption or continuation
of any applicable Plans.
7.2 With respect to classes and/or series of Shares which impose a
contingent deferred sales charge, the Distributor shall receive and may retain
any contingent deferred sales charge which is imposed on such sales as set forth
in the Prospectus, subject to the limitation 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 Trustees 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
Trustees or any agent or representative of the Fund, the Distributor shall
provide such additional information as may reasonably be requested concerning
the activities of the Distributor hereunder and the costs incurred in performing
such activities with respect to the relevant class and/or series of Shares.
Section 9. Allocation of Expenses
[7]
<PAGE>
The Fund shall bear all costs and expenses of the continuous offering
of its Shares (except for those costs and expenses borne by the Distributor
pursuant to a Plan and subject to the requirements of Rule 12b-1 under the
Investment Company Act), including fees and disbursements of its counsel and
auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and all amendments and supplements thereto, and preparing
and mailing annual and periodic reports and proxy materials to shareholders
(including but not limited to the expense of setting in type any such
Registration Statements, Prospectuses, annual or periodic reports or proxy
materials). The Fund shall also bear the cost of expenses of qualification of
the Shares for sale, and, if necessary or advisable in connection therewith, of
qualifying the Fund as a broker or dealer, in such states of the United States
or other jurisdictions as shall be selected by the Fund and the Distributor
pursuant to Section 5.4 hereof and the cost and expense payable to each such
state for continuing qualification therein until the Fund decides to discontinue
such qualification pursuant to Section 5.4 hereof. As set forth in Section 8
above, the Fund shall also bear the expenses it assumes pursuant to any Plan, so
long as such Plan is in effect.
Section 10. Indemnification
10.1 The Fund agrees to indemnify, defend and hold the Distributor, its
officers and directors and any person who controls the Distributor within the
meaning of Section 15 of the Securities Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any
reasonable counsel fees incurred in connection therewith) which the Distributor,
its officers, directors or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, except insofar as such claims,
demands, liabilities or expenses arise out of or are based upon any such untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in
[8]
<PAGE>
conformity with information furnished in writing by the Distributor to the Fund
for use in the Registration Statement or Prospectus; provided, however, that
this indemnity agreement shall not inure to the benefit of any such officer,
director, trustee or controlling person unless a court of competent jurisdiction
shall determine in a final decision on the merits, that the person to be
indemnified was not liable by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations under the 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 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 any
such controlling person, such notification to be given by letter or telegram
addressed to the Fund at its principal business office. The Fund agrees promptly
to notify the Distributor of the commencement of any litigation or proceedings
against it or any of its officers or directors in connection with the issue and
sale of any Shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund, its
officers and Trustees 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 Trustees 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 Trustees or officers or such
controlling person resulting from such claims or demands shall arise out of or
be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration
[9]
<PAGE>
Statement or Prospectus or shall arise out of or be based upon any alleged
omission to state a material fact in connection with such information required
to be stated in the Registration Statement or Prospectus or necessary to make
such information not misleading. The Distributor's agreement to indemnify the
Fund, its officers and Trustees 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 Trustees 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 Trustees 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 Trustees who are not parties
to the Agreement or interested persons of any such parties and who have no
direct or indirect financial interest in the Agreement or in the operation of
any of the Fund's Plans or in any agreement related thereto (Independent
Trustees), 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 Trustees or by vote of a
majority of the outstanding voting securities of the applicable class and/or
series of the Fund, or by the Distributor, on sixty (60) days' written notice to
the other party. This Agreement shall automatically terminate in the event of
its assignment.
11.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding voting securities," when used in the
Agreement, shall have the respective meanings specified in the Investment
Company Act.
[10]
<PAGE>
Section 12. Amendments to this Agreement
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Trustees 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
Trustees 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 the
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
the accordance with the laws of the State of New York as at the time in effect
and the applicable provisions of the Investment Company Act. To the extent that
the applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
[11]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written
PRUDENTIAL SECURITIES INCORPORATED
By:
-------------------------------
Robert F. Gunia
Senior Vice President
PRUDENTIAL DRYDEN FUND
By:
-------------------------------
Richard A. Redeker
President
[12]
CUSTODIAN CONTRACT
Between
THE PRUDENTIAL INSTITUTIONAL FUND
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
Page
----
1. Employment of Custodian and Property to be Held By
It ................................................................. 1
2. Duties of the Custodian with Respect to Property
of the Fund Held by the Custodian in the United States ............. 3
2.1 Holding Securities ........................................ 3
2.2 Delivery of Securities .................................... 3
2.3 Registration of Securities ................................ 8
2.4 Bank Accounts ............................................. 9
2.5 Availability of Federal Funds ............................. 10
2.6 Collection of Income ...................................... 11
2.7 Payment of Fund Monies .................................... 11
2.8 Liability for Payment in Advance of
Receipt of Securities Purchased ........................... 15
2.9 Appointment of Agents ..................................... 15
2.10 Deposit of Fund Assets in Securities System ............... 15
2.l0A Fund Assets Held in the Custodian's Direct
Paper System .............................................. 18
2.11 Segregated Account ........................................ 20
2.12 Ownership Certificates for Tax Purposes ................... 22
2.13 Proxies ................................................... 22
2.14 Communications Relating to Portfolio
Securities ................................................ 22
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States ......................... 23
3.1 Appointment of Foreign Sub-Custodians ..................... 23
3.2 Assets to be Held ......................................... 24
3.3 Foreign Securities Depositories ........................... 24
3.4 Segregation of Securities ................................. 24
3.5 Agreements with Foreign Banking Institutions .............. 25
3.6 Access of Independent Accountants of the Fund ............. 26
3.7 Reports by Custodian ...................................... 26
3.8 Transactions in Foreign Custody Account ................... 26
3.9 Liability of Foreign Sub-Custodians ....................... 27
3.10 Liability of Custodian .................................... 28
3.11 Reimbursement for Advances ................................ 29
3.12 Monitoring Responsibilities ............................... 29
3.13 Branches of U.S. Banks .................................... 30
3.14 Tax Law ................................................... 31
4. Payments for Sales or Repurchase or Redemptions
of Shares of the Fund .............................................. 31
5. Proper Instructions ................................................ 32
6. Actions Permitted Without Express Authority ........................ 33
7. Evidence of Authority .............................................. 34
<PAGE>
8. Duties of Custodian With Respect to the Books of Account
and Calculation of Net Asset Value and Net Income .................. 34
9. Records ............................................................ 35
10. Opinion of Fund's Independent Accountants .......................... 36
11. Reports to Fund by Independent Public Accountants .................. 36
12. Compensation of Custodian .......................................... 36
13. Responsibility of Custodian ........................................ 37
14. Effective Period, Termination and Amendment ........................ 39
15. Successor Custodian ................................................ 40
16. Interpretive and Additional Provisions ............................. 42
17. Additional Funds ................................................... 42
18. Massachusetts Law to Apply ......................................... 43
19. Prior Contracts .................................................... 43
<PAGE>
CUSTODIAN CONTRACT
This Contract between The Prudential Institutional Fund, a business
trust organized and existing under the laws of Delaware, having its principal
place of business at 751 Broad Street, Newark, New Jersey 07102 hereinafter
called the "Fund", and State Street Bank and Trust Company, a Massachusetts
trust company, having its principal place of business at 225 Franklin Street,
Boston, Massachusetts, 02110, hereinafter called the "Custodian",
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund intends to initially offer shares in seven series,
the Growth Stock Fund, Stock Index Fund, International Stock Fund, Balanced
Fund, Active Balanced Fund, Bond Fund and Money Market Fund (such series
together with all other series subsequently established by the Fund and made
subject to this Contract in accordance with paragraph 17, being herein referred
to as the "Portfolio(s)");
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of the assets
of the Portfolios of the Fund, including securities
<PAGE>
which the Fund, on behalf of the applicable Portfolio desires to be held in
places within the United States ("domestic securities") and securities it
desires to be held outside the United States ("foreign securities") pursuant to
the provisions of the Declaration of Trust. The Fund on behalf of the
Portfolio(s) agrees to deliver to the Custodian all securities and cash of the
Portfolios, and all payments of income, payments of principal or capital
distributions received by it with respect to all securities owned by the
Portfolio(s) from time to time, and the cash consideration received by it for
such new or treasury shares of beneficial interest of the Fund representing
interests in the Portfolios, ("Shares") as may be issued or sold from time to
time. The Custodian shall not be responsible for any property of a Portfolio
held or received by the Portfolio and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article
5), the Custodian shall on behalf of the applicable Portfolio(s) from time to
time employ one or more sub-custodians, located in the United States but only in
accordance with an applicable vote by the Board of Trustees of the Fund on
behalf of the applicable Portfolio(s), and provided that the Custodian shall
have no more or less responsibility or liability to the Fund on account of any
actions or omissions of any sub-custodian so employed than any such
sub-custodian has to the Custodian. The Custodian may employ as sub-custodian
for the Fund's foreign securities on behalf of the applicable Portfolio(s) the
foreign banking institutions and foreign securities depositories
-2-
<PAGE>
designated in Schedule A hereto but only in accordance with the provisions of
Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By the
Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate for
the account of each Portfolio all non-cash property, to be held by it in
the United States including all domestic securities owned by such
Portfolio, other than (a) securities which are maintained pursuant to
Section 2.10 in a clearing agency which acts as a securities depository or
in a book-entry system authorized by the U.S. Department of the Treasury,
collectively referred to herein as "Securities System" and (b) commercial
paper of an issuer for which State Street Bank and Trust Company acts as
issuing and paying agent ("Direct Paper") which is deposited and/or
maintained in the Direct Paper System of the Custodian pursuant to Section
2.l0A.
2.2 Delivery of Securities. The Custodian shall release and deliver domestic
securities owned by a Portfolio held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper book
entry system account ("Direct Paper System Account") only upon receipt of
Proper Instructions from the Fund on behalf of the applicable Portfolio,
which may be continuing instructions when deemed appropriate by the
parties, and only in the following cases:
-3-
<PAGE>
1) Upon sale of such securities for the account of the Portfolio and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Portfolio;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other similar
offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of the
Portfolio or into the name of any nominee or nominees of the Custodian
or into the name or nominee name of any agent appointed pursuant to
Section 2.9 or into the name or nominee name of any sub-custodian
appointed pursuant to Article 1; or for exchange for a different
number of bonds, certificates or other
-4-
<PAGE>
evidence representing the same aggregate face amount or number of
units; provided that, in any such case, the new securities are to be
delivered to the Custodian;
7) Upon the sale of such securities for the account of the Portfolio, to
the broker or its clearing agent, against a receipt, for examination
in accordance with "street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or liability for any
loss arising from the delivery of such securities prior to receiving
payment for such securities except as may arise from the Custodian's
own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions
for conversion contained in such securities, or pursuant to any
deposit agreement; provided that, in any such case, the new securities
and cash, if any, are to be delivered to the Custodian;
-5-
<PAGE>
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar securities
or the surrender of interim receipts or temporary securities for
definitive securities; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of securities made by the
Portfolio, but only against receipt of adequate collateral as agreed
upon from time to time by the Custodian and the Fund on behalf of the
Portfolio, which may be in the form of cash or obligations issued by
the United States government, its agencies or instrumentalities,
except that in connection with any loans for which collateral is to be
credited to the Custodian's account in the book-entry system
authorized by the U.S. Department of the Treasury, the Custodian will
not be held liable or responsible for the delivery of securities owned
by the Portfolio prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by the Fund
on behalf of the Portfolio requiring a pledge of assets by the
-6-
<PAGE>
Fund on behalf of the Portfolio, but only against receipt of amounts
borrowed;
12) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the "Exchange
Act") and a member of The National Association of Securities Dealers,
Inc. ("NASD"), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national securities
exchange, or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Portfolio of the Fund;
13) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange Act,
relating to compliance with the rules of the Commodity Futures Trading
Commission and/or any Contract Market, or any similar organization or
organizations, regarding account deposits in connection with
transactions by the Portfolio of the Fund;
-7-
<PAGE>
14) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the Fund, for delivery to such Transfer Agent or to the
holders of shares in connection with distributions in kind, as may be
described from time to time in the currently effective prospectus and
statement of additional information of the Fund, related to the
Portfolio ("Prospectus"), in satisfaction of requests by holders of
Shares for repurchase or redemption; and
15) For any other proper corporate purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund on behalf of the
applicable Portfolio, a certified copy of a resolution of the Board of
Trustees or of the Executive Committee signed by an officer of the
Fund and certified by the Secretary or an Assistant Secretary,
specifying the securities of the Portfolio to be delivered, setting
forth the purpose for which such delivery is to be made, declaring
such purpose to be a proper corporate purpose, and naming the person
or persons to whom delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be
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registered in the name of the Portfolio or in the name of any nominee of
the Fund on behalf of the Portfolio or of any nominee of the Custodian
which nominee shall be assigned exclusively to the Portfolio, unless the
Fund has authorized in writing the appointment of a nominee to be used in
common with other registered investment companies having the same
investment adviser as the Portfolio, or in the name or nominee name of any
agent appointed pursuant to Section 2.9 or in the name or nominee name of
any sub-custodian appointed pursuant to Article 1. All securities accepted
by the Custodian on behalf of the Portfolio under the terms of this
Contract shall be in "street name" or other good delivery form. If,
however, the Fund directs the Custodian to maintain securities in "street
name", the Custodian shall utilize its best efforts only to timely collect
income due the Fund on such securities and to notify the Fund on a best
efforts basis only of relevant corporate actions including, without
limitation, pendency of calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of each Portfolio of
the Fund, subject only to draft or order by the Custodian acting pursuant
to the terms of this Contract, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from or for the
account of the Portfolio,
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other than cash maintained by the Portfolio in a bank account established
and used in accordance with Rule 17f-3 under the Investment Company Act of
1940. Funds held by the Custodian for a Portfolio may be deposited by it to
its credit as Custodian in the Banking Department of the Custodian or in
such other banks or trust companies as it may in its discretion deem
necessary or desirable; provided, however, that every such bank or trust
company shall be qualified to act as a custodian under the Investment
Company Act of 1940 and that each such bank or trust company and the funds
to be deposited with each such bank or trust company shall on behalf of
each applicable Portfolio be approved by vote of a majority of the Board of
Trustees of the Fund. Such funds shall be deposited by the Custodian in its
capacity as Custodian and shall be withdrawable by the Custodian only in
that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund on
behalf of each applicable Portfolio and the Custodian, the Custodian shall,
upon the receipt of Proper Instructions from the Fund on behalf of a
Portfolio, make federal funds available to such Portfolio as of specified
times agreed upon from time to time by the Fund and the Custodian in the
amount of checks received in payment for Shares of such Portfolio which are
deposited into the Portfolio's account.
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2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to registered domestic securities held hereunder to which each
Portfolio shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and
other payments with respect to bearer domestic securities if, on the date
of payment by the issuer, such securities are held by the Custodian or its
agent thereof and shall credit such income, as collected, to such
Portfolio's custodian account. Without limiting the generality of the
foregoing, the Custodian shall detach and present for payment all coupons
and other income items requiring presentation as and when they become due
and shall collect interest when due on securities held hereunder. Income
due each Portfolio on securities loaned pursuant to the provisions of
Section 2.2 (10) shall be the responsibility of the Fund. The Custodian
will have no duty or responsibility in connection therewith, other than to
provide the Fund with such information or data as may be necessary to
assist the Fund in arranging for the timely delivery to the Custodian of
the income to which the Portfolio is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from the Fund
on behalf of the applicable Portfolio, which may be continuing instructions
when
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deemed appropriate by the parties, the Custodian shall pay out monies of a
Portfolio in the following cases only:
1) Upon the purchase of domestic securities, options, futures contracts
or options on futures contracts for the account of the Portfolio but
only (a) against the delivery of such securities or evidence of title
to such options, futures contracts or options on futures contracts to
the Custodian (or any bank, banking firm or trust company doing
business in the United States or abroad which is qualified under the
Investment Company Act of 1940, as amended, to act as a custodian and
has been designated by the Custodian as its agent for this purpose)
registered in the name of the Portfolio or in the name of a nominee of
the Custodian referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a Securities
System, in accordance with the conditions set forth in Section 2.10
hereof; (c) in the case of a purchase involving the Direct Paper
System, in accordance with the conditions set forth in Section 2.l0A;
(d) in the case of repurchase agreements entered into between the Fund
on behalf of the Portfolio and the
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Custodian, or another bank, or a broker-dealer which is a member of
NASD, (i) against delivery of the securities either in certificate
form or through an entry crediting the Custodian's account at the
Federal Reserve Bank with such securities or (ii) against delivery of
the receipt evidencing purchase by the Portfolio of securities owned
by the Custodian along with written evidence of the agreement by the
Custodian to repurchase such securities from the Portfolio or (e) for
transfer to a time deposit account of the Fund in any bank, whether
domestic or foreign; such transfer may be effected prior to receipt of
a confirmation from a broker and/or the applicable bank pursuant to
Proper Instructions from the Fund as defined in Article 5;
2) In connection with conversion, exchange or surrender of securities
owned by the Portfolio as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued by the Portfolio as
set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the Portfolio,
including but not
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limited to the following payments for the account of the Portfolio:
interest, taxes, management, accounting, transfer agent and legal
fees, and operating expenses of the Fund whether or not such expenses
are to be in whole or part capitalized or treated as deferred
expenses;
5) For the payment of any dividends on Shares of the Portfolio declared
pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in addition to
Proper Instructions from the Fund on behalf of the Portfolio, a
certified copy of a resolution of the Board of Trustees or of the
Executive Committee of the Fund signed by an officer of the Fund and
certified by its Secretary or an Assistant Secretary, specifying the
amount of such payment, setting forth the purpose for which such
payment is to be made, declaring such purpose to be a proper purpose,
and naming the person or persons to whom such payment is to be made.
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2.8 Liability for Payment in Advance of Receipt of Securities Purchased. Except
as specifically stated otherwise in this Contract, in any and every case
where payment for purchase of domestic securities for the account of a
Portfolio is made by the Custodian in advance of receipt of the securities
purchased in the absence of specific written instructions from the Fund on
behalf of such Portfolio to so pay in advance, the Custodian shall be
absolutely liable to the Fund for such securities to the same extent as if
the securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of 1940,
as amended, to act as a custodian, as its agent to carry out such of the
provisions of this Article 2 as the Custodian may from time to time direct;
provided, however, that the appointment of any agent shall not relieve the
Custodian of its responsibilities or liabilities hereunder.
2.10 Deposit of Fund Assets in Securities Systems. The Custodian may deposit
and/or maintain securities owned by a Portfolio in a clearing agency
registered with the Securities and Exchange Commission under Section 17A of
the Securities Exchange Act of 1934, which acts as a securities depository,
or in the book-entry system authorized by the U.S. Department of the
Treasury and
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certain federal agencies, collectively referred to herein as "Securities
System" in accordance with applicable Federal Reserve Board and Securities
and Exchange Commission rules and regulations, if any, and subject to the
following provisions:
1) The Custodian may keep securities of the Portfolio in a
Securities System provided that such securities are represented
in an account ("Account") of the Custodian in the Securities
System which shall not include any assets of the Custodian other
than assets held as a fiduciary, custodian or otherwise for
customers;
2) The records of the Custodian with respect to securities of the
Portfolio which are maintained in a Securities System shall
identify by book-entry those securities belonging to the
Portfolio;
3) The Custodian shall pay for securities purchased for the account
of the Portfolio upon (i) receipt of advice from the Securities
System that such securities have been transferred to the Account,
and (ii) the making of an entry on the records of the Custodian
to reflect such payment and transfer for the account of the
Portfolio. The Custodian shall transfer securities sold
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for the account of the Portfolio upon (i) receipt of advice from
the Securities System that payment for such securities has been
transferred to the Account, and (ii) the making of an entry on
the records of the Custodian to reflect such transfer and payment
for the account of the Portfolio. Copies of all advices from the
Securities System of transfers of securities for the account of
the Portfolio shall identify the Portfolio, be maintained for the
Portfolio by the Custodian and be provided to the Fund at its
request. Upon request, the Custodian shall furnish the Fund on
behalf of the Portfolio confirmation of each transfer to or from
the account of the Portfolio in the form of a written advice or
notice and shall furnish to the Fund on behalf of the Portfolio
copies of daily transaction sheets reflecting each day's
transactions in the Securities System for the account of the
Portfolio;
4) The Custodian shall provide the Fund for the Portfolio with any
report obtained by the Custodian on the Securities System's
accounting system, internal accounting control and procedures for
safeguarding securities deposited in the Securities System;
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5) The Custodian shall have received from the Fund on behalf of the
Portfolio the initial or annual certificate, as the case may be,
required by Article 14 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for the benefit of the
Portfolio for any loss or damage to the Portfolio resulting from
use of the Securities System by reason of any negligence,
misfeasance or misconduct of the Custodian or any of its agents
or of any of its or their employees or from failure of the
Custodian or any such agent to enforce effectively such rights as
it may have against the Securities System; at the election of the
Fund, it shall be entitled to be subrogated to the rights of the
Custodian with respect to any claim against the Securities System
or any other person which the Custodian may have as a consequence
of any such loss or damage if and to the extent that the
Portfolio has not been made whole for any such loss or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System The Custodian may
deposit and/or maintain securities owned by a Portfolio in the Direct
Paper System of the Custodian subject to the following provisions:
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1) No transaction relating to securities in the Direct Paper System will
be effected in the absence of Proper Instructions from the Fund on
behalf of the Portfolio;
2) The Custodian may keep securities of the Portfolio in the Direct Paper
System only if such securities are represented in an account
("Account") of the Custodian in the Direct Paper System which shall
not include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Portfolio;
4) The Custodian shall pay for securities purchased for the account of
the Portfolio upon the making of an entry on the records of the
Custodian to reflect such payment and transfer of securities to the
account of the Portfolio. The Custodian shall transfer securities sold
for the account of the Portfolio upon the making of an entry on the
records of the Custodian to reflect such transfer and receipt of
payment for the account of the Portfolio;
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5) The Custodian shall furnish the Fund on behalf of the Portfolio
confirmation of each transfer to or from the account of the
Portfolio, in the form of a written advice or notice, of Direct
Paper on the next business day following such transfer and shall
furnish to the Fund on behalf of the Portfolio copies of daily
transaction sheets reflecting each day's transaction in the
Securities System for the account of the Portfolio;
6) The Custodian shall provide the Fund on behalf of the Portfolio
with any report on its system of internal accounting control as
the Fund may reasonably request from time to time.
2.11 Segregated Account. The Custodian shall upon receipt of Proper Instructions
from the Fund on behalf of each applicable Portfolio establish and maintain
a segregated account or accounts for and on behalf of each such Portfolio,
into which account or accounts may be transferred cash and/or securities,
including securities maintained in an account by the Custodian pursuant to
Section 2.10 hereof, (i) in accordance with the provisions of any agreement
among the Fund on behalf of the Portfolio, the Custodian and a
broker-dealer registered under the Exchange Act and a member of the NASD
(or any futures commission merchant registered under
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the Commodity Exchange Act), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national securities
exchange (or the Commodity Futures Trading Commission or any registered
contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by
the Portfolio, (ii) for purposes of segregating cash or government
securities in connection with options purchased, sold or written by the
Portfolio or commodity futures contracts or options thereon purchased or
sold by the Portfolio, (iii) for the purposes of compliance by the
Portfolio with the procedures required by Investment Company Act Release
No. 10666, or any subsequent release or releases of the Securities and
Exchange Commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper corporate
purposes, but only, in the case of clause (iv), upon receipt of, in
addition to Proper Instructions from the Fund on behalf of the applicable
Portfolio, a certified copy of a resolution of the Board of Trustees or of
the Executive Committee signed by an officer of the Fund and certified by
the Secretary or an Assistant Secretary, setting forth the purpose or
purposes of such segregated account and declaring such purposes to be
proper corporate purposes.
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2.12 0wnership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to domestic securities of each Portfolio held by it and in
connection with transfers of securities.
2.13 Proxies. The Custodian shall, with respect to the domestic securities held
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of
the Portfolio or a nominee of the Portfolio, all proxies, without
indication of the manner in which such proxies are to be voted, and shall
promptly deliver to the Portfolio such proxies, all proxy soliciting
materials and all notices relating to such securities.
2.14 Communications Relating to Portfolio Securities
Subject to the provisions of Section 2.3, the Custodian shall transmit
promptly to the Fund for each Portfolio all written information (including,
without limitation, pendency of calls and maturities of domestic securities
and expirations of rights in connection therewith and notices of exercise
of call and put options written by the Fund on behalf of the Portfolio and
the maturity of futures contracts purchased or sold by the Portfolio)
received by the Custodian from issuers of the securities being held for the
Portfolio. With respect to tender or exchange offers, the Custodian shall
transmit promptly to
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the Portfolio all written information received by the Custodian from
issuers of the securities whose tender or exchange is sought and from the
party (or his agents) making the tender or exchange offer. If the Portfolio
desires to take action with respect to any tender offer, exchange offer or
any other similar transaction, the Portfolio shall notify the Custodian at
least three business days prior to the date on which the Custodian is to
take such action.
3. Duties of the Custodian with Respect to Property of the Fund Held Outside of
the United States
3.1 Appointment of Foreign Sub-Custodians
The Fund hereby authorizes and instructs the Custodian to employ as
sub-custodians for the Portfolio's securities and other assets maintained
outside the United States the foreign banking institutions and foreign
securities depositories designated on Schedule A hereto ("foreign
sub-custodians"). Upon receipt of "Proper Instructions", as defined in
Section 5 of this Contract, together with a certified resolution of the
Fund's Board of Trustees, the Custodian and the Fund may agree to amend
Schedule A hereto from time to time to designate additional foreign banking
institutions and foreign securities depositories to act as sub-custodian.
Upon receipt of Proper Instructions, the Fund may instruct the Custodian to
cease the employment of any one or more such sub-custodians for maintaining
custody of the Portfolio's assets.
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3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under
the Investment Company Act of 1940, and (b) cash and cash equivalents in
such amounts as the Custodian or the Fund may determine to be reasonably
necessary to effect the Portfolio's foreign securities transactions.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon in
writing by the Custodian and the Fund, assets of the Portfolios shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as sub-custodians
pursuant to the terms hereof. Where possible, such arrangements shall
include entry into agreements containing the provisions set forth in
Section 3.5 hereof.
3.4 Segregation of Securities. The Custodian shall identify on its books as
belonging to each applicable Portfolio of the Fund, the foreign securities
of such Portfolios held by each foreign sub-custodian. Each agreement
pursuant to which the Custodian employs a foreign banking institution shall
require that such institution establish a custody account for the Custodian
on behalf of the Fund for each applicable Portfolio of the Fund and
physically segregate in each account, securities and other assets of the
Portfolios, and, in the event that such institution
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deposits the securities of one or more of the Portfolios in a foreign
securities depository, that it shall identify on its books as belonging to
the Custodian, as agent for each applicable Portfolio, the securities so
deposited.
3.5 Agreements with Foreign Banking Institutions. Each agreement with a foreign
banking institution shall be substantially in the form set forth in Exhibit
1 hereto and shall provide that: (a) the assets of each Portfolio will not
be subject to any right, charge, security interest, lien or claim of any
kind in favor of the foreign banking institution or its creditors or agent,
except a claim of payment for their safe custody or administration; (b)
beneficial ownership for the assets of each Portfolio will be freely
transferable without the payment of money or value other than for custody
or administration; (c) adequate records will be maintained identifying the
assets as belonging to each applicable Portfolio; (d) officers of or
auditors employed by, or other representatives of the Custodian, including
to the extent permitted under applicable law the independent public
accountants for the Fund, will be given access to the books and records of
the foreign banking institution relating to its actions under its agreement
with the Custodian; and (e) assets of the Portfolios held by the foreign
sub-custodian will be subject only to the instructions of the Custodian or
its agents.
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3.6 Access of Independent Accountants of the Fund. Upon request of the Fund,
the Custodian will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of
any foreign banking institution employed as a foreign sub-custodian insofar
as such books and records relate to the performance of such foreign banking
institution under its agreement with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from time to
time, as mutually agreed upon, statements in respect of the securities and
other assets of the Portfolio(s) held by foreign sub-custodians, including
but not limited to an identification of entities having possession of the
Portfolio(s) securities and other assets and advices or notifications of
any transfers of securities to or from each custodial account maintained by
a foreign banking institution for the Custodian on behalf of each
applicable Portfolio indicating, as to securities acquired for a Portfolio,
the identity of the entity having physical possession of such securities.
3.8 Transactions in Foreign Custody Account
(a) Except as otherwise provided in paragraph (b) of this Section 3.8, the
provision of Sections 2.2 and 2.7 of this Contract shall apply, mutatis
mutandis to the foreign securities of the Fund held outside the United
States by foreign sub-custodians.
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(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of each
applicable Portfolio and delivery of securities maintained for the account
of each applicable Portfolio may be effected in accordance with the
customary established securities trading or securities processing practices
and procedures in the jurisdiction or market in which the transaction
occurs, including, without limitation, delivering securities to the
purchaser thereof or to a dealer therefor (or an agent for such purchaser
or dealer) against a receipt with the expectation of receiving later
payment for such securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may be
maintained in the name of such entity's nominee to the same extent as set
forth in Section 2.3 of this Contract, and the Fund agrees to hold any such
nominee harmless from any liability as a holder of record of such
securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which the
Custodian employs a foreign banking institution as a foreign sub-custodian
shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the
Custodian and the Fund from and against any loss, damage, cost, expense,
liability or claim arising out of or in connection with the institution's
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performance of such obligations. At the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with respect to
any claims against a foreign banking institution as a consequence of any
such loss, damage, cost, expense, liability or claim if and to the extent
that the Fund has not been made whole for any such loss, damage, cost,
expense, liability or claim.
3.10 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set forth
with respect to sub-custodians generally in this Contract and, regardless
of whether assets are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of a U.S. bank as
contemplated by paragraph 3.13 hereof, the Custodian shall not be liable
for any loss, damage, cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions, or acts of war or
terrorism or any loss where the sub-custodian has otherwise exercised
reasonable care. Notwithstanding the foregoing provisions of this paragraph
3.10, in delegating custody duties to State Street London Ltd., the
Custodian shall not be relieved of any responsibility to the Fund for any
loss due to such delegation, except such loss as may result from (a)
political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation,
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nationalization, insurrection, civil strife or armed hostilities) or (b)
other losses (excluding a bankruptcy or insolvency of State Street London
Ltd. not caused by political risk) due to Acts of God, nuclear incident or
other losses under circumstances where the Custodian and State Street
London Ltd. have exercised reasonable care.
3.11 Reimbursement for Advances. If the Fund requires the Custodian to advance
cash or securities for any purpose for the benefit of a Portfolio including
the purchase or sale of foreign exchange or of contracts for foreign
exchange, or in the event that the Custodian or its nominee shall incur or
be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Contract, except
such as may arise from its or its nominee's own negligent action, negligent
failure to act or willful misconduct, any property at any time held for the
account of the applicable Portfolio shall be security therefor and should
the Fund fail to repay the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of such Portfolios assets
to the extent necessary to obtain reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually to the
Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be similar
in kind and scope to that furnished to the Fund
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in connection with the initial approval of this Contract. In addition, the
Custodian will promptly inform the Fund in the event that the Custodian
learns of a material adverse change in the financial condition of a foreign
sub-custodian or any material loss of the assets of the Fund or in the case
of any foreign sub-custodian not the subject of an exemptive order from the
Securities and Exchange Commission is notified by such foreign
sub-custodian that there appears to be a substantial likelihood that its
shareholders' equity will decline below $200 million (U.S. dollars or the
equivalent thereof) or that its shareholders' equity has declined below
$200 million (in each case computed in accordance with generally accepted
U.S. accounting principles).
3.13 Branches of U.S. Banks
(a) Except as otherwise set forth in this Contract, the provisions hereof
shall not apply where the custody of the Portfolios assets are maintained
in a foreign branch of a banking institution which is a "bank" as defined
by Section 2(a)(5) of the Investment Company Act of 1940 meeting the
qualification set forth in Section 26(a) of said Act. The appointment of
any such branch as a sub-custodian shall be governed by paragraph 1 of this
Contract.
(b) Cash held for each Portfolio of the Fund in the United Kingdom shall be
maintained in an interest bearing account established for the Fund with the
Custodian's
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London branch, which account shall be subject to the direction of the
Custodian, State Street London Ltd. or both.
3.14 Tax Law
The Custodian shall have no responsibility or liability for any obligations
now or hereafter imposed on the Fund or the Custodian as custodian of the
Fund by the tax law of the United States of America or any state or
political subdivision thereof. It shall be the responsibility of the Fund
to notify the Custodian of the obligations imposed on the Fund or the
Custodian as custodian of the Fund by the tax law of jurisdictions other
than those mentioned in the above sentence, including responsibility for
withholding and other taxes, assessments or other governmental charges,
certifications and governmental reporting. The sole responsibility of the
Custodian with regard to such tax law shall be to use reasonable efforts to
assist the Fund with respect to any claim for exemption or refund under the
tax law of jurisdictions for which the Fund has provided such information.
4. Payments for Sales or Repurchases or Redemptions of Shares of the Fund
The Custodian shall receive from the distributor for the Shares or from the
Transfer Agent of the Fund and deposit into the account of the appropriate
Portfolio such payments as are received for Shares of that Portfolio issued or
sold from time to time by the Fund. The Custodian will provide timely
notification
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to the Fund on behalf of each such Portfolio and the Transfer Agent of any
receipt by it of payments for Shares of such Portfolio.
From such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and any applicable votes of the Board of
Trustees of the Fund pursuant thereto, the Custodian shall, upon receipt of
instructions from the Transfer Agent, make funds available for payment to
holders of Shares who have delivered to the Transfer Agent a request for
redemption or repurchase of their Shares. In connection with the redemption or
repurchase of Shares of a Portfolio, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian shall honor checks drawn on
the Custodian by a holder of Shares, which checks have been furnished by the
Fund to the holder of Shares, when presented to the Custodian in accordance with
such procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.
5. Proper Instructions
Proper Instructions as used throughout this Contract means a writing signed
or initialled by one or more person or persons as the Board of Trustees shall
have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested.
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<PAGE>
Oral instructions will be considered Proper Instructions if the Custodian
reasonably believes them to have been given by a person authorized to give such
instructions with respect to the transaction involved. The Fund shall cause all
oral instructions to be confirmed in writing. Upon receipt of a certificate of
the Secretary or an Assistant Secretary as to the authorization by the Board of
Trustees of the Fund accompanied by a detailed description of procedures
approved by the Board of Trustees, Proper Instructions may include
communications effected directly between electro-mechanical or electronic
devices provided that the Board of Trustees and the Custodian are satisfied that
such procedures afford adequate safeguards for the Portfolios' assets. For
purposes of this Section, Proper Instructions shall include instructions
received by the Custodian pursuant to any three - party agreement which requires
a segregated asset account in accordance with Section 2.11.
6. Actions Permitted without express Authority
The Custodian may in its discretion, without express authority from the
Fund on behalf of each applicable Portfolio:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this Contract,
provided that all such payments shall be accounted for to the Fund on behalf of
the Portfolio;
2) surrender securities in temporary form for securities in definitive
form;
-33-
<PAGE>
3) endorse for collection, in the name of the Portfolio, checks, drafts and
other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other dealings with the
securities and property of the Portfolio except as otherwise directed by the
Board of Trustees of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a certified copy of a vote of the Board of
Trustees of the Fund as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or of any action
by the Board of Trustees pursuant to the Declaration of Trust as described in
such vote, and such vote may be considered as in full force and effect until
receipt by the Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and Calculation of
Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Trustees of the Fund to keep the
books of account of each Portfolio and/or compute the net asset value per share
of the outstanding shares of each Portfolio or, if directed in writing to do so
by the Fund on behalf of the Portfolio, shall itself
-34-
<PAGE>
keep such books of account and/or compute such net asset value per share. If so
directed, the Custodian shall also calculate daily the net income of the
Portfolio as described in the Fund's currently effective prospectus related to
such Portfolio and shall advise the Fund and the Transfer Agent daily of the
total amounts of such net income and, if instructed in writing by an officer of
the Fund to do so, shall advise the Transfer Agent periodically of the division
of such net income among its various components. The calculations of the net
asset value per share and the daily income of each Portfolio shall be made at
the time or times described from time to time in the Fund's currently effective
prospectus related to such Portfolio.
9. Records
The Custodian shall with respect to each Portfolio create and maintain all
records relating to its activities and obligations under this Contract in such
manner as will meet the obligations of the Fund under the Investment Company Act
of 1940, with particular attention to Section 31 thereof and Rules 31a-l and
31a-2 thereunder. All such records shall be the property of the Fund and shall
at all times during the regular business hours of the Custodian be open for
inspection by duly authorized officers, employees or agents of the Fund and
employees and agents of the Securities and Exchange Commission. The Custodian
shall, at the Fund's request, supply the Fund with a tabulation of securities
owned by each Portfolio and held by the Custodian and shall, when requested to
do so by the Fund and for such compensation as shall be agreed upon between the
Fund and the Custodian, include certificate numbers in such tabulations.
-35-
<PAGE>
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund on behalf of
each applicable Portfolio may from time to time request, to obtain from year to
year favorable opinions from the Fund's independent accountants with respect to
its activities hereunder in connection with the preparation of the Fund's Form
N-lA, and Form N-SAR or other annual reports to the Securities and Exchange
Commission and with respect to any other requirements of such Commission.
11. Reports to Fund By Independent Public Accountants
The Custodian shall provide the Fund, on behalf of each of the Portfolios
at such times as the Fund may reasonably require, with reports by independent
public accountants on the accounting system, internal accounting control and
procedures for safeguarding securities, futures contracts and options on futures
contracts, including securities deposited and/or maintained in a Securities
System, relating to the services provided by the Custodian under this Contract;
such reports, shall be of sufficient scope and in sufficient detail, as may
reasonably be required by the Fund to provide reasonable assurance that any
material inadequacies would be disclosed by such examination, and, if there are
no such inadequacies, the reports shall so state.
12. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as agreed upon from time to time between the Fund on
behalf of each applicable Portfolio and the Custodian.
-36-
<PAGE>
13. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Contract and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties, including any
futures commission merchant acting pursuant to the terms of a three-party
futures or options agreement. The Custodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Contract, but shall be
kept indemnified by and shall be without liability to the Fund for any action
taken or omitted by it in good faith without negligence. It shall be entitled to
rely on and may act upon advice of counsel (who may be counsel for the Fund) on
all matters, and shall be without liability for any action reasonably taken or
omitted pursuant to such advice.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States (except as specifically provided in Article 3.10)
and, regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a U.S. bank
as contemplated by paragraph 3.11 hereof, the Custodian shall not be liable for
any loss, damage,
-37-
<PAGE>
cost, expense, liability or claim resulting from, or caused by, the direction of
or authorization by the Fund to maintain custody or any securities or cash of
the Fund in a foreign country including, but not limited to, losses resulting
from nationalization, expropriation, currency restrictions, or acts of war or
terrorism.
If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of money or
which action may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to the Fund or the Portfolio being liable for the payment
of money or incurring liability of some other form, the Fund on behalf of the
Portfolio, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
If the Fund requires the Custodian, its affiliates, subsidiaries or agents,
to advance cash or securities for any purpose (including but not limited to
securities settlements, foreign exchange contracts and assumed settlement) for
the benefit of a Portfolio including the purchase or sale of foreign exchange or
of contracts for foreign exchange or in the event that the Custodian or its
nominee shall incur or be assessed any taxes, charges, expenses, assessments,
claims or liabilities in connection with the performance of this Contract,
except such as may arise from its or its nominee's own negligent action,
negligent failure to act or willful misconduct, any property at any time held
for the account of the applicable Portfolio shall
-38-
<PAGE>
be security therefor and should the Fund fail to repay the Custodian promptly,
the Custodian shall be entitled to utilize available cash and to dispose of such
Portfolio's assets to the extent necessary to obtain reimbursement.
14. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than thirty (30)
days after the date of such delivery or mailing; provided, however that the
Custodian shall not with respect to a Portfolio act under Section 2.10 hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Trustees of the Fund has approved the
initial use of a particular Securities System by such Portfolio and the receipt
of an annual certificate of the Secretary or an Assistant Secretary that the
Board of Trustees has reviewed the use by such Portfolio of such Securities
System, as required in each case by Rule 17f-4 under the Investment Company Act
of 1940, as amended and that the Custodian shall not with respect to a Portfolio
act under Section 2.lOA hereof in the absence of receipt of an initial
certificate of the Secretary or an Assistant Secretary that the Board of
Trustees has approved the initial use of the Direct Paper System by such
Portfolio and the receipt of an annual certificate of the Secretary or an
-39-
<PAGE>
Assistant Secretary that the Board of Trustees has reviewed the use by such
Portfolio of the Direct Paper System; provided further, however, that the Fund
shall not amend or terminate this Contract in contravention of any applicable
federal or state regulations, or any provision of the Declaration of Trust, and
further provided, that the Fund on behalf of one or more of the Portfolios may
at any time by action of its Board of Trustees (i) substitute another bank or
trust company for the Custodian by giving notice as described above to the
Custodian, or (ii) immediately terminate this Contract in the event of the
appointment of a conservator or receiver for the Custodian by the Comptroller of
the Currency or upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.
15. Successor Custodian
If a successor custodian for the Fund, of one or more of the Portfolios
shall be appointed by the Board of Trustees of the Fund, the Custodian shall,
upon termination, deliver to such successor custodian at the office of the
Custodian, duly endorsed and in the form for transfer, all securities of each
applicable Portfolio then held by it hereunder and shall transfer to an account
of the successor custodian all of the securities of each such Portfolio held in
a Securities System.
-40-
<PAGE>
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of Trustees
of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Trustees shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian on behalf of each applicable Portfolio and all
instruments held by the Custodian relative thereto and all other property held
by it under this Contract on behalf of each applicable Portfolio and to transfer
to an account of such successor custodian all of the securities of each such
Portfolio held in any Securities System. Thereafter, such bank or trust company
shall be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of
-41-
<PAGE>
Trustees to appoint a successor custodian, the Custodian shall be entitled to
fair compensation for its services during such period as the Custodian retains
possession of such securities, funds and other properties and the provisions of
this Contract relating to the duties and obligations of the Custodian shall
remain in full force and effect.
16. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and the
Fund on behalf of each of the Portfolios, may from time to time agree on such
provisions interpretive of or in addition to the provisions of this Contract as
may in their joint opinion be consistent with the general tenor of this
Contract. Any such interpretive or additional provisions shall be in a writing
signed by both parties and shall be annexed hereto, provided that no such
interpretive or additional provisions shall contravene any applicable federal or
state regulations or any provision of the Declaration of Trust of the Fund. No
interpretive or additional provisions made as provided in the preceding sentence
shall be deemed to be an amendment of this Contract.
17. Additional Funds
In the event that the Fund establishes one or more series of Shares in
addition to the Growth Stock Fund, Stock Index Fund, International Stock Fund,
Balanced Fund, Active Balanced Fund, Bond Fund and Money Market Fund with
respect to which it desires to have the Custodian render services as custodian
under the terms hereof, it shall so notify the Custodian in writing, and if
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<PAGE>
the Custodian agrees in writing to provide such services, such series of Shares
shall become a Portfolio hereunder.
18. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
19. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund on behalf of each of the Portfolios and the Custodian
relating to the custody of the Fund's assets.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 30th day of October, 1992.
ATTEST THE PRUDENTIAL INSTITUTIONAL FUND
/s/ ROBIN YONIS SANDLAUFER By /S/ Mark R. Fetting
- -------------------------- ----------------------
Robin Yonis Sandlaufer
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ [ILLEGIBLE] By /S/ [ILLEGIBLE]
- ----------------------- ----------------------
Assistant Secretary Senior Vice President
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<PAGE>
Schedule A
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Trustees of The Prudential
Institutional Fund for use as sub-custodians for the Fund's securities and other
assets:
(Insert banks and securities depositories)
Certified:
____________________________
Fund's Authorized Officer
Date: ___________________
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<PAGE>
The Prudential Institutional Fund
Schedule A
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Trustees of The Prudential
Institutional Fund for use as sub-custodians for the Trust's securities and
other assets:
Securities Depository
or
Country Bank Clearing Agency
- ------- ---- ---------------
Argentina Citibank, N.A. None
Australia Australia and Austraclear
New Zealand Banking Limited
Group Limited
Austria Girozentrale und Oesterreichische
Bank der oesterreichischen Kontrollbank AG
Sparkassen AG
Belgium Banque Bruxelles Caisse
Lambert S.A. Interprofessionnelle
de Depots et de Virements
de Titres S.A. (C.I.K.)
Canada Canada Trust The Canadian Depository
Company for Securities Limited
Chile Citibank, N.A. None
Denmark Den Danske Bank Vaerdipapircentralen
Finland Kansallis-Osake-Pankki None
France Credit Commercial de Societe
France Interprofessionnelle pour
la Compensation des
Valeurs Mobilieres
(SICOVAM)
Germany Berliner Handels - und The Deutscher Kassenverein
Frankfurter Bank AG
Hong Kong Standard Chartered Bank None
Indonesia Standard Chartered Bank None
Ireland Bank of Ireland The Gilts Settlement
Office
Italy Credito Italiano Monte Titoli, S.p.A.
<PAGE>
Securities Depository
or
Country Bank Clearing Agency
- ------- ---- ---------------
Japan Sumitomo Trust & Banking None
Co., Ltd.
Korea Bank of Seoul None
Luxembourg Cedel
Malaysia Standard Chartered Bank None
Mexico Citibank, N.A. Instituto para el Deposito
de Valores (INDEVAL)
Netherlands Bank Mees & Hope N.V.; NECIGEF
Subsidiary of Algemene (Nederlands Centraal
Bank Nederland, N.V. Instituut voor Giraal
Effectenverkeer B.V.)
New Zealand Westpac Banking Corporation None
Norway Christiania Bank The Norwegian Registry of
OG Kreditkasse Securities,
Verdipapirsentralen
Philippines Standard Chartered Bank None
Portugal Banco Comercial Portugues None
(Lisbon)
Singapore The Development Bank The Central Depository
of Singapore Ltd. (Pte) Ltd.
Spain Banco Hispano Americano None
Sweden Skandinaviska Vardepapperscentralen
Enskilda Banken
Switzerland Union Bank of Switzerland Schweizerische Effekten-
Giro AG (SEGA)
Taiwan Central Trust of China The Taiwan Securities
Central Depository
Company, Ltd.
Thailand Standard Chartered Bank None
<PAGE>
Securities Depository
or
Country Bank Clearing Agency
- ------- ---- ---------------
United Kingdom State Street Bank and The Central Gilts Office
Trust Company, London
branch, and State Street
London Limited, a subsidiary
of State Street Bank and
Trust Company
Transnational The Euroclear System
Cedel
Certified:
/s/ S. JANE ROSE
- -------------------------
Fund's Authorized Officer
Date: October 30, 1992
THE PRUDENTIAL INSTITUTIONAL FUND
Transfer Agency and Service Agreement
between
Prudential Mutual Fund Management, Inc.
and
Prudential Mutual Fund Services, Inc.
<PAGE>
TABLE OF CONTENTS
Article 1 Terms of Appointment; Duties of PMFS .......................... 4
Article 2 Reimbursement of Expenses ..................................... 7
Article 3 Duty of Care .................................................. 8
Article 4 Documents and Covenants
of the Administrator and PMFS ................................. 10
Article 5 Termination of Agreement ...................................... 12
Article 6 Assignment .................................................... 12
Article 7 Affiliations .................................................. 13
Article 8 Amendment ..................................................... 14
Article 9 Applicable Law ................................................ 14
Article 10 Miscellaneous ................................................. 14
Article 11 Merger of Agreement ........................................... 16
2
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 30th day of October, 1992 by and between
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC., a Delaware corporation, having its
principal office and place of business at One Seaport Plaza, New York, New York
10292 (the Administrator or PMF), and PRUDENTIAL MUTUAL FUND SERVICES, INC., a
New Jersey corporation, having its principal office and place of business at
Raritan Plaza One, Edison, New Jersey 08837 (the Agent or PMFS).
W I T N E S S E T H
WHEREAS, the Administrator has entered into an Administration, Transfer
Agency and Service Agreement, dated October 30, 1992 (the Administration
Agreement), with The Prudential Institutional Fund (the Trust), a Delaware
business trust and a diversified, open-end management investment company
registered under the Investment Company Act of 1940 (the 1940 Act), pursuant to
which PMF will provide certain administrative services and act as transfer
agent, dividend disbursing agent and shareholder servicing agent of the Trust;
WHEREAS, the shares of beneficial interest of the Trust are divided into
separate series or portfolios (each a Fund), each of which is established
pursuant to a resolution of the Trustees of the Trust, and the Trustees may from
time to time terminate such
3
<PAGE>
Funds or establish and terminate additional Funds;
WHEREAS, the shares of beneficial interest of the Trust are being offered
exclusively to qualified retirement programs through their plan sponsors or
administrators and to other institutional investors;
WHEREAS, the Administrator desires to retain PMFS to act as transfer agent,
dividend disbursing agent and shareholder servicing agent for the Trust and PMFS
is willing to act as transfer agent, dividend disbursing agent and shareholder
servicing agent on the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of PMFS
1.01 Subject to the terms and conditions set forth in this Agreement, the
Administrator hereby employs and appoints PMFS to act as, and PMFS agrees to act
as, the transfer agent for the authorized and issued shares of beneficial
interest of each Fund of the Trust, $.00l par value (Shares), and as dividend
disbursing agent and shareholder servicing agent of the Trust or any Fund
thereof in accordance with the prospectus and statement of additional
information (prospectus) of the Trust, as amended from time to time.
Shareholders of the Trust will include only qualified retirement programs and
other institutional investors (Programs) and Shares will be held in omnibus
accounts at the
4
<PAGE>
Transfer Agent in the name of the shareholder of record (Shareholder). It is
understood that the Transfer Agent is authorized to communicate with and receive
instructions from Program sponsors and administrators and that the Transfer
Agent will not recognize or communicate with individual employees participating
in a Program.
1.02 PMFS agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement among the Administrator, PMFS and the Trust, PMFS shall:
(i) Receive for acceptance, orders for the purchase of Shares, and promptly
deliver payment and appropriate documentation therefor to the Custodian of the
Trust authorized pursuant to the Trust's Declaration of Trust (the Custodian);
(ii) Pursuant to purchase orders, issue the appropriate number of Shares
and hold such Shares in the appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and redemption directions
and deliver the appropriate documentation therefor to the Custodian;
(iv) At the appropriate time as and when it receives monies paid to it by
the Custodian with respect to any redemption, pay over or cause to be paid over
in the appropriate manner such monies as instructed by the redeeming
Shareholders;
(v) Effect transfers of Shares by the registered owners thereof upon
receipt of appropriate instructions;
5
<PAGE>
(vi) Prepare and transmit payments for dividends and distributions declared
by the Trust;
(vii) Maintain records of account for and advise the Trust and its
Shareholders as to the foregoing; and
(viii) Record the issuance of Shares of the Trust and maintain pursuant to
Rule l7Ad-l0(e) under the Securities Exchange Act of 1934 (1934 Act) a record of
the total number of Shares of the Trust which are authorized, issued and
outstanding. When recording the issuance of Shares, PMFS shall have no
obligation to take cognizance of any Blue Sky laws relating to the issue or sale
of such Shares, which functions shall be the sole responsibility of the Trust.
(b) In addition to and not in lieu of the services set forth in the above
paragraph (a), PMFS shall perform the customary services of a transfer agent,
dividend disbursing agent and, as relevant, shareholder servicing agent,
including but not limited to, maintaining all Shareholder accounts, preparing
Shareholder meeting lists, mailing proxies, receiving and tabulating proxies,
mailing Shareholder reports and prospectuses to current Shareholders, preparing
and filing appropriate forms required with respect to dividends and
distributions by federal tax authorities for all Shareholders, preparing and
mailing confirmation forms and statements of account to Shareholders for all
purchases and redemptions of Shares and other confirmable transactions in
Shareholder accounts, preparing and mailing activity statements for Shareholders
and providing Shareholder account information.
6
<PAGE>
(c) PMFS may also provide such additional services and functions not
specifically described herein as may be mutually agreed between PMFS and the
Administrator and set forth in Schedule B hereto. Procedures applicable to
certain of these services may be established from time to time by agreement
between the Administrator and PMFS.
Article 2 Reimbursement of Expenses
2.01 The Administrator agrees to reimburse PMFS for out-of-pocket expenses
incurred by PMFS for the items set out in Schedule A attached hereto. In
addition, any other expenses incurred by PMFS at the request or with the consent
of the Trust will be reimbursed by the Administrator.
Article 3 Duty of Care
3.01 PMFS shall not be liable for any error of judgment or for any loss
suffered by the Administrator or the Trust in connection with the matters to
which this agreement relates except a loss resulting from willful misfeasance,
bad faith or gross negligence on the Agent's part in the performance of its
duties or from its reckless disregard of its obligations and duties under this
Agreement.
3.02 PMFS shall not be responsible for any losses arising out of or
attributable to:
(a) the reliance on or use by PMFS or its agents or subcontractors of
information, records and documents which (i) are
7
<PAGE>
received by PMFS or its agents or subcontractors and furnished to it by or on
behalf of the Trust, and (ii) have been prepared and/or maintained by the Trust
any other person or firm on behalf of the Trust.
(b) The reliance on, or the carrying out by PMFS or its agents or
subcontractors of, any instructions or requests of the Trust.
(c) The offer or sale of Shares in violation of any requirement under the
federal securities laws or regulations or the securities or Blue Sky laws of any
State or other jurisdiction that such Shares be registered in such State or
other jurisdiction or in violation of any stop order or other determination or
ruling by any federal agency or any State or other jurisdiction with respect to
the offer or sale of such Shares in such State or other jurisdiction.
3.03 At any time PMFS may apply to any officer of the Trust for
instructions, and may consult with legal counsel, with respect to any matter
arising in connection with the services to be performed by PMFS under this
Agreement, and PMFS and its agents or subcontractors shall not be liable for any
action taken or omitted by it in reliance upon such instructions or upon the
opinion of such counsel. PMFS, its agents and subcontractors shall be protected
and indemnified in acting upon any paper or document furnished by or on behalf
of the Trust, reasonably believed to be genuine and to have been signed by the
proper person or persons, or upon any instruction, information, data, records or
documents
8
<PAGE>
provided to PMFS or its agents or subcontractors by machine readable input,
telex, CRT data entry or other similar means authorized by the Trust, and shall
not be held to have notice of any change of authority of any person, until
receipt of written notice thereof from the Trust.
3.04 In the event either party is unable to perform its obligations under
the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes.
3.05 Neither party to this Agreement shall be liable to the other party for
consequential damages under any provision of this Agreement or for any act or
failure to act hereunder.
Article 4 Documents and Covenants of the Administrator and PMFS
4.01 The Administrator shall promptly furnish to PMFS the following:
(a) The current registration statements and any amendments and supplements
thereto filed with the SEC pursuant to the requirements of the 1933 Act and the
1940 Act;
(b) All account application forms or other documents relating to
Shareholder accounts; and
(d) Such other certificates, documents or opinions as the Agent deems to be
appropriate or necessary for the proper performance of its duties.
9
<PAGE>
4.02 PMFS hereby agrees to establish and maintain facilities and procedures
reasonably acceptable to the Trust for safekeeping of check forms and facsimile
signature imprinting devices, if any, and for the preparation or use, and for
keeping account of, such forms and devices.
4.03 PMFS shall prepare and keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the 1940 Act, and the Rules and Regulations
thereunder, PMFS agrees that all such records prepared or maintained by PMFS
relating to the services to be performed by PMFS hereunder are the property of
the Trust and will be preserved, maintained and made available in accordance
with such Section 31 of the 1940 Act, and the Rules and Regulations thereunder,
and will be surrendered promptly to the Trust on and in accordance with its
request.
4.04 PMFS and the Administrator agree that all books, records, information
and data pertaining to the business of the Trust which are exchanged or received
pursuant to the negotiation or the carrying out of this Agreement shall remain
confidential and shall not be voluntarily disclosed to any other person except
as may be required by law or with the prior consent of the parties.
4.05 In case of any requests or demands for the inspection of the
Shareholder records of the Trust, PMFS will endeavor to notify the Trust and to
secure instructions from an authorized officer of the Trust as to such
inspection. PMFS reserves the right, however, to exhibit the Shareholder records
to any person
10
<PAGE>
whenever it is advised by its counsel that it may be held liable for the failure
to exhibit the Shareholder records to such person.
Article 5 Termination of Agreement
5.01 This Agreement may be terminated by either party upon sixty (60) days
written notice to the other.
5.02 Should the right to terminate be exercised by the Administrator or
should the Administration Agreement be terminated by the Trust, all
out-of-pocket expenses associated with the movement of records and other
materials will be borne by the Trust. Additionally, PMFS reserves the right to
charge for any other reasonable fees and expenses associated with such
termination.
Article 6 Assignment
6.01 Except as provided in Section 6.03 below, neither this Agreement nor
any rights or obligations hereunder may be assigned by either party without the
written consent of the other party.
6.02 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
6.03 PMFS may, in its sole discretion and without further consent by the
Trust, subcontract, in whole or in part, for the performance of its obligations
and duties hereunder with any person or entity including but not limited to: (i)
Prudential Securities Incorporated (Prudential Securities), a registered
broker-dealer, (ii) The Prudential Insurance Company of America (Prudential),
(iii) any Prudential Securities or Prudential
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subsidiary or affiliate duly registered as a broker-dealer and/or a transfer
agent pursuant to the 1934 Act or (iv) any other Prudential Securities or
Prudential affiliate or subsidiary; provided, however, that PMFS shall be as
fully responsible to the Administrator and the Trust for the acts and omissions
of any agent or subcontractor as it is for its own acts and omissions.
Article 7 Affiliations
7.01 PMFS may now or hereafter, without the consent of or notice to the
Trust, function as Transfer Agent and/or Shareholder Servicing Agent for any
other investment company registered with the SEC under the 1940 Act, including
without limitation any investment company whose adviser, administrator, sponsor
or principal underwriter is or may become affiliated with Prudential Securities
and/or Prudential or any of its or their direct or indirect subsidiaries or
affiliates.
7.02 It is understood and agreed that the Trustees, officers, employees,
agents and Shareholders of the Trust, and the directors, officers, employees,
agents and shareholders of the Trust's investment adviser and/or distributor,
are or may be interested in the Agent as directors, officers, employees, agents,
shareholders or otherwise, and that the directors, officers, employees, agents
or shareholders of the Agent may be interested in the Trust as Trustees,
officers, employees, agents, Shareholders or otherwise, or in the investment
adviser and/or distributor as officers, directors, employees, agents,
shareholders or otherwise.
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Article 8 Amendment
8.01 This Agreement may be amended or modified by a written agreement
executed by both parties and authorized or approved by a resolution of the
Trustees of the Trust.
Article 9 Applicab1e Law
9.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the State of New Jersey.
Article 10 Miscellaneous
10.01 In the event that any check or other order for payment of money on
the account of any Shareholder or new investor is returned unpaid for any
reason, PMFS will (a) give prompt notification to the Trust's distributor
(Distributor) of such non-payment; and (b) take such other action, including
imposition of a reasonable processing or handling fee, as PMFS may, in its sole
discretion, deem appropriate or as the Trust and the Distributor may instruct
PMFS.
10.02 Any notice or other instrument authorized or required by this
Agreement to be given in writing to the Administrator, the Trust, or PMFS shall
be sufficiently given if addressed to that party and received by it at its
office set forth below or at such other place as it may from time to time
designate in writing.
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To PMFS:
Prudential Mutual Fund Services, Inc.
Raritan Plaza One
Edison, NJ 08837
Attention: President
To the Administrator:
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
Attention: President
With Copies to:
The Manager:
Prudential Institutional Fund Management, Inc.
W.W. Scranton Office Park
30 E.D. Preate Drive
Moosic, PA 18507-1796
Attention: President
The Trust:
Prudential Institutional Fund
Prudential Plaza
Newark, NJ 07102
Attention: President
Article 11 Merger of Agreement
11.01 This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject matter
hereof whether oral or written.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed of the day and year first above written.
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
BY: /s/ Robert F. Gunia
------------------------------------------
Robert F. Gunia
Executive Vice President
PRUDENTIAL MUTUAL FUND SERVICES, INC.
BY: /s/ Fred Fiandaca
------------------------------------------
Fred Fiandaca
Chairman and Chief Executive Officer
Agreed to and Acknowledged By:
THE PRUDENTIAL INSTITUTIONAL FUND
By: /s/ Mark R. Fetting
- ------------------------------------
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SCHEDULE A
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SCHEDULE B
17
ARNOLD & PORTER
399 PARK AVENUE
NEW YORK, NEW YORK 10022-4690
(212) 715-1000
FACSIMILE: (212) 715-1399
October 23, 1992
The Prudential Institutional Fund
Prudential Plaza
751 Broad Street
Newark, New Jersey 07102-3777
Re: The Prudential Institutional Fund
---------------------------------
Ladies and Gentlemen:
We have acted as counsel to The Prudential Institutional Fund, a
Delaware business trust (the "Trust"), in connection with certain matters
relating to the organization of the Trust and the proposed issuance of shares of
certain series of the Trust (the "Shares"), in the manner and on the terms set
forth in the Registration Statement on Form N-1A of the Trust filed with the
Securities and Exchange Commission (File No. 33-48066), as amended by Amendment
No.1 thereto (the "Registration Statement"). You have requested our opinion in
connection with the filing of the Registration Statement.
In rendering our opinion, we have examined and relied upon originals,
or copies certified or otherwise identified to our satisfaction, of such
documents, organizational records, certificates of public officials and such
other instruments as we have deemed necessary or advisable for purposes of this
opinion, and we have made such investigations of law as we have deemed
appropriate.
Based on the foregoing and subject to the qualifications set forth
herein, we are of the opinion that:
1. The Trust is a duly organized and validly existing business trust in
good standing under the laws of the State of Delaware.
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2. The issuance of the Shares has been duly authorized and, subject to
the effectiveness of the Registration Statement and compliance with applicable
state securities laws, upon the issuance and sale of the Shares as contemplated
by the Registration Statement for a consideration not less than the par value
thereof as required by the laws of Delaware, and not less than the net asset
value thereof as required by the Investment Company Act of 1940, such Shares
will be legally issued, fully paid and non-assessable shares of beneficial
interest in the Trust.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as a part of the Registration Statement and with any state
securities commission where such filing is required and to the reference to our
firm as counsel in the Statement of Additional Information filed as part of the
Registration Statement. 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
Securities Act of 1933, as amended.
This opinion is limited to the laws of State of New York and the
federal law of the United States of America, and we do not express any opinion
herein concerning any other law. Insofar as the opinions expressed herein relate
to matters that are governed by the laws of the State of Delaware, we have
relied on the opinion of Morris, Nichols, Arsht & Tunnell, a copy of which is
attached hereto, without independent investigation on our part of the facts,
circumstances or law underlying such opinion. Our opinions expressed herein are
based on the assumptions and subject to the exceptions expressed in such
opinion.
This opinion speaks only as of its date. In the absence of a specific
request, we assume no obligation to supplement or update this opinion as of any
date occurring hereafter. This opinion is limited to the matters on which you
have requested our opinion, and you must judge whether the matters addressed
herein are sufficient for your purposes. This opinion is being delivered solely
for your benefit and may not be relied upon by any person other than the
addressee hereof.
Very truly yours,
/s/ ARNOLD & PORTER
2
MORRIS, NICHOLS, ARSHT & TUNNELL
1201 NORTH MARKET STREET
P.O. BOX 1347
WILMINGTON, DELAWARE 19899-1347
TELEPHONE (302) 658-9200
TELECOPY (302) 658-3989
OCTOBER 23, 1992
The Prudential Institutional Fund
Prudential Plaza
751 Broad Street
Newark, New Jersey 07102-3777
Re: The Prudential Institutional Fund
---------------------------------
Ladies and Gentlemen:
We have acted as special Delaware counsel to The Prudential
Institutional Fund, a Delaware business trust (the "Trust"), in connection with
certain matters relating to the organization of the Trust and the proposed
issuance of Shares of certain Series of the Trust (the "Applicable Shares")
pursuant to and as described in Registration Statement No. 33-48066 on Form N-1A
filed with the Securities and Exchange Commission, as amended by Amendment No. 1
thereto (as amended, the "Registration Statement"). Capitalized terms used
herein and not otherwise herein defined are used as defined in the Agreement and
Declaration of Trust of the Trust dated May 11, 1992, as amended by the First
Amendment to Agreement and Declaration of Trust of the Trust dated as of July 7,
1992 (as amended, the "Governing Instrument").
In rendering this opinion, we have examined copies of the following
documents, each in the form provided to us: the Certificate of Trust of the
Trust as filed in the Office of the Secretary of State of the State of Delaware
(the "Recording office") on May 11, 1992 (the "Certificate"), as amended by a
First Amendment thereto as filed in the Recording Office on June 1, 1992; the
Governing Instrument; a Purchase Agreement dated as of July 7, 1992 between the
Trust and Prudential Institutional Fund Management, Inc.; the revised By-Laws of
the Trust as adopted on October 5, 1992; Resolutions of the Sole Trustee of the
Trust dated May 11, 1992; a Written Consent of Sole Trustee of the Trust dated
as of July 7, 1992; a Written Consent of Sole Trustee of the Trust dated as of
October 5, 1992; a Consent of Sole Shareholder of the Trust
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dated as of October 5, 1992; minutes of a meeting of the Board of Trustees of
the Trust dated October 12, 1992; the Registration Statement; the Trust's
Notification of Registration Filed Pursuant to Section 8(a) of the Investment
Company Act of 1940 on Form N-8A as filed with the Securities and Exchange
Commission on May 21, 1992; and a certificate of good standing of the Trust
obtained as of a recent date from the Recording Office. In such examinations, we
have assumed the genuineness of all signatures, the conformity to original
documents of all documents submitted to us as copies or drafts of documents to
be executed and the legal capacity of natural persons to complete the execution
of documents. We have further assumed for the purpose of the opinion: (i) the
due authorization, execution and delivery by, or on behalf of, each of the
parties thereto of the above-referenced instruments, certificates and other
documents (provided that we do not assume due authorization of any of the
foregoing on behalf of the Trust), and of all documents contemplated by the
Governing Instrument, By-Laws, applicable Resolutions of the Sole Trustee or
Trustees and the Registration Statement (including the Prospectus and Statement
of Additional Information forming a part thereof) (collectively, "Operative
Documents") to be executed by investors acquiring Applicable Shares (the
"Shareholders" and each, individually, a "Shareholder"); (ii) the payment of
consideration for Applicable Shares, and the application of such consideration,
as provided in the Governing Instrument, and compliance with the other terms,
conditions and restrictions set forth in the Operative Documents in connection
with the issuance of Applicable Shares; (iii) that appropriate notation of the
names and addresses of, the number of Applicable Shares held by, and the
consideration paid by, Shareholders will be maintained in the appropriate
registers and other books and records of the Trust in connection with the
issuance, redemption or transfer of Applicable Shares; (iv) that no event has
occurred subsequent to the filing of the Certificate that would cause a
termination or reorganization of the Trust under Section 2 or 3 of Article VIII
of the Governing Instrument; (v) that the activities of the Trust have been and
will be conducted in accordance with the terms of the Governing Instrument and
the Delaware Business Trust Act, 12 Del. C. s.s.3801 et seg. (the "Delaware
Act"); and (vi) that each of the documents examined by us is in full force and
effect and has not been modified, supplemented or otherwise amended, except as
herein referenced. No opinion is expressed herein with respect to the
requirements of, or compliance with, federal or state securities or blue sky
laws. Further, we have not participated in the preparation of the Registration
Statement or any other offering documentation relating to the Trust, the
Applicable Shares or the related Series, and we assume no responsibility for
their contents. As to any facts material to our opinion, other than those
assumed, we have relied without independent investigation on the
above-referenced documents and on
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the accuracy, as of the date hereof, of the matters therein contained.
Based on and subject to the foregoing, and limited in all respects to
matters of Delaware law, it is our opinion that:
1. The Trust is a duly organized and validly existing business trust in
good standing under the laws of the State of Delaware.
2. The issuance of the Applicable Shares has been duly authorized on
behalf of the Trust and, when issued to Shareholders in accordance with the
terms, conditions, requirements and procedures set forth in the Operative
Documents, the Applicable Shares will constitute legally issued, fully paid and
non-assessable Shares of beneficial interest in the Trust.
3. Under the Delaware Act and the terms of the Governing Instrument,
each shareholder of the Trust, in such capacity, will be entitled to the same
limitation of personal liability as that extended to stockholders of private
corporations for profit organized under the General Corporation Law of the State
of Delaware; provided, however, that we express no opinion with respect to the
liability of any Shareholder who is , was or may become a named trustee of the
Trust. Neither the existence nor exercise of the voting rights granted to
Shareholders under the Governing Instrument will, of itself, cause a Shareholder
to be deemed a trustee of the Trust under the Delaware Act. Notwithstanding the
foregoing or the opinion expressed in paragraph 2 above, we note that, pursuant
to Section 5 of Article IV of the Governing Instrument, the Trustees have the
power to cause Shareholders, or Shareholders of a particular Series, to have the
obligation to pay certain custodian, transfer, servicing or similar agent
charges by setting off the same against declared but unpaid dividends or by
reducing Share ownership.
We consent to the filing of this opinion as an Exhibit to the
Registration Statement. In giving this consent, we do not thereby admit that we
come within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
We understand that the firm of Arnold & Porter may rely as to matters
of Delaware law on the opinions set forth above in connection with the rendering
of its opinion to you dated on or about the date hereof concerning the issuance
of Applicable Shares, and we hereby consent to such reliance. Except as provided
above, the opinions set forth above are expressed solely for the benefit of the
addressee hereof and may not be furnished or quoted to, or
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relied upon, by any other person or entity for any purpose without our prior
written consent.
Sincerely,
MORRIS, NICHOLS, ARSHT & TUNNELL
/s/ WALTER C. TUTHILL
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CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 8 to Registration
Statement No. 33-48066 of Prudential Dryden Fund of our reports on the financial
statements of The Prudential Institutional Fund-Stock Index Fund and The
Prudential Institutional Fund-Active Balanced Fund dated November 13, 1996,
appearing in the Statement of Additional Information, which is a part of such
Registration Statement, and to the references to us under the headings
"Financial Highlights" in the Prospectus, which is a part of such Registration
Statement, and "Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants" in the Statement of Additional Information.
/s/ Deloitte & Touche LLP
New York, New York
March 31, 1997
PRUDENTIAL DRYDEN FUND
(the Fund)
PLAN PURSUANT TO RULE 18F-3
The Fund hereby adopts this plan pursuant to Rule 18f-3 under the
Investment Company Act of 1940 (the 1940 Act), setting forth the separate
arrangement and expense allocation of each class of shares. Any material
amendment to this plan is subject to prior approval of the Board of
Directors/Trustees, including a majority of the independent Directors/Trustees.
CLASS CHARACTERISTICS
CLASS A SHARES: Class A shares are subject to a high initial sales charge and
a distribution and/or service fee pursuant to Rule 12b-1 under
the 1940 Act (Rule 12b-1 fee) not to exceed .30 of 1% per
annum of the average daily net assets of the class. The
initial sales charge is waived or reduced for certain eligible
investors.
CLASS B SHARES: Class B shares are not subject to an initial sales charge but
are subject to a high contingent deferred sales charge
(declining by 1% each year) which will be imposed on certain
redemptions and a Rule 12b-1 fee of not to exceed 1% per
annum of the average daily net assets of the class. The
contingent deferred sales charge is waived for certain
eligible investors. Class B shares automatically convert to
Class A shares approximately seven years after purchase.
CLASS C SHARES: Class C shares are not subject to an initial sales charge but
are subject to a low contingent deferred sales charge
(declining by 1% each year) which will be imposed on certain
redemptions and a Rule 12b-1 fee not to exceed 1% per annum of
the average daily net assets of the class.
CLASS Z SHARES: Class Z shares are not subject to either an initial or
contingent deferred sales charge nor are they subject to any
Rule 12b-1 fee.
CLASS I SHARES: Class I shares are not subject to either an initial or
contingent deferred sales shares nor are they subject to any
Rule 12b-1 fee. Class I shares are subject to nominal transfer
agency fees or expenses.
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INCOME AND EXPENSE ALLOCATIONS
Income, any realized and unrealized capital gains and losses, and expenses
not allocated to a particular class, will be allocated to each class on
the basis of the net asset value of that class in relation to the net
asset value of the Fund.
DIVIDENDS AND DISTRIBUTIONS
Dividends and other distributions paid by the Fund to each class of
shares, to the extent paid, will be paid on the same day and at the same
time, and will be determined in the same manner and will be in the same
amount, except that the amount of the dividends and other distributions
declared and paid by a particular class may be different from that paid by
another class because of Rule 12b-1 fees and other expenses borne
exclusively by that class.
EXCHANGE PRIVILEGE
Holders of Class A Shares, Class B Shares, Class C Shares, Class Z
Shares and Class I Shares shall have such exchange privileges as set forth
in the Fund's current prospectus. Exchange privileges may vary among
Classes and among holders of a Class.
CONVERSION FEATURES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be
effected at relative net asset value without the imposition of any
additional sales charge.
GENERAL
A. Each class of shares shall have exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and shall
have separate voting rights on any matter submitted to shareholders in
which the interests of one class differ from the interests of any other
class.
B. On an ongoing basis, the Directors/Trustees, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Fund
for the existence of any material conflicts among the interests of its
several classes. The Directors/Trustees, including a majority of the
independent Directors/Trustees, shall take such action as is reasonably
necessary to eliminate any such conflicts that may develop. Prudential
Mutual Fund Management LLC, the Fund's Manager, will be responsible for
reporting any potential or existing conflicts to the Trustees.
C. For purposes of expressing an opinion on the financial statements of the
Fund, the methodology and procedures for
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calculating the net asset value and dividends/distributions of the Fund's
several classes and the proper allocation of income and expenses among
such classes will be examined annually by the Fund's independent auditors
who, in performing such examination, shall consider the factors set forth
in the relevant auditing standards adopted, from time to time, by the
American Institute of Certified Public Accountants.
Dated: February 19, 1997
3
