<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1997
REGISTRATION NOS. 33-53151, 811-7167
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [_]
POST-EFFECTIVE AMENDMENT NO. 5 [X]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 7 [X]
(CHECK APPROPRIATE BOX OR BOXES)
PRUDENTIAL EUROPE GROWTH FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 367-7530
S. JANE ROSE, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of the Registration Statement.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
[_] Immediately upon filing pursuant to paragraph (b)
[X] on July 2, 1997 pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)
[_] on (date) pursuant to paragraph (a)
[_] 75 days after filing pursuant to paragraph (a)(ii)
[_] on (date) pursuant to paragraph (a)(ii) of Rule 485.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
SHARE AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES BEING BEING OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED* PER SHARE** OFFERING*** FEE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common Stock,
Par value $.001......... 365,753 $16.18 N/A $0
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
* The shares being registered as set forth in this table are in addition to
the indefinite number of shares of common stock which the Registrant has
registered under the Securities Act of 1933, as amended, pursuant to Rule
24f-2 under the Investment Company Act of 1940. The Registrant's Rule 24f-2
Notice for the fiscal year ended April 30, 1997 was filed on June 30, 1997
(Accession Number 0000921073-97-000005).
** The fee for the shares being registered by this filing has been computed on
the basis of the market value per share in effect on June 18, 1997.
*** Calculation of the proposed maximum offering price has been made pursuant
to Rule 24e-2. During its fiscal year ended April 30, 1997, the fund
redeemed 39,078,561 shares of common stock. During its current fiscal
year, the fund used 38,712,808 shares it redeemed during the fiscal year
ended April 30, 1997, for a reduction pursuant to Rule 24f-2(c). The fund
currently is registering 365,753 shares redeemed during its fiscal year
ended April 30, 1997. During its current fiscal year the fund filed no
other post-effective amendments for the purpose of the reduction pursuant
to Rule 24e-2(a).
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION
-------- --------
<C> <S> <C>
Item 1. Cover Page....................... Cover Page
Item 2. Synopsis......................... Fund Expenses; Fund Highlights
Item 3. Condensed Financial Information.. Fund Expenses; Financial
Highlights; How the Fund
Calculates Performance
Item 4. General Description of Cover Page; Fund Highlights; How
Registrant....................... the Fund Invests; General
Information
Item 5. Management of the Fund........... Financial Highlights; How the
Fund is Managed Not Applicable
Item 5A. Management's Discussion of Fund
Performance......................
Item 6. Capital Stock and Other Taxes, Dividends and
Securities....................... Distributions; General
Information; Shareholder Guide
Item 7. Purchase of Securities Being Shareholder Guide; How the Fund
Offered.......................... Values its Shares; How the Fund
is Managed
Item 8. Redemption or Repurchase......... Shareholder Guide; How the Fund
Values its Shares
Item 9. Pending Legal Proceedings........ Not Applicable
Part B
Item 10. Cover Page....................... Cover Page
Item 11. Table of Contents................ Table of Contents
Item 12. General Information and History.. General Information
Item 13. Investment Objectives and Investment Objective and
Policies......................... Policies; Investment Restrictions
Item 14. Management of the Fund........... Directors and Officers; Manager;
Distributor
Item 15. Control Persons and Principal Not Applicable
Holders of Securities............
Item 16. Investment Advisory and Other Manager; Distributor; Custodian,
Services......................... Transfer and Dividend Disbursing
Agent and Independent Accountants
Item 17. Brokerage Allocation and Other Portfolio Transactions
Practices........................
Item 18. Capital Stock and Other Not Applicable
Securities.......................
Item 19. Purchase, Redemption and Pricing
of Securities Purchase and Redemption of Fund
Being Offered................... Shares; Shareholder Investment
Account; Net Asset Value
Item 20. Tax Status....................... Taxes
Item 21. Underwriters..................... Distributor
Item 22. Calculation of Performance Data.. Performance Information
Item 23. Financial Statements............. Financial Statements
</TABLE>
<PAGE>
PRUDENTIAL EUROPE GROWTH FUND, INC.
- -------------------------------------------------------------------------------
PROSPECTUS DATED JULY 1, 1997
- -------------------------------------------------------------------------------
Prudential Europe Growth Fund, Inc. (the Fund) is an open-end, diversified
management investment company whose investment objective is long-term growth
of capital. The Fund seeks to achieve this objective by investing primarily in
equity securities (common stock, securities convertible into common stock and
preferred stock) of companies domiciled in Europe. Under normal circumstances,
the Fund intends to invest at least 65% of its total assets in such
securities. The Fund may also invest in equity securities of other companies
and in non-convertible debt securities and may engage in various derivative
transactions such as options on stocks, stock indices, foreign currencies,
futures contracts on foreign currencies and foreign currency exchange
contracts and the purchase and sale of futures contracts on foreign currencies
and groups of currencies and on financial or stock indices to hedge its
portfolio and to attempt to enhance returns. There can be no assurance that
the Fund's investment objective will be achieved. See "How the Fund Invests--
Investment Objective and Policies." The Fund's address is Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, and its telephone
number is (800) 225-1852.
The Fund is not intended to constitute a complete investment program. Because
of its investment objective and policies, including its European orientation,
the Fund is subject to greater investment risks than certain other mutual
funds. See "How the Fund Invests--Risk Factors and Special Considerations of
Investing in Foreign Securities."
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information
about the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated July 1, 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 Fund at the
address or telephone number noted above.
- -------------------------------------------------------------------------------
Investors are advised to read the Prospectus and retain it for future
reference.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL EUROPE GROWTH FUND, INC.?
Prudential Europe Growth Fund, Inc. is a mutual fund. A mutual fund pools
the resources of investors by selling its shares to the public and investing
the proceeds of such sale in a portfolio of securities designed to achieve
its investment objective. Technically, the Fund is an open-end, diversified
management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is long-term growth of capital. The Fund
seeks to achieve this objective by investing primarily in equity securities
(common stock, securities convertible into common stock and preferred stock)
of companies domiciled in Europe. There can be no assurance that the Fund's
investment objective will be achieved. See "How the Fund Invests--Investment
Objective and Policies" at page 6.
WHAT ARE THE FUND'S RISK FACTORS AND SPECIAL CHARACTERISTICS?
Under normal circumstances, the Fund anticipates that at least 65% of its
total assets will consist of European equity securities, primarily common
stock and other securities convertible into common stock. See "How the Fund
Invests--Investment Objective and Policies" at page 6. The Fund may invest
in developing countries, and in countries with new or developing capital
markets such as those in Eastern and Central Europe. Investing in securities
of foreign companies and countries involves certain risks and considerations
not typically associated with investments in domestic companies. See "How
the Fund Invests--Risk Factors and Special Considerations of Investing in
Foreign Securities" at page 8. The Fund is permitted to invest up to 25% of
its net assets in lower quality foreign convertible debt securities provided
that such securities have a minimum rating of at least B as determined by a
nationally recognized securities rating organization (NRSRO), such as
Standard & Poor's Ratings Group or another NRSRO or, if unrated, are of
equivalent quality. Lower rated securities are subject to a greater risk of
loss of principal and interest. See "How the Fund Invests--Risk Factors
Relating to Investing in Foreign Debt Securities Rated Below Investment
Grade (Junk Bonds)" at page 9. The Fund may also engage in various hedging
and return enhancement strategies and invest in derivative instruments. See
"How the Fund Invests--Hedging and Return Enhancement Strategies--Risks of
Hedging and Return Enhancement Strategies" at page 11.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager), is the
manager of the Fund and is compensated for its services at an annual rate of
.75 of 1% of the Fund's average daily net assets. As of May 31, 1997, PIFM
served as manager or administrator to 62 investment companies, including 40
mutual funds, with aggregate assets of approximately $56 billion. The
Prudential Investment Corporation, which does business under the name of
Prudential Investments (PI, the investment adviser or the Subadviser)
furnishes investment advisory services in connection with the management of
the Fund under a Subadvisory Agreement with PIFM. See "How the Fund is
Managed--Manager" at page 14. The management fee is higher than that paid by
most other investment companies.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's Class A, Class B, Class C and Class Z shares and
is paid an annual distribution and service fee which is currently being
charged at an annual rate of .25 of 1% of the average daily net assets of
the Class A shares, and at an annual rate of 1% of the average daily net
assets of each of the Class B and Class C shares. Prudential Securities
incurs the expenses of distributing Class Z shares under a Distribution
Agreement with the Fund, none of which is reimbursed by or paid for by the
Fund. See "How the Fund is Managed--Distributor" at page 15.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 per class for Class A and Class B
shares and $5,000 for Class C shares. The minimum subsequent investment is $100
for Class A, Class B and Class C shares. Class Z shares are not subject to any
minimum investment requirements. There is no minimum investment requirement for
certain retirement and employee savings plans or custodial accounts for the
benefit of minors. For purchases made through the Automatic Savings
Accumulation Plan, the minimum initial and subsequent investment is $50. See
"Shareholder Guide--How to Buy Shares of the Fund" at page 21 and "Shareholder
Guide--Shareholder Services" at page 31.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services 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 plus a sales charge which
may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). Class Z shares are offered to a
limited group of investors at net asset value without any sales charge. See
"How the Fund Values its Shares" at page 17 and "Shareholder Guide--How to Buy
Shares of the Fund" at page 21.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four classes of shares through this Prospectus:
.Class A Sold with an initial sales charge of up to 5% of the offering
Shares: price.
.Class B Sold without an initial sales charge but are subject to a
Shares: contingent deferred sales charge or CDSC (declining from 5%
to zero of the lower of the amount invested or the redemption
proceeds) which will be imposed on certain redemptions made
within six years of purchase. Although Class B shares are
subject to higher ongoing distribution-related expenses than
Class A shares, Class B shares will automatically convert to
Class A shares (which are subject to lower ongoing expenses)
approximately seven years after purchase.
.Class C Sold without an initial sales charge but, for one year after
Shares: purchase, are subject to a CDSC of 1% on redemptions. Like
Class B shares, Class C shares are subject to higher ongoing
distribution-related expenses than Class A shares but do not
convert to another class.
.Class Z Sold without either an initial or contingent deferred sales
Shares: charge to a limited group of investors. Class Z shares are
not subject to any ongoing service or distribution expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 22.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 26.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to pay dividends of net investment income and net capital
gains at least annually. Dividends and distributions will be automatically
reinvested in additional shares of the Fund at NAV without a sales charge
unless you request that they be paid to you in cash. See "Taxes, Dividends and
Distributions" at page 18.
3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
SHAREHOLDER
TRANSACTION CLASS A SHARES CLASS B SHARES CLASS C SHARES
EXPENSES+ -------------- ------------------------------------------- ----------------------------
<S> <C> <C> <C>
Maximum Sales
Load Imposed on
Purchases (as a
percentage of
offering price).. 5.00% None None
Maximum Deferred
Sales Load (as a
percentage of
offering price).. None None None
Maximum Deferred
Sales Load
Imposed on
Reinvestment
Dividends (as a
percentage of 5% during the first year, decreasing
whichever is by 1% annually to 1% in the fifth and 1% on redemptions made
lower)........... None the sixth years and 0% in the seventh year* within one year of purchase.
Redemption Fees
(as percentage
of amount
redeemed, if
applicable)...... None None None
Exchange Fees..... None None None
<CAPTION>
ANNUAL FUND CLASS A SHARES CLASS B SHARES CLASS C SHARES
OPERATING EXPENSES -------------- ------------------------------------------- ----------------------------
<S> <C> <C> <C>
(as a percentage of average net assets)
Management Fees... .75% .75% .75%
12b-1 Fees........ .25%++ 1.00% 1.00%
Other Expenses.... .36% .36% .36%
---- ------------------------------------------- ----------------------------
Total Fund
Operating
Expenses......... 1.36%++ 2.11% 2.11%
==== =========================================== ============================
<CAPTION>
SHAREHOLDER
TRANSACTION CLASS Z SHARES
EXPENSES+ ----------------
<S> <C>
Maximum Sales
Load Imposed on
Purchases (as a
percentage of
offering price).. None
Maximum Deferred
Sales Load (as a
percentage of
offering price).. None
Maximum Deferred
Sales Load
Imposed on
Reinvestment
Dividends (as a
percentage of
whichever is
lower)........... None
Redemption Fees
(as percentage
of amount
redeemed, if
applicable)...... None
Exchange Fees..... None
<CAPTION>
ANNUAL FUND CLASS Z SHARES**
OPERATING EXPENSES ----------------
<S> <C>
(as a percentage of average net assets)
Management Fees... .75%
12b-1 Fees........ None
Other Expenses.... .36%
----------------
Total Fund
Operating
Expenses......... 1.11%
================
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
EXAMPLE ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual
return and (2) redemption at the end of each
time period:
Class A..................................... $63 $91 $121 $205
Class B..................................... $71 $96 $123 $216
Class C..................................... $31 $66 $113 $244
Class Z..................................... $11 $35 $ 61 $135
You would pay the following expenses on the
same investment, assuming no redemption:
Class A..................................... $63 $91 $121 $205
Class B..................................... $21 $66 $113 $216
Class C..................................... $21 $66 $113 $244
Class Z..................................... $11 $35 $ 61 $135
</TABLE>
The above example is based on data for the Fund's fiscal year ended April
30, 1997. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.
The purpose of this table is to assist investors in understanding the
various types of costs and expenses that an investor in the Fund will
bear, whether directly or indirectly. For more complete descriptions of
the various costs and expenses, see "How the Fund is Managed." "Other
Expenses" include an estimated operating expenses of the Fund, such as
Directors' and professional fees, registration fees, reports to
shareholders, transfer agency and custodian (domestic and foreign) fees
(but excludes foreign withholding taxes).
----------
* Class B shares will automatically convert to Class A shares
approximately seven years after purchase. See "Shareholder Guide--
Conversion Feature--Class B Shares."
+ Pursuant to rules of the National Association of Securities Dealers,
Inc., the aggregate initial sales charges, deferred sales charges and
asset-based sales charges on shares of the Fund may not exceed 6.25% of
total gross sales, subject to certain exclusions. This 6.25% limitation
is imposed on the Fund rather than on a per shareholder basis.
Therefore, long-term shareholders of the Fund may pay more in total
sales charges than the economic equivalent of 6.25% of such
shareholders' investment in such shares. See "How the Fund is Managed--
Distributor."
++ Although the Class A Distribution and Service Plan provides that the
Fund may pay up to an annual rate of .30 of 1% of the average daily net
assets of the Class A shares, the Distributor agreed to limit its
distribution fees with respect to Class A shares of the Fund so as not
to exceed .25 of 1% of the average daily net assets of the Class A
shares for the then current fiscal year. Total operating expenses
without such limitation would have been 1.61%. See "How the Fund is
Managed--Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
The following financial highlights for the fiscal year ended April 30, 1997
have been audited by Price Waterhouse LLP, independent accountants, whose
report thereon was unqualified. The following financial highlights for the
fiscal year ended April 30, 1996 and the fiscal period ended April 30, 1995
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 following financial highlights contain selected
data for a Class A, Class B, Class C and Class Z share of common stock
outstanding, total return, ratio to average net assets and other supplemental
data for the period indicated. The information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholders Guide--
Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------- ----------------------------- --------------------------
JULY 13,
1994(B) JULY 13, JULY 13,
YEAR ENDED THROUGH YEAR ENDED 1994(B) YEAR ENDED 1994(B)
APRIL 30, APRIL APRIL 30, THROUGH APRIL 30, THROUGH
---------------- 30, ------------------ APRIL 30, --------------- APRIL 30,
1997 1996(C) 1995(C) 1997 1996(C) 1995(C) 1997 1996(C) 1995(C)
------- ------- -------- -------- -------- --------- ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of
period......... $ 13.69 $ 11.77 $ 11.40 $ 13.49 $ 11.69 $ 11.40 $13.49 $ 11.69 $ 11.40
------- ------- -------- -------- -------- --------- ------ ------- ---------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
gain (loss).... .09 .06 .01 (.04) (.04) (.06) (.04) (.04) (.06)
Net realized and
unrealized gain
on investment
and foreign
currency
transactions... 2.24 1.86 .36 2.23 1.84 .35 2.23 1.84 .35
------- ------- -------- -------- -------- --------- ------ ------- ---------
Total from
investment
operations..... 2.33 1.92 .37 2.19 1.80 .29 2.19 1.80 .29
------- ------- -------- -------- -------- --------- ------ ------- ---------
LESS
DISTRIBUTIONS
Distributions
paid to
shareholders
from net
realized gains
on investment
and foreign
currency
transactions... (.56) -- -- (.56) -- -- (.56) -- --
------- ------- -------- -------- -------- --------- ------ ------- ---------
Total
distributions.. (.56) -- -- (.56) -- -- (.56) -- --
------- ------- -------- -------- -------- --------- ------ ------- ---------
Net asset value,
end of period.. $ 15.46 $ 13.69 $ 11.77 $ 15.12 $ 13.49 $ 11.69 $15.12 $ 13.49 $ 11.69
======= ======= ======== ======== ======== ========= ====== ======= =========
TOTAL
RETURN(D):..... 17.20% 16.31% 3.25% 16.41% 15.40 % 2.54 % 16.41% 15.40 % 2.54 %
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end
of period
(000).......... $38,807 $47,789 $ 41,963 $139,277 $125,868 $ 106,081 $8,010 $ 7,741 $ 7,260
Average net
assets (000)... $37,834 $47,183 $ 29,598 $133,135 $122,255 $ 85,623 $8,002 $ 7,768 $ 6,094
Ratios to
average net
assets:
Expenses,
including
distribution
fees.......... 1.36% 1.53% 1.84%(a) 2.11 % 2.28 % 2.59 %(a) 2.11% 2.28 % 2.59 %(a)
Expenses,
excluding
distribution
fees.......... 1.11% 1.28% 1.59%(a) 1.11 % 1.28 % 1.59 %(a) 1.11% 1.28 % 1.59 %(a)
Net investment
income (loss). .57% .44% .06%(a) (.27)% (.33)% (.71)%(a) (.25)% (.30)% (.71)%(a)
For Class A, B
and C Shares:
Portfolio
turnover rate. 31% 65% 25%
Average
commission rate
per share...... $0.0463 $0.0233 N/A
<CAPTION>
CLASS Z
--------------------
APRIL 15,
1996(B)
YEAR ENDED THROUGH
APRIL 30, APRIL 30,
1997 1996(C)
---------- ---------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of
period......... $ 13.68 $ 13.40
---------- ---------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
gain (loss).... .02 .28
Net realized and
unrealized gain
on investment
and foreign
currency
transactions... 2.37 --
---------- ---------
Total from
investment
operations..... 2.39 .28
---------- ---------
LESS
DISTRIBUTIONS
Distributions
paid to
shareholders
from net
realized gains
on investment
and foreign
currency
transactions... (.56) --
---------- ---------
Total
distributions.. (.56) --
---------- ---------
Net asset value,
end of period.. $ 15.51 $ 13.68
========== =========
TOTAL
RETURN(D):..... 17.66% 2.09%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end
of period
(000).......... $11,949 $ 204(e)
Average net
assets (000)... $ 7,958 $ 203(e)
Ratios to
average net
assets:
Expenses,
including
distribution
fees.......... 1.11% 1.28%(a)
Expenses,
excluding
distribution
fees.......... 1.11% 1.28%(a)
Net investment
income (loss). .22% .54%(a)
For Class A, B
and C Shares:
Portfolio
turnover rate.
Average
commission rate
per share......
</TABLE>
- ---------
(a) Annualized.
(b) Commencement of class operations.
(c) Based on average shares outstanding, by class.
(d) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a full
year are not annualized.
(e) Figures are actual and not rounded to the nearest thousand.
N/A--Data not required for these periods.
5
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS LONG-TERM GROWTH OF CAPITAL. THE FUND
SEEKS TO ACHIEVE THIS OBJECTIVE BY INVESTING PRIMARILY IN EQUITY SECURITIES OF
COMPANIES DOMICILED IN EUROPE. EUROPEAN COUNTRIES INCLUDE AUSTRIA, BELGIUM,
BULGARIA, THE CZECH REPUBLIC, DENMARK, FINLAND, FRANCE, GERMANY, GREECE,
HUNGARY, IRELAND, ITALY, LUXEMBOURG, THE NETHERLANDS, NORWAY, POLAND,
PORTUGAL, ROMANIA, RUSSIA, SLOVAKIA, SPAIN, SWEDEN, SWITZERLAND, TURKEY AND
THE UNITED KINGDOM. Equity securities in which the Fund may invest include
common stock, preferred stock and common stock equivalents, such as warrants
and convertible debt securities (rated investment grade or below investment
grade, or non-rated, as described below). Current income from dividends and
interest will not be an important consideration in selecting portfolio
securities. THE FUND ANTICIPATES THAT, UNDER NORMAL MARKET CONDITIONS, AT
LEAST 65% OF ITS TOTAL ASSETS WILL CONSIST OF EQUITY SECURITIES OF EUROPEAN
COMPANIES. THE FUND MAY INVEST IN THE EQUITY SECURITIES OF COMPANIES DOMICILED
IN ANY COUNTRY WITHIN EUROPE THAT THE INVESTMENT ADVISER BELIEVES TO BE
STABLE. THERE IS NO LIMIT ON THE PERCENTAGE OF FUND ASSETS THAT MAY BE
INVESTED IN ANY SINGLE COUNTRY. UNDER NORMAL CIRCUMSTANCES, THE FUND MAY
INVEST THE REMAINDER OF ITS ASSETS IN SECURITIES OF ISSUERS DOMICILED OUTSIDE
OF EUROPE, DEBT OBLIGATIONS, REPURCHASE AGREEMENTS AND MAY HOLD CASH, SUBJECT
TO THE LIMITATIONS DESCRIBED HEREIN. The Fund reserves the right as a
defensive measure to hold temporarily other types of securities without limit,
including commercial paper, bankers' acceptances, non-convertible debt
securities (corporate and government) or government and high quality money
market securities of United States and non-United States issuers, or cash
(foreign currencies or United States dollars), in such proportions as, in the
opinion of the Fund's investment adviser, prevailing market, economic or
political conditions warrant. The Fund may also temporarily hold cash and
invest in high quality foreign or domestic money market instruments pending
investment of proceeds from new sales of Fund shares or to meet ordinary daily
cash needs. THERE CAN BE NO ASSURANCE THAT THE FUND'S OBJECTIVE WILL BE
ACHIEVED. See "Investment Objective and Policies" in the Statement of
Additional Information.
AS WITH AN INVESTMENT IN ANY MUTUAL FUND, AN INVESTMENT IN THIS FUND CAN
DECREASE IN VALUE AND YOU CAN LOSE MONEY.
THE FUND MAY INVEST IN DEVELOPING COUNTRIES, AND IN COUNTRIES WITH NEW OR
DEVELOPING CAPITAL MARKETS, SUCH AS THOSE IN EASTERN AND CENTRAL EUROPE. These
countries may have relatively unstable governments, economies based on only a
few industries and securities markets that trade a limited number of
securities. Securities of issuers located in these countries tend to have
volatile prices and offer the potential for substantial loss as well as gain.
In addition, these securities may be less liquid than investments in more
established countries and markets as a result of inadequate trading volume or
restrictions on trading imposed by the governments of such countries. See
"Risk Factors and Special Considerations of Investing in Foreign Securities"
below.
UNDER NORMAL CIRCUMSTANCES, THE FUND MAY INVEST UP TO 35% OF ITS TOTAL ASSETS
IN THE SECURITIES OF ISSUERS DOMICILED OUTSIDE OF EUROPE. Such investments may
include (i) securities of companies in countries which are linked by
tradition, economic markets, cultural similarities or geography to Europe and
(ii) securities of companies which have operations in Europe or which stand to
benefit from political and economic events in Europe. For example, the Fund
may invest in a company outside of Europe when the Fund's investment adviser
believes at the time of investment that the value of the company's securities
may be enhanced by conditions or developments in Europe even though the
company's production facilities are located outside of Europe.
UNDER NORMAL CONDITIONS, THE FUND MAY ALSO INVEST UP TO 35% OF ITS TOTAL
ASSETS IN DEBT OBLIGATIONS, INCLUDING OBLIGATIONS ISSUED OR GUARANTEED BY THE
U.S. GOVERNMENT, ITS AGENCIES OR INSTRUMENTALITIES, OR BY FOREIGN GOVERNMENTS
OR SUPRANATIONAL ORGANIZATIONS, OBLIGATIONS ISSUED BY BANKS AND CORPORATIONS
AND OTHER DEBT OBLIGATIONS. These obligations may be denominated in U.S.
dollars or in foreign currencies. The issuers of such securities may or may
not be domiciled in Europe. Supranational organizations include entities such
as: the World Bank, which was chartered to finance development projects in
developing member countries; the European Community, which is a twelve-nation
organization engaged
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in cooperative economic activities; the European Coal and Steel Community,
which is an economic union of various European nations' steel and coal
industries; and the Asian Development Bank, which is an international
development bank established to lend funds, promote investment and provide
technical assistance to member nations in the Asian and Pacific regions.
The Fund will purchase "investment grade" debt obligations. Investment grade
debt obligations are bonds and other obligations rated within the four highest
quality grades as determined by Moody's Investors Service, Inc. (Moody's)
(currently Aaa, Aa, A and Baa for bonds, MIG 1, MIG 2, MIG 3 and MIG 4 for
notes and P-1 for commercial paper), or Standard & Poor's Ratings Group (S&P)
(currently AAA, AA, A and BBB for bonds, SP-1 and SP-2 for notes and A-1 for
commercial paper), or by another nationally recognized statistical rating
organization (NRSRO) or, in unrated securities of equivalent quality as
determined by the Manager. See the "Description of Security Ratings" in the
Appendix to the Prospectus. The Fund is permitted to invest up to 25% of its
net assets in lower quality, foreign convertible debt securities provided that
such securities have a minimum rating of at least B as determined by one NRSRO
or, if unrated, are deemed by the investment adviser to be of comparable
quality. Securities rated Baa by Moody's or BBB by S&P, although considered to
be investment grade, lack outstanding investment characteristics and, in fact,
have speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make interest
and principal payments than is the case with higher grade bonds. Lower rated
debt securities are subject to a greater risk of loss of principal and
interest. See "Risk Factors Relating to Investing in Foreign Debt Securities
Rated Below Investment Grade (Junk Bonds)" below.
THE FUND MAY INVEST IN SECURITIES NOT LISTED ON SECURITIES EXCHANGES. THESE
SECURITIES WILL GENERALLY HAVE AN ESTABLISHED MARKET (SUCH AS THE OVER-THE-
COUNTER MARKET), THE DEPTH AND LIQUIDITY OF WHICH MAY VARY FROM TIME TO TIME
AND FROM SECURITY TO SECURITY. SEE "OTHER INVESTMENTS AND POLICIES--ILLIQUID
SECURITIES" BELOW.
In addition to analyzing the companies in which investments are made, the
investment adviser also considers such factors as: prospects for economic
growth for each foreign country; expected levels of inflation and interest
rates; government policies influencing business conditions; the range of
individual investment opportunities available to international investors; and
other pertinent financial, tax, social, political and national factors--all in
relation to the prevailing prices of securities in each country.
IN ADDITION TO PURCHASING EQUITY SECURITIES OF EUROPEAN ISSUERS, THE FUND MAY
INVEST IN AMERICAN DEPOSITARY RECEIPTS (ADRS), EUROPEAN DEPOSITARY RECEIPTS
(EDRS) OR OTHER SECURITIES CONVERTIBLE INTO SECURITIES OF CORPORATIONS
DOMICILED IN EUROPE. These securities may not necessarily be denominated in
the same currency as the securities into which they may be converted.
Generally, ADRs, in registered form, are designed for use in the United States
securities markets and EDRs, in bearer form, are designed for use in European
securities markets. The Fund may invest in ADRs and EDRs through both
sponsored and unsponsored arrangements. In a sponsored ADR or EDR arrangement,
the foreign issuer assumes the obligation to pay some or all of the
depository's transaction fees, whereas in an unsponsored arrangement, the
foreign issuer assumes no obligations and the depository's transaction fees
are paid by the ADR or EDR holders. Foreign issuers in respect of whose
securities unsponsored ADRs or EDRs have been issued are not necessarily
obligated to disclose material information in the markets in which the
unsponsored ADRs or EDRs are traded and, therefore, there may not be a
correlation between such information and the market value of such securities.
THE FUND MAY INVEST UP TO 5% OF ITS NET ASSETS IN WARRANTS. A warrant gives
the holder thereof the right to subscribe by a specified date to a stated
number of shares of stock of the issuer at a fixed price. Warrants tend to be
more volatile than the underlying stock, and if at a warrant's expiration date
the stock is trading at a price below the price set in the warrant, the
warrant will expire worthless. Conversely, if at the expiration date the
underlying stock is trading at a price higher than the price set in the
warrant, the Fund can acquire the stock at a price below its market value.
AS INDICATED ABOVE, WHEN CONDITIONS DICTATE A DEFENSIVE STRATEGY, THE FUND
MAY INVEST TEMPORARILY, WITHOUT LIMIT, IN HIGH QUALITY MONEY MARKET
INSTRUMENTS OF UNITED STATES AND NON-UNITED STATES ISSUERS (INCLUDING, WITH
RESPECT TO UNITED STATES ISSUERS, REPURCHASE AGREEMENTS MATURING IN SEVEN DAYS
OR LESS). The Fund will only invest in money market instruments that have
short term ratings in at least the second highest category by at least one
NRSRO or are issued by
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companies that have outstanding debt securities rated at least investment
grade by an NRSRO or in unrated securities of issuers that the Fund's
investment adviser has determined to be of comparable quality. Subsequent to
its purchase by the Fund, a security may be assigned a lower rating or cease
to be rated. Such an event would not require the elimination of the issue from
the portfolio, but the investment adviser will consider such an event in
determining whether the Fund should continue to hold the security in its
portfolio. Securities rated Baa by Moody's or BBB by S&P, for example,
although considered to be investment grade, lack outstanding investment
characteristics and, in fact, have speculative characteristics. See
"Description of Security Ratings" in the Appendix.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND MAY NOT BE
CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE FUND'S
OUTSTANDING VOTING SECURITIES, AS DEFINED IN THE INVESTMENT COMPANY ACT.
INVESTMENT POLICIES THAT ARE NOT FUNDAMENTAL MAY BE MODIFIED BY THE BOARD OF
DIRECTORS.
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN FOREIGN SECURITIES
FOREIGN SECURITIES INVOLVE CERTAIN RISKS, WHICH SHOULD BE CONSIDERED
CAREFULLY BY AN INVESTOR IN THE FUND. THESE RISKS INCLUDE POLITICAL OR
ECONOMIC INSTABILITY IN THE COUNTRY OF THE ISSUER, THE DIFFICULTY OF
PREDICTING INTERNATIONAL TRADE PATTERNS, THE POSSIBILITY OF IMPOSITION OF
EXCHANGE CONTROLS AND THE RISK OF CURRENCY FLUCTUATIONS. Such securities may
be subject to greater fluctuations in price than securities issued by U.S.
corporations or issued or guaranteed by the U.S. Government, its
instrumentalities or agencies. In addition, there may be less publicly
available information about a foreign company than about a domestic company.
Foreign companies generally are not subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to domestic
companies. There is generally less government regulation of securities
exchanges, brokers and listed companies abroad than in the United States and
there is a possibility of expropriation, confiscatory taxation or diplomatic
developments which could affect investment.
ALTHOUGH THE FUND INTENDS TO INVEST PRIMARILY IN EQUITY SECURITIES, IT MAY
INVEST IN DEBT SECURITIES OF FOREIGN ISSUERS. In many instances, foreign debt
securities may provide higher yields than securities of domestic issuers which
have similar maturities and are of similar quality. These investments,
however, may be less liquid than the securities of U.S. corporations. In the
event of default of any such foreign debt obligations, it may be more
difficult for the Fund to obtain or enforce a judgment against the issuers of
such securities.
ADDITIONAL COSTS COULD BE INCURRED IN CONNECTION WITH THE FUND'S
INTERNATIONAL INVESTMENT ACTIVITIES. Foreign brokerage commissions are
generally higher than United States brokerage commissions. Increased custodian
costs as well as administrative difficulties (such as the applicability of
foreign laws to foreign custodians in various circumstances) may be associated
with the maintenance of assets in foreign jurisdictions.
If 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 the Fund's securities
denominated in that currency. Such changes also will affect the Fund's income
and distributions to shareholders. In addition, although the Fund will receive
income in such currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the exchange rate for any such
currency declines after the Fund's income has been accrued and translated into
U.S. dollars, the Fund could be required to liquidate portfolio securities to
make such distributions, particularly in instances in which the amount of
income the Fund is required to distribute is not immediately reduced by the
decline in such currency. Similarly, if an exchange rate declines between the
time the Fund incurs expenses in U.S. dollars and the time such expenses are
paid, the amount of such currency required to be converted into U.S. dollars
in order to pay such expenses in U.S. dollars will be greater than the
equivalent amount in any such currency of such expenses at the time they were
incurred. The Fund may, but need not, enter into forward foreign currency
exchange contracts, options on foreign currencies and futures contracts on
foreign currencies and related options, for hedging purposes, including:
locking-in the U.S. dollar price of the purchase or sale of
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securities denominated in a foreign currency; locking-in the U.S. dollar
equivalent of interest or dividends to be paid on such securities which are
held by the Fund; and protecting the U.S. dollar value of such securities
which are held by the Fund.
SHAREHOLDERS SHOULD BE AWARE THAT INVESTING IN THE EQUITY AND FIXED-INCOME
MARKETS OF DEVELOPING COUNTRIES (I.E., EASTERN AND CENTRAL EUROPE) 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,
DESCRIBED ABOVE, MAY BE GREATER WITH RESPECT TO INVESTMENTS IN DEVELOPING
COUNTRIES.
RISK FACTORS RELATING TO INVESTING IN FOREIGN DEBT SECURITIES RATED BELOW
INVESTMENT GRADE (JUNK BONDS)
Fixed-income securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and
general market liquidity (market risk). Lower rated or unrated (i.e., high
yield or high risk) securities, commonly referred to as "junk" bonds, are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in the general
level of interest rates. The investment adviser considers both credit risk and
market risk in making investment decisions for the Fund. Investors should
carefully consider the relative risks of investing in high yield securities
and understand that such securities are not generally meant for short-term
trading.
Under adverse economic conditions, there is a risk that highly leveraged
issuers may be unable to service their debt obligations or to repay their
obligations upon maturity. In addition, the secondary market for high yield
securities, which is concentrated in relatively few market makers, may not be
as liquid as the secondary market for more highly rated securities. Under
adverse market or economic conditions, the secondary market for high yield
securities could contract further, independent of any specific adverse changes
in the condition of a particular issuer. As a result, the investment adviser
could find it more difficult to sell these securities or may be able to sell
the securities only at prices lower than if such securities were widely
traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in
calculating the Fund's net asset value.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting
in a decline in the overall credit quality of the debt portion of the Fund's
portfolio and increasing the exposure of the Fund to the risks of high yield
securities.
CONVERTIBLE SECURITIES
A CONVERTIBLE SECURITY IS A BOND OR PREFERRED STOCK WHICH MAY BE CONVERTED AT
A STATED PRICE WITHIN A SPECIFIED PERIOD OF TIME INTO A CERTAIN QUANTITY OF
THE COMMON STOCK OF THE SAME OR A DIFFERENT ISSUER. Convertible securities are
senior to common stocks in a corporation's capital structure, but are usually
subordinated to similar nonconvertible securities. While providing a fixed
income stream (generally higher in yield than the income derivable from a
common stock but lower than that afforded by a similar nonconvertible
security), a convertible security also affords an investor the opportunity,
through its conversion feature, to participate in the capital appreciation
dependent upon a market price advance in the convertible security's underlying
common stock. The Fund may invest up to 25% of its net assets in foreign
convertible securities rated below investment grade. See "Risk Factors
Relating to Investing in Foreign Debt Securities Rated Below Investment Grade
(Junk Bonds)."
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
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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.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES INCLUDING DERIVATIVE
TRANSACTIONS TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN. These strategies currently include the use of options, forward
currency exchange contracts and futures contracts and options thereon. The
Fund's ability to use these strategies may be limited by market conditions,
regulatory limits and tax considerations and there can be no assurance that
any of these strategies will succeed. See "Investment Objective and Policies"
and "Taxes" in the Statement of Additional Information. New financial products
and risk management techniques continue to be developed and the Fund may use
these new investments and techniques to the extent consistent with its
investment objective and policies.
OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON
SECURITIES AND CURRENCIES THAT ARE TRADED ON U.S. OR FOREIGN SECURITIES
EXCHANGES OR IN THE OVER-THE-COUNTER MARKET TO ENHANCE RETURN OR TO HEDGE THE
FUND'S PORTFOLIO. These options will be on equity securities, financial
indices (e.g., S&P 500) and foreign currencies. The Fund may write covered put
and call options to generate additional income through the receipt of
premiums, purchase put options in an effort to protect the value of securities
(or currencies) that it owns against a decline in market value and purchase
options in an effort to protect against an increase in the price of securities
(or currencies) it intends to purchase. The Fund may also purchase put and
call options to offset previously written put and call options of the same
series. See "Investment Objective and Policies--Options on Securities" in the
Statement of Additional Information.
A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE RIGHT
FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE SECURITIES OR CURRENCY SUBJECT
TO THE OPTION AT A SPECIFIED PRICE (the exercise price or strike price). The
writer of a call option, in return for the premium, has the obligation, upon
exercise of the option, to deliver, depending upon the terms of the option
contract, the underlying securities or a specified amount of cash to the
purchaser upon receipt of the exercise price. When the Fund writes a call
option, the Fund gives up the potential for gain on the underlying securities
or currency in excess of the exercise price of the option during the period
that the option is open.
A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES OR CURRENCY SUBJECT TO THE
OPTION TO THE WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of
the put option, in return for the premium, has the obligation, upon exercise
of the option, to acquire the securities or currency underlying the option at
the exercise price. The Fund might, therefore, be obligated to purchase the
underlying securities or currency for more than their current market price.
THE FUND WILL WRITE ONLY "COVERED" OPTIONS. A written option is covered if,
as long as the Fund is obligated under the option, it (i) owns an offsetting
position in the underlying security or (ii) maintains in a segregated account
cash or other liquid, unencumbered assets, marked to market daily with a value
sufficient at all times to cover its obligations in a segregated account. See
"Investment Objective and Policies--Options on Securities" in the Statement of
Additional Information. There is no limitation on the amount of options the
Fund may write.
FORWARD CURRENCY EXCHANGE CONTRACTS
THE FUND MAY ENTER INTO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO
PROTECT THE VALUE OF ITS ASSETS AGAINST FUTURE CHANGES IN THE LEVEL OF
CURRENCY EXCHANGE RATES. The Fund may enter into such contracts on a spot,
i.e., cash, basis at the
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rate then prevailing in the currency exchange market or on a forward basis, by
entering into a forward contract to purchase or sell currency. A forward
contract on foreign currency is an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days agreed upon
by the parties from the date of the contract at a price set on the date of the
contract.
THE FUND'S DEALINGS IN FORWARD CONTRACTS WILL BE LIMITED TO HEDGING INVOLVING
EITHER SPECIFIC TRANSACTIONS OR PORTFOLIO POSITIONS. Transaction hedging is
the purchase or sale of a forward contract with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency or in a different currency (cross hedge). Although
there are no limits on the number of forward contracts which the Fund may
enter into, the Fund may not position hedge (including cross hedges) with
respect to a particular currency for an amount greater than the aggregate
market value (determined at the time of making any sale of forward currency)
of the securities being hedged. See "Investment Objective and Policies--Risks
Related to Forward Foreign Currency Exchange Contracts" in the Statement of
Additional Information.
FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE FOR
CERTAIN HEDGING, RETURN ENHANCEMENT AND RISK MANAGEMENT PURPOSES IN ACCORDANCE
WITH REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION. These futures
contracts and related options will be on financial indices and foreign
currencies or groups of foreign currencies such as the European Currency Unit.
A European Currency Unit is a basket of specified amounts of the currencies of
certain member states of the European Economic Community, a European economic
cooperative organization. A financial futures contract is an agreement to
purchase or sell an agreed amount of securities or currencies at a set price
for delivery in the future.
The Fund may not purchase or sell futures contracts and related options for
return enhancement or risk management purposes, if immediately thereafter the
sum of the amount of initial margin deposits on the Fund's existing futures
and options on futures and premiums paid for such related options would exceed
5% of the liquidation value of the Fund's total assets. The Fund may purchase
and sell futures contracts and related options, without limitation, for bona
fide hedging purposes. The value of all futures contracts sold will not exceed
the total market value of the Fund's portfolio.
THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND RELATED OPTIONS DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET
AND IS SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements
in the price of a futures contract and the movements in the index or price of
the currencies being hedged is imperfect and there is a risk that the value of
the indices or currencies being hedged may increase or decrease at a greater
rate than the related futures contracts resulting in losses to the Fund.
Certain futures exchanges or boards of trade have established daily limits on
the amount that the price of futures contracts or related options may vary,
either up or down, from the previous day's settlement price. These daily
limits may restrict the Fund's ability to purchase or sell certain futures
contracts or related options on any particular day.
The Fund's ability to enter into 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 "Taxes" in the Statement
of Additional Information.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS AND IN CURRENCY EXCHANGE
TRANSACTIONS INVOLVES INVESTMENT RISKS AND TRANSACTION COSTS TO WHICH THE FUND
WOULD NOT BE SUBJECT ABSENT THE USE OF THESE STRATEGIES. If the investment
adviser's predictions of movements in the direction of the securities, foreign
currency and interest rate markets are inaccurate, the adverse consequences to
the Fund may leave the Fund in a worse position than if such strategies were
not used. Risks inherent in the use of options, foreign currency and futures
contracts and options on futures contracts include: (1) dependence on the
investment
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adviser's ability to predict correctly movements in the direction of interest
rates, securities prices and currency markets; (2) imperfect correlation
between the price of options and futures contracts and options thereon and
movements in the prices of the securities or currencies being hedged; (3) the
fact that the skills needed to use these strategies are different from those
needed to select portfolio securities; (4) the possible absence of a liquid
secondary market for any particular instrument at any time; (5) the possible
need to defer closing out certain hedged positions to avoid adverse tax
consequences; and (6) the possible inability of the Fund to purchase or sell a
portfolio security at a time that otherwise would be favorable for it to do
so, or the possible need for the Fund to sell a portfolio security at a
disadvantageous time, due to the need for the Fund to maintain "cover" or to
segregate securities in connection with hedging transactions. See "Taxes" in
the Statement of Additional Information.
The Fund will generally purchase options and futures on an exchange only if
there appears to be a liquid secondary market for such options or futures; the
Fund will generally purchase OTC options only if management believes that the
other party to options will continue to make a market for such options.
However, there can be no assurance that a liquid secondary market will
continue to exist or that the other party will continue to make a market.
Thus, it may not be possible to close an options or futures transaction. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively hedge its portfolio. There is also
the risk of loss by the Fund of margin deposits or collateral in the event of
bankruptcy of a broker with whom the Fund has an open position in an option, a
futures contract or related option.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Fund will enter into repurchase agreements whereby the seller of the
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date is usually within a day or two
of the original purchase, although it may extend over a number of months. The
Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the purchase price of the underlying securities
(including accrued interest earned thereon). In the event of a default or
bankruptcy by a seller, the Fund will promptly seek to liquidate the
collateral. To the extent that the proceeds from any sale of such collateral
upon a default in the obligation to repurchase are less than the repurchase
price, the Fund will suffer a loss. The Fund may participate in a joint
repurchase account with other investment companies managed by Prudential
Investments Fund Management LLC pursuant to an order of the Securities and
Exchange Commission (SEC). See "Investment Objective and Policies--Repurchase
Agreements" in the Statement of Additional Information.
BORROWING
The Fund may borrow an amount equal to no more than 33 1/3% of the value of
its total assets (calculated when the loan is made) from banks for temporary,
extraordinary or emergency purposes or for the clearance of transactions. The
Fund may pledge up to 33 1/3% of its total assets to secure these borrowings.
If the Fund's asset coverage for borrowings falls below 300%, the Fund will
take prompt action to reduce its borrowings.
SEGREGATED ACCOUNTS
The 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 (including foreign securities), debt
securities or other liquid, unencumbered assets equal in value to its
obligations in respect of potentially leveraged transactions. These include
forward contracts, when-issued and delayed delivery securities, futures
contracts, written options and options on futures contracts (unless otherwise
covered). If collateralized or otherwise covered, in accordance with SEC
guidelines, these will not be deemed to be senior securities. The assets
deposited in the segregated account will be marked-to-market daily.
ILLIQUID SECURITIES
The Fund may hold up to 10% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven
days, securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities
markets either within or outside of the United States. Restricted securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as
amended (the Securities Act) and privately placed commercial paper
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that have a readily available market are not considered illiquid for purposes
of this limitation. Investing in Rule 144A securities could, however, have the
effect of increasing the level of Fund illiquidity to the extent that
qualified institutional buyers become, for a limited time, uninterested in
purchasing these securities. The investment adviser will monitor the liquidity
of such restricted securities under the supervision of the Board of Directors.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the applicable notice period.
The staff of the SEC has taken the position that purchased OTC options and
the assets used as "cover" for written OTC options are illiquid securities.
However, the Fund may treat the securities it uses as "cover" for written OTC
options on U.S. Government securities as liquid provided it follows a
specified procedure. The Fund may sell OTC options on U.S. Government
securities only to qualified dealers who agree that the Fund may repurchase
options it writes for a maximum price to be calculated by a predetermined
formula. In such cases, OTC options would be considered liquid only to the
extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option. See "Investment Objective and Policies--
Illiquid Securities" in the Statement of Additional Information.
PORTFOLIO TURNOVER
As a result of the Fund's investment policies, its portfolio turnover rate
may exceed 100%, although the rate is not expected to exceed 150%. High
portfolio turnover (over 100%) may involve correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by the
Fund. See "Portfolio Transactions and Brokerage" in the Statement of
Additional Information. In addition, high portfolio turnover may result in
increased short-term capital gains, which, when distributed to shareholders,
are treated as ordinary income. See "Taxes, Dividends and Distributions."
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed delivery
basis. When-issued or delayed delivery transactions arise when securities are
purchased or sold by the Fund with payment and delivery taking place a month
or more in the future in order to secure what is considered to be an
advantageous price and yield to the Fund at the time of entering into the
transaction. While the Fund will only purchase securities on a when-issued or
delayed delivery basis with the intention of acquiring the securities, the
Fund may sell the securities before the settlement date, if it is deemed
advisable. At the time the Fund makes the commitment to purchase securities on
a when-issued or delayed delivery basis, the Fund will record the transaction
and thereafter reflect the value, each day, of such security in determining
the net asset value of the Fund. At the time of delivery of the securities,
the value may be more or less than the purchase price. The Fund's Custodian
will maintain, in a segregated account of the Fund, cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets, marked to
market daily, having a value equal to or greater than the Fund's purchase
commitments. Subject to this requirement, the Fund may purchase securities on
such basis without limit. See "Investment Objective and Policies--When-Issued
and Delayed Delivery Securities" in the Statement of Additional Information.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral or secures a
letter of credit in favor of the Fund in an amount equal to at least 100%,
determined daily, of the market value of the securities loaned which are
maintained in a segregated account pursuant to applicable regulations. During
the time portfolio securities are on loan, the borrower will pay the Fund an
amount equivalent to any dividend or interest paid on such securities and the
Fund may invest the cash collateral and earn additional income, or it may
receive an agreed-upon amount of interest income from the borrower. As with
any extensions of credit, there are risks of delay in recovery and in some
cases loss of rights in the collateral should the borrower of the securities
fail financially. As a matter of fundamental policy, the Fund cannot lend more
than 30% of the value of its total assets. See "Investment Objective and
Policies--Lending of Securities" in the Statement of Additional Information.
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales against-the-box for the purpose of deferring
realization of gain or loss for federal income tax purposes. A short sale
"against-the-box" is a short sale in which the Fund owns an equal amount of
the securities sold short or
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securities convertible into or exchangeable for, without payment of any
further consideration, securities of the same issue as, and equal in amount
to, the securities sold short. Legislation recently proposed by Congress would
restrict the ability to defer gains or losses using short sales against the
box. There can be no assurance that such legislation will be enacted or, if
enacted, as to the effective date of such legislation.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, DECIDES UPON
MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE
DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY
INVESTMENT ADVISORY SERVICES.
For the fiscal year ended April 30, 1997, total expenses of Class A, Class B,
Class C and Class Z shares as a percentage of average net assets were 1.36%,
2.11%, 2.11% and 1.11%, respectively. See "Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER) FORMERLY,
PRUDENTIAL MUTUAL FUND MANAGEMENT LLC (PMF), GATEWAY CENTER THREE, 100
MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER OF THE FUND AND
IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF 0.75 OF 1% OF THE FUND'S
AVERAGE DAILY NET ASSETS. PIFM IS ORGANIZED IN NEW YORK AS A LIMITED LIABILITY
COMPANY. IT IS THE SUCCESSOR TO PRUDENTIAL MUTUAL FUND MANAGEMENT, INC., A
DELAWARE CORPORATION ESTABLISHED IN 1987 (PMF). PMF TRANSFERRED ITS ASSETS TO
PIFM IN SEPTEMBER 1996. FOR THE FISCAL YEAR ENDED APRIL 30, 1997, THE FUND
PAID MANAGEMENT FEES TO PMF AND PIFM OF .75% OF THE FUND'S AVERAGE DAILY NET
ASSETS. SEE "MANAGER" IN THE STATEMENT OF ADDITIONAL INFORMATION.
As of May 31, 1997, PIFM served as the manager to 40 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $56 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. SEE
"MANAGER" IN THE STATEMENT OF ADDITIONAL INFORMATION.
UNDER THE SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER OR
THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY SERVICES IN
CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PIFM continues to have responsibility for all investment
advisory services and supervises PI's performance of such services. The Fund
is managed under the supervision of Daniel J. Duane, a Managing Director and
Chief Investment Officer for Global Equity Investments of PMFIM. Mr. Duane has
supervised the management of the Fund's portfolio since its inception and has
been employed by PI as a portfolio manager since 1990. Mr. Duane is a
Chartered Financial Analyst. Mr. Duane also serves as the portfolio manager of
other investment companies advised by PI, including the Prudential Series Fund
(Global Equity Portfolio), Prudential World Fund (Global Series) and
Prudential Pacific Growth Fund.
PIFM and PI are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company.
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DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE
SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE
LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A,
CLASS B, CLASS C AND CLASS Z SHARES OF THE FUND. IT IS AN INDIRECT, WHOLLY-
OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION
AGREEMENTS (THE DISTRIBUTION AGREEMENTS), PRUDENTIAL SECURITIES (THE
DISTRIBUTOR) INCURS THE EXPENSES OF DISTRIBUTING THE FUND'S CLASS A, CLASS B
AND CLASS C SHARES. Prudential Securities also incurs the expenses of
distributing the Fund's Class Z shares under the Distribution Agreement, none
of which are reimbursed by or paid for by the Fund. These expenses include
commissions and account servicing fees paid to, or on account of, financial
advisers of Prudential Securities and representatives of Pruco Securities
Corporation (Prusec), an affiliated broker-dealer, commissions and account
servicing fees paid to, or on account of, other broker-dealers or financial
institutions (other than national banks) which have entered into agreements
with the Distributor, advertising expenses, the cost of printing and mailing
prospectuses to potential investors and indirect and overhead costs of
Prudential and Prusec associated with the sale of Fund shares, including
lease, utility, communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE FUND MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL
RATE OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES.
The Class A Plan provides that (i) up to .25 of 1% of the average daily net
assets of the Class A shares may be used to pay for personal service and/or
the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30
of 1% of the average daily net assets of the Class A shares. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class A Plan to .25 of 1% of the average daily net assets of the Class A
shares for the fiscal year ending April 30, 1998.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND PAYS PRUDENTIAL SECURITIES FOR
ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C SHARES
AT AN ANNUAL RATE OF 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF THE CLASS B
AND CLASS C SHARES. The Class B and Class C Plans provide for the payment to
Prudential Securities of (i) an asset-based sales charge of .75 of 1% of the
average daily net assets of the Class B and Class C shares, respectively, and
(ii) a service fee of .25 of 1% of the average daily net assets of each of the
Class B and Class C shares. The service fee is used to pay for personal
service and/or the maintenance of shareholder accounts. Prudential Securities
also receives contingent deferred sales charges from certain redeeming
shareholders. See "Shareholder Guide--How to Sell Your Shares--Contingent
Deferred Sales Charges."
Distribution expenses attributable to the sale of Class A, Class B and Class
C shares of the Fund will be allocated to each class based upon the ratio of
sales of each such class to the sales of all Class A, Class B and Class C
shares of the Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Fund, including a
majority of the Directors who are not "interested persons" of the Fund (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to
the Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each
Plan may be terminated at any time by vote of a majority of the Rule 12b-1
Directors or of a majority of the outstanding shares of the applicable class
of the Fund. The Fund will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
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<PAGE>
In addition to distribution and service fees paid by the Fund under the Class
A, Class B and Class C Plans, the Manager (or one of its affiliates) may make
payments out of its own resources to dealers (including Prudential Securities)
and other persons which distribute shares of the Fund (including Class Z
shares). Such payments may be calculated by reference to the net asset value
of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the
allegations asserted against it, PSI consented to the entry of an SEC
Administrative Order which stated that PSI's conduct violated the federal
securities laws, directed PSI to cease and desist from violating the federal
securities laws, pay civil penalties, and adopt certain remedial measures to
address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of
a $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the
signing of the agreement, provided that PSI complies with the terms of the
agreement. If, upon completion of the three year period, PSI has complied with
the terms of the agreement, no prosecution will be instituted by the United
States for the offenses charged in the complaint. If on the other hand, during
the course of the three year period, PSI violates the terms of the agreement,
the U.S. Attorney can then elect to pursue these charges. Under the terms of
the agreement, PSI agreed, among other things, to pay an additional
$330,000,000 into the fund established by the SEC to pay restitution to
investors who purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may
be obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by Brown Brothers Harriman & Co., an
independent custodian, are separate and distinct from PSI.
FEE WAIVERS AND SUBSIDY
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. Fee waivers
and expense subsidies will increase the Fund's total return. See "Performance
Information" in the Statement of Additional Information and "Fund Expenses."
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
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CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109,
serves as Custodian for the Fund's portfolio securities and cash and, in that
capacity, maintains certain financial and accounting books and records
pursuant to an agreement with the Fund.
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 Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. For
valuation purposes, quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents. THE BOARD OF DIRECTORS HAS FIXED THE
SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE FUND'S NAV TO BE AS OF 4:15
P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase,
sell or redeem shares have been received by the Fund or days on which changes
in the value of the Fund's portfolio securities do not materially affect the
NAV.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger distribution-
related fee to which Class B and Class C shares are subject. The NAV of Class
Z shares will generally be higher than the NAV of the other three classes
because Class Z shares are not subject to any distributor and/or service fees.
It is expected, however, that the NAV of the four classes will tend to
converge immediately after the recording of dividends, which will differ by
approximately the amount of distribution-related expense accrual differential
among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS TOTAL RETURN (INCLUDING "AVERAGE
ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) AND YIELD IN ADVERTISEMENTS
OR SALES LITERATURE. TOTAL RETURN AND YIELD ARE CALCULATED SEPARATELY FOR
CLASS A, CLASS B, CLASS C AND CLASS Z SHARES. These figures are based on
historical earnings and are not intended to indicate future performance. The
"total return" shows how much an investment in the Fund would have increased
(decreased) over a specified period of time (i.e., one, five, or ten years or
since inception of the Fund) assuming that all distributions and dividends by
the Fund were reinvested on the reinvestment dates during the period and less
all recurring fees. The "aggregate" total return reflects actual performance
over a stated period of time. "Average annual" total return is a hypothetical
rate of return that, if achieved annually, would have produced the same
aggregate total return if performance had been constant over the entire
period. "Average annual" total return smooths out variations in performance
and takes into account any applicable initial or contingent deferred sales
charges. Neither "average annual" total return nor "aggregate" total return
takes into account any federal or state income taxes
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<PAGE>
which may be payable upon redemption. The "yield" refers to the income
generated by an investment in the Fund over a one-month or 30-day period. This
income is then "annualized"; that is, the amount of income generated by the
investment during that 30-day period is assumed to be generated each 30-day
period for twelve periods and is shown as a percentage of the investment. The
income earned on the investment is also assumed to be reinvested at the end of
the sixth 30-day period. The Fund also may include comparative performance
information in advertising or marketing the Fund's shares. Such performance
information may include data from Lipper Analytical Services, Inc.,
Morningstar Publications, Inc., and other industry publications, business
periodicals and market indices. See "Performance Information" in the Statement
of Additional Information. Further performance information will be contained
in the Fund's annual and semi-annual reports to shareholders, which will be
available without charge. See "Shareholder Guide--Shareholder Services--
Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED (THE INTERNAL REVENUE CODE). ACCORDINGLY, THE FUND WILL NOT BE SUBJECT
TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME AND CAPITAL GAINS, IF
ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS.
The Fund may, from time to time, invest in corporations treated for federal
income tax purposes as passive foreign investment companies ("PFICs"). PFICs
are foreign corporations which own mostly passive assets or that derive a
majority of their income from passive sources. The Fund's investments in PFICs
are subject to special tax provisions that may subject the Fund to federal
income taxes and a change in the nature of interest with respect to certain
gains and income realized by the Fund. See "Taxes" in the Statement of
Additional Information.
In addition, under the Internal Revenue Code, special rules apply to the
treatment of certain options and futures contracts (Section 1256 contracts).
At the end of each year, such investments held by the Fund will be required to
be "marked to market" for federal income tax purposes, i.e., treated as having
been sold at market value. Sixty percent of any gain or loss recognized on
these "deemed sales" and on actual dispositions will be treated as long-term
capital gain or loss, and the remainder will be treated as short-term capital
gain or loss. See "Taxes" in the Statement of Additional Information.
Gains or losses on disposition of debt securities denominated in a foreign
currency attributable to fluctuations in the value of foreign currency between
the date of acquisition of the security and the date of disposition are
treated as ordinary gain or loss. These gains or losses increase or decrease
the amount of the Fund's investment company taxable income available to be
distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. If currency fluctuation
losses exceed other investment company taxable income during a taxable year,
distributions made by the Fund during the year would be characterized as a
return of capital to shareholders, reducing the shareholder's basis in his or
her Fund shares.
TAXATION OF SHAREHOLDERS
All dividends out of net taxable investment income, together with
distributions of net short-term capital gains, will be taxable as ordinary
income to the shareholder whether or not reinvested. Any net long-term capital
gains distributed to shareholders will be taxable as such to the shareholders,
whether or not reinvested and regardless of the length of time a shareholder
has owned his or her shares. The maximum long-term capital gains rate for
corporate shareholders is currently the same as the maximum corporate 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%. Legislation recently proposed by Congress would, if enacted, reduce the
maximum long-term gains rate for corporations and individuals. There can be no
assurance that such legislation will be enacted or, if enacted, as to the
effective date of such legislation.
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<PAGE>
The Fund may incur foreign income taxes in connection with some of its
foreign investments. Certain of these taxes may be "passed through" to
shareholders who may then have the option of claiming such taxes as either a
deduction or a tax credit. See "Taxes" in the Statement of Additional
Information.
Any gain or loss realized upon a sale or redemption of shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any loss, however, on the sale,
exchange or redemption of 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.
A shareholder who acquires shares of the Fund and sells or otherwise disposes
of such shares within 90 days of acquisition may not be allowed to take into
account certain sales charges incurred in acquiring such shares for purposes
of calculating gain or loss realized upon a sale or exchange of shares of the
Fund.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of any
class of the Fund's shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Fund is required to withhold and remit
to the U.S. Treasury 31% of dividend, capital gain income and redemption
proceeds, payable on the accounts of those shareholders who fail to furnish
their tax identification numbers on IRS Form W-9 (or IRS Form W-8 in the case
of certain foreign shareholders) with the required certifications regarding
the shareholder's status under the federal income tax law.
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
THE FUND EXPECTS TO PAY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY, AND MAKE
DISTRIBUTIONS OF ANY CAPITAL GAINS IN EXCESS OF NET LONG-TERM CAPITAL LOSSES
ON AN ANNUAL BASIS. Dividends paid by the Fund with respect to each class of
shares, to the extent any dividends are paid, will be calculated in the same
manner, at the same time, on the same day and will be in the same amount
except that Class A, Class B and Class C shares will bear their own
distribution charges, generally resulting in lower dividends for Class B and
Class C shares in relation to Class A and Class Z shares and lower dividends
for Class A shares in relation to Class Z shares. Distribution of net capital
gains, if any, will be paid in the same amount for each class of shares. See
"How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES, BASED ON
THE NAV OF EACH CLASS ON THE RECORD DATE OR SUCH OTHER DATE AS THE BOARD OF
DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS
THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential Mutual
Fund Services LLC., Attn: Account Maintenance Unit, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. The Fund will notify each shareholder after
the close of the Fund's taxable year both of the dollar amount and the taxable
status of that year's dividends and distributions on a per share basis. If you
hold shares through Prudential Securities, you should contact your financial
advisor to elect to receive dividends and distributions in cash.
WHEN THE FUND GOES "EX-DIVIDEND," ITS NAV IS REDUCED BY THE AMOUNT OF THE
DIVIDEND OR DISTRIBUTION. IF YOU BUY SHARES JUST PRIOR TO THE EX-DIVIDEND DATE
(WHICH GENERALLY OCCURS FOUR BUSINESS DAYS PRIOR TO THE RECORD DATE), THE
PRICE YOU PAY WILL INCLUDE THE DIVIDEND OR DISTRIBUTION AND A PORTION OF YOUR
INVESTMENT WILL BE RETURNED TO YOU AS A TAXABLE DISTRIBUTION. YOU SHOULD,
THEREFORE, CONSIDER THE TIMING OF DIVIDENDS WHEN MAKING YOUR PURCHASES.
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GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE FUND IS AUTHORIZED TO OFFER 2 BILLION SHARES OF COMMON STOCK, $.001 PAR
VALUE PER SHARE, DIVIDED INTO FOUR CLASSES OF SHARES, DESIGNATED CLASS A,
CLASS B, CLASS C AND CLASS Z SHARES, EACH CONSISTING OF 500 MILLION AUTHORIZED
SHARES. Each class represents an interest in the same assets of the Fund and
is identical in all respects except that (i) each class is subject to
different sales charges and distribution and/or service fees (except for Class
Z shares which are not subject to any distribution and/or service fees) which
may affect performance, (ii) each class has exclusive voting rights on any
matter submitted to shareholders that relates solely to its arrangement and
has separate voting rights on any matter submitted to shareholders in which
the interests of one class differ from the interests of any other class, (iii)
each class has a different exchange privilege, (iv) only Class B shares have a
conversion feature and (v) Class Z shares are offered exclusively for sale to
a limited group of investors. See "How the Fund is Managed--Distributor." In
accordance with the Fund's Articles of Incorporation, the Board of Directors
may authorize the creation of additional series and classes within such
series, with such preferences, privileges, limitations and voting and dividend
rights as the Directors may determine. Currently, the Fund is offering four
classes, designated Class A, Class B, Class C and Class Z shares.
The Board of Directors may increase or decrease the number of authorized
shares without approval by shareholders. Shares of the Fund, when issued, are
fully paid, nonassessable, fully transferable and redeemable at the option of
the holder. Shares are also redeemable at the option of the Fund under certain
circumstances as described under "Shareholder Guide--How to Sell Your Shares."
Each share of each class of common stock is equal as to earnings, assets and
voting privileges, except as noted above, and each class (with the exception
of Class Z shares, which are not subject to any distribution for service fees)
bears the expenses related to the distribution of its shares. Except for the
conversion feature applicable to the Class B shares, there are no conversion,
preemptive or other subscription rights. In the event of liquidation, each
share of common stock of the Fund is entitled to its portion of all of the
Fund's assets after all debts and expenses of the Fund have been paid. Since
Class B and Class C shares generally bear higher distribution expenses than
Class A shares, the liquidation proceeds to shareholders of those classes are
likely to be lower than to Class A shareholders and Class Z shareholders,
whose Class Z shares are not subject to any distribution or service fees. The
Fund's shares do not have cumulative voting rights for the election of
Directors.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF DIRECTORS IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OR
MORE OF THE FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL
OF ONE OR MORE DIRECTORS OR TO TRANSACT ANY OTHER BUSINESS.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Fund with the SEC under
the Securities Act. Copies of the Registration Statement may be obtained at a
reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
20
<PAGE>
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC, ATTENTION: INVESTMENT SERVICES, P.O. BOX 15020, NEW BRUNSWICK,
NEW JERSEY 08906-5020. The purchase price is the NAV next determined following
receipt of an order in proper form by the Transfer Agent or Prudential
Securities plus a sales charge which, at your option, may be imposed either
(i) at the time of purchase (Class A shares) or (ii) on a deferred basis
(Class B or Class C shares). Class Z shares are offered to a limited group of
investors at net asset value without any sales charge. Participants in
programs sponsored by Prudential Retirement Services should contact their
client representative for more information about Class Z shares. See
"Alternative Purchase Plan" below. See also "How the Fund Values its Shares."
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a stock certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who
hold their shares through Prudential Securities will not receive stock
certificates.
The minimum initial investment is $1,000 per class for Class A and Class B
shares and $5,000 for Class C shares. There is no minimum investment
requirement for Class Z shares. The minimum subsequent investment is $100 for
all classes except for Class Z shares, for which there is no such minimum. All
minimum investment requirements are waived for certain retirement and employee
savings plans or custodial accounts for the benefit of minors. For purchases
through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment is $50. See "Shareholder Services" below.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares."
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must first telephone PMFS to receive an account number at (800) 225-1852
(toll-free). The following information will be requested: your name, address,
tax identification number, class election, dividend distribution election,
amount being wired and wiring bank. Instructions should then be given by you
to your bank to transfer funds by wire to Bankers Trust Company, New York; ABA
number: 021-001-033; A/C: Brown Brothers Harriman & Co., New York, Account:
01-501-026; REF: Prudential Europe Growth Fund, Inc., Account: 8114597. You
should specify on the wire the account number assigned by PMFS and your name
and identify the class in which you are eligible to invest. (Class A, Class B,
Class C or Class Z shares).
If you arrange for receipt by Bankers Trust of federal funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Fund as
of that day. See "Net Asset Value" in the Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire Bankers Trust
directly and should be sure that the wire specifies Prudential Europe Growth
Fund, Inc., Class A, Class B, Class C or Class Z shares and your name and
individual account number. It is not necessary to call PMFS to make subsequent
purchase orders utilizing federal funds. The minimum amount which may be
invested by wire is $1,000.
21
<PAGE>
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS FOUR CLASSES OF SHARES THROUGH THIS PROSPECTUS (CLASS A,
CLASS B, CLASS C AND CLASS Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST
BENEFICIAL SALES CHARGE STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE
AMOUNT OF THE PURCHASE, THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND
OTHER RELEVANT CIRCUMSTANCES (ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------------------------------ -------------------------- --------------------------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of .30 of 1% (currently being Initial sales charge waived or
5% of the public offering price charged at a rate of .25 reduced for certain purchases
of 1%)
Class B Maximum contingent deferred 1% Shares convert to Class A
sales charge or CDSC of 5% of shares approximately seven years
the lesser of the amount invested after purchase
or the redemption proceeds; declines
to zero after six years
Class C Maximum CDSC of 1% of the 1% Shares do not convert to
lesser of the amount invested or another class
the redemption proceeds on
redemptions made within one year
of purchase.
Class Z None None Sold to a limited group
of investors
</TABLE>
The four classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
is subject to different sales charges and distribution and/or service fees
(with the exception of Class Z shares, which are not subject to any
distribution or service fees) which may affect performance, (ii) each class
has exclusive voting rights on any matter submitted to shareholders that
relates solely to its arrangement and has separate voting rights on any matter
submitted to shareholders in which the interests of one class differs from the
interests of any other class and (iii) only Class B shares have a conversion
feature. The four classes also have separate exchange privileges. See "How to
Exchange Your Shares" below. The income attributable to each class and the
dividends payable on the shares of each class will be reduced by the amount of
the distribution fee (if any) of each class. Class B and Class C shares bear
the expenses of a higher distribution fee which will generally cause them to
have higher expense ratios and to pay lower dividends than the Class A and
Class Z shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B, Class C and Class
Z shares and will generally receive more compensation initially for selling
Class A and Class B shares than for selling Class C shares or Class Z shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of
any applicable sales charge (whether imposed at the time of purchase or
redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares
automatically convert to Class A shares approximately seven years after
purchase (see "Conversion Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund.
22
<PAGE>
If you intend to hold your investment in the Fund for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 5% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6-year period, you
should consider purchasing Class C shares over either Class A or Class B
shares.
If you intend to hold your investment for 7 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class A or Class B shares over Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money
invested initially because the sales charge on Class A shares is deducted at
the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and Class C shares for the
higher cumulative annual distribution-related fee on those shares to exceed
the initial sales charge plus cumulative annual distribution-related fees on
Class A shares. This does not take into account the time value of money, which
further reduces the impact of the higher Class B or Class C distribution-
related fee on the investment, fluctuations in net asset value, the effect of
the return on the investment over this period of time or redemptions during
which the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES
UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. SEE "REDUCTION
AND WAIVER OF INITIAL SALES CHARGES" AND "CLASS Z SHARES" BELOW.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed
as a percentage of the offering price and of the amount invested) as shown in
the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
------------------ --------------- --------------- -----------------
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50 4.71 4.25
$50,000 to $99,999 4.00 4.17 3.75
$100,000 to $249,999 3.25 3.36 3.00
$250,000 to $499,999 2.50 2.56 2.40
$500,000 to $999,999 2.00 2.04 1.90
$1,000,000 and above None None None
</TABLE>
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
may pay dealers, financial advisers and other persons which distribute Class A
shares a finder's fee based on a percentage of the net asset value of shares
sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be
aggregated to determine the applicable reduction. See "Purchase and
23
<PAGE>
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--
Class A Shares" in the Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the
Internal Revenue Code (collectively, Benefit Plans), provided that the plan
has existing assets of at least $1 million invested in shares of Prudential
Mutual Funds (excluding money market funds other than those acquired pursuant
to the exchange privilege) or 250 eligible employees or participants. In the
case of Benefit Plans whose accounts are held directly with the Transfer Agent
or Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account record keeping (Direct Account Benefit
Plans) and Benefit Plans sponsored by PSI or its subsidiaries (PSI or
Subsidiary Prototype Benefit Plans), Class A shares may be purchased at NAV by
participants who are repaying loans made from such plans to the participant.
PRUDENTIAL RETIREMENT PROGRAMS. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or non-
qualified under the Internal Revenue Code, for which Prudential serves as the
plan administrator or recordkeeper, provided that (i) the plan has at least $1
million in existing assets or 250 eligible employees and (ii) the Fund is an
available investment option. These plans include pension, profit-sharing,
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code, deferred compensation and annuity plans under Sections 457 or
403(b)(7) of the Internal Revenue Code and plans that participate in the
Transfer Agent's PruArray and SmartPath Programs (benefit plan recordkeeping
services) (hereafter referred to as a PruArray or SmartPath Plan). All plans
of a company for which Prudential serves as plan administrator or recordkeeper
are aggregated in meeting the $1 million threshold. The term "existing assets"
as used herein includes stock issued by a plan sponsor, shares of Prudential
Mutual Funds and shares of certain unaffiliated mutual funds that participate
in the PruArray or SmartPath Program (Participating Funds). "Existing assets"
also include monies invested in The Guaranteed Interest Account (GIA), a group
annuity insurance product issued by Prudential, and units of The Stable Value
Fund (SVF), an unaffiliated bank collective fund. Class A shares may also be
purchased at NAV by plans that have monies invested in GIA and SVF, provided
(i) the purchase is made with the proceeds of a redemption from either GIA or
SVF and (ii) Class A shares are an investment option of the plan.
PruArray Association Benefit Plans. Class A shares are also offered at net
asset value to Benefit Plans or non-qualified plans sponsored by employers
which are members of a common trade, professional or membership association
(Association) that participate in the PruArray Program provided that the
Association enters into a written agreement with Prudential. Such Benefit
Plans or non-qualified plans may purchase Class A shares at net asset value
without regard to the assets or number of participants in the individual
employer's qualified Plan(s) or non-qualified plans so long as the employers
in the Association (i) have retirement plan assets in the aggregate of at
least $1 million or 250 participants in the aggregate and (ii) maintain their
accounts with the Fund's transfer agent.
PruArray Savings Program. Class A shares are also offered at net asset value
to employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for
purchase at net asset value by Individual Retirement Accounts and Savings
Accumulation Plans of the company's employees. The Program is available only
to (i) employees who open an IRA or Savings Accumulation Plan account with the
Fund's transfer agent and (ii) spouses of employees who open an IRA account
with the Fund's transfer agent. The program is offered to companies that have
at least 250 eligible employees.
Special Rules Applicable to Retirement Plans. After a Benefit Plan or
PruArray or SmartPath Plan qualifies to purchase Class A shares at NAV, all
subsequent purchases will be made at NAV.
Other Waivers. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers and current and former Directors/Trustees of the Prudential Mutual
Funds (including the Fund), (b) employees of Prudential Securities and their
subsidiaries and members of the families of such persons who maintain an
24
<PAGE>
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees of subadvisers of the Prudential Mutual Funds provided that
purchases at NAV are permitted by such person's employer, (d) 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, (e) registered representatives and employees of dealers
who have entered into a selected dealer agreement with Prudential Securities
provided that purchases at NAV are permitted by such person's employer, (f)
investors who have a business relationship with a financial adviser who joined
Prudential Securities from another investment firm, provided that (i) the
purchase is made within 180 days of the commencement of the financial
adviser's employment at Prudential Securities or, within one year in the case
of Benefit Plans, (ii) the purchase is made with the proceeds of a redemption
of shares of any open-end, non-money market fund sponsored by the financial
adviser's previous employer (other than a fund which imposes a distribution or
service fee of .25 of 1% or less) and (iii) the financial adviser served as
the client's broker on the previous purchase and (g) investors in Individual
Retirement Accounts, provided the purchase is made with the proceeds of a tax-
free, rollover of assets from a Benefit Plan for which Prudential Investments
serves as the recordkeeper or administrator.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation
of your entitlement. No initial sales charges are imposed upon Class A shares
purchased upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--
Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent, Prudential Securities or Prusec.
Although there is no sales charge imposed at the time of purchase, redemption
of Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges." The Distributor may pay sales
commissions of up to 4% of the purchase price of Class B shares to dealers,
financial advisers and other persons who sell Class B shares at the time of
sale from its own resources. This facilitates the ability of the Fund to sell
the Class B shares without an initial sales charge being deducted at the time
of purchase. The Distributor anticipates that it will recoup its advancement
of sales commissions from the combination of the CDSC and the distribution
fee. See "How the Fund is Managed--Distributor." In connection with the sale
of Class C shares, the Distributor may pay dealers, financial advisers and
other persons which distribute Class C shares a sales commission of up to 1%
of the purchase price at the time of the sale.
CLASS Z SHARES
Class Z shares are currently available for purchase by the following
categories of investors: (i) pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code, deferred
compensation plans and annuity plans under Sections 457 and 403(b)(7) of the
Internal Revenue Code, and non-qualified plans for which the Fund is an
available option (collectively, Benefit Plans), provided such Benefit Plans
(in combination with other plans sponsored by the same employer or group of
related employers) have at least $50 million in defined contribution assets;
(ii) participants in any fee-based program or trust program sponsored by
Prudential Securities Incorporated (Prudential Securities), The Prudential
Savings Bank, F.S.B. (or any affiliate) which includes mutual funds as
investment options and for which the Fund is an available option; (iii)
certain participants in the MEDLEY Program (group variable annuity contracts)
sponsored by The Prudential Insurance Company of America (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) the Prudential Securities
Cash Balance Pension Plan, an employee defined benefit plan sponsored by
Prudential Securities (only applicable to Prudential Equity Income Fund,
Prudential Europe Growth Fund, Inc. and Prudential Pacific Growth Fund, Inc.);
25
<PAGE>
(vi) current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund); and (vii) employees of Prudential and/or Prudential
Securities who participate in a Prudential-sponsored employee savings plan.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM SHARES OF THE FUND AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. See " How the Fund Values its
Shares." In certain cases, however, redemption proceeds will be reduced by the
amount of any applicable contingent deferred sales charge, as described below.
See "Contingent Deferred Sales Charges--Waiver of Contingent Deferred Sales
Charges--Class B Shares" below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST REDEEM
YOUR SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR PRUDENTIAL
SECURITIES FINANCIAL ADVISER. IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A
WRITTEN REQUEST FOR REDEMPTION SIGNED BY YOU EXACTLY AS THE ACCOUNT IS
REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES, THE CERTIFICATES SIGNED IN
THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES, MUST BE RECEIVED BY THE
TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE PROCESSED. IF
REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY,
WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST BE
SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services 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, 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 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 the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or
(d) during any other period when the SEC, by order, so permits; provided that
applicable rules and regulations of the SEC shall govern as to whether the
conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE
OR BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price
in whole or in part by a distribution in kind of securities from the
investment portfolio of the Fund, in lieu of cash, in conformity with
applicable rules of the SEC. Securities will be readily marketable and will be
valued in the same manner as a regular redemption. See "How the Fund Values
its Shares." If your shares are redeemed in kind, you would incur transaction
costs in converting the assets into cash. The
26
<PAGE>
Fund has, however, elected to be governed by Rule 18f-1 under the Investment
Company Act, under which the Fund is obligated to redeem shares solely in cash
up to the lesser of $250,000 or 1% of the net asset value of the Fund during
the 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board of
Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose
account has a net asset value of less than $500 due to a redemption. The Fund
will give any such shareholder 60 days' prior written notice in which to
purchase sufficient additional shares to avoid such redemption. No contingent
deferred sales charge will be imposed on any involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of redemption. Any contingent deferred sales charge or CDSC paid in
connection with such redemption will be credited (in shares) to your account.
(If less than a full repurchase is made, the credit will be on a pro rata
basis.) You must notify the Fund's Transfer Agent, either directly or through
Prudential Securities, at the time the repurchase privilege is exercised to
adjust your account for the CDSC you previously paid. Thereafter, any
redemptions will be subject to the CDSC applicable at the time of the
redemption. See "Contingent Deferred Sales Charges" below. Exercise of the
repurchase privilege may not affect federal tax treatment of any gain or loss
realized upon redemption. See "Taxes" in the Statement of Additional
Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within one year of purchase will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid
to you. The CDSC will be imposed on any redemption by you which reduces the
current value of your Class B or Class C shares to an amount which is lower
than the amount of all payments by you for shares during the preceding six
years, in the case of Class B shares, and one year, in the case of Class C
shares. A CDSC will be applied on the lesser of the original purchase price or
the current value of the shares being redeemed. Increases in the value of your
shares or shares purchased through reinvestment of dividends or distributions
are not subject to a CDSC. The amount of any CDSC will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
the Contingent Deferred Sales Charges" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of your shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month. The CDSC will be calculated from the first day of the month
after the initial purchase, excluding the time shares were held in a money
market fund. See "How to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
YEAR SINCE PURCHASE AS A PERCENTAGE OF DOLLARS INVESTED
PAYMENT MADE OR REDEMPTION PROCEEDS
------------------- -----------------------------------
<S> <C>
First............................... 5.0%
Second.............................. 4.0%
Third............................... 3.0%
Fourth.............................. 2.0%
Fifth............................... 1.0%
Sixth............................... 1.0%
Seventh............................. None
</TABLE>
27
<PAGE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results generally in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in net asset value above the total
amount of payments for the purchase of Fund shares made during the preceding
six years; then of amounts representing the cost of shares held beyond the
applicable CDSC period; and finally, of amounts representing the cost of
shares held for the longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase, you decided
to redeem $500 of your investment. Assuming at the time of the redemption the
NAV had appreciated to $12 per share, the value of your Class B shares would
be $1,260 (105 shares at $12 per share). The CDSC would not be applied to the
value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500
minus $260) would be charged at a rate of 4% (the applicable rate in the
second year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will be
waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint
tenancy (with rights of survivorship), or a trust, at the time of death or
initial determination or disability, provided that the shares were purchased
prior to death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with the following distributions made without penalty under the
Internal Revenue Code from a tax-deferred retirement plan, an IRA or Section
403(b) custodial account: (i) in the case of a tax-deferred retirement plan, a
lump-sum or other distribution after retirement; (ii) in the case of an IRA or
Section 403(b) custodial account, a lump-sum or other distribution after
attaining age 59 1/2; and (iii) a tax-free return of an excess contribution or
plan distribution following the death or disability of the shareholder,
provided that the shares were purchased prior to death or disability. The
waiver does not apply in the case of a tax-free rollover or transfer of
assets, other than one following a separation from service (i.e., following
voluntary or involuntary termination of employment or following retirement).
Under no circumstances will the CDSC be waived on redemptions resulting from
the termination of a tax-deferred retirement plan, unless such redemptions
otherwise qualify for a waiver as described above. In the case of Direct
Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be waived
on redemptions which represent borrowings from such plans. Shares purchased
with amounts used to repay a loan from such plans on which a CDSC was not
previously deducted will thereafter be subject to a CDSC without regard to the
time such amounts were previously invested. In the case of a 401(k) plan, the
CDSC will also be waived upon the redemption of shares purchased with amounts
used to repay loans made from the account to the participant and from which a
CDSC was previously deducted. In addition, the CDSC will be waived on
redemptions of shares held by Directors of the Fund.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec, at the time of redemption, that you are entitled to
waiver of the CDSC and provide the Transfer Agent with such supporting
documentation as it may deem appropriate. The waiver will be granted subject
to confirmation of your entitlement. See "Waiver of the Contingent Deferred
Sales Charge--Class B Shares" in the Statement of Additional Information.
Systematic Withdrawal Plan. The CDSC will be waived (or reduced) on certain
redemptions pursuant to a Systematic Withdrawal Plan. On an annual basis, up
to 12% of the total dollar amount subject to the CDSC may be redeemed without
charge. The Fund's Transfer Agent will calculate the total amount available
for this waiver annually. The CDSC will be waived (or reduced) on redemptions
until this threshold 12% is reached.
28
<PAGE>
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES
PruArray or SmartPath Plans. The CDSC will be waived on the following
redemptions from certain qualified and non-qualified retirement and deferred
compensation plans that participate in the Transfer Agent's PruArray and
SmartPath Programs: (i) redemptions from a 403(b) or 457 plan; and (ii)
redemptions from a qualified or non-qualified plan, provided, that the
investment options of the plan include shares of Prudential Mutual Funds and
shares of non-affiliated mutual funds.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec, at the time of redemption, that you are entitled to
waiver of the CDSC and provide the Transfer Agent with such supporting
documentation as it may deem appropriate. The waiver will be granted subject
to confirmation of your entitlement. See "Waiver of the Contingent Deferred
Sales Charge--Class B Shares" in the Statement of Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected
at relative net asset value without the imposition of any additional sales
charge. The first conversion of Class B shares occurred in February 1995, when
the conversion feature was first implemented.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each conversion date in accordance with the following
formula: (i) the ratio of (a) the amounts paid for Class B shares purchased at
least seven years prior to the conversion date to (b) the total amount paid
for all Class B shares purchased and then held in your account (ii) multiplied
by the total number of Class B shares then in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or
amounts representing Class B shares then in your account that were acquired
through the automatic reinvestment of dividends and other distributions will
convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as described above will generally be either more or less
than the number of shares actually purchased approximately seven years before
such conversion date. For example, if 100 shares were initially purchased at
$10 per share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 or 47.62% multiplied by 200 shares or 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to
shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share net asset value of the Class A shares may be
higher than that of the Class B shares at the time of conversion. Thus,
although the aggregate dollar value will be the same, you may receive fewer
Class A shares than Class B shares converted. See "How the Fund Values its
Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been
made on the last day of the month, or for Class B shares acquired through
exchange, or a series of exchanges, on the last day of the month in which the
original payment for purchases of such Class B shares was made. For Class B
shares previously exchanged for shares of a money market fund, the time period
during which such shares were held in the money market fund will be excluded.
For example, Class B shares held in a money market fund for one year will not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase
of such shares.
29
<PAGE>
The conversion feature is subject to the continuing availability of opinions
of counsel (i) that the dividends and other distributions paid on Class A,
Class B, Class C and Class Z shares will not constitute "preferential
dividends" under the Internal Revenue Code and (ii) that the conversion of
shares does not constitute a taxable event. The conversion of Class B shares
into Class A shares may be suspended if such opinions or rulings are no longer
available. If conversions are suspended, Class B shares of the Fund will
continue to be subject, possibly indefinitely, to their higher annual
distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET
FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A,
CLASS B, CLASS C AND CLASS Z SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B,
CLASS C AND CLASS Z SHARES, RESPECTIVELY, OF ANOTHER FUND ON THE BASIS OF THE
RELATIVE NAV. No sales charge will be imposed at the time of the exchange. Any
applicable CDSC payable upon the redemption of shares exchanged will be that
imposed by the fund in which shares are initially purchased and will be
calculated from the first day of the month after the initial purchase,
excluding the time shares were held in a money market fund. Class B and Class
C shares may not be exchanged into money market funds other than Prudential
Special Money Market Fund, Inc. For purposes of calculating the holding period
applicable to the Class B conversion feature, the time period during which
Class B shares were held in a money market fund will be excluded. See
"Conversion Feature--Class B Shares" above. An exchange will be treated as a
redemption and purchase for tax purposes. See "Shareholder Investment
Account--Exchange Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may
call the Fund at (800) 225-1852 to execute a telephone exchange of shares, on
weekdays, except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New
York time. For your protection and to prevent fraudulent exchanges, your
telephone call will be recorded and you will be asked to provide your personal
identification number. A written confirmation of the exchange transaction will
be sent to you. NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS,
LIABILITY OR COST WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY
BELIEVED TO BE GENUINE UNDER THE FOREGOING PROCEDURES. 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.
SPECIAL EXCHANGE PRIVILEGE. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV. See "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above. Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z
30
<PAGE>
shares will have their Class B and Class C shares which are not subject to a
CDSC and their Class A shares exchanged for Class Z shares on a quarterly
basis. Eligibility for this exchange privilege will be calculated on the
business day prior to the date of the exchange. Amounts representing Class B
or Class C shares which are not subject to a CDSC include the following: (1)
amounts representing Class B or Class C shares acquired pursuant to the
automatic reinvestment of dividends and distributions, (2) amounts
representing the increase in the net asset value above the total amount of
payments for the purchase of Class B or Class C shares and (3) amounts
representing Class B or Class C shares held beyond the applicable CDSC period.
Class B and Class C shareholders must notify the Transfer Agent either
directly or through Prudential Securities or Prusec that they are eligible for
this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares
when they elect to have those assets become a part of the fee-based program.
Upon leaving the program (whether voluntarily or not), such Class Z shares
(and, to the extent provided for in the program, Class Z shares acquired
through participation in the program) will be exchanged for Class A shares at
net asset value. Similarly, participants in PSI's 401(k) Plan for which the
Fund's Class Z shares are an available option and who wish to transfer their
Class Z shares out of the PSI 401(k) Plan following separation from service
(i.e., voluntary or involuntary termination of employment or retirement) will
have their Class Z shares exchanged for Class A shares at NAV.
The Fund reserves the right to reject any exchange order including exchanges
(and market timing transactions) which are of the 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 the Fund, you can
take advantage of the following additional services and privileges:
. AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at NAV
without a sales charge. You may direct the Transfer Agent in writing not less
than 5 full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. If you
hold shares through Prudential Securities, you should contact your financial
adviser.
. AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Fund's shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
. TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both self-
employed individuals and corporate employers. These plans permit either self-
direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or
the Transfer Agent. If you are considering adopting such a plan, you should
consult with your own legal or tax adviser with respect to the establishment
and maintenance of such a plan.
. SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders, which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--
31
<PAGE>
Contingent Deferred Sales Charges." See also "Shareholder Investment Account--
Systematic Withdrawal Plan" in the Statement of Additional Information.
. REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102. In addition, monthly
unaudited financial data are available upon request from the Fund.
. SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102, 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.
32
<PAGE>
APPENDIX
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
'gilt edge.' Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than Aaa bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
CA: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
COMMERCIAL PAPER
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months.
P-1: The designation 'Prime-1' or 'P-1' indicates the highest quality
repayment capacity of the rated issue.
P-2: The designation 'Prime-2' or 'P-2' indicates a strong capacity for
repayment.
A-1
<PAGE>
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated AAA has the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A: Debt rated A has strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC: Debt rated BB, B, CCC, and CC is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligations. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposures to adverse
conditions.
COMMERCIAL PAPER
Standard & Poor's commercial paper ratings are current assessments of the
likelihood of timely payment of debt having an original maturity of no more
than 270 days.
A-1: The A-1 designation indicates that the degree of safety regarding timely
payment is very strong.
A-2: Capacity for timely payment on issues with the designation A-2 is
strong. However, the relative degree of safety is not as overwhelming as for
issues designated A-1.
A-2
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your
Prudential Securities financial adviser or Prusec representative or telephone
the Funds at (800) 225-1852 for a free prospectus. Read the prospectus
carefully before you invest or send money.
TAXABLE BOND FUNDS EQUITY FUNDS
Prudential Allocation Fund
Prudential Diversified Bond Fund, Inc. Balanced Portfolio
Prudential Government Income Fund, Inc. Strategy Portfolio
Prudential Government Securities Trust
Short-Intermediate Term Series Prudential Distressed Securities
Prudential High Yield Fund, Inc. Fund, Inc.
Prudential Mortgage Income Fund, Inc. Prudential Dryden Fund
Prudential Structured Maturity Fund, Inc. Prudential Active Balance Fund
Income Portfolio
Prudential Stock Index Fund
The BlackRock Government Income Trust
Prudential Emerging Growth Fund,
Inc.
TAX-EXEMPT BOND FUNDS Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential California Municipal Fund Prudential Jennison Series Fund,
Inc.
California Series
California Income Series Prudential Jennison Growth Fund
Prudential Municipal Bond Fund
High Yield Series Prudential Jennison Growth &
Income Fund
Insured Series Prudential Multi-Sector Fund, Inc.
Intermediate Series
Prudential Municipal Series Fund Prudential Small Company Value
Fund, Inc.
Florida Series Prudential Utility Fund, Inc.
Hawaii Income Series Nicholas-Applegate Fund, Inc.
MONEY MARKET FUNDS
. Taxable Money Market Funds
Maryland Series Nicholas-Applegate Growth Equity
Fund
Prudential Government Securities
Massachusetts Series Trust
Michigan Series Money Market Series
New Jersey Series U.S. Treasury Money Market
Series
New York Series
North Carolina Series Prudential Special Money Market
Ohio Series Fund, Inc.
Pennsylvania Series Money Market Series
Prudential National Municipals Fund, Inc. Prudential MoneyMart Assets, Inc.
. Tax-Free Money Market Funds
GLOBAL FUNDS Prudential Tax-Free Money Fund,
Inc.
Prudential California Municipal
Prudential Europe Growth Fund, Inc. Fund
Prudential Global Genesis Fund, Inc. California Money Market Series
Prudential Municipal Series Fund
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio Connecticut Money Market Series
Massachusetts Money Market
Series
Prudential Intermediate Global Income Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc. New Jersey Money Market Series
Prudential World Fund, Inc. New York Money Market Series
Global Series
. Command Funds
International Stock Series Command Money Fund
Global Utility Fund, Inc. Command Government Fund
The Global Government Plus Fund, Inc.
The Global Total Return Fund, Inc. Command Tax-Free Fund
. Institutional Money Market Funds
Prudential Institutional Liquidity
Portfolio, Inc.
Institutional Money Market
Series
B-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS........................................................... 2
What are the Fund's Risk Factors and Special Characteristics?............ 2
FUND EXPENSES............................................................. 4
FINANCIAL HIGHLIGHTS...................................................... 5
HOW THE FUND INVESTS...................................................... 6
Investment Objective and Policies........................................ 6
Risk Factors and Special Considerations of Investing in Foreign
Securities.............................................................. 8
Risk Factors Relating to Investing in Foreign Debt Securities Rated Below
Investment Grade (Junk Bonds)........................................... 9
Hedging and Return Enhancement Strategies................................ 10
Other Investments and Policies........................................... 12
Investment Restrictions.................................................. 14
HOW THE FUND IS MANAGED................................................... 14
Manager.................................................................. 14
Distributor.............................................................. 15
Fee Waivers and Subsidy.................................................. 16
Portfolio Transactions................................................... 16
Custodian and Transfer and Dividend Disbursing Agent..................... 17
HOW THE FUND VALUES ITS SHARES............................................ 17
HOW THE FUND CALCULATES PERFORMANCE....................................... 17
TAXES, DIVIDENDS AND DISTRIBUTIONS........................................ 18
GENERAL INFORMATION....................................................... 20
Description of Common Stock.............................................. 20
Additional Information................................................... 20
SHAREHOLDER GUIDE......................................................... 21
How to Buy Shares of the Fund............................................ 21
Alternative Purchase Plan................................................ 22
How to Sell Your Shares.................................................. 26
Conversion Feature-- Class B Shares...................................... 29
How to Exchange Your Shares.............................................. 30
Shareholder Services..................................................... 31
DESCRIPTION OF SECURITY RATINGS........................................... A-1
THE PRUDENTIAL MUTUAL FUND FAMILY......................................... B-1
</TABLE>
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MF160A 42MO25U
CUSIP No.:
Class A: 74431N-10-3
Class B: 74431N-20-2
Class C: 74431N-30-1
Class Z: 74431N-40-0
PRUDENTIAL
EUROPE
GROWTH
FUND, INC.
PROSPECTUS
July 1, 1997
[LOGO] PRUDENTIAL INVESTMENTS
<PAGE>
PRUDENTIAL EUROPE GROWTH FUND, INC.
Statement of Additional Information
dated July 1, 1997
Prudential Europe Growth Fund, Inc. (the Fund) is an open-end, diversified
management investment company whose investment objective is long-term growth
of capital. The Fund seeks to achieve this objective by investing primarily in
equity securities (common stock, securities convertible into common stock and
preferred stock) of companies domiciled in Europe. Under normal circumstances,
the Fund intends to invest at least 65% of its total assets in such
securities. The Fund may also invest in equity securities of other companies
and in non-convertible debt securities, and may engage in various derivative
transactions such as options on stocks, stock indices, foreign currencies and
futures contracts on foreign currencies and the purchase and sale of futures
contracts on foreign currencies and groups of currencies and on financial or
stock indices to hedge its portfolio and to attempt to enhance return. There
can be no assurance that the Fund's investment objective will be achieved. See
"Investment Objective and Policies."
Prudential Mutual Fund Investment Management, a unit of The Prudential
Investment Corporation (PIC), the subadviser to the Fund, maintains a group of
professionals with knowledge of and experience in European markets.
Representatives of this group pay on-site visits to many companies considered
for the Fund, focus on key themes that could provide growth potential in
Europe and evaluate investment opportunities for the Fund in the privatization
of industries in Europe. See "How the Fund is Managed--Manager" in the
Prospectus.
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus dated July 1, 1997, a copy of
which may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
---- ---------------
<S> <C> <C>
Investment Objective and Policies......................... B-2 6
Investment Restrictions................................... B-14 14
Directors and Officers.................................... B-15 15
Manager................................................... B-19 14
Distributor............................................... B-21 15
Portfolio Transactions and Brokerage...................... B-24 16
Purchase and Redemption of Fund Shares.................... B-25 21
Shareholder Investment Account............................ B-28 31
Net Asset Value........................................... B-32 17
Taxes..................................................... B-33 18
Performance Information................................... B-36 17
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants.................................. B-38 17
Independent Accountant's Report........................... B-50 --
Financial Statements...................................... B-40 --
Appendix--Historical Performance Data..................... A-1 --
Appendix--General Investment Information.................. A-4 --
Appendix--Information Relating to The Prudential.......... A-5 --
</TABLE>
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is long-term growth of capital. It seeks to
achieve this objective by investing primarily in equity securities, common
stocks, common stock equivalents (including warrants and convertible debt
securities) and other equity securities of companies domiciled in Europe.
Companies domiciled in Europe include (i) companies organized under the laws
of a European country, (ii) companies for which the principal securities
trading market is in Europe, (iii) companies which derive at least 50% of
their revenues or profits from goods produced or sold, investments made or
services performed in Europe or (iv) companies which have at least 50% of
their assets situated in Europe. See "How the Fund Invests--Investment
Objective and Policies" in the Prospectus. There can be no assurance that the
Fund's investment objective will be achieved.
U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES. The Fund is permitted to invest in U.S. Treasury
securities, including bills, notes, bonds and other debt securities issued by
the U.S. Treasury. These instruments are direct obligations of the U.S.
Government and, as such, are backed by the "full faith and credit" of the
United States. They differ primarily in their interest rates, the lengths of
their maturities and the dates of their issuances.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in securities issued by agencies of the
U.S. Government or instrumentalities of the U.S. Government. These
obligations, including those which are guaranteed by Federal agencies or
instrumentalities, may or may not be backed by the full faith and credit of
the United States. Obligations of the Government National Mortgage Association
(GNMA), the Farmers Home Administration and the Small Business Administration
are backed by the full faith and credit of the United States. In the case of
securities not backed by the full faith and credit of the United States, the
Fund must look principally to the agency issuing or guaranteeing the
obligation for ultimate repayment and may not be able to assert a claim
against the United States if the agency or instrumentality does not meet its
commitments. Securities in which the Fund may invest which are not backed by
the full faith and credit of the United States include obligations such as
those issued by the Federal Home Loan Bank, the Federal Home Loan Mortgage
Corporation (FHLMC), the Federal National Mortgage Association, the Student
Loan Marketing Association, Resolution Funding Corporation and the Tennessee
Valley Authority, each of which has the right to borrow from the U.S. Treasury
to meet its obligations, and obligations of the Farm Credit System, the
obligations of which may be satisfied only by the individual credit of the
issuing agency. FHLMC investments may include collateralized mortgage
obligations. See "Other Investments and Investment Techniques" below.
Obligations issued or guaranteed as to principal and interest by the United
States Government may be acquired by the Fund in the form of custodial
receipts that evidence ownership of future interest payments, principal
payments or both on certain United States Treasury notes or bonds. Such notes
and bonds are held in custody by a bank on behalf of the owners. These
custodial receipts are commonly referred to as Treasury strips.
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in mortgage-backed securities,
including those which represent undivided ownership interests in pools of
mortgages. The U.S. Government or the issuing agency or instrumentality
guarantees the payment of interest on and principal of these securities.
However, the guarantees do not extend to the yield or value of the securities
nor do the guarantees extend to the yield or value of the Fund's shares. These
securities are in most cases "pass-through" instruments, through which the
holders receive a share of all interest and principal payments from the
mortgages underlying the securities, net of certain fees. Because the
prepayment characteristics of the underlying mortgages vary, it is not
possible to predict accurately the average life of a particular issue of pass-
through certificates. Mortgage-backed securities are often subject to more
rapid repayment than their maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying mortgage
obligations. During periods of declining interest rates, prepayment of
mortgages underlying mortgage-backed securities can be expected to accelerate.
The Fund's ability to invest in high-yielding mortgage-backed securities will
be adversely affected to the extent that prepayments of
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mortgages must be reinvested in securities which have lower yields than the
prepaid mortgages. Moreover, prepayments of mortgages which underlie
securities purchased at a premium could result in capital losses.
The Fund may invest in both Adjustable Rate Mortgage Securities (ARMs),
which are pass-through mortgage securities collateralized by adjustable rate
mortgages, and Fixed-Rate Mortgage Securities (FRMs), which are collateralized
by fixed-rate mortgages.
The values of U.S. Government securities (like those of other fixed-income
securities generally) will change as interest rates fluctuate. During periods
of falling U.S. interest rates, the values of U.S. Government securities
generally rise and, conversely, during periods of rising interest rates, the
values of such securities generally decline. The magnitude of these
fluctuations will generally be greater for securities with longer-term
maturities.
FOREIGN DEBT SECURITIES
The Fund is permitted to invest in foreign corporate and government
securities. "Foreign Government securities" include debt securities issued or
guaranteed, as to payment of principal and interest, by governments, quasi-
governmental entities, governmental agencies, supranational entities and other
governmental entities (collectively, Government Entities) of foreign countries
denominated in the currencies of such countries or in U.S. dollars (including
debt securities of a Government Entity in any such country denominated in the
currency of another such country).
A "supranational entity" is an entity constituted by the national
governments of several countries to promote economic development. Examples of
such supranational entities include, among others, the World Bank
(International Bank for Reconstruction and Development), the European
Investment Bank and the Asian Development Bank. Debt securities of "quasi-
governmental entities" are issued by entities owned by a national, state, or
equivalent government or are obligations of a political unit that are not
backed by the national government's "full faith and credit" and general taxing
powers. Examples of quasi-government issuers include, among others, the
Province of Ontario and the City of Stockholm. "Foreign government securities"
shall also include debt securities of Government Entities denominated in
European Currency Units. A European Currency Unit represents specified amounts
of the currencies of certain of the member states of the European Community.
Foreign government securities shall also include mortgage-backed securities
issued by foreign Government Entities including quasi-governmental entities.
OPTIONS ON SECURITIES
The Fund may purchase and write (i.e., sell) put and call options on
securities that are traded on U.S. or foreign securities exchanges or that are
traded in the over-the-counter markets. A call option is a short-term contract
pursuant to which the purchaser, in return for a premium paid, has the right
to buy the security underlying the option at a specified exercise price at any
time during the term of the option. The writer of the call option, who
receives the premium, has the obligation, upon exercise of the option, to
deliver the underlying security against payment of the exercise price. A put
option is a similar contract which gives the purchaser, in return for a
premium, the right to sell the underlying security at a specified price during
the term of the option. The writer of the put, who receives the premium, has
the obligation to buy the underlying security upon exercise at the exercise
price. The Fund will generally write put options when its investment adviser
desires to invest in the underlying security. The premium paid by the
purchaser of an option will reflect, among other things, the relationship of
the exercise price to the market price and volatility of the underlying
security, the remaining term of the option, supply and demand and interest
rates.
A call option written by the Fund is "covered" if the Fund owns the security
underlying the option or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its Custodian) upon conversion
or exchange of other securities held in its portfolio. A call option is also
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covered if the Fund holds on a share-for-share basis a call on the same
security as the call written where the exercise price of the call held is
equal to or less than the exercise price of the call written or greater than
the exercise price of the call written if the difference is maintained by the
Fund in cash or other liquid unencumbered assets, marked-to-market daily, in a
segregated account with its Custodian. A put option written by the Fund is
"covered" if the Fund maintains cash, U.S. Government securities or other
liquid unencumbered assets, marked-to-market daily, with a value equal to the
exercise price in a segregated account with its Custodian, or else holds on a
share-for-share basis a put on the same security as the put written where the
exercise price of the put held is equal to or greater than the exercise price
of the put written.
If the writer of an option wishes to terminate the obligation, he or she may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be cancelled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after he or she had been notified of the exercise of an option. Similarly, an
investor who is the holder of an option may liquidate his or her position by
effecting a "closing sale transaction." This is accomplished by selling an
option of the same series as the option previously purchased. There is no
guarantee that either a closing purchase or a closing sale transaction can be
effected. To secure the obligation to deliver the underlying security in the
case of a call option, the writer of the option is generally required to
pledge for the benefit of the broker the underlying security or other assets
in accordance with the rules of the relevant exchange or clearinghouse, such
as The Options Clearing Corporation (OCC), an institution created to interpose
itself between buyers and sellers of options in the United States.
Technically, the clearinghouse assumes the other side of every purchase and
sale transaction on an exchange and, by doing so, guarantees the transaction.
The Fund will realize a profit from a closing transaction if, where the Fund
writes the option, the cost of the closing transaction is less than the
premium received from writing the option or, where the Fund purchases an
option, if the proceeds from the closing transaction are more than the premium
paid to purchase the option. The Fund will realize a loss from a closing
transaction in the first case if the price of the transaction is more than the
premium received from writing the option and, in the second case, if the
proceeds from the closing transaction are less than the premium paid to
purchase the option. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option may be
offset in whole or in part if the Fund holds the underlying security by
appreciation of the underlying security owned by the Fund.
The Fund may also purchase a "protective put," i.e., a put option acquired
for the purpose of protecting a portfolio security from a decline in market
value. In exchange for the premium paid for the put option, the Fund acquires
the right to sell the underlying security at the exercise price of the put
regardless of the extent to which the underlying security declines in value.
The loss to the Fund is limited to the premium paid for, and transaction costs
in connection with, the put plus the initial excess, if any, of the market
price of the underlying security over the exercise price. However, if the
market price of the security underlying the put rises, the profit the Fund
realizes on the sale of the security will be reduced by the premium paid for
the put option less any amount (net of transaction costs) for which the put
may be sold. Similar principles apply to the purchase of puts on stock
indices, as described below.
OPTIONS ON SECURITIES INDICES. In addition to options on securities, the
Fund may also purchase and sell put and call options on securities indices
traded on U.S. or foreign securities exchanges or traded in the over-the-
counter markets. Options on securities indices are similar to options on
securities except that, rather than the right to take or make delivery of a
security at a specified price, an option on a securities index gives the
holder the right to receive, upon exercise of the option, an amount of cash if
the closing level of the securities index upon which the option is based is
greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. This amount of cash is equal to such difference
between the closing price of the index and the exercise price of the option
expressed in dollars times a specified multiple (the multiplier). The writer
of the option is obligated, in return for the premium received, to make
delivery of this amount. All settlements on options on indices are in cash,
and gain or loss depends on price movements in the securities market generally
(or in a particular industry or segment of the market) rather than price
movements in individual securities.
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The multiplier for an index option performs a function similar to the unit
of trading for a stock option. It determines the total dollar value per
contract of each point in the difference between the exercise price of an
option and the current level of the underlying index. A multiplier of 100
means that a one-point difference will yield $100. Options on different
indices may have different multipliers. Because exercises of index options are
settled in cash, a call writer cannot determine the amount of its settlement
obligations in advance and, unlike call writing on specific stocks, cannot
provide in advance for, or cover, its potential settlement obligations by
acquiring and holding the underlying securities. In addition, unless the Fund
has other liquid assets which are sufficient to satisfy the exercise of a
call, the Fund would be required to liquidate portfolio securities or borrow
in order to satisfy the exercise.
Because the value of an index option depends upon movements in the level of
the index rather than the price of a particular security, whether the Fund
will realize a gain or loss on the purchase or sale of an option on an index
depends upon movements in the level of security prices in the market generally
or in an industry or market segment rather than movements in the price of a
particular security. Accordingly, successful use by the Fund of options on
indices would be subject to the investment adviser's ability to predict
correctly movements in the direction of the securities market generally or of
a particular industry. This requires different skills and techniques than
predicting changes in the price of individual stocks. The investment adviser
currently uses such techniques in conjunction with the management of other
mutual funds.
RISKS OF TRANSACTIONS IN OPTIONS
An option position may be closed out only on an exchange, board of trade or
other trading facility which provides a secondary market for an option of the
same series. Although the Fund will generally purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option, or at any particular time, and for some options no
secondary market on an exchange or otherwise may exist. In such event it might
not be possible to effect closing transactions in particular options, with the
result that the Fund would have to exercise its options in order to realize
any profit and would incur brokerage commissions upon the exercise of call
options and upon the subsequent disposition of underlying securities acquired
through the exercise of call options or upon the purchase of underlying
securities for the exercise of put options. If the Fund, as a covered call
option writer, is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange or a clearing corporation may not at all times be
adequate to handle current trading volume; or (vi) one or more exchanges
could, for economic or other reasons, decide or be compelled at some future
date to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in the
class or series of options) would cease to exist, although outstanding options
on that exchange that had been issued by a clearing corporation as a result of
trades on that exchange would continue to be exercisable in accordance with
their terms. There is no assurance that higher than anticipated trading
activity or other unforeseen events might not, at times, render certain of the
facilities of any of the clearing corporations inadequate, and thereby result
in the institution by an exchange of special procedures which may interfere
with the timely execution of customers' orders. The Fund intends to purchase
and sell only those options which are cleared by clearinghouses whose
facilities are considered to be adequate to handle the volume of options
transactions.
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RISKS OF OPTIONS ON INDICES
The Fund's purchase and sale of options on indices will be subject to risks
described above under "Risks of Transactions in Options." In addition, the
distinctive characteristics of options on indices create certain risks that
are not present with stock options.
Index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading in the index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number
of stocks included in the index. If this occurred, the Fund would not be able
to close out options which it had purchased or written and, if restrictions on
exercise were imposed, may be unable to exercise an option it holds, which
could result in substantial losses to the Fund. It is the Fund's policy to
purchase or write options only on indices which include a number of stocks
sufficient to minimize the likelihood of a trading halt in the index.
The ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop in all index option contracts. The
Fund will not purchase or sell any index option contract unless and until, in
the investment adviser's opinion, the market for such options has developed
sufficiently that the risk in connection with such transactions is not
substantially greater than the risk in connection with options on securities
in the index.
SPECIAL RISKS OF WRITING CALLS ON INDICES
Because exercises of index options are settled in cash, a call writer such
as the Fund cannot determine the amount of its settlement obligations in
advance and, unlike call writing on specific stocks, cannot provide in advance
for, or cover, its potential settlement obligations by acquiring and holding
the underlying securities. However, the Fund will write call options on
indices only under the circumstances described below under "Limitations on
Purchase and Sale of Stock Options and Options on Stock Indices, Foreign
Currencies and Futures Contracts on Foreign Currencies."
Price movements in the Fund's portfolio probably will not correlate
precisely with movements in the level of the index and, therefore, the Fund
bears the risk that the price of the securities held by the Fund may not
increase as much as the index. In such event, the Fund would bear a loss on
the call which is not completely offset by movements in the price of the
Fund's portfolio. It is also possible that the index may rise when the Fund's
portfolio of stocks does not rise. If this occurred, the Fund would experience
a loss on the call which is not offset by an increase in the value of its
portfolio and might also experience a loss in its portfolio. However, because
the value of a diversified portfolio will, over time, tend to move in the same
direction as the market, movements in the value of the Fund in the opposite
direction as the market would be likely to occur for only a short period or to
a small degree.
Unless the Fund has other liquid assets which are sufficient to satisfy the
exercise of a call, the Fund would be required to liquidate portfolio
securities in order to satisfy the exercise. Because an exercise must be
settled within hours after receiving the notice of exercise, if the Fund fails
to anticipate an exercise, it may have to borrow from a bank (in amounts not
exceeding 33 1/3% of the Fund's total assets) pending settlement of the sale
of securities in its portfolio and would incur interest charges thereon.
When the Fund has written a call, there is also a risk that the market may
decline between the time the Fund has a call exercised against it, at a price
which is fixed as of the closing level of the index on the date of exercise,
and the time the Fund is able to sell stocks in its portfolio. As with stock
options, the Fund will not learn that an index option has been exercised until
the day following the exercise date but, unlike a call on stock where the Fund
would be able to deliver the underlying securities in settlement, the Fund may
have to sell part of its investment portfolio in order to make settlement in
cash, and the price of such investments might decline before they can be sold.
This timing risk makes certain strategies involving more than one option
substantially more risky with index options than with stock options. For
example, even if an index call which the Fund has written is "covered" by an
index call held by the Fund with the same strike price, the Fund will bear the
risk that the level of the index
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may decline between the close of trading on the date the exercise notice is
filed with the clearing corporation and the close of trading on the date the
Fund exercises the call it holds or the time the Fund sells the call which, in
either case, would occur no earlier than the day following the day the
exercise notice was filed.
If the Fund holds an index option and exercises it before final
determination of the closing index value for that day, it runs the risk that
the level of the underlying index may change before closing. If such a change
causes the exercised option to fall out-of-the-money, the Fund will be
required to pay the difference between the closing index value and the
exercise price of the option (times the applicable multiplier) to the assigned
writer. Although the Fund may be able to minimize this risk by withholding
exercise instructions until just before the daily cutoff time or by selling
rather than exercising an option when the index level is close to the exercise
price, it may not be possible to eliminate this risk entirely because the
cutoff times for index options may be earlier than those fixed for other types
of options and may occur before definitive closing index values are announced.
RISKS OF OPTIONS ON FOREIGN CURRENCIES
Options on foreign currencies involve the currencies of two nations and
therefore, developments in either or both countries affect the values of
options on foreign currencies. Risks include those described in the Prospectus
under "How the Fund Invests--Risk Factors and Special Considerations of
Investing in Foreign Securities," including government actions affecting
currency valuation and the movements of currencies from one country to
another. The quantity of currency underlying option contracts represent odd
lots in a market dominated by transactions between banks; this can mean extra
transaction costs upon exercise. Option markets may be closed while round-the-
clock interbank currency markets are open, and this can create price and rate
discrepancies.
RISKS RELATED TO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts in
several circumstances. When the Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, or when the Fund
anticipates the receipt in a foreign currency of dividends or interest
payments on a security which it holds, the Fund may desire to "lock-in" the
U.S. dollar price of the security or the U.S. dollar equivalent of such
dividend or interest payment, as the case may be. By entering into a forward
contract for a fixed amount of dollars, for the purchase or sale of the amount
of foreign currency involved in the underlying transactions, the Fund may be
able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the foreign currency
during the period between the date on which the security is purchased or sold,
or on which the dividend or interest payment is declared, and the date on
which such payments are made or received.
Additionally, when the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of
some or all of the Fund's portfolio securities denominated in such foreign
currency. The precise matching of the forward contract amounts and the value
of the securities involved will not generally be possible since the future
value of securities in foreign currencies will change as a consequence of
market movements in the value of those securities between the date on which
the forward contract is entered into and the date it matures. The projection
of short-term currency market movement is extremely difficult, and the
successful execution of a short-term hedging strategy is highly uncertain. The
Fund's Custodian will place cash or other liquid, unencumbered assets, market-
to-market daily, in a segregated account of the Fund in an amount equal to the
value of the Fund's total assets committed to the consummation of forward
foreign currency exchange contract (less the value of any "covering"
positions, if any). If the value of the securities placed in the segregated
account declines, additional cash or securities will be placed in the account
on a daily basis so that the value of the account will equal the amount of the
Fund's net commitment with respect to such contracts.
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The Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency,
or it may retain the security and terminate its contractual obligation to
deliver the foreign currency by purchasing an "offsetting" contract with the
same currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the forward contract.
Accordingly, if a decision is made to sell the security and make delivery of
the foreign currency and if the market value of the security is less than the
amount of foreign currency that the Fund is obligated to deliver, then it
would be necessary for the Fund to purchase additional foreign currency on the
spot market (and bear the expense of such purchase).
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. Should forward contract prices
decline during the period between the Fund's entering into a forward contract
for the sale of a foreign currency and the date it enters into an offsetting
contract for the purchase of the foreign currency, the Fund will realize a
gain to the extent that the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
contract prices increase, the Fund will suffer a loss to the extent that the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. Of course, the Fund
is not required to enter into such transactions with regard to its foreign
currency-denominated securities. It also should be recognized that this method
of protecting the value of the Fund's portfolio securities against a decline
in the value of a currency does not eliminate fluctuations in the underlying
prices of the securities which are unrelated to exchange rates. Additionally,
although such contracts tend to minimize the risk of loss due to a decline in
the value of the hedged currency, at the same time they tend to limit any
potential gain which might result should the value of such currency increase.
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the spread) between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign
currency to the Fund at one rate, while offering a lesser rate of exchange
should the Fund desire to resell that currency to the dealer.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures contracts as a
hedging device. Due to the imperfect correlation between the price of futures
contracts and movements in the currency or group of currencies, the price of a
futures contract may move more or less than the price of the currencies being
hedged. In the case of futures contracts on securities indices, the
correlation between the price of the futures contract and the movements in the
index may not be perfect. Therefore, a correct forecast of currency rates,
market trends or international political trends by the investment adviser may
still not result in a successful hedging transaction.
Although the Fund will purchase or sell futures contracts only on exchanges
where there appears to be an adequate secondary market, there is no assurance
that a liquid secondary market on an exchange will exist for any particular
contract or at any particular time. Accordingly, there can be no assurance
that it will be possible, at any particular time, to close a futures position.
In the event the Fund could not close a futures position and the value of such
position declined, the Fund would be required to continue to make daily cash
payments of variation margin. There is no guarantee that the price movements
of the portfolio securities denominated in foreign currencies will, in fact,
correlate with the price movements in the futures contract and thus provide an
offset to losses on a futures contract. Currently, currency futures contracts
are available on various foreign currencies
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including the Australian Dollar, British Pound, Canadian Dollar, Japanese Yen,
Swiss Franc, German Mark and Eurodollars. Index futures contracts are
available on various U.S. and foreign securities indices.
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act of 1940, as amended (the
Investment Company Act), are exempt from the definition of "commodity pool
operator," subject to compliance with certain conditions. The exemption is
conditioned upon a requirement that all of the Fund's futures or options
transactions constitute bona fide hedging transactions within the meaning of
the regulations of the Commodity Futures Trading Commission (CFTC). The Fund
will use currency futures and options on futures or commodity options
contracts in a manner consistent with this requirement. The Fund may also
enter into futures or related options contracts for return enhancement and
risk management purposes if the aggregate initial margin and option premiums
do not exceed 5% of the liquidation value of the Fund's total assets, after
taking into account unrealized profits and unrealized losses on any such
contracts, provided, however, that in the case of an option that is in-the-
money, the in-the-money amount may be excluded in computing such 5%. The above
restriction does not apply to the purchase and sale of futures and related
options contracts for bona fide hedging purchases.
Successful use of futures contracts by the Fund is also subject to the
ability of the Fund's investment adviser to predict correctly movements in the
direction of markets and other factors affecting currencies or the securities
market generally. For example, if the Fund had hedged against the possibility
of an increase in currency rates which would adversely affect the price of
securities in its portfolio and the price of such securities increases
instead, the Fund will lose part or all of the benefit of the increased value
of its securities because it will have offsetting losses in its futures
positions. In addition, in such situations, if the Fund has insufficient cash
to meet daily variation margin requirements, it may need to sell securities to
meet such requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. The Fund
may have to sell securities at a time when it is disadvantageous to do so.
The hours of trading of futures contracts may not conform to the hours
during which the Fund may trade the underlying securities. To the extent that
the futures markets close before the securities markets, significant price and
rate movements can take place in the securities markets that cannot be
reflected in the futures markets.
OPTIONS ON FUTURES CONTRACTS
An option on a futures contract gives the purchaser the right, but not the
obligation, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option exercise period. The writer of
the option is required upon exercise to assume an offsetting futures position
(a short position if the option is a call and a long position if the option is
a put). Upon exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by
delivery of the accumulated cash balance in the writer's futures margin
account which represents the amount by which the market price of the futures
contract, at exercise, exceeds, in the case of a call, or is less than, in the
case of a put, the exercise price of the option on the futures contract.
Currency options can be purchased or written with respect to futures contracts
on various foreign currencies, including the Australian Dollar, British Pound,
Canadian Dollar, Japanese Yen, Swiss Franc, German Mark and Eurodollars. With
respect to stock indices, options are traded on futures contracts for various
U.S. and foreign stock indices including the S&P 500 Stock Index and the NYSE
Composite Index.
The holder or writer of an option may terminate its position by selling or
purchasing an option of the same series. There is no guarantee that such
closing transactions can be effected.
B-9
<PAGE>
LIMITATIONS ON PURCHASE AND SALE OF STOCK OPTIONS AND OPTIONS ON STOCK
INDICES, FOREIGN CURRENCIES AND FUTURES CONTRACTS ON FOREIGN CURRENCIES
The Fund may write put and call options on stocks only if they are covered,
and such options must remain covered so long as the Fund is obligated as a
writer. The Fund will write put options on stock indices and foreign
currencies and futures contracts on foreign currencies only if they are
covered by segregating with the Fund's Custodian an amount of cash, U.S.
Government securities, or liquid assets equal to the aggregate exercise price
of the puts. The Fund will not enter into futures contracts or related options
if the aggregate initial margin and premiums exceed 5% of the liquidation
value of the Fund's total assets, taking into account unrealized profits and
losses on such contracts, provided, however, that in the case of an option
that is in-the-money, the in-the-money amount may be excluded in computing
such 5%. The above restriction does not apply to the purchase or sale of
futures contracts and related options for bona fide hedging purposes. The Fund
does not intend to purchase options on equity securities or securities indices
if the aggregate premiums paid for such outstanding options would exceed 10%
of the Fund's total assets.
Except as described below, the Fund will write call options on indices only
if on such date it holds a portfolio of stocks at least equal to the value of
the index times the multiplier times the number of contracts. When the Fund
writes a call option on a broadly-based stock market index, the Fund will
segregate or put into escrow with its Custodian, or pledge to a broker as
collateral for the option, cash, liquid securities, or a portfolio of
securities substantially replicating the movement of the index, in the
judgment of the Fund's investment adviser, with a market value at the time the
option is written of not less than 100% of the current index value times the
multiplier times the number of contracts.
If the Fund has written an option on an industry or market segment index, it
will segregate or put into escrow with its Custodian, or pledge to a broker as
collateral for the option, at least ten "qualified securities," all of which
are stocks of issuers in such industry or market segment, with a market value
at the time the option is written of not less than 100% of the current index
value times the multiplier times the number of contracts. Such stocks will
include stocks which represent at least 50% of the weighting of the industry
or market segment index and will represent at least 50% of the Fund's holdings
in that industry or market segment. No individual security will represent more
than 15% of the amount so segregated, pledged or escrowed in the case of
broadly-based stock market index options or 25% of such amount in the case of
industry or market segment index options. If at the close of business on any
day the market value of such qualified securities so segregated, escrowed or
pledged falls below 100% of the current index value times the multiplier times
the number of contracts, the Fund will so segregate, escrow or pledge an
amount in cash, or liquid securities equal in value to the difference. In
addition, when the Fund writes a call on an index which is in-the-money at the
time the call is written, the Fund will segregate with its Custodian or pledge
to the broker as collateral cash, U.S. Government securities or other high-
grade short-term debt obligations equal in value to the amount by which the
call is in-the-money times the multiplier times the number of contracts. Any
amount segregated pursuant to the foregoing sentence may be applied to the
Fund's obligation to segregate additional amounts in the event that the market
value of the qualified securities falls below 100% of the current index value
times the multiplier times the number of contracts. A "qualified security" is
an equity security which is listed on a national securities exchange or listed
on NASDAQ against which the Fund has not written a stock call option and which
has not been hedged by the Fund by the sale of stock index futures. However,
if the Fund holds a call on the same index as the call written where the
exercise price of the call held is equal to or less than the exercise price of
the call written or greater than the exercise price of the call written if the
difference is maintained by the Fund in cash, Treasury bills or other high-
grade short-term obligations in a segregated account with its Custodian, it
will not be subject to the requirements described in this paragraph.
The Fund may engage in futures contracts and options on futures transactions
as a hedge against changes, resulting from market or political conditions, in
the value of the currencies to which the Fund is subject or to which the Fund
expects to be subject in connection with future purchases. The Fund may engage
in such transactions when they are economically appropriate for the reduction
of risks inherent in the ongoing management of the Fund. The Fund may write
options on futures contracts to realize through the receipt of premium income
a greater return than would be realized in the Fund's portfolio securities
alone.
B-10
<PAGE>
POSITION LIMITS. Transactions by the Fund in futures contracts and options
will be subject to limitations, if any, established by each of the exchanges,
boards of trade or other trading facilities (including NASDAQ) governing the
maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert, regardless of whether
the options are written on the same or different exchanges, boards of trade or
other trading facilities or are held or written in one or more accounts or
through one or more brokers. Thus, the number of futures contracts and options
which the Fund may write or purchase may be affected by the futures contracts
and options written or purchased by other investment advisory clients of the
investment adviser. An exchange, board of trade or other trading facility may
order the liquidations of positions found to be in excess of these limits, and
it may impose certain other sanctions.
DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When conditions dictate a defensive strategy, the Fund may temporarily
invest in money market instruments, including commercial paper of
corporations, certificates of deposit, bankers' acceptances and other
obligations of domestic and foreign banks, obligations issued or guaranteed by
the U.S. Government, its agencies or its instrumentalities and repurchase
agreements (described more fully below). Such investments may be subject to
certain risks, including future political and economic developments, the
possible imposition of withholding taxes on interest income, the seizure or
nationalization of foreign deposits and foreign exchange controls or other
restrictions.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
From time to time, in the ordinary course of business, the Fund may purchase
or sell securities on a when-issued or delayed delivery basis, that is,
delivery and payment can take place a month or more after the date of the
transaction. The Fund will make commitments for such when-issued transactions
only with the intention of actually acquiring the securities. The Fund's
Custodian will maintain, in a separate account of the Fund, cash, U.S.
Government securities or other liquid unencumbered assets, marked to market
daily, having a value equal to or greater than such commitments. If the Fund
chooses to dispose of the right to acquire a when-issued security prior to its
acquisition, it could, as with the disposition of any other portfolio
security, incur a gain or loss due to market fluctuations.
SHORT SALES AGAINST-THE-BOX
The Fund may make short sales of securities or maintain a short position,
provided that at all times when a short position is open the Fund owns an
equal amount of such securities or securities convertible into or
exchangeable, without payment of any further consideration, for an equal
amount of the securities of the same issuer as the securities sold short (a
short sale against-the-box), and that not more than 25% of the Fund's net
assets (determined at the time of the short sale) may be subject to such
sales. Short sales will be made primarily to defer realization of gain or loss
for federal tax purposes. Legislation recently proposed by Congress would
restrict the ability to defer realization or gains or losses using short sales
against-the-box. There can be no assurance that such legislation will be
enacted or, if enacted, as to the effective date of such legislation. As a
matter of current operating policy, the Fund will not engage in short-sales
other than short-sales against-the-box.
REPURCHASE AGREEMENTS
The Fund's repurchase agreements will be collateralized by U.S. Government
obligations. The Fund will enter into repurchase transactions only with
parties meeting creditworthiness standards approved by the Fund's Board of
Directors. The Fund's investment adviser will monitor the creditworthiness of
such parties, under the general supervision of the Board of Directors. In the
event of a default or bankruptcy by a seller, the Fund will promptly seek to
liquidate the collateral. To the extent that the proceeds from any sale of
such collateral upon a default in the obligation to repurchase are less than
the repurchase price, the Fund will suffer a loss.
B-11
<PAGE>
The Fund may participate in a joint repurchase agreement account with other
investment companies managed by Prudential Mutual Fund Management LLC (PIFM or
the Manager) pursuant to an order of the Securities and Exchange Commission
(SEC). On a daily basis, any uninvested cash balances of the Fund may be
aggregated with those of such investment companies and invested in one or more
repurchase agreements. Each fund participates in the income earned or accrued
in the joint account based on the percentage of its investment.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and financial institutions, provided
that outstanding loans do not exceed in the aggregate 30% of the value of the
Fund's total assets and provided that such loans are callable at any time by
the Fund and are at all times secured by cash or equivalent collateral that is
equal to at least the market value, determined daily, of the loaned
securities. The advantage of such loans is that the Fund continues to receive
payments in lieu of the interest and dividends of the loaned securities, while
at the same time earning interest either directly from the borrower or on the
collateral which will be invested in short-term obligations.
A loan may be terminated by the Fund at any time. If the borrower fails to
maintain the requisite amount of collateral, the loan automatically
terminates, and the Fund could use the collateral to replace the securities
while holding the borrower liable for any excess of replacement cost over
collateral. As with any extensions of credit, there are risks of delay in
recovery and in some cases loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of portfolio
securities will only be made to firms determined to be creditworthy pursuant
to procedures approved by the Board of Directors of the Fund. On termination
of the loan, the borrower is required to return the securities to the Fund,
and any gain or loss in the market price during the loan would inure to the
Fund.
Since voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such rights if the
matters involved would have a material effect on the Fund's investment in the
securities which are the subject of the loan. The Fund will pay reasonable
finders', administrative and custodial fees in connection with a loan of its
securities or may share the interest earned on collateral with the borrower.
ILLIQUID SECURITIES
The Fund may not hold more than 15% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other
illiquid securities, including securities that are illiquid by virtue of the
absence of a readily available market (either within or outside of the United
States) or legal or contractual restrictions on resale. Historically, illiquid
securities have included securities subject to contractual or legal
restrictions on resale because they have not been registered under the
Securities Act of 1933, as amended (Securities Act), securities which are
otherwise not readily marketable and repurchase agreements having a maturity
of longer than seven days. Securities which have not been registered under the
Securities Act are referred to as private placements or restricted securities
and are purchased directly from the issuer or in the secondary market. Mutual
funds do not typically hold a significant amount of these restricted or other
illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted
securities in order to dispose of them resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities
B-12
<PAGE>
and corporate bonds and notes. Institutional investors depend on an efficient
institutional market in which the unregistered security can be readily resold
or on an issuer's ability to honor a demand for repayment. The fact that there
are contractual or legal restrictions on resale to the general public or to
certain institutions may not be indicative of the liquidity of such
investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to
the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the Securities Act for resales of certain
securities to qualified institutional buyers. The investment adviser
anticipates that the market for certain restricted securities such as
institutional commercial paper and foreign securities will expand further as a
result of this regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc. (NASD).
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Board of Directors. In reaching liquidity decisions, the investment adviser
will consider, inter alia, the following factors: (1) the frequency of trades
and quotes for the security; (2) the number of dealers wishing to purchase or
sell the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer). In addition, in order for commercial paper that is issued in
reliance on Section 4(2) of the Securities Act to be considered liquid, (i) it
must be rated in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations (NRSRO), or if only one
NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable
quality in the view of the investment adviser; and (ii) it must not be "traded
flat" (i.e. without accrued interest) or in default as to principal or
interest. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of its total assets in securities of other
investment companies. Generally, the Fund does not intend to invest in such
securities. If the Fund does invest in securities of other investment
companies, shareholders of the Fund may be subject to duplicate management and
advisory fees.
PORTFOLIO TURNOVER
As a result of the investment policies described above, the Fund may engage
in a substantial number of portfolio transactions, but the Fund's portfolio
turnover rate is not expected to exceed 150%. For the fiscal years ended April
30, 1997 and April 30, 1996, the Fund's portfolio turnover rate was 31% and
65%, respectively. The portfolio turnover rate is generally the percentage
computed by dividing the lesser of portfolio purchases or sales (excluding all
securities, including options, whose maturities or expiration date at
acquisition were one year or less) by the monthly average value of the
portfolio. High portfolio turnover (over 100%) involves correspondingly
greater brokerage commissions and other transaction costs, which are borne
directly by the Fund. In addition, high portfolio turnover may also mean that
a proportionately greater amount of distributions to shareholders will be
taxed as ordinary income rather than long-term capital gains compared to
investment companies with lower portfolio turnover. See "Portfolio
Transactions and Brokerage" and "Taxes."
B-13
<PAGE>
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. A "majority of the
Fund's outstanding voting securities," when used in this Statement of
Additional Information, means the lesser of (i) 67% of the shares represented
at a meeting at which more than 50% of the outstanding voting shares are
present in person or represented by proxy or (ii) more than 50% of the
outstanding voting shares.
The Fund may not:
1. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); provided that
the deposit or payment by the Fund of initial or maintenance margin in
connection with futures or options is not considered the purchase of a
security on margin.
2. Make short sales of securities or maintain a short position if, when
added together, more than 25% of the value of the Fund's net assets would be
(i) deposited as collateral for the obligation to replace securities borrowed
to effect short sales and (ii) allocated to segregated accounts in connection
with short sales. Short sales "against-the-box" are not subject to this
limitation.
3. Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow from banks up to 33 1/3% of the value of its total assets
(calculated when the loan is made) for temporary, extraordinary or emergency
purposes or for the clearance of transactions. The Fund may pledge up to 33
1/3% of the value of its total assets to secure such borrowings. For purposes
of this restriction, the purchase or sale of securities on a when-issued or
delayed delivery basis, forward foreign currency exchange contracts and
collateral arrangements relating thereto, and collateral arrangements with
respect to futures contracts and options thereon and with respect to the
writing of options and obligations of the Fund to Directors pursuant to
deferred compensation arrangements are not deemed to be a pledge of assets or
the issuance of a senior security.
4. Purchase any security (other than obligations of the U.S. Government, its
agencies or instrumentalities) if as a result: (i) with respect to 75% of the
Fund's total assets, more than 5% of the Fund's total assets (determined at
the time of investment) would then be invested in securities of a single
issuer, or (ii) 25% or more of the Fund's total assets (determined at the time
of the investment) would be invested in a single industry.
5. Buy or sell real estate or interests in real estate, except that the Fund
may purchase and sell securities which are secured by real estate, securities
of companies which invest or deal in real estate and publicly traded
securities of real estate investment trusts. The Fund may not purchase
interests in real estate limited partnerships which are not readily
marketable.
6. Buy or sell commodities or commodity contracts, except that the Fund may
purchase and sell financial futures contracts and options thereon. (For
purposes of this restriction, futures contracts on currencies and on
securities indices and forward foreign currency exchange contracts are not
deemed to be commodities or commodity contracts.)
7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws. The Fund has not adopted a fundamental
investment policy with respect to investments in restricted securities. See
"Illiquid Securities."
8. Make investments for the purpose of exercising control or management.
9. Invest in securities of other investment companies, except by purchases
in the open market involving only customary brokerage commissions and as a
result of which the Fund will not hold more than 3% of the outstanding voting
securities of any one investment company, will not have invested more than 5%
of its total assets in any one investment company and will not have
B-14
<PAGE>
invested more than 10% of its total assets (determined at the time of
investment) in such securities of one or more investment companies, or except
as part of a merger, consolidation or other acquisition.
10. Invest in interests in oil, gas or other mineral exploration or
development programs, except that the Fund may invest in the securities of
companies which invest in or sponsor such programs.
11. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities limited to 30% of the Fund's total assets.
12. Purchase more than 10% of all outstanding voting securities of any one
issuer.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the
percentage limitation is met at the time the investment is made, a later
change in percentage resulting from changing total or net asset values will
not be considered a violation of such policy. However, in the event that the
Fund's asset coverage for borrowings falls below 300%, the Fund will take
prompt action to reduce its borrowings, as required by applicable law.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH
(1) FUND PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- --------------------- ------------- --------------------------------------------
<S> <C> <C>
Edward D. Beach (72) Director President and Director of BMC Fund, Inc., a
closed-end investment company; prior thereto,
Vice Chairman of Broyhill Furniture
Industries, Inc.; Certified Public Accountant;
Secretary and Treasurer of Broyhill Family
Foundation, Inc.; Chairman of the Board of
Trustees of Mars Hill College; President,
Treasurer and Director of First Financial
Fund, Inc. and The High Yield Plus Fund, Inc.;
Director of The High Yield Income Fund, Inc.
Stephen C. Eyre (74) Director Executive Director of The John A. Hartford
Foundation, Inc. (charitable foundation)
(since May 1985); Director of Faircom, Inc.;
Trustee Emeritus of Pace University.
Delayne Dedrick Gold Director Marketing and Management Consultant; Director of
(58) The High Yield Income Fund, Inc.
*Robert F. Gunia (50) Director Comptroller, Prudential Investments (since May
1996); Executive Vice President and Treasurer
(since December 1996) of PIMF, and formerly
Chief Administrative Officer (July 1990-
September 1996), Director (January 1989-
September 1996), Executive Vice President,
Treasurer and Chief Financial Officer (June
1987-September 1996) of PMF; Vice President
and Director of The Asia Pacific Fund, Inc.
(since May 1989); Director of The High Yield
Income Fund, Inc.
Don G. Hoff (61) Director Chairman and Chief Executive Officer of
Intertec, Inc. (Investments) since 1980;
Chairman and CEO of The Lamaur Corporation,
Inc.; Director of Innovative Capital
Management, Inc. and The Greater China Fund,
Inc.; Chairman and Director of The Asia
Pacific Fund, Inc.
</TABLE>
B-15
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH
(1) FUND PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
--------------------- ------------- --------------------------------------------
<S> <C> <C>
Robert E. LaBlanc (62) Director President of Robert E. LaBlanc Associates, Inc.
(telecommunications) since 1981; formerly
General partner at Salomon Brothers; formerly
Vice Chairman of Continental Telecom; Director
of Storage Technology Corporation, Titan
Corporation and Tribune Company; Trustee of
Manhattan College.
*Mendel A. Melzer Director Chief Investment Officer (since September 1996);
CFA, ChFC, CLU (35) formerly Chief Financial Officer (November
751 Broad Street 1995-October 1996) of Prudential Investments;
Newark, NJ 07102 formerly Senior Vice President and Chief
Financial Officer of Prudential Preferred
Financial Services (April 1993-November 1995);
Managing Director of Prudential Investment
Advisors (April 1991-April 1993); Senior Vice
President of Prudential Capital Corporation
(July 1989-April 1991); Chairman and Director
of Prudential Series Fund, Inc.; Director of
The High Yield Income Fund, Inc.
*Richard A. Redeker (53) President and Employee of Prudential Investments; formerly
751 Broad Street Director President, Chief Executive Officer and
Newark, NJ 07102 Director (October 1993-September 1996) of PMF;
formerly Executive Vice President, Director
and Member of the Operating Committee (1993-
September 1996), Prudential Securities;
formerly Director (October 1993-September
1996) of Prudential Securities Group, Inc.;
formerly Senior Executive Vice President and
Director of Kemper Financial Services, Inc.
(September 1978-September 1993); President and
Director of The High Yield Income Fund, Inc.
Robin B. Smith (57) Director Chairman (since August 1996) and Chief Executive
Officer (since January 1988), formerly
President (September 1981-August 1996) of
Publishers Clearing House; Director of
BellSouth Corporation, Texaco Inc., Springs
Industries Inc. and Kmart Corporation.
Stephen Stoneburn (53) Director President and Chief Executive Officer of
Quadrant Media Corp. (a publishing company)
(since June 1996); formerly President of Argus
Integrated Media, Inc. (June 1995-June 1996);
formerly Senior Vice President and Managing
Director, Cowles Business Media (January 1993-
1995); prior thereto, Senior Vice President
(January 1991-1992) and Publishing Vice
President (May 1989-December 1990) of Gralla
Publications (a division of United Newspapers,
U.K.); formerly Senior Vice President of
Fairchild Publications, Inc.
Nancy H. Teeters (66) Director Economist; formerly Vice President and Chief
Economist (March 1986-June 1990) of
International Business Machines Corporation;
formerly Member of the Board of Governors of
the Horace Rackham School of Graduate Studies
of the University of Michigan; Director of
Inland Steel Corporation (since July 1991) and
First Financial Fund, Inc.
</TABLE>
B-16
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE
(1) POSITION WITH FUND PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
--------------------- ------------------ --------------------------------------------
<S> <C> <C>
Susan C. Cote (42) Vice President Executive Vice President and Chief Financial
Officer of PIFM (since May 1996); formerly
Chief Operating Officer & Managing Director of
Prudential Investments (March 1995-May 1996)
and formerly Senior Vice President-Fund
Administration (September 1983-February 1995)
of PMF.
Thomas A. Early (42) Vice President Executive Vice President, Secretary and General
Counsel of PIFM (since December 1996); Senior
Vice President and Assistant Secretary of
Prudential Mutual Fund Services LLC (since
December 1996); Vice President and General
Counsel of Prudential Retirement Services
(since March 1994); formerly Associate General
Counsel and Chief Financial Services Officer,
Frank Russell Company (1988-1994).
S. Jane Rose (51) Secretary Senior Vice President and Senior Counsel of
PIFM; Senior Vice President and Senior Counsel
of Prudential Securities (since July 1992);
formerly Senior Vice President (January 1991-
September 1996) and Senior Counsel (June 1987-
December 1990) of Prudential Mutual Fund
Management, Inc. and Vice President and
Associate General Counsel of Prudential
Securities.
Grace C. Torres (38) Treasurer and First Vice President (since March 1994) of PIFM;
Principal Financial First Vice President (since March 1994) of
and Accounting Prudential Securities; formerly, First Vice
Officer President (March 1994-September 1996) of
Prudential Mutual Fund Management, Inc. and
Vice President of Bankers Trust (July 1989-
March 1994).
Stephen M. Ungerman (44) Assistant Treasurer First Vice President (since February 1993) of
PIFM; Tax Director of The Prudential Insurance
Company of America (since March 1996);
Assistant Treasurer of PMFS (since December
1996); prior thereto, Senior Tax Manager of
Price Waterhouse LLP (1981-January 1993).
</TABLE>
- --------
(1) Unless otherwise noted the address for each of the above persons is c/o
Prudential Investments Fund Management LLC, Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077.
* "Interested" director, as defined in the Investment Company Act by reason of
their affiliation with Prudential Securities or PIMF.
Directors and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities.
The officers conduct and supervise the daily business operations of the
Fund, while the Directors, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
The Fund pays each of its Directors who is not an affiliated person of the
Manager annual compensation of $3,500, in addition to certain out-of-pocket
expenses. The amount of annual compensation paid to each Director may change
as a result of the introduction of additional funds upon which the Director
may be asked to serve.
B-17
<PAGE>
Directors may receive their Directors' fees pursuant to a deferred fee
arrangement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of Directors' fees in installments which accrue interest at a
rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury
Bills at the beginning of each calendar quarter or, pursuant to an SEC
exemptive order, at the daily rate of return of the Fund (the fund rate). The
Fund's obligation to make payments of deferred Directors' fees, together with
interest thereon is a general obligation of the Fund. Currently, Mr. Dorsey
and Ms. Smith have elected to defer their fees at the Fund rate.
The Directors have adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 72, except that retirement is being phased in for Directors who were age 68
or older as of December 31, 1993. Under this phase-in provision, Mr.Beach, is
scheduled to retire on December 31, 1999.
Pursuant to the terms of the Management Agreement with the Fund, the Manager
pays all compensation of officers and employees of the Fund as well as the
fees and expenses of all Directors of the Fund who are affiliated persons of
the Manager.
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended April 30, 1997 to the Directors who are not
affiliated with the Manager and the aggregate compensation paid to such
Directors for service on the Fund's Board and that of any other investment
companies managed by Prudential Investments Fund Management LLC. (Fund
Complex) for the calendar year ended December 31, 1996.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSIONS OR COMPENSATION
RETIREMENT FROM FUND
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID
NAME AND POSITION FROM FUND EXPENSES RETIREMENT TO DIRECTORS (2)
- ----------------- ------------ ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Thomas R. Anderson--
Former Director $2,500 None N/A $ 20,625(5/5)*
Edward D. Beach--
Director $1,167 None N/A $166,000(21/39)*
Eugene C. Dorsey--Former
Director -- None N/A $111,535(12/36)*
Stephen C. Eyre--
Director $1,167 None N/A $ 34,250(4/5)*
Delayne D. Gold--
Director $1,167 None N/A $175,308(21/42)*
Robert F. Gunia (1)--
Director -- None N/A --
Don G. Hoff--Director $1,167 None N/A $ 50,042(5/7)*
Robert F. LaBlanc--
Director $1,167 None N/A $ 34,542(4/6)*
Mendel A. Melzer (1)--
Director -- None N/A --
Richard A. Redeker (1)--
Director -- None N/A --
Robin B. Smith--Director -- None N/A $109,294(11/20)*
Stephen Stoneburn--
Director $1,167 None N/A $ 30,375(4/6)*
Nancy H. Teeters--
Director $1,167 None N/A $103,583(11/28)*
</TABLE>
- --------
* Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
(1) Robert F. Gunia, Mendel A. Melzer and Richard A. Redeker, who are
interested Directors, do not receive compensation from the Fund or any
fund in the Fund Complex.
(2) Total compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1996, including amounts deferred at the
election of Directors under the funds' Deferred Compensation Plans.
Including accrued interest, total deferred compensation amounted to
$111,535 for Eugene C. Dorsey and $109,294 for Robin B. Smith. Currently,
Ms. Smith has agreed to defer some of her fees at the T-Bill rate and
other fees at the Fed Fund rate.
As of June 6, 1997, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding common stock of the Fund. As of that
date, the only beneficial owner of greater than 5% of the outstanding shares
of any class of shares of the
B-18
<PAGE>
Fund was Prudential Trust Co. FBO PSI Cash Balance Pension Benefits
Department, 33rd Floor, One Seaport Plaza, New York, NY 10038-3526 which held
694,272 Class Z shares (or approximately 92% of the outstanding Class Z
shares).
As of June 6, 1997, Prudential Securities was the record holder for other
beneficial owners of 1,605,262 Class A shares (approximately 60% of such
shares outstanding), 6,794,898 Class B shares (approximately 74% of such
shares outstanding), 429,441 Class C shares (approximately 82% of such shares
outstanding) and 41,048 Class Z shares (approximately 5%). In the event of any
meetings of shareholders, Prudential Securities will forward, or cause the
forwarding of, proxy materials to beneficial owners for which it is the record
holder.
MANAGER
The manager of the Fund is Prudential Investments Fund Management LLC
(formerly Prudential Mutual Fund--Management LLC) (PIFM or the Manager),
Gateway Center Three, Newark, New Jersey 07102. PIFM serves as manager to all
of the other investment companies that, together with the Fund, comprise the
Prudential Mutual Funds. See "How the Fund is Managed--Manager" in the
Prospectus. As of May 31, 1997, PIFM managed and/or administered open-end and
closed-end management investment companies with assets of approximately $56
billion. According to the Investment Company Institute, as of December 31,
1996, the Prudential Mutual Funds were the 15th largest family of mutual funds
in the United States.
PIFM is a subsidiary of Prudential Securities Incorporated and The
Prudential Insurance Company of America (Prudential). PIFM has two wholly-
owned subsidiaries: Prudential Mutual Fund Distributors, Inc., and Prudential
Mutual Fund Services LLC. (PMFS or the Transfer Agent). PMFS serves as the
transfer agent for the Prudential Mutual Funds and, in addition, provides
customer service, record keeping and management and administration services to
qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PIFM, subject to the supervision of the Fund's Board of Directors
and in conformity with the stated policies of the Fund, manages both the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention, disposition and loan of securities and
other assets. In connection therewith, PIFM is obligated to keep certain books
and records of the Fund. PIFM also administers the Fund's corporate affairs
and, in connection therewith, furnishes the Fund with office facilities,
together with those ordinary clerical and bookkeeping services which are not
being furnished by Brown Brothers Harriman & Co., the Fund's custodian (the
Custodian), and Prudential Mutual Fund Services, Inc. (PMFS or the Transfer
Agent), the Fund's transfer and dividend disbursing agent. The management
services of PIFM for the Fund are not exclusive under the terms of the
Management Agreement and PIFM is free to, and does, render management services
to others.
For its services, PIFM receives, pursuant to the Management Agreement, a fee
at an annual rate of .75 of 1% of the Fund's average daily net assets. The fee
is computed daily and payable monthly. The Management Agreement also provides
that, in the event the expenses of the Fund (including the fees of PIFM, 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
PIFM will be reduced by the amount of such excess. Reductions in excess of the
total compensation payable to PIFM will be paid by PIFM to the Fund.
In connection with its management of the corporate affairs of the Fund, PIFM
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Directors who are not affiliated persons of PIFM or
the Fund's investment adviser;
B-19
<PAGE>
(b) all expenses incurred by PIFM or by the Fund in connection with managing
the ordinary course of the Fund's business, other than those assumed by the
Fund as described below; and
(c) the costs and expenses payable to The Prudential Investment Corporation,
doing business as Prudential Investments (PI), pursuant to the Subadvisory
Agreement between PIFM and PI (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Directors who are not affiliated persons of the
Manager or the Fund's investment adviser, (c) the fees and certain expenses of
the Custodian and Transfer and Dividend Disbursing Agent, including the cost
of providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities transactions, (f) all taxes and
corporate fees payable by the Fund to governmental agencies, (g) the fees of
any trade associations of which the Fund may be a member, (h) the cost of
stock certificates representing shares of the Fund, (i) the cost of fidelity
and liability insurance, (j) certain organization expenses of the Fund and the
fees and expenses involved in registering and maintaining registration of the
Fund and of its shares with the SEC, registering the Fund as a broker or
dealer and qualifying its shares under state securities laws, including the
preparation and printing of the Fund's registration statements and
prospectuses for such purposes, (k) allocable communications expenses with
respect to investor services and all expenses of shareholders' and Directors'
meetings and of preparing, printing and mailing reports, proxy statements and
prospectuses to shareholders in the amount necessary for distribution to the
shareholders, (l) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the Fund's
business and (m) distribution fees.
The Management Agreement provides that PIFM will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the
matters to which the Management Agreement relates, except a loss resulting
from willful misfeasance, bad faith, gross negligence or reckless disregard of
duty. The Management Agreement provides that it will terminate automatically
if assigned, and that it may be terminated without penalty by either party
upon not more than 60 days' nor less than 30 days' written notice. The
Management Agreement will continue in effect for a period of more than two
years from the date of execution only so long as such continuance is
specifically approved at least annually in conformity with the Investment
Company Act. The Management Agreement was last approved by the Board of
Directors of the Fund, including all of the Directors who are not parties to
the contract or interested persons of any such party, as defined in the
Investment Company Act, on May 29, 1997, and by the initial shareholder of the
Fund on July 7, 1994.
For the fiscal years ended April 30, 1997, and April 30, 1996, PIFM received
management fees of $1,401,970 and $1,329,043, respectively (0.75% of the
average net assets of the Fund).
PIFM has entered into the Subadvisory Agreement with PI, a wholly-owned
subsidiary of Prudential. The Subadvisory Agreement provides that PI will
furnish investment advisory services in connection with the management of the
Fund. In connection therewith, PI is obligated to keep certain books and
records of the Fund. PIFM continues to have responsibility for all investment
advisory services pursuant to the Management Agreement and supervises PI's
performance of such services. PI is reimbursed by PIFM for the reasonable
costs and expenses incurred by PI in furnishing those services. Investment
advisory services are provided to the Fund by a unit of the Subadviser, known
as Prudential Mutual Fund Investment Management.
The Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the Directors who are not parties to the contract or
interested persons of any such party, as defined in the Investment Company
Act, on May 29, 1997, and by the initial shareholder of the Fund on July 7,
1994.
B-20
<PAGE>
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PIFM or PIC upon not more than 60 days', nor less than
30 days', written notice. The Subadvisory Agreement provides that it will
continue in effect for a period of more than two years from its execution only
so long as such continuance is specifically approved at least annually in
accordance with the requirements of the Investment Company Act.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, acts as the distributor of the Class
A, Class B, Class C and Class Z shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the
Fund under Rule 12b-1 under the Investment Company Act and separate
distribution agreements (the Distribution Agreements), Prudential Securities
(collectively, the Distributor) incurs the expenses of distributing the Fund's
Class A, Class B and Class C shares. Prudential Securities also incurs the
expenses of distributing the Fund's Class Z shares under the Distribution
Agreement, none of which are reimbursed by or paid for by the Fund. See "How
the Fund is Managed--Distributor" in the Prospectus.
On May 29, 1997, the Board of Directors, including a majority of the
Directors who are not interested persons of the Fund and who have no direct or
indirect financial interest in the operation of the Class A, Class B or Class
C Plan or in any agreement related to the Plans (the Rule 12b-1 Directors), at
a meeting called for the purpose of voting on each Plan, approved the
continuance of the Plans and Distribution Agreements. 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 on July 7, 1994.
Class A Plan. For the fiscal year ended April 30, 1997, the Fund paid
distribution fees of $94,585 under the Class A Plan. This amount was primarily
expended for payment of account servicing fees to financial advisers and other
persons who sell Class A shares. In addition, during the same period, PSI
received approximately $77,600 in initial sales charges with respect to the
sale of Class A shares.
Class B Plan. For the fiscal year ended April 30, 1997, Prudential
Securities received $1,331,350 from the Fund under the Class B Plan and spent
approximately $736,300 in distributing the Class B shares of the Fund. It is
estimated that of the latter amount, approximately $61,400 (8.4%) was spent on
printing and mailing of prospectuses to other than current shareholders,
$175,400 (23.8%) on compensation to Pruco Securities Corporation, an
affiliated broker-dealer, for commissions to its representatives and other
expenses, including an allocation on account of overhead and other branch
office distribution-related expenses incurred by it for distribution of Fund
shares; and $499,400 (67.8%) on the aggregate of (i) payment of commissions
and account servicing fees to financial advisers ($298,400 or 40.5%), and (ii)
an allocation on account of overhead and other branch office distribution-
related expenses ($201,000 or 27.3%). The term "overhead and other branch
office distribution-related expenses" represents (a) the expenses of operating
branch offices of Prusec and Prudential Securities in connection with the sale
of Fund shares, including lease costs, the salaries and employee benefits of
operations and sales support personnel, utility costs, communications costs
and the costs of stationery and supplies, (b) the costs of client sales
seminars, (c) expenses of mutual fund
B-21
<PAGE>
sales coordinators to promote the sale of Fund shares and (d) other incidental
expenses relating to branch promotion of Fund sales.
Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by investors upon certain redemptions of Class B shares.
See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges" in the Prospectus. For the fiscal year ended April 30, 1997,
Prudential Securities received approximately $115,000 in contingent deferred
sales charges attributable to the Class B shares.
Class C Plan. For the fiscal year ended April 30, 1997, Prudential
Securities received $80,025 from the Fund under the Class C Plan and spent
approximately $79,300 in distributing the Fund's Class C shares. It is
estimated that of the latter amount approximately $4,000 (5.1%) was spent on
printing and mailing of prospectuses to other than current shareholders;
$2,000 (2.5%) on compensation to Pruco Securities Corporation, an affiliated
broker-dealer, for commissions to its representatives and other expenses,
including an allocation of overhead and other branch office distribution-
related expenses, incurred by it for distribution of Fund shares $73,300
(92.4%) on the aggregate of (i) payments of commission and account servicing
fees to financial advisors $69,600 (87.8%) and (ii) an allocation of overhead
and other branch office distribution-related expenses $3,700 (4.6%). The term
"overhead and other branch office distribution-related expenses" represents
(a) the expenses of operating Prudential Securities' branch offices in
connection with the sale of Fund shares, including lease costs, the salaries
and employee benefits of operations and sales support personnel, utility
costs, communications costs and the costs of stationery and supplies, (b) the
costs of client sales seminars, (c) expenses of mutual fund sales coordinators
to promote the sale of Fund shares and (d) other incidental expenses relating
to branch promotion of Fund sales.
Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by holders of Class C shares upon certain redemptions of
Class C shares. See "Shareholder Guide--How to Sell Your Shares--Contingent
Deferred Sales Charges" in the Prospectus. For the fiscal year ended April 30,
1997, Prudential Securities received approximately $100 in contingent deferred
sales charges attributable to Class C shares.
The Plans continue in effect from year to year, provided that each such
continuance is approved at least annually by a vote of the Board of Directors,
including a majority vote of the Rule 12b-1 Directors, cast in person at a
meeting called for the purpose of voting on such continuance. The Plans may
each be terminated at any time, without penalty, by the vote of a majority of
the Rule 12b-1 Directors or by the vote of the holders of a majority of the
outstanding shares of the applicable class on not more than 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
Directors in the manner described above. Each Plan will automatically
terminate in the event of its assignment. The 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 Directors will review at least quarterly
a written report of the distribution expenses incurred on behalf of each class
of shares of the Fund by the Distributor. The report will include an
itemization of the distribution expenses and the purposes of such
expenditures. In addition, as long as the Plans remain in effect, the
selection and nomination of Rule 12b-1 Directors shall be committed to the
Rule 12b-1 Directors.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify
Prudential Securities to the extent permitted by applicable law against
certain liabilities under the Securities Act.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and
a limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities
B-22
<PAGE>
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 will also serve as an independent
"ombudsman" whom PSI employees can call anonymously with complaints about
ethics and compliance. Prudential Securities shall report any allegations or
instances of criminal conduct and material improprieties to the new director.
The new director will submit compliance reports which shall identify all such
allegations or instances of criminal conduct and material improprieties every
three months for a three-year period.
NASD MAXIMUM SALES CHARGE RULE
Pursuant to rules of the NASD, the Distributor is required to limit
aggregate initial sales charges, deferred sales charges and asset-based sales
charges to 6.25% of total gross sales of each class of shares. 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 the 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-23
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities, futures
and options on securities and futures for the Fund, the selection of brokers,
dealers and futures commission merchants to effect the transactions and the
negotiation of brokerage commissions, if any. The term "Manager" as used in
this section includes the Subadviser. Broker-dealers may receive negotiated
brokerage commissions on Fund portfolio transactions, including options and
the purchase and sale of underlying securities upon the exercise of options.
On foreign securities exchanges, commissions may be fixed. Orders may be
directed to any broker or futures commission merchant including, to the extent
and in the manner permitted by applicable law, Prudential Securities and its
affiliates.
Equity securities traded in the over-the-counter market and bonds, including
convertible bonds, are generally traded on a "net" basis with dealers acting
as principal for their own accounts without a stated commission, although the
price of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price which includes an amount
of compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments and U.S.
Government agency securities may be purchased directly from the issuer, in
which case no commissions or discounts are paid. The Fund will not deal with
Prudential Securities or any affiliate in any transaction in which Prudential
Securities or any affiliate acts as principal. Thus, it will not deal with
Prudential Securities acting as market maker, and it will not execute a
negotiated trade with Prudential Securities if execution involves Prudential
Securities' acting as principal with respect to any part of the Fund's order.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities, or an affiliate, during the
existence of the syndicate, is a principal underwriter (as defined in the
Investment Company Act), except in accordance with rules of the SEC. This
limitation, in the opinion of the Fund, will not significantly affect the
Fund's ability to pursue its present investment objective. However, in the
future in other circumstances, the Fund may be at a disadvantage because of
this limitation in comparison to other funds with similar objectives but not
subject to such limitations.
In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price
and efficient execution. Within the framework of this policy, the Manager will
consider the research and investment services provided by brokers, dealers or
futures commission merchants who effect or are parties to portfolio
transactions of the Fund, the Manager or the Manager's other clients. Such
research and investment services are those which brokerage houses customarily
provide to institutional investors and include statistical and economic data
and research reports on particular companies and industries. Such services are
used by the Manager in connection with all of its investment activities, and
some of such services obtained in connection with the execution of
transactions for the Fund may be used in managing other investment accounts.
Conversely, brokers, dealers or futures commission merchants furnishing such
services may be selected for the execution of transactions of such other
accounts, whose aggregate assets are far larger than the Fund's, and the
services furnished by such brokers, dealers or futures commission merchants
may be used by the Manager in providing investment management for the Fund.
Commission rates are established pursuant to negotiations with the broker,
dealer or futures commission merchant based on the quality and quantity of
execution services provided by the broker in the light of generally prevailing
rates. The Manager's policy is to pay higher commissions to brokers, other
than Prudential Securities, for particular transactions than might be charged
if a different broker had been selected, on occasions when, in the Manager's
opinion, this policy furthers the objective of obtaining best price and
execution. In addition, the Manager is authorized to pay higher commissions on
brokerage transactions for the Fund to brokers other than Prudential
Securities (or any affiliate) in order to secure research and investment
services described above, subject to review by the Fund's Board of Directors
from time to time as to the extent and continuation of this practice. The
allocation of orders among brokers and the commission rates paid are reviewed
periodically by the Fund's Board of Directors. The Fund will not pay up for
research in principal transactions.
B-24
<PAGE>
Subject to the above considerations, Prudential Securities (or any
affiliate) may act as a securities broker or futures commission merchant for
the Fund. In order for Prudential Securities (or any affiliate) to effect any
portfolio transactions for the Fund, the commissions, fees or other
remuneration received by Prudential Securities (or any affiliate) must be
reasonable and fair compared to the commissions, fees or other remuneration
paid to other brokers or futures commission merchants in connection with
comparable transactions involving similar securities or futures being
purchased or sold on an exchange during a comparable period of time. This
standard would allow Prudential Securities (or any affiliate) to receive no
more than the remuneration which would be expected to be received by an
unaffiliated broker or futures commission merchant in a commensurate arm's-
length transaction. Furthermore, the Board of Directors of the Fund, including
a majority of the Directors who are not "interested" persons, has adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to Prudential Securities (or any affiliate) are
consistent with the foregoing standard. In accordance with Section 11(a) of
the Securities Exchange Act of 1934, Prudential Securities may not retain
compensation for effecting transactions on a national securities exchange for
the Fund unless the Fund has expressly authorized the retention of such
compensation. Prudential Securities must furnish to the Fund at least annually
a statement setting forth the total amount of all compensation retained by
Prudential Securities from transactions effected for the Fund during the
applicable period. Brokerage and futures transactions with Prudential
Securities are also subject to such fiduciary standards as may be imposed by
applicable law.
During the fiscal years ended April 30, 1997 and April 30, 1996, the Fund
paid brokerage commissions of $336,933 and $538,259, respectively, of which
none were paid to Prudential Securities.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). Class Z shares of the
Fund are not subject to any sales or redemption charge and are offered to a
limited group of investors at net asset value without any sales charge. See
"Shareholder Guide--How to Buy Shares of the Fund" in the Prospectus.
Each class represents an interest in the same assets of the Fund and is
identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service fees (except for Class Z shares,
which are not subject to any sales or redemption charge or to any distribution
and/or service fee), (ii) each class has exclusive voting rights with respect
to any matter submitted to shareholders that relates solely to its arrangement
and has separate voting rights on any matter submitted to shareholders in
which the interests of one class differ from the interests of any other class,
(iii) each class has a different exchange privilege, (iv) only Class B shares
have a conversion feature and (v) Class Z shares are offered exclusively to a
limited group of investors. See "Distributor" and "Shareholder Investment
Account--Exchange Privilege."
B-25
<PAGE>
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, 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. Using the
Fund's net asset value at April 30, 1997, the maximum offering price of the
Fund's shares is as follows:
<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share.................. $15.46
Maximum sales charge (5% of offering price)............................. .81
------
Offering price to public................................................ $16.27
======
CLASS B
Net asset value, redemption price and offering price to public per Class
B share*............................................................... $15.12
======
CLASS C
Net asset value, redemption price and offering price to public per Class
C share*............................................................... $15.12
======
CLASS Z
Net asset value and redemption price per Class Z share.................. $15.51
======
</TABLE>
- --------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "Shareholder Guide--How to Sell Your Shares--
Contingent Deferred Sales Charges" in the Prospectus.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the
purchases may be combined to take advantage of the reduced sales charges
applicable to larger purchases. See the table of breakpoints under
"Shareholder Guide--Alternative Purchase Plan" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a company will be
deemed to control the company, and a partnership will be deemed to be
controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more 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-26
<PAGE>
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be
granted subject to confirmation of the investor's holdings. The Combined
Purchase and Cumulative Purchase Privilege does not apply to individual
participants in any retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of
related investors, as described above under "Combined Purchase and Cumulative
Purchase Privilege," may aggregate the value of their existing holdings of
shares of the Fund and shares of other Prudential Mutual Funds (excluding
money market funds other than those acquired pursuant to the exchange
privilege) to determine the reduced sales charge. However, the value of shares
held directly with the Transfer Agent and through Prudential Securities will
not be aggregated to determine the reduced sales charge. All shares must be
held either directly with the Transfer Agent or through Prudential Securities.
The value of existing holdings for purposes of determining the reduced sales
charge is calculated using the maximum offering or price (net asset value plus
maximum sales charge) as of the previous business day. See "How the Fund
Values Its Shares" in the Prospectus. The Distributor must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charges will be granted subject to confirmation of the
investor's holdings. Rights of Accumulation are not available to individual
participants in any retirement or group plans.
LETTERS OF INTENT. Reduced sales charges are also available to investors (or
an eligible group of related investors), including retirement and groups
plans, who enter into a written Letter of Intent providing for the purchase,
within a thirteen-month period, of shares of the Fund and shares of other
Prudential Mutual Funds (Investment Letter of Intent). Retirement and group
plans may also qualify to purchase Class A shares at net asset value by
entering into a Letter of Intent whereby they agree to enroll, within a
thirteen-month period, a specified number of eligible employees or
participants (Participant Letter of Intent).
For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other
than those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the
Transfer Agent or through Prudential Securities.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number
of investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant
enrollment goal over a thirteen-month period. Each investment made during the
period, in the case of an Investment Letter of Intent, will receive the
reduced sales charge applicable to the amount represented by the goal as if it
were a single investment. In the case of a Participant Letter of Intent, each
investment made during the period will be made at net asset value. Escrowed
Class A shares totaling 5% of the dollar amount of the Letter of Intent will
be held by the Transfer Agent in the name of the purchaser, except in the case
of retirement and group plans where the employer or plan sponsor will be
responsible for paying any applicable sales charge. The effective date of an
Investment Letter of Intent (except in the case of retirement and group plans)
may be back-dated up to 90 days, in order that any investment made during this
90-day period, valued at the purchaser's cost, can be applied to the
fulfillment of the Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter
of Intent does not obligate the retirement or group plan to enroll the
indicated number of eligible employees or participants. In the event the
Letter of Intent goal is not achieved within the thirteen-month period, the
purchaser (or the employer or plan sponsor in the case of any retirement or
group plan) is required to pay the difference between the sales charge
otherwise applicable to the purchases made during this period and sales
charges actually paid. Such payment may be made directly to the Distributor
or, if not paid, the Distributor will liquidate sufficient escrowed shares to
obtain such difference. Investors electing to purchase Class A shares of the
Fund pursuant to a Letter of Intent should carefully read such Letter of
Intent.
B-27
<PAGE>
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, 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 any
individual participant in any retirement or group plans.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge is waived under circumstances described
in the Prospectus. See "Shareholder Guide--How to Sell Your Shares--Waiver of
Contingent Deferred Sales Charges--Class B Shares" in the Prospectus. In
connection with these waivers, the Transfer Agent will require you to submit
the supporting documentation set forth below.
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 A copy of the Social Security Administration
will be considered disabled award letter or a letter from a physician on
if he or she is unable to the physician's letterhead stating that the
engage in any substantial shareholder (or, in the case of a trust, the
gainful activity by reason grantor) is permanently disabled. The letter
of any medically determin- must also indicate the date of disability.
able physical or mental im-
pairment which can be ex-
pected to result in death
or to be of long-continued
and indefinite duration.
Distribution from an IRA or A copy of the distribution form from the
403(b) Custodial Account custodial firm indicating (i) the date of birth
of the shareholder and (ii) that the
shareholder is over age 59 1/2 and is taking a
normal distribution--signed by the shareholder.
Distribution from Retirement A letter signed by the plan
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 stock certificate is desired, it must
be requested in writing for each transaction. Certificates are issued only for
full shares and may be redeposited in the Account at any time. There is no
charge to the investor for issuance of a certificate. The Fund makes available
to its shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. For the convenience
of investors, all dividends and distributions are automatically reinvested in
full and fractional shares of the Fund. An investor may direct the Transfer
Agent in writing not less than five full business days prior to the record
date to have subsequent dividends or distributions sent in cash rather than
reinvested. In the case of recently purchased shares for which registration
instructions have not been received on the record date,
B-28
<PAGE>
cash payment will be made directly to the dealer. Any shareholder who receives
a cash payment representing a dividend or distribution may reinvest such
dividend or distribution at net asset value by returning the check or the
proceeds to the Transfer Agent within 30 days after the payment date. Such
investment will be made at the net asset value per share next determined after
receipt of the check or proceeds by the Transfer Agent. Such shareholder will
receive credit for any contingent deferred sales charge paid in connection
with the amount of proceeds being reinvested.
EXCHANGE PRIVILEGE. The Fund makes available to its shareholders the
privilege of exchanging their shares of the Fund for shares of certain other
Prudential Mutual Funds, including one or more specified money market funds,
subject in each case to the minimum investment requirements of such funds.
Shares of such other Prudential Mutual Funds may also be exchanged for shares
of the Fund. All exchanges are made on the basis of relative net asset value
next determined after receipt of an order in proper form. An exchange will be
treated as a redemption and purchase for tax purposes. Shares may be exchanged
for shares of another fund only if shares of such fund may legally be sold
under applicable state laws. For retirement and group plans having a limited
menu of Prudential Mutual Funds, the Exchange Privilege is available for those
funds eligible for investment in the particular program.
It is contemplated that the Exchange Privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential Mutual Funds, shares of Prudential
Government Securities Trust (Intermediate Term Series) and shares of the money
market funds specified below. No fee or sales load will be imposed upon the
exchange. Shareholders of money market funds who acquired such shares upon
exchange of Class A shares may use the Exchange Privilege only to acquire
Class A shares of the Prudential Mutual Funds participating in the Exchange
Privilege.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New 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 the Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential Mutual Funds and shares of Prudential Special Money Market Fund, a
money market fund. No CDSC will be payable upon such exchange, but a CDSC may
be payable upon the redemption of 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.
B-29
<PAGE>
Class B and Class C shares of the Fund may also be exchanged for Class B and
Class C shares, respectively, of an eligible money market fund without
imposition of any CDSC at the time of exchange. Upon subsequent redemption
from such money market fund or after re-exchange into the Fund, such shares
will be subject to the CDSC calculated without regard to the time such shares
were held in the money market fund. In order to minimize the period of time in
which shares are subject to a CDSC, shares exchanged out of the money market
fund will be exchanged on the basis of their remaining holding periods, with
the longest remaining holding periods being transferred first. In measuring
the time period shares are held in a money market fund and "tolled" for
purposes of calculating the CDSC holding period, exchanges are deemed to have
been made on the last day of the month. Thus, if shares are exchanged into the
Fund from a money market fund during the month (and are held in the Fund at
the end of the month), the entire month will be included in the CDSC holding
period. Conversely, if shares are exchanged into a money market fund prior to
the last day of the month (and are held in the money market fund on the last
day of the month), the entire month will be excluded from the CDSC holding
period.
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. No fee or sales load will be imposed upon the
exchange.
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on 60 days' notice, and any fund, including the Fund,
or the Distributor, has the right to reject any exchange application relating
to such fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more
shares when the price is low and fewer shares when the price is high. The
average cost per share is lower than it would be if a constant number of
shares were bought at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.(/1/)
- --------
(/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.
B-30
<PAGE>
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(/2/)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS $100,000 $150,000 $200,000 $250,000
------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years........ $ 110 $ 165 $ 220 $ 275
20 Years........ 176 264 352 440
15 Years........ 296 444 592 740
10 Years........ 555 833 1,110 1,388
5 Years......... 1,371 2,057 2,742 3,428
</TABLE>
- --------
(/2/)The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the
Fund. The investment return and principal value of an investment will
fluctuate so that an investor's shares when redeemed may be worth more or
less than their original cost.
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 the Fund
monthly by authorizing his or her bank account or Prudential Securities
Account (including a Command Account) to be debited to invest specified dollar
amounts in shares of the Fund. The investor's bank must be a member of the
Automatic Clearing House System. Stock certificates are not issued to ASAP
participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders through Prudential Securities or the Transfer Agent. Such
withdrawal plan provides for monthly or quarterly checks in any amount, except
as provided below, up to the value of the shares in the shareholder's account.
Withdrawals of Class B or Class C shares may be subject to a CDSC. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and
(iii) the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment Account--
Automatic Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may
be terminated at any time, and the Distributor reserves the right to initiate
a fee of up to $5 per withdrawal, upon 30 days' written notice to the
shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares
are inadvisable because of the sales charges applicable to (i) the purchase of
Class A shares and (ii) the withdrawal of Class B and Class C shares. Each
shareholder should consult his or her own tax adviser with regard to the tax
consequences of the plan, particularly if used in connection with a retirement
plan.
B-31
<PAGE>
TAX-DEFERRED RETIREMENT PLANS. Various qualified retirement plans, including
a 401(k) plan, self-directed individual retirement accounts and "tax-deferred
accounts" under Section 403(b)(7) of the Internal Revenue Code are available
through the Distributor. These plans are for use by both self-employed
individuals and corporate employers. These plans permit either self-direction
of accounts by participants, or a pooled account arrangement. Information
regarding the establishment of these plans, and the administration, custodial
fees and other details are available 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/)
<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
------------- -------- --------
<S> <C> <C>
10 years.......................... $ 26,165 $ 31,291
15 years.......................... 44,676 58,649
20 years.......................... 68,109 98,846
25 years.......................... 97,780 157,909
30 years.......................... 135,346 244,692
</TABLE>
- --------
(/1/)The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable
versus tax-deferred compounding for the periods and on the terms
indicated. Earnings in the IRA account will be subject to tax when
withdrawn from the account.
NET ASSET VALUE
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of
investments listed on a securities exchange and NASDAQ National Market System
securities (other than options on stock and stock indices) are valued at the
last sales price on the day of valuation, or, if there was no sale on such
day, the mean between the last bid and asked prices on such day, or at the bid
price on such day in the absence of an asked price as provided by a pricing
service. Corporate bonds (other than convertible debt securities) and U.S.
Government securities that are actively traded in the over-the-counter market,
including listed securities for which the primary market is believed to be
over-the-counter, are valued at a price provided by a broker-dealer or
independent pricing service. Convertible debt securities that are actively
traded in the over-the-counter market, including listed securities for which
the primary market is believed to be over-the-counter, are valued at the mean
between the last reported bid and asked prices provided by principal market
makers. Options on stock and stock indices traded on an exchange are valued at
the mean between the most recently quoted bid and asked prices on the
respective exchange and futures contracts and options thereon are valued at
their last sales prices as of the close of the commodities exchange or board
of trade. Should an extraordinary event, which is likely to affect the value
of the security, occur after the close of an exchange on which a
B-32
<PAGE>
portfolio security is traded, such security will be valued at fair value
considering factors determined in good faith by the investment adviser under
procedures established by and under the general supervision of the Fund's
Board of Directors.
Securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
Board of Directors. Short-term debt securities are valued at cost, with
interest accrued or discount amortized to the date of maturity, if their
original maturity was 60 days or less, unless this is determined by the Board
of Directors not to represent fair value. Short-term securities with remaining
maturities of more than 60 days, for which market quotations are readily
available, are valued at their current market quotations as supplied by an
independent pricing agent or principal market maker. The Fund will compute its
net asset value at 4:15 P.M., New York time, on each day the New York Stock
Exchange is open for trading except on days on which no orders to purchase,
sell or redeem Fund shares have been received or days on which changes in the
value of the Fund's portfolio securities do not affect net asset value. In the
event the New York Stock Exchange closes early on any business day, the net
asset value of the Fund's shares shall be determined at a time between such
closing and 4:15 P.M., New York time.
Net asset value is calculated separately for each class. The net asset value
of Class B and Class C shares will generally be lower than the net asset value
of Class A shares as a result of the larger distribution-related fee to which
Class B and Class C shares are subject. The net asset value of Class Z shares
will generally be higher than the net asset value of Class A, Class B or Class
C shares as a result of the fact that Class Z shares are not subject to any
distribution or service fee. It is expected, however, that the net asset value
per share of each class will tend to converge immediately after the recording
of dividends which will differ by approximately the amount of the distribution
expense accrual differential among the classes.
TAXES
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code.
This relieves the Fund (but not its shareholders) from paying federal income
tax on income which is distributed to shareholders and permits net capital
gains of the Fund (i.e., the excess of net long-term capital gains over net
short-term capital losses) to be treated as long-term capital gains of the
shareholders, regardless of how long shareholders have held their shares in
the Fund.
Qualification as a regulated investment company requires, among other
things, that: (a) at least 90% of the Fund's annual gross income (without
reduction for losses from the sale or other disposition of securities) be
derived from interest, dividends, payments with respect to securities loans,
and gains from the sale or other disposition of securities or options thereon
or foreign currencies, or other income (including but not limited to gains
from options, futures or forward contracts) derived with respect to its
business of investing in such securities or currencies; (b) the Fund derive
less than 30% of its gross income from gains (without reduction for losses)
from the sale or other disposition of securities, options thereon, futures
contracts, options thereon, forward contracts and foreign currencies held for
less than three months (except for foreign currencies directly related to the
Fund's business of investing in foreign securities) (the "short-short rule");
(c) the Fund diversify its holdings so that, at the end of each quarter of the
taxable year (i) at least 50% of the market value of the Fund's assets is
represented by cash, U.S. Government securities and other securities limited
in respect of any one issuer to an amount not greater than 5% of the market
value of the Fund's assets and 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its assets is invested
in the securities of any one issuer (other than U.S. Government securities);
and (d) the Fund distribute to its shareholders at least 90% of its net
investment income (including net short-term capital gains) other than net
capital gains in each year. Legislation recently proposed by Congress would,
if enacted, eliminate the short-short rule. There can be no assurance that
such legislation will be enacted or, if enacted, as to the effective date of
such legislation.
B-33
<PAGE>
Gains or losses on sales of securities by the Fund will generally be treated
as long-term capital gains or losses if the securities have been held by it
for more than one year except in certain cases where the Fund acquires a put
or writes a call thereon or makes a short sale against-the-box as described in
"Investment Objectives and Policies." Other gains or losses on the sale of
securities will be short-term capital gains or losses. Gains and losses on the
sale, lapse or other termination of options on securities will generally be
treated as gains and losses from the sale of securities (assuming they do not
qualify as Section 1256 contracts as defined in the Prospectus). If an option
written by the Fund on securities lapses or is terminated through a closing
transaction, such as a repurchase by the Fund of the option from its holder,
the Fund will generally realize short-term capital gain or loss. If securities
are sold by the Fund pursuant to the exercise of a call option written by it,
the Fund will include the premium received in the sale proceeds of the
securities delivered in determining the amount of gain or loss on the sale.
Certain of the Fund's transactions may be subject to wash sale and short sale
provisions of the Internal Revenue Code which may, among other things, require
the Fund to defer losses. In addition, debt securities acquired by the Fund
may be subject to original issue discount which may cause the Fund to accrete
income in advance of the receipt of cash with respect to interest and market
discount rules which may cause gains to be treated as ordinary income.
Special rules apply to most options on stock indices, futures contracts and
options thereon, and forward foreign currency exchange contracts in which the
Fund may invest. See "Investment Objective and Policies." These investments
will generally constitute Section 1256 contracts and will be required to be
"marked to market" for federal income tax purposes at the end of the Fund's
taxable year, i.e., treated as having been sold at market value. Except with
respect to forward foreign currency exchange contracts, 60% of any gain or
loss recognized on such deemed sales and on actual dispositions will be
treated as long-term capital gain or loss, and the remainder will be treated
as short-term capital gain or loss.
Forward currency contracts, options and futures contracts entered into by
the Fund may create "straddles" for federal income tax purposes. Positions
which are part of a straddle will be subject to certain wash sale and short
sale provisions of the Internal Revenue Code. In the case of a straddle, the
Fund may be required to defer the recognition of losses on positions it holds
to the extent of any unrecognized gain on offsetting positions held by the
Fund. Straddles may also result in the loss of the holding period of the
underlying property and therefore the Fund's ability to enter into forward
currency contracts, options and futures contracts may be limited by the short-
short rule. The conversion transaction rules may apply to certain transactions
to treat all or a portion of the gain thereon as ordinary income rather than
as capital gain.
A "passive foreign investment company" (PFIC) is a foreign corporation that,
in general, meets either of the following tests: (a) at least 75% of its gross
income is passive or (b) an average of at least 50% of its assets produce, or
are held for the production of, passive income. If the Fund acquires and holds
stock in a PFIC beyond the end of the taxable year of its acquisition, the
Fund will be subject to federal income tax on a portion of any "excess
distribution" received on the stock or of any gain from disposition of the
stock (collectively, "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders.
Proposed Treasury regulations and legislation recently proposed by Congress
provide that the Fund may make a "mark-to-market" election with respect to
certain stock it holds of a PFIC and avoid the foregoing tax and interest
obligation. If the election is in effect, at the end of the Fund's taxable
year, the Fund will recognize the amount of gains, if any, with respect to
PFIC stock. No loss will be recognized on PFIC stock. Alternatively, the Fund
may elect to treat any PFIC in which it invests as a "qualified electing
fund," in which case, in lieu of the foregoing tax and interest obligation,
the Fund will be required to include in income each year its pro rata share of
the qualified electing fund's annual ordinary earnings and net capital gain,
even if they are not distributed to the Fund; those amounts would be subject
to the distribution requirements applicable to the Fund described above.
Because the election to treat a PFIC as a qualified electing fund cannot be
made without the provision of certain information by the PFIC, it is unlikely
that the Fund will be able to make such an election.
Under the Internal Revenue Code, gains or losses attributable to
fluctuations in exchange rates which occur between the time the Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the
B-34
<PAGE>
time the Fund actually collects such receivables or pays such liabilities are
treated as ordinary income or ordinary loss. Similarly, gains or losses on
forward foreign currency exchange contracts or dispositions of debt securities
denominated in a foreign currency attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security and the
date of disposition also are treated as ordinary gain or loss. These gains,
referred to under the Internal Revenue Code as "Section 988" gains or losses,
increase or decrease the amount of the Fund's investment company taxable
income available to be distributed to its shareholders as ordinary income,
rather than increasing or decreasing the amount of the Fund's net capital
gain. If Section 988 losses exceed other investment company taxable income
during a taxable year, the Fund would not be able to make any ordinary
dividend distributions, or distributions made before the losses were realized
would be recharacterized as a return of capital to shareholders, rather than
as an ordinary dividend, reducing each shareholder's basis in his or her Fund
shares.
The Fund is required to distribute 98% of its ordinary income in the same
calendar year in which it is earned. The Fund is also required to distribute
during the calendar year 98% of the capital gain net income it earned during
the 12 months ending on October 31 of such calendar year, as well as all
undistributed ordinary income and undistributed capital gain net income from
the prior year or the twelve-month period ending on October 31 of such prior
year, respectively. To the extent it does not meet these distribution
requirements, the Fund will be subject to a nondeductible 4% excise tax on the
undistributed amount. For purposes of this excise tax, income on which the
Fund pays income tax is treated as distributed.
Any dividends paid shortly after a purchase by an investor may have the
effect of reducing the per share net asset value of the investor's shares by
the per share amount of the dividends. Furthermore, such dividends, although
in effect a return of capital, are subject to federal income taxes. Therefore,
prior to purchasing shares of the Fund, the investor should carefully consider
the impact of dividends, including capital gains distributions, which are
expected to be or have been announced.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
The per share dividends on Class B and Class C shares will generally be
lower than the per share dividends on Class A shares as a result of the higher
distribution-related fees applicable to the Class B and Class C shares. The
per share dividends on Class Z shares will generally be higher than the per
share dividends on Class A, Class B or Class C shares because Class Z shares
are not subject to any distribution or service fees. The per share capital
gains distributions will be paid in the same amounts for Class A, Class B,
Class C and Class Z shares. See "Net Asset Value."
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a
nominee or fiduciary) who is a nonresident alien individual, a foreign
corporation or a foreign partnership ("foreign shareholder") are subject to a
30% (or lower treaty rate) withholding tax upon the gross amount of the
dividends unless the dividends are effectively connected with a U.S. trade or
business conducted by the foreign shareholder. Capital gain dividends paid to
a foreign shareholder are generally not subject to withholding tax. A foreign
shareholder will, however, be required to pay U.S. income tax at regular rates
on any dividends and capital gain distributions which are effectively
connected with a U.S. trade or business of the foreign shareholder.
Dividends received by corporate shareholders are eligible for a dividends-
received deduction of 70% to the extent the Fund's income is derived from
qualified dividends received by the Fund from domestic corporations. Since the
Fund is likely to have a substantial portion of its assets invested in
securities of foreign issuers, the amount of the Fund's dividends eligible for
the corporate dividends-received deduction will be minimal. Individual
shareholders are not eligible for the dividends-received deduction.
B-35
<PAGE>
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine in advance the effective
rate of foreign tax to which the Fund will be subject, since the amount of the
Fund's assets to be invested in various countries will vary.
If the Fund is liable for foreign income taxes, and if more than 50% of the
value of the Fund's assets at the end of the taxable year consist of
securities of foreign corporations, the Fund may elect to "pass through" to
the Fund's shareholders the amount of foreign income taxes paid by the Fund.
The Fund expects to meet the requirements for "passing-through" to its
shareholders foreign income taxes paid, but there can be no assurance that the
Fund will be able to, or will elect to do so. If the Fund made the election,
shareholders would be required to: (i) include in gross income (in addition to
taxable dividends actually received) their pro rata share of the foreign
income taxes paid by the Fund; and (ii) treat their pro rata share of foreign
income taxes as paid by them. Shareholders are then permitted either to deduct
their pro rata share of foreign income taxes in computing their taxable income
or use it as a foreign tax credit against U.S. income taxes. No deduction for
foreign taxes may be claimed by a shareholder who does not itemize deductions.
Foreign shareholders may not deduct or claim a credit for foreign tax in
computing their U.S. income tax liability unless the dividends paid to them by
the Fund are effectively connected with a U.S. trade or business. Accordingly,
a foreign shareholder may recognize additional taxable income as a result of
the Fund's election to "pass-through" the foreign taxes to shareholders.
Each shareholder will be notified within 60 days after the close of the
Fund's taxable year whether the foreign taxes paid by the Fund will "pass
through" for that year and, if so, such notification will designate (a) the
shareholder's portion of the foreign taxes paid by the Fund and (b) the
portion of the dividend which represents income derived from foreign sources.
The amount of foreign taxes for which a shareholder may claim a credit in
any year will generally be subject to a separate limitation for "passive
income," which includes, among other things, dividends, interest (other than
high withholding tax interest) and certain foreign currency gains. Gain or
loss from the sale of a security or from a Section 988 transaction which is
treated as ordinary income or loss (or would have been so treated absent an
election by the Fund) will be treated as derived from sources within the
United States, potentially reducing the amount allowable as a credit under the
limitation.
The tax consequences to a foreign shareholder entitled to claim the benefits
of an applicable tax treaty may be different from those described herein.
Foreign shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the
Fund.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares. See "How the Fund
Calculates Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P (1 + T) to the nth power = ERV
Where:P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10 year periods at the end of the 1, 5 or
10 year periods (or fractional portion thereof).
B-36
<PAGE>
Average annual total return takes into account any applicable initial or
deferred sales charges but does not take into account any federal or state
income taxes that may be payable upon redemption.
The average annual total return for Class A shares for the one year period
ended April 30, 1997 was 11.34% and for the period from July 13, 1994
(commencement of operations) to April 30, 1997 was 10.94%. The average annual
total return for Class B shares for the one-year period ended April 30, 1997
was 11.41% and for the period from July 13, 1994 (commencement of operations)
to April 30, 1997 was 11.25%. The average annual total return for Class C
shares for the one-year period ended April 30, 1997 was 15.41% and for the
period from July 13, 1994 (commencement of operations) to April 30, 1997 was
12.13%. The average annual total return for Class Z shares for the one-year
period ended April 30, 1997 was 17.66% and for the period from April 15, 1996
(commencement of operations) to April 30, 1997 was 19.27%.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B
and Class C shares. See "How the Fund Calculates Performance" in the
Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV - P
------
P
Where:P = a hypothetical initial payment of $1,000.
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1, 5
or 10 year periods (or fractional portion thereof).
The aggregate total return for the one year period ended and from July 13,
1994 (commencement of investment operations) to April 30, 1997, for the Fund's
(i) Class A shares were 17.20% and 40.75%, respectively, (ii) Class B shares
were 16.41% and 37.75%, respectively, and (iii) Class C shares were 16.41% and
37.75%, respectively. The aggregate total return for the one year period ended
and from April 15, 1996 (commencement of offering of Class Z shares) to April
30, 1997 was 17.66% and 20.12%, respectively.
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
B-37
<PAGE>
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long term and the rate of
inflation.(1)
----------------------------
Performance
Comparison of Different
Types of Investments
Over the Long Term
(1/1926 - 03/1997)
----------------------------
Common Stocks 10.7%
Long-Term Govt. Bonds 5.0%
Inflation 3.1%
----------------------------
/1/Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1997
Yearbook," (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). All rights reserved. Common stock returns are based on the
Standard & Poor's 500 Stock Index, a market-weighted, unmanaged index of
500 common stocks in a variety of industry sectors. It is a commonly used
indicator of broad stock price movements. This chart is for illustrative
purposes only, and is not intended to represent the performance of any
particular investment or fund. Investors cannot invest directly in an
index. Past performance is not a guarantee of future results.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTANTS
Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109,
serves as Custodian for the Fund's portfolio securities and cash and in that
capacity maintains certain financial and accounting books and records pursuant
to an agreement with the Fund. Subcustodians provide custodial services for
the Fund's foreign assets held outside the United States. See "How the Fund is
Managed--Custodian and Transfer and Dividend Disbursing Agent" in the
Prospectus.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the
Fund. PMFS is a wholly-owned subsidiary of PIFM. PMFS provides customary
transfer agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, payment of dividends and distributions and
related functions. For these services, PMFS receives an annual fee per
shareholder account, a new account set-up fee for each manually established
account and a monthly inactive zero balance account fee per shareholder
account. PMFS is also reimbursed for its out-of-pocket expenses, including but
not limited to postage, stationery, printing, allocable communication expenses
and other costs. For the fiscal year ended April 30, 1997 the Fund incurred
fees of approximately $243,800 for such services.
B-38
<PAGE>
Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281,
served as the Fund's independent accountants for the fiscal year ended April
30, 1996 and prior thereto, and in that capacity audited the Fund's financial
statements. Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New
York 10036 currently serves as the Fund's independent accountants and in that
capacity have audited the Fund's financial statements for the fiscal year
ended April 30, 1997.
B-39
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF APRIL 30, 1997
- --------------------------------------------------------------------------------
SHARES DESCRIPTION VALUE (NOTE 1)
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS-95.1%
COMMON STOCK-95.1%
- --------------------------------------------------------------------------------
BELGIUM--2.7%
11,950 Barco Industries NV (Electrical &
electronics) $ 2,039,821
8,500 Kredietbank NV (Banking) 3,317,578
---------------
5,357,399
- --------------------------------------------------------------------------------
FEDERAL REPUBLIC OF GERMANY--6.8%
49,700 Hoechst AG* (Chemicals) 1,954,543
6,020 Linde AG (Machinery & engineering) 4,404,199
25,800 SAP AG (Data processing &
reproduction) 4,704,609
3,700 Volkswagen AG (Automobiles & auto parts) 2,355,965
---------------
13,419,316
- --------------------------------------------------------------------------------
FINLAND--2.0%
64,900 Nokia Corp. ( Telecommunications equipment) 4,017,035
- --------------------------------------------------------------------------------
FRANCE--20.3%
40,000 Bertrand Faure SA (Automobiles & auto parts) 1,918,490
9,800 Carrefour SA(Retail) 6,128,048
9,300 Hermes International (Textiles & apparel
manufacturing) 2,505,534
20,421 Imetal SA (Miscellaneous materials &
commodities) 2,806,902
24,500 Legrand SA (Electrical & electronics) 4,141,141
16,800 Rexel SA (Electrical & electronics) 4,482,883
31,418 Salomon SA (Recreation & other
consumer growth) 2,219,073
19,800 Seb SA (Appliances & household
durables) 3,496,216
39,580 Sidel SA (Machinery & engineering) 2,847,179
22,738 Unibail (Financial services) 2,204,543
72,100 Valeo SA (Automobiles & auto parts) 4,454,054
35,400 Total SA (Oil services) 2,940,129
---------------
40,144,192
PRUDENTIAL EUROPE GROWTH FUND, INC.
- --------------------------------------------------------------------------------
SHARES DESCRIPTION VALUE(NOTE 1)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ITALY--4.6%
133,100 Bulgari SpA* (Retail) $ 2,409,163
1,547,900 Telecom Italia Mobile SpA*
(Telecommunications) 4,874,792
1,300,000 Credito Italiano SpA (Banking) 1,824,661
---------------
9,108,616
- --------------------------------------------------------------------------------
NETHERLANDS--7.6%
51,200 Hagemeyer (Wholesale & international
trading) 4,461,258
11,750 Heineken NV (Beverages) 1,972,145
56,500 IHC Caland NV (Oil services) 2,794,095
17,700 Nutricia Verenigde Bedrijven NV
(Food & household products) 2,689,648
17,500 Royal Dutch Petroleum Co. (Energy sources) 3,132,453
---------------
15,049,599
- --------------------------------------------------------------------------------
NORWAY--1.6%
169,300 Tomra Systems ASA (Waste management) 3,285,565
- --------------------------------------------------------------------------------
SPAIN--7.0%
19,554 Azkoyen SA (Manufacturing) 2,936,647
91,643 Banco Central Hispanoamericano (Banking) 2,796,606
107,300 Centros Commerciales Pryca SA (Retail) 1,868,984
123,000 Telefonica de Espana (Telecommunications) 3,158,850
66,700 Tele Pizza SA (Restaurants) 3,064,592
---------------
13,825,679
- --------------------------------------------------------------------------------
SWEDEN--9.2%
109,700 Allgon AB (Telecommunications) 3,008,123
84,600 Astra AB (Health & personal care) 3,361,080
41,400 Hennes & Mauritz AB (Retail) 5,993,033
96,100 Mo och Domsjo AB (Forest
products & paper) 2,874,198
290,900 Skandinaviska Enskilda Banken (Banking) 2,968,139
---------------
18,204,573
- --------------------------------------------------------------------------------
See Notes to Financial Statements
40
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF APRIL 30, 1997
- --------------------------------------------------------------------------------
SHARES DESCRIPTION VALUE(NOTE 1)
- --------------------------------------------------------------------------------
UNITED KINGDOM--27.1%
472,200 Bank of Ireland (Banking) $ 4,922,488
159,500 Barclays PLC (Banking) 2,975,259
347,100 British Sky Broadcasting Group PLC
(Broadcasting & publishing) 3,217,586
289,100 Carpetright PLC (Retail) 2,223,873
531,700 Compass Group PLC (Leisure & tourism) 5,845,397
345,100 Dixons Group PLC (Retail) 2,839,855
422,600 Electrocomponents PLC
(Electronic components &
instruments) 2,714,734
263,700 EMAP PLC (Broadcasting &
publishing) 3,267,877
179,148 GKN PLC (Automobiles & auto parts) 2,773,637
327,700 Hays PLC (Business & public services) 2,904,515
224,800 Reed International PLC (Broadcasting &
publishing) 4,156,784
186,500 Siebe PLC (Machinery & engineering) 2,769,174
300,700 Standard Chartered PLC (Banking) 4,565,080
997,200 Vodafone Group PLC
(Telecommunications) 4,476,020
326,900 Whitebread PLC (Beverages) 4,093,608
---------------
53,745,887
- --------------------------------------------------------------------------------
UNITED STATES--6.2%
76,500 Baan Company NV* (Data processing &
reproduction) 4,111,875
40,900 Gucci Group NV (Retail) 2,837,437
67,500 SGS-Thompson Microelectronics NV*
(Electronic components &
instruments) 5,290,313
---------------
12,239,625
---------------
Total common stocks
(cost US$142,090,652) 188,397,486
PRUDENTIAL EUROPE GROWTH FUND, INC.
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT DESCRIPTION VALUE(NOTE 1)
(000)
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--6.2%
REPURCHASE AGREEMENT--6.2%
$ 12,358 Bear Stearns & Co. Inc.,
5.375%, dated 4/30/97, due
5/1/97 in the amount of
$12,359,845(cost US$12,358,000;
the value of the collateral including
accrued interest is US$12,634,169) $ 12,358,000
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS--101.3%
(cost US$154,448,652; Note 4) 200,755,486
Liabilities in excess of other assets-(1.3%) (2,712,536)
---------------
Net Assets-100.0% $ 198,042,950
---------------
---------------
- --------------------
* Non-income producing security
- --------------------------------------------------------------------------------
See Notes to Financial Statements
41
<PAGE>
STATEMENT OF ASSETS AND LIABILIITIES PRUDENTIAL EUROPE GROWTH FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Assets April 30, 1997
Investments, at value (cost US$154,448,652). . . . . . . . . . . . . . . . . . . . . . . . . . $ 200,755,486
Foreign currency, at value (cost US$6,801,509) . . . . . . . . . . . . . . . . . . . . . . . . 6,685,742
Dividends receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 716,069
Receivable for Fund shares sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,262
Deferred expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,442
--------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208,238,001
--------------
LIABILITIES
Payable for Fund shares reacquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,779,914
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164,681
Distribution fee payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128,641
Management fee payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121,815
--------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,195,051
--------------
NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 198,042,950
--------------
--------------
Net assets were comprised of:
Common stock, at par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,023
Paid-in capital in excess of par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,667,281
--------------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,680,304
Undistributed net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128,778
Accumulated net realized gain on investments and foreign currency transactions . . . . . . . 7,075,981
Net unrealized appreciation on investments and foreign currencies. . . . . . . . . . . . . . 46,157,887
--------------
Net Assets, April 30, 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 198,042,950
--------------
--------------
Class A :
Net asset value and redemption price per share
( $38,806,588 / 2,510,118 shares of common stock issued and outstanding) . . . . . . . . . . $15.46
Maximum sales charge ( 5% of offering price ). . . . . . . . . . . . . . . . . . . . . . . . .81
------
Maximum offering price to public . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16.27
------
------
Class B :
Net asset value and redemption price per share
( $139,277,519 / 9,212,798 shares of common stock issued and outstanding). . $15.12
------
------
Class C :
Net asset value and redemption price per share
( $8,010,295 / 529,672 shares of common stock issued and outstanding). . . . . . . . . . . . $15.12
------
------
Class Z :
Net asset value and redemption price per share
( $11,948,548 / 770,153 shares of common stock issued and outstanding) . . . . . . . . . . . $15.51
------
------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
42
<PAGE>
PRUDENTIAL EUROPE GROWTH FUND, INC.
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Year Ended
April 30,
NET INVESTMENT INCOME 1997
------------
Income
Dividends (net of foreign withholding taxes of
$379,838) . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,132,002
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . 301,153
------------
Total income. . . . . . . . . . . . . . . . . . . . . 3,433,155
------------
Expenses
Management fee. . . . . . . . . . . . . . . . . . . . . . . 1,401,970
Distribution fee--Class A . . . . . . . . . . . . . . . . . 94,585
Distribution fee--Class B . . . . . . . . . . . . . . . . . 1,331,350
Distribution fee--Class C . . . . . . . . . . . . . . . . . 80,025
Transfer agent's fees and expenses. . . . . . . . . . . . . 268,000
Custodian's fees and expenses . . . . . . . . . . . . . . . 120,000
Reports to shareholders . . . . . . . . . . . . . . . . . . 100,000
Amortization of organization expenses . . . . . . . . . . . 50,000
Registration fees . . . . . . . . . . . . . . . . . . . . . 45,000
Audit fee and expenses. . . . . . . . . . . . . . . . . . . 35,000
Directors' fees and expenses. . . . . . . . . . . . . . . . 28,000
Legal fees and expenses . . . . . . . . . . . . . . . . . . 12,500
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . 16,307
------------
Total operating expenses . . . . . . . . . . . . . . . 3,582,737
------------
Net investment loss. . . . . . . . . . . . . . . . . . . . . . . (149,582)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENT AND FOREIGN CURRENCY
TRANSACTIONS
Net realized gain (loss) on:
Investment transactions . . . . . . . . . . . . . . . . . . 15,321,646
Foreign currency transactions . . . . . . . . . . . . . . . 278,360
------------
15,600,006
------------
Net change in unrealized appreciation (depreciation) on:
Investments . . . . . . . . . . . . . . . . . . . . . . . . 14,928,631
Foreign currencies. . . . . . . . . . . . . . . . . . . . . (48,429)
------------
14,880,202
------------
Net gain on investments and foreign currencies . . . . . . . . . 30,480,208
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS. . . . . . . . . . . . . . . . . . . . $30,330,626
------------
------------
PRUDENTIAL EUROPE GROWTH FUND, INC.
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
Year Ended April 30,
--------------------
1997 1996
------- -------
INCREASE (DECREASE)
IN NET ASSETS
Operations
Net investment loss . . . . . . . . . . . . . $ (149,582) $ (217,884)
Net realized gain on investment and
foreign currency transactions. . . . . . 15,600,006 3,252,406
Net change in unrealized
appreciation (depreciation) of
investments and foreign
currencies . . . . . . . . . . . . . . . 14,880,202 21,905,018
---------- ----------
Net increase in net assets resulting
from operations . . . . . . . . . . . . . . . 30,330,626 24,939,540
---------- ----------
Dividends and distributions (Note 1)
Distributions from net realized gains
Class A. . . . . . . . . . . . . . . . . (1,314,232) --
Class B. . . . . . . . . . . . . . . . . (4,996,228) --
Class C. . . . . . . . . . . . . . . . . (297,634) --
Class Z. . . . . . . . . . . . . . . . . (382,973) --
---------- ----------
(6,991,067) --
---------- ----------
Fund share transactions (net of share
conversions) (Note 5)
Net proceeds from shares sold . . . . . . . . 563,381,129 213,839,301
Net asset value of shares issued in
reinvestment of distributions. . . . . . 6,574,997 --
Cost of shares reacquired . . . . . . . . . . (576,650,878)(212,685,204)
------------- ------------
Net increase (decrease) in net
assets from Fund share
transactions. . . . . . . . . . . . . . . . . (6,694,752) 1,154,097
---------- ----------
Total increase . . . . . . . . . . . . . . . . . . 16,644,807 26,093,637
NET ASSETS
Beginning of year. . . . . . . . . . . . . . . . . 181,398,143 155,304,506
---------- ----------
End of year. . . . . . . . . . . . . . . . . . . . $198,042,950 $181,398,143
---------- ----------
---------- ----------
See Notes to Financial Statements
43
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL EUROPE GROWTH FUND, INC.
- --------------------------------------------------------------------------------
Prudential Europe Growth Fund, Inc. (the "Fund"), is registered under the
Investment Company Act as a diversified, open-end management investment company.
The investment objective of the Fund is to seek long-term capital growth by
investing primarily in equity securities of companies domiciled in Europe. The
Fund was incorporated in Maryland on March 18, 1994 and commenced investment
operations on July 13, 1994.
- ----------------------------
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
SECURITIES VALUATION: Securities traded on an exchange (whether domestic or
foreign) are valued at the last reported sales price on the primary exchange on
which they are traded. Securities traded in the over-the-counter market
(including securities listed on exchanges for which a last sales price is not
available) are valued at the average of the last reported bid and asked prices.
Securities for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board of
Directors of the Fund.
Short-term securities which mature in more than 60 days are valued based upon
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian or designated
subcustodians, as the case may be under triparty repurchase agreements, take
possession of the underlying collateral securities, the value of which exceeds
the principal amount of the repurchase transaction including accrued interest.
If the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
FOREIGN CURRENCY TRANSLATION: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at
the closing daily rate of exchange as reported by a major bank;
(ii) purchases and sales of investment securities, income and expenses--at
the rate of exchange prevailing on the respective dates of such
transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the fiscal year, the Fund does not isolate
that portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of securities held at fiscal year end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of long-term portfolio securities sold
during the fiscal period. Accordingly, realized foreign currency gains (losses)
are included in the reported net realized gains on investment transactions.
Net realized gain on foreign currency transactions of $278,360 represents net
foreign exchange gains or losses from holding of foreign currencies, currency
gains or losses realized between the trade and settlement dates on security
transactions, and the difference between the amounts of dividends and foreign
taxes recorded on the Fund's books and the U.S. dollar equivalent amounts
actually received or paid. Net currency gains and losses from valuing foreign
currency denominated assets and liabilities (other than investments) at year end
exchange rates are reflected as a component of net unrealized appreciation on
investments and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized gains and losses from investment and
currency transactions are calculated on the identified cost basis. Dividend
income is recorded
44
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL EUROPE GROWTH FUND, INC.
on the ex-dividend date, and interest income is recorded on an accrual basis.
Expenses are recorded on the accrual basis which may require the use of certain
estimates by management.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares of the Fund based
upon the relative proportion of net assets of each class at the beginning of the
day.
EQUALIZATION: Effective May 1, 1996 the Fund discontinued the accounting
practice known as equalization. Equalization is a practice whereby a portion of
the proceeds from sales and costs of reacquisitions of Fund shares, equivalent
on a per share basis to the amount of distributable net investment income on the
date of the transaction, is credited or charged to undistributed net investment
income.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountant's Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect caused by
applying this statement was to decrease undistributed net investment loss and
decrease accumulated net realized gain on investments and foreign currency
transactions by $278,360 for the year ended April 30, 1997, due to realized
and recognized currency gains during the period.
DIVIDENDS AND DISTRIBUTIONS: The Fund expects to pay dividends of net
investment income and distributions of net realized capital and currency
gains, if any, annually. Dividends and distributions are recorded on the
ex-dividend date.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for foreign currency transactions.
FEDERAL INCOME 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 income to 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 ORGANIZATION EXPENSES: Approximately $177,000 of expenses were incurred
in connection with the organization of the Fund. These costs have been deferred
and are being amortized ratably over a period of sixty months from the date the
Fund commenced investment operations.
The Fund, along with other affiliated registered investment companies (the
"Funds"), entered into a credit agreement (the "Agreement") on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement as of April 30,
1997. The Funds pay a commitment fee at an annual rate of .005 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the Funds.
- --------------------------------------------------------------------------------
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Investments Fund Management
LLC ("PIFM"). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadvisor's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ("PIC"); PIC furnishes investment advisory services in
connection with the management of the Fund. PIFM pays for the cost of the
subadvisor's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .75 of 1% of the average daily net assets of the Fund.
The Fund has a distribution agreement with Prudential
45
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL EUROPE GROWTH FUND, INC.
Securities Incorporated ("PSI") which acts as the distributor of the Class A, B,
C, and Z shares of the Fund. The Fund compensates PSI for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the "Class A, B and C Plans") regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
No distribution or service fees are paid to PSI as distributor of the Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI with respect to
Class A, B and C shares, for distribution-related activities at an annual rate
of up to .30 of 1%, 1% and 1%, of the average daily net assets of the Class A, B
and C shares, respectively. Such expenses under the Class A, Class B and Class C
Plans were .25 of 1%, 1% and 1%, respectively of the average daily net assets of
the Class A, Class B and Class C shares for the year ended April 30, 1997. No
distribution or service fees are paid to PSI as distributor for the Class Z
shares of the Fund.
PSI has advised the Fund that it has received approximately $77,600 in front-end
sales charges resulting from sales of Class A shares during the year ended April
30, 1997. From these fees PSI paid such sales charges to Pruco Securities
Corporation, an affiliated broker-dealer, which in turn paid commissions to
sales persons and incurred other distribution costs.
PSI has advised the Fund that for the year ended April, 1997 it received
approximately $115,000 and $100 in contingent deferred sales charges imposed
upon certain redemptions by Class B and Class C shareholders, respectively.
PSI, PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
- --------------------------------------------------------------------------------
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ("PMFS"), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended April 30, 1997, the
Fund incurred fees of approximately $243,800 for the services of PMFS. As of
April 30, 1997, approximately $21,200 of such fees were due to PMFS. Transfer
agent's fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- --------------------------------------------------------------------------------
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term investments,
for the year ended April 30, 1997 were $53,929,005 and $62,878,872
respectively.
The United States federal income tax basis of the Fund's investments is
substantially the same as for financial reporting purposes and, accordingly, as
of April 30, 1997 net unrealized appreciation for federal income tax purposes
was $46,306,834 (gross unrealized appreciation--$47,548,217; gross unrealized
depreciation-- $1,241,383). For federal income tax purposes, the Fund utilized
its capital loss carryforward of approximately $1,254,600 to partially offset
the Fund's net taxable gains realized and recognized in the year ended April 30,
1997.
- --------------------------------------------------------------------------------
NOTE 5. CAPITAL
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5.00%. Class B shares are sold with
a contingent deferred sales charge which declines from 5% to zero depending on
the period of time the shares are held. Class C shares are sold with a
contingent deferred sales charge of 1% during the first year. Class B shares
will automatically convert to Class A shares on a quarterly basis approximately
seven years after purchase. A special exchange privilege is also available for
shareholders who qualified to purchase Class A shares at net asset value.
Effective April 15, 1996 the Fund commenced offering Class Z shares. Class Z
shares are not subject to any sales or redemption charge and are offered
exclusively for sale to the participants of the Prudential Securities 401(k)
Plan, a defined contribution plan sponsored by Prudential Securities. All
classes of shares have equal rights as to earnings, assets and voting privileges
except that each class bears different distribution expenses and has exclusive
voting rights with respect to its distribution plan. There are 2 billion shares
of $.001 par value common stock authorized and divided into four classes,
designated Class A, Class B, Class C and Class Z Shares, each consisting of 500
million authorized shares.
46
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL EUROPE GROWTH FUND, INC.
- --------------------------------------------------------------------------------
Transactions in shares of common stock were as follows:
Shares Amount
-------- ---------
Class A
- -------
Year ended April 30, 1997:
Shares sold. . . . . . . . . . . . . . . . . . . . 23,351,661$ 344,533,412
Shares issued in reinvestment
of distributions. . . . . . . . . . . . . . . 80,872 1,196,902
Shares reacquired. . . . . . . . . . . . . . . . . (24,625,496)(363,626,484)
---------- ----------
Net decrease in shares outstanding
before conversion. . . . . . . . . . . . . . . . . (1,192,963) (17,896,170)
Shares issued upon conversion
from Class B. . . . . . . . . . . . . . . . . 211,034 3,125,390
---------- ----------
Net decrease in shares outstanding . . . . . . . . (981,929)$ (14,770,780)
---------- ----------
---------- ----------
Year ended April 30, 1996:
Shares sold. . . . . . . . . . . . . . . . . . . . 11,353,245$ 146,536,469
Shares reacquired. . . . . . . . . . . . . . . . . (11,576,243)(149,929,575)
------------ -----------
Net decrease in shares
outstanding before conversion . . . . . . . . (222,998) (3,393,106)
Shares issued upon conversion
from Class B. . . . . . . . . . . . . . . . . 149,628 1,908,762
---------- ----------
Net decrease in shares outstanding . . . . . . . . (73,370)$ (1,484,344)
---------- ----------
---------- ----------
Class B
- -------
Year ended April 30, 1997:
Shares sold. . . . . . . . . . . . . . . . . . . 9,531,575 $140,295,556
Shares issued in reinvestment
of distributions . . . . . . . . . . . . . . . . . 324,391 4,710,146
Shares reacquired. . . . . . . . . . . . . . . . . (9,758,102)(143,749,550)
---------- ----------
Net decrease in shares
outstanding before conversion . . . . . . . . (97,864) 1,256,152
Shares issued upon conversion
from Class A. . . . . . . . . . . . . . . . . (214,885) (3,125,390)
---------- ----------
Net decrease in shares outstanding . . . . . . . . (117,021)$ (1,869,238)
---------- ----------
---------- ----------
Class B . . . . . . . . . . . . . . . . . . . . Shares Amount
---------- ----------
Year ended April 30, 1996:
Shares sold. . . . . . . . . . . . . . . . . . . . 4,965,336 $63,469,612
Shares reacquired. . . . . . . . . . . . . . . . . (4,561,206) (58,326,887)
---------- ----------
Net increase in shares
outstanding before conversion . . . . . . . . 404,130 5,142,725
Shares issued upon conversion
from Class A. . . . . . . . . . . . . . . . . (151,150) (1,908,762)
---------- ----------
Net increase in shares outstanding . . . . . . . . 252,980 $ 3,233,963
---------- ----------
---------- ----------
Class C
- -------
Year ended April 30, 1997:
Shares sold. . . . . . . . . . . . . . . . . . . . 4,507,770$ 66,198,312
Shares issued in reinvestment
of distributions. . . . . . . . . . . . . . . 19,502 283,176
Shares reacquired. . . . . . . . . . . . . . . . . (4,571,336) (67,391,048)
---------- ----------
Net decrease in shares outstanding . . . . . . . . (44,064) $ (909,560)
---------- ----------
---------- ----------
Year ended April 30, 1996:
Shares sold. . . . . . . . . . . . . . . . . . . . 295,865 $ 3,833,020
Shares reacquired. . . . . . . . . . . . . . . . . (343,363) (4,428,742)
---------- ----------
Net decrease in shares outstanding . . . . . . . . (47,498) $ (595,722)
---------- ----------
---------- ----------
Class Z
- -------
Year ended April 30, 1997:
Shares sold. . . . . . . . . . . . . . . . . . . . 862,103 $ 12,353,849
Shares issued in reinvestment
of distributions. . . . . . . . . . . . . . . 25,963 384,773
Shares reacquired. . . . . . . . . . . . . . . . . (117,928) (1,883,796)
---------- ----------
Net increase in shares outstanding . . . . . . . . 770,138 $ 10,854,826
---------- ----------
---------- ----------
April 15, 1996(a)
through April 30, 1996:
Shares sold. . . . . . . . . . . . . . . . . . . . 15 $ 200
Shares reacquired. . . . . . . . . . . . . . . . . -- --
---------- ----------
Net increase on shares outstanding . . . . . . . . 15 $ 200
---------- ----------
---------- ----------
- ----------------------------------
(a) Commencement of offering of Class Z shares.
47
<PAGE>
FINANCIAL HIGHLIGHTS PRUDENTIAL EUROPE GROWTH FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
----------------------------------------- -----------------------------------------
Year Year July 13,1994(b) Year Year July 13,1994(b)
Ended Ended through Ended Ended through
April 30, April 30, April 30, April 30, April 30, April 30,
1997 1996 (c) 1995 (c) 1997 1996 (c) 1995 (c)
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period . . . $ 13.69 $ 11.77 $ 11.40 $ 13.49 $ 11.69 $ 11.40
-------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income (loss) . . . . . . . .09 .06 .01 (.04) (.04) (.06)
Net realized and unrealized
gain on investment and
foreign currency transactions. . . . . . 2.24 1.86 .36 2.23 1.84 .35
-------- -------- -------- -------- -------- --------
Total from investment operations . . . . 2.33 1.92 .37 2.19 1.80 .29
-------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Distributions paid to shareholders
from net realized gains on investment
and foreign currency transactions. . . . (.56) -- -- (.56) -- --
-------- -------- -------- -------- -------- --------
Total distributions. . . . . . . . . . . (.56) -- -- (.56) -- --
-------- -------- -------- -------- -------- --------
Net asset value, end of period . . . . . . $ 15.46 $ 13.69 $ 11.77 $ 15.12 $ 13.49 $ 11.69
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
TOTAL RETURN(d): . . . . . . . . . . . . . 17.20% 16.31% 3.25% 16.41% 15.40% 2.54%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000). . . . . . $ 38,807 $ 47,789 $ 41,963 $139,277 $125,868 $106,081
Average net assets (000) . . . . . . . . . $ 37,834 $ 47,183 $ 29,598 $133,135 $122,255 $ 85,623
Ratios to average net assets:
Expenses, including distribution fees. . 1.36% 1.53% 1.84%(a) 2.11% 2.28% 2.59%(a)
Expenses, excluding distribution fees. . 1.11% 1.28% 1.59%(a) 1.11% 1.28% 1.59%(a)
Net investment income (loss) . . . . . . .57% .44% .06%(a) (.27)% (.33)% (.71)%(a)
FOR CLASS A, B, C AND Z SHARES:
Portfolio turnover rate . . . . . . . . . 31% 65% 25%
Average commission rate per share. . . . . $ 0.0463 $ 0.0233 N/A
</TABLE>
- ------------------------------
(a) Annualized.
(b) Commencement of class operations.
(c) Based on average shares outstanding, by class.
(d) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements
48
<PAGE>
FINANCIAL HIGHLIGHTS PRUDENTIAL EUROPE GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
----------------------------------------- -------------------------------
Year Year July 13,1994(b) Year April 15, 1996(b)
Ended Ended through Ended through
April 30, April 30, April 30, April 30, April 30,
1997 1996 (c) 1995 (c) 1997 1996 (c)
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period . . . $ 13.49 $ 11.69 $ 11.40 $ 13.68 $ 13.40
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income (loss) . . . . . . . (.04) (.04) (.06) .02 .28
Net realized and unrealized
gain on investment and
foreign currency transactions. . . . . . 2.23 1.84 .35 2.37 --
--------- --------- --------- --------- ---------
Total from investment operations . . . . 2.19 1.80 .29 2.39 .28
--------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Distributions paid to shareholders
from net realized gains on investment
and foreign currency transactions . . . (.56) -- -- (.56) --
--------- --------- --------- --------- ---------
Total distributions. . . . . . . . . . . (.56) -- -- (.56) --
--------- --------- --------- --------- ---------
Net asset value, end of period . . . . . . $ 15.12 $ 13.49 $ 11.69 $ 15.51 $ 13.68
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TOTAL RETURN(d): . . . . . . . . . . . . . 16.41% 15.40% 2.54% 17.66% 2.09%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000). . . . . . $ 8,010 $ 7,741 $ 7,260 $ 11,949 $ 204(e)
Average net assets (000) . . . . . . . . . $ 8,002 $ 7,768 $ 6,094 $ 7,958 $ 203(e)
Ratios to average net assets:
Expenses, including distribution fees. . 2.11% 2.28% 2.59%(a) 1.11% 1.28%(a)
Expenses, excluding distribution fees. . 1.11% 1.28% 1.59%(a) 1.11% 1.28%(a)
Net investment income (loss) . . . . . . (.25)% (.30)% (.71)%(a) .22% .54%(a)
</TABLE>
- ------------------------------
(a) Annualized.
(b) Commencement of class operations.
(c) Based on average shares outstanding, by class.
(d) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(e) Figures are actual and not rounded to the nearest thousand.
- --------------------------------------------------------------------------------
See Notes to Financial Statements
49
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS PRUDENTIAL EUROPE GROWTH FUND, INC.
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of
Prudential Europe Growth Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Europe Growth Fund, Inc.
(the "Fund") at April 30, 1997, and the results of its operations, the changes
in its net assets and the financial highlights for the year then ended, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audit. We
conducted our audit of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at April 30, 1997 by
correspondence with the custodian and brokers, provides a reasonable basis for
the opinion expressed above. The accompanying statement of changes in net
assets for the year ended April 30, 1996 and financial highlights for the year
ended April 30, 1996 and the period ended April 30, 1995 were audited by other
independent accountants, whose opinion dated June 13, 1996 was unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
June 24, 1997
50
<PAGE>
CHANGE IN AUDITORS
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
independent accountants. For the period ended April 30, 1995 and the year ended
April 30, 1996, Deloitte & Touche LLP expressed an unqualified opinion on the
Fund's financial statements. There were no disagreements between Fund management
and Deloitte & Touch LLP prior to their termination. The Board of Directors
approved the termination of Deloitte & Touch LLP and the appointment of Price
Waterhouse LLP as the Fund's independent accountants.
- --------------------------------------------------------------------------------
See Notes to Financial Statements
51
<PAGE>
Independent Auditors' Report PRUDENTIAL EUROPE GROWTH FUND, INC.
================================================================================
The Shareholders and Board of Directors
Prudential Europe Growth Fund, Inc.
We have audited the accompanying statement of assets and liabilities including
the portfolio of investments of Prudential Europe Growth Fund, Inc., as of April
30, 1996, the related statements of operations for the year then ended and of
changes in net assets for the year then ended and for the period July 13, 1994
(commencement of operations) to April 30, 1995 and the financial highlights for
the periods presented. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at April
30, 1996 by correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Europe
Growth Fund, Inc. as of April 30, 1996, the results of its operations, the
changes in its net assets and the financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
June 13, 1996
<PAGE>
APPENDIX--HISTORICAL PERFORMANCE DATA
The historical performance information 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 illustrates the peformance of major world stock markets for the
period from 1987 through 1997. It does not represent the performance of any
Prudential Mutual Fund.
EUROPEAN STOCK MARKETS HAVE
OUTPERFORMED THE U.S. MARKET
OVER THE LONG TERM.
(AVERAGE ANNUAL TOTAL RETURNS,
3/31/87 TO 3/31/97)
NETHERLANDS 17.0%
SWEDEN 16.7%
DENMARK 15.3%
BELGIUM 14.1%
UNITED STATES 13.6%
Source: Morgan Stanley Capital International based on data retrieved from
Lipper Analytical New Applications (LANA) as of 3/31/97. Morgan Stanley
country indices are unmanaged indices that reflect the largest two-thirds of
each country's total stock market capitalization. Past performance is no
guarantee of future results. This chart is for illustrative purposes only and
is not indicative of the past, present or future performance of the Fund.
Investors cannot invest directly in stock indices.
A-1
<PAGE>
This chart shows the long-term performance of various asset classes and the
rate of inflation.
[CHART]
Source: Prudential Investment Corporation based on data from Ibbotson
Associates, EnCORR Software, Chicago, Illinois. Used with permission. All
rights reserved. This chart is for illustrative purposes only and is not
indicative of the past, present, or future performance of any portfolio.
Generally, stock returns are attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile
than bond prices over the long-term.
Small stock returns for 1926-1989 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.
Long-term government bond returns are represented by a portfolio that
contains only one bond with a maturity of roughly 20 years. At the beginning
of each year a new bond with a then-current coupon replaces the old bond.
Treasury bill returns are for a one-month bill. Treasuries are guaranteed by
the government as to the timely payment of principal and interest; equities
are not. Inflation is measured by the consumer price index (CPI).
Impact of Inflation. The "real" rate of investment return is that which
exceeds the rate of inflation, the percentage change in the value of consumer
goods and the general cost of living. A common goal of long-term investors is
to outpace the erosive impact of inflation on investment returns.
The chart below 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 of different
bond market sectors and investors should not consider this performance data as
an indication of the future performance of the Fund or of any sector in which
the Fund invests.
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All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information
has not been verified. The figures do not reflect the operating expenses and
fees of a mutual fund. See "Fund Expenses" in the prospectus. The net effect
of the deduction of the operating expenses of a mutual fund on these
historical total returns, including the compounded effect over time, could be
substantial.
Historical Total Returns of Different Bond Market Sectors
<TABLE>
<CAPTION>
YEAR 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. TREASURY
BONDS/1/ 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% -3.4% 18.4% 2.7%
U.S. MORTGAGE
SECURITIES/2/ 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% -1.6% 16.8% 5.4%
U.S. CORPORATE
BONDS/3/ 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% -3.9% 22.3% 3.3%
U.S. HIGH YIELD
CORPORATE BONDS/3/ 5.0% 12.5% 0.8% -9.6% 46.2% 15.8% 17.1% -1.0% 19.2% 11.4%
WORLD GOV'T
BONDS/4/ 35.2% 2.3% -3.4% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1%
- --------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN
HIGHEST AND LOWEST
RETURN IN PERCENT 33.2% 10.25% 18.8% 24.9% 30.9% 11.0% 12.0% 9.9% 5.5% 8.7%
- --------------------------------------------------------------------------------------------------
</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 Assocition (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.
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APPENDIX--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns,
while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable
returns. Owning a portfolio of securities mitigates the individual risks (and
returns) of any one security. Additionally, diversification among types of
securities reduces the risks and (general returns) of any one type of
security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer-term bonds are generally more sensitive to
changes in interest rates. When interest rates fall, bond prices generally
rise. Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portolio'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.
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APPENDIX--INFORMATION RELATING TO 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. The Prudential provides auto insurance for more
than 1.7 million cars and insures more than 1.4 million homes.
Money Management. The Prudential is one of the largest pension fund managers
in the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k)
plans. In July 1995, Institutional Investor ranked Prudential the third
largest institutional money manager of the 300 largest money management
organizations in the United States as of December 31, 1994. As of December 31,
1995, Prudential had more than $314 billion in assets under management.
Prudential Investments, a business group of Prudential, (of which Prudential
Mutual Funds is a key part) manages over $190 billion in assets of
institutions and individuals.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 34,000 brokers
and agents and more than 1,100 offices in the United States./2/
Healthcare. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 5 million
Americans receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Bank, a wholly-owned subsidiary of the
Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.
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/1/Prudential Mutual Fund Investment Management, a unit of PIC, serves as the
Subadviser to substantially all of the Prudential Mutual Funds. Wellington
Management Company serves as the subadviser to Global Utility Fund, Inc.,
Nicholas-Applegate Capital Management as subadviser to Nicholas-Applegate
Fund, Inc., Jennison Associates Capital Corp. as the subadviser to
Prudential Jennison Fund, Inc. and BlackRock Financial Management, Inc. as
subadviser to the BlackRock Government Income Trust. There are multiple
subadvisers for The Target Portfolio Trust.
/2/As of December 31, 1994.
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INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
Prudential Mutual Fund Management is one of the sixteenth largest mutual
fund companies in the country, with over 2.5 million shareholders invested in
more than 50 mutual fund portfolios and variable annuities with more than 3.7
million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser
in national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in
surveys conducted by national and regional publications and media
organizations such as The Wall Street Journal, The New York Times, Barron's
and USA Today.
Equity Funds. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual
fund in both bull and bear markets as well as a fund's risk profile.
Prudential Equity Fund is managed with a "value" investment style by PIC. In
1995, Prudential Securities introduced Prudential Jennison Fund, a growth-
style equity fund managed by Jennison Associates Capital Corp., a premier
institutional equity manager and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of
its kind in the country) along with 100 or so 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.
- --------
/3/As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
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<PAGE>
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. 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.
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
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.
- --------
/4/Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadvisor, 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.
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/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.
/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.
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PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a)Financial Statements:
(1) Financial Statements included in the Prospectus constituting Part A
of this Registration Statement:
Financial Highlights.
(2) Financial Statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
Portfolio of Investments at April 30, 1997.
Statement of Assets and Liabilities as of April 30, 1997.
Statement of Operations for the fiscal year ended April 30, 1997.
Statement of Changes in Net Assets for the fiscal years ended April
30, 1997 and through April 30, 1996.
Notes to Financial Statements.
Financial Highlights.
Independent Accountant's Report.
(b)Exhibits:
1. (a) Articles of Incorporation, incorporated by reference to Exhibit
1 to the Registration Statement on Form N-1A (File No 33-53151)
filed on April 15, 1994.
(b) Certificate of Correction to Articles of Incorporation,
incorporated by reference to Exhibit 1 to the Registration Statement
on Form N-1A (File No. 33-53151) filed on January 6, 1995.
(c) Articles Supplementary incorporated by reference to Exhibit
No.1(c) to the Registration Statement on Form N-1A (File No. 33-
53151) filed on March 7, 1996.
2. By-Laws, incorporated by reference to Exhibit 2 to the Registration
Statement on Form N-1A (File No. 33-53151) filed on April 15, 1994.
4. Instruments defining rights of shareholders, incorporated by
reference to Exhibit 4 to the Registration Statement on Form N-1A
(File No. 33-53151) filed on April 15, 1994.
5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc., incorporated by reference to Exhibit
5 to the Registration Statement on Form N-1A File No. 33-53151)
filed on January 6, 1995.
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation, incorporated by
reference to Exhibit 5 to the Registration Statement on Form N-1A
(File No. 33-53151) filed on January 6, 1995.
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6. (a) Distribution Agreement between the Registrant and Prudential
Mutual Fund Distributors, Inc. (Class A Shares), incorporated by
reference to Exhibit No.6(a) to Post-Effective Amendment No. 2 to
the Registration Statement on Form N-1A (File No. 33-53151) filed
on June 30, 1995.
(b) Distribution Agreement between the Registrant and Prudential
Securities Incorporated (Class B shares), incorporated by reference
to Exhibit No.6(b) to Post-Effective Amendment No. 2 to the
Registration Statement on Form N-1A (File No. 33-53151) filed on
June 30, 1995.
(c) Distribution Agreement between the Registrant and Prudential
Securities Incorporated (Class C shares), incorporated by reference
to Exhibit No.6(c) to Post-Effective Amendment No. 2 to the
Registration Statement on Form N-1A (File No. 33-53151) filed on
June 30, 1995.
(d) Form of Selected Dealer Agreement, incorporated by reference to
Exhibit 6(e) to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (File No. 33-53151) filed on June 23, 1994.
(e) Form of Distribution Agreement between the Registrant and
Prudential Securities Incorporated (Class Z shares) incorporated by
reference to Exhibit No.6(e) to the Registration Statement on Form
N-1A (File No. 33-53151) filed on March 7, 1996.
7. Not Applicable.
8. Custodian Contract between the Registrant and Brown Brothers
Harriman & Co., incorporated by reference to Exhibit 8 to the
Registration Statement on Form N-1A (File No. 33-53151) filed on
January 6, 1995.
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc., incorporated by reference to
Exhibit 9 to the Registration Statement on Form N-1A (File No. 33-
3151) filed on January 6, 1995.
10. (a) Opinion of Shereff, Friedman, Hoffman & Goodman, LLP,
incorporated by reference to Exhibit 10 to Pre-Effective Amendment
No. 1 to the Registration Statement on Form N-1A (File No. 33-
53151) filed on June 23, 1994.
(b) Opinion of Sullivan & Cromwell is filed herewith.
11. (a) Consent of Independent Accountants is filed herewith.
(b) Consent of Deloitte & Touche LLP is filed herewith.
12. Not Applicable.
13. Purchase Agreement, incorporated by reference to Exhibit 13 to the
Registration Statement on Form N-1A (File No. 33-53151) filed on
January 6, 1995.
14. Not Applicable.
15. (a) Distribution and Service Plan for Class A Shares, incorporated
by reference to Exhibit 15 to the Registration Statement on Form N-
1A (File No. 33-53151) filed on January 6, 1995.
(b) Distribution and Service Plan for Class B Shares, incorporated
by reference to Exhibit 15 to the Registration Statement on Form N-
1A (File No. 33-53151) filed on January 6, 1995.
(c) Distribution and Service Plan for Class C Shares, incorporated
by reference to Exhibit 15 to the Registration Statement on Form N-
1A (File No. 33-53151) filed on January 6, 1995.
16. Schedule of Computation of Performance Quotations, incorporated by
reference to Exhibit 16 to the Registration Statement on Form N-1A
(File No. 33-53151) filed on January 6, 1995.
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<PAGE>
17. Financial Data Schedules filed as Exhibit 27 for electronic
purposes.
18. Rule 18f-3 Plan, incorporated by reference to Exhibit 18 to the
Registration Statement on Form N-1A (File No.33-53151) filed on
July 3, 1996.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of June 6, 1997, there were 5,651, 18,283, 712 and 28 record holders of
Class A, Class B, Class C and Class Z common stock, $.001 par value per share,
of the Registrant, respectively.
ITEM 27. INDEMNIFICATION.
As permitted by Section 17(h) and (i) of the Investment Company Act of 1940
(the 1940 Act) and pursuant to Article VI of the Fund's By-Laws (Exhibit 2 to
the Registration Statement), officers, directors, employees and agents of the
Registrant will not be liable to the Registrant, any shareholder, officer,
director, employee, agent or other person for any action or failure to act,
except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Section 2-418 of the Maryland General Corporation Law permits indemnification
of directors who acted in good faith and reasonably believed that the conduct
was in the best interests of the Registrant. As permitted by Section 17(i) of
the 1940 Act, pursuant to Section 10 of each Distribution Agreement (Exhibit 6
to the Registration Statement), each Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities arising
from bad faith, gross negligence, willful misfeasance or reckless disregard of
duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1940 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in connection with the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such director, officer or controlling person in connection with
the shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the 1940 Act and will be governed
by the final adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of
indemnification payments to officers and directors under certain
circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management, LLC (PIMF) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from
reckless disregard by them of their respective obligations and duties under
the agreements.
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The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and each Distribution Agreement in a manner
consistent with Release No. 11330 of the Securities and Exchange Commission
under the 1940 Act so long as the interpretation of Section 17(h) and 17(i) of
such Act remain in effect and are consistently applied.
Under Section 17(h) of the 1940 Act, it is the position of the staff of the
Securities and Exchange Commission that if there is neither a court
determination on the merits that the defendant is not liable nor a court
determination that the defendant was not guilty of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of one's office, no indemnification will be permitted unless an
independent legal counsel (not including a counsel who does work for either
the Registrant, its investment adviser, its principal underwriter or persons
affiliated with these persons) determines, based upon a review of the facts,
that the person in question was not guilty of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct
of his Office.
Under its Articles of Incorporation, the Registrant may advance funds to
provide for indemnification. Pursuant to the Securities and Exchange
Commission staff's position on Section 17(h) advances will be limited in the
following respect:
(1) Any advances must be limited to amounts used, or to be used, for the
preparation and/or presentation of a defense to the action (including cost
connected with preparation of a settlement);
(2) Any advances must be accompanied by a written promise by, or on behalf
of, the recipient to repay that amount of the advance which exceeds the amount
to which it is ultimately determined that he is entitled to receive from the
Registrant by reason of indemnification;
(3) Such promise must be secured by a surety bond or other suitable
insurance; and
(4) Such surety bond or other insurance must be paid for by the recipient of
such advance.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Prudential Investments Fund Management LLC.
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, 100 Mulberry Street, Newark,
New Jersey 07102.
<TABLE>
<CAPTION>
NAME AND
ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATION
-------- ------------------ --------------------
<C> <C> <S>
Brian Storms Chief Executive Officer President, Prudential Mutual, Funds &
and Officer-In-Charge, Annuities (PMF&A); President and
President, Chief Chief Executive Officer, PIFM
Operating Officer
Robert F. Gunia Executive Vice President Controller, Prudential Investments;
and Executive Vice President and
Treasurer Treasurer, PIFM; Senior Vice
President of Prudential Securities
Incorporated (Prudential Securities)
Thomas A. Early Executive Vice Vice President and General Counsel,
President, PMF&A; Executive Vice President,
Secretary and General Secretary and General Counsel, PIFM
Counsel
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATION
---------------- ------------------ --------------------
<C> <C> <S>
Susan C. Cote Executive Vice Executive Vice President, Chief
President, Financial Officer, PIFM; Vice
Chief Financial Officer President of Finance, PMF&A
Neil A. McGuinness Executive Vice President Executive Vice President and
Director of Marketing, PMF&A;
Executive Vice President PIFM
Robert J. Sullivan Executive Vice President Executive Vice President, PMF&A;
Executive Vice President PIFM
</TABLE>
(b) The Prudential Investment Corporation (PIC)
See "Management of the Fund--Subadviser" in the Prospectus constituting Part
A of this Registration Statement and "Subadviser" in the Statement of
Additional Information constituting Part B of this Registration Statement.
The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Prudential Plaza, Newark, NJ 07101.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATION
---------------- ------------------ --------------------
<C> <C> <S>
E. Michael Caulfield Chairman of the Board, Chief Executive Officer of
President and Chief Prudential Investments of The
Executive Officer and Prudential Insurance Company of
Director America (Prudential)
Jonathan M. Greene President--Investment Management
Senior Vice President of Prudential Investments of
and Director Prudential
John R. Strangfeld Vice President and President of Private Asset
Director Management Group of Prudential
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Prudential Securities Incorporated
C-5
<PAGE>
Prudential Securities is distributor for Command Government Fund, Command
Money Fund, Command Tax-Free Fund, Prudential Government Securities Trust
(Intermediate Term Series, Money Market Series and U.S. Treasury Money Market
Series), Prudential MoneyMart Assets, Inc., Prudential Institutional Liquidity
Portfolio, Inc., Prudential Special Money Market Fund, Inc., Prudential Tax-
Free Money Fund, Inc., Prudential Jennison Series Fund, Inc., The Target
Portfolio Trust, Prudential Allocation Fund, Prudential California Municipal
Fund, Prudential Distressed Securities Fund, Inc., Prudential Diversified Bond
Fund, Inc., Prudential Dryden Fund, Prudential Emerging Growth Fund, Inc.,
Prudential Equity Fund, Inc., Prudential Equity Income Fund, Prudential Europe
Growth Fund Inc., Prudential Global Genesis Fund, Inc., Prudential Global
Limited Maturity Fund, Inc., Prudential Natural Resources Fund, Inc.,
Prudential Government Income Fund, Inc., Prudential Growth Opportunity Fund,
Inc., Prudential High Yield Fund Inc., Prudential Intermediate Global Income
Fund, Inc., Prudential Mortgage Income Fund, Inc., Prudential Multi-Sector
Fund, Inc., Prudential Municipal Bond Fund, Prudential Municipal Series Fund,
Prudential National Municipals Fund, Inc., Prudential Pacific Growth Fund,
Inc., Prudential Small Company Value Fund, Inc., Prudential Structured Maturity
Fund, Inc., First Financial Fund, Inc., Prudential Utility Fund, Inc.,
Prudential World Fund, Inc., The Global Government Plus Fund, Inc., The Global
Total Return Fund, Inc., Global Utility Fund, Inc., Nicholas-Applegate Fund,
Inc. (Nicholas-Applegate Growth Equity Fund) and The BlackRock Government
Income Trust. Prudential Securities is also a depositor for the following unit
investment trust:
Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
(b) Information concerning the directors and officers of Prudential
Securities Incorporated is set forth below:
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME/1/ UNDERWRITER REGISTRANT
- ------- ------------- -------------
<S> <C> <C>
Robert Golden .......... Executive Vice President and Director None
One New York Plaza
New York, N.Y. 10292
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, N.Y. 10292
Martin Pfinsgraff....... Executive Vice President, Chief Financial Officer and Director None
Vincent T. Pica, II .... Executive Vice President and Director None
One New York Plaza
New York, N.Y. 10292
Hardwick Simmons........ Chief Executive Officer, President and Director None
Lee B. Spencer.......... Executive Vice President, Secretary, General Counsel and Director None
Brian Storms............ Director None
</TABLE>
- ----------
/1/The address of each person named is One Seaport Plaza, New York, New York
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 account, 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
Brown Brothers Harriman & Co. 40 Water Street, Boston, Massachusetts 02109, The
Prudential
C-6
<PAGE>
Investment Corporation, Prudential Plaza, 745 Broad Street, Newark, New
Jersey, the Registrant, Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102, 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 3la-1(f) will be kept at Two Gateway Center, documents required
by Rules 31a-1(b)(4) and (11) and 31a-1(d) at One Seaport Plaza and the
remaining accounts, books and other documents required by such other pertinent
provisions of Section 31(a) and the Rules promulgated thereunder will be kept
by Brown Brothers Harriman & Co. and Prudential Mutual Fund Services LLC.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the captions "Management of the Fund--Manager"
and "Management of the Fund--Distributor" in the Prospectus and the captions
"Manager" and "Distributor" in the Statement of Additional Information,
constituting Parts A and B, respectively, of this Registration Statement,
Registrant is not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS
Registrant makes the following undertaking:
To furnish each person to whom a Prospectus is delivered with a copy of the
Registrant's latest annual report to shareholders upon request and without
charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this Post-
Effective Amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Newark, and
State of New Jersey, on the 30th day of June, 1997.
PRUDENTIAL EUROPE GROWTH FUND, INC.
PRUDENTIAL EUROPE GROWTH FUND, INC.
/s/ Richard A. Redeker
By_____________________________
RICHARD A. REDEKER
President
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Edward D. Beach Director June 30, 1997
- -------------------------------------
EDWARD D. BEACH
/s/ Stephen C. Eyre Director June 30, 1997
- -------------------------------------
STEPHEN C. EYRE
/s/ Delayne D. Gold Director June 30, 1997
- -------------------------------------
DELAYNE D. GOLD
/s/ Robert F. Gunia Director June 30, 1997
- -------------------------------------
ROBERT F. GUNIA
/s/ Don G. Hoff Director June 30, 1997
- -------------------------------------
DON G. HOFF
/s/ Robert E. LaBlanc Director June 30, 1997
- -------------------------------------
ROBERT E. LABLANC
/s/ Mendel A. Melzer Director June 30, 1997
- -------------------------------------
MENDEL A. MELZER
/s/ Richard A. Redeker President and June 30, 1997
- ------------------------------------- Director
RICHARD A. REDEKER
/s/ Robin B. Smith Director June 30, 1997
- -------------------------------------
ROBIN B. SMITH
/s/ Stephen Stoneburn Director June 30, 1997
- -------------------------------------
STEPHEN STONEBURN
/s/ Nancy H. Teeters Director June 30, 1997
- -------------------------------------
NANCY H. TEETERS
/s/ Grace C. Torres Treasurer, Principal June 30, 1997
- ------------------------------------- Financial and
Accounting Officer
GRACE C. TORRES
C-8
<PAGE>
PRUDENTIAL EUROPE GROWTH FUND, INC.
EXHIBIT INDEX
1. (a) Articles of Incorporation, incorporated by reference to Exhibit 1 to
the Registration Statement on Form N-1A (File No. 33-53131) filed on April
15, 1994.
(b) Certificate of Correction to Articles of Incorporation, incorporated by
reference to Exhibit 1 to the Registration Statement on Form N-1A (File No.
33-53151) filed on January 6, 1995.
(c) Articles Supplementary incorporated by reference to Exhibit No.1(c) to
the Registration Statement on Form N-1A (File No. 33-53151) filed on March
7, 1996.
2. By-Laws, incorporated by reference to Exhibit 2 to the Registration
Statement on Form N-1A (File No. 33-53131) filed on April 15, 1994.
4. Instruments defining rights of shareholders, incorporated by reference to
Exhibit 4 to the Registration Statement on Form N-1A (File No. 33-53131)
filed on April 15, 1994.
5 (a) Management Agreement between the Registrant and Prudential Mutual Fund
Management, Inc., incorporated by reference to Exhibit 5 to the
Registration Statement on Form N-1A (File No. 33-53151) filed on January 6,
1995.
(b) Subadvisory Agreement between Prudential Mutual Fund Management, Inc.
and The Prudential Investment Corporation, incorporated by reference to
Exhibit 5 to the Registration Statement on Form N-1A (File No. 33-53151)
filed on January 6, 1995.
6. (a) Distribution Agreement between the Registrant and Prudential Mutual
Fund Distributors, Inc. (Class A Shares), incorporated by reference to
Exhibit No. 6(a) to Post-Effective Amendment No. 2 to the Registration
Statement on Form N-1A (File No. 33-53151) filed on June 30, 1995.
(b) Distribution Agreement between the Registrant and Prudential Securities
Incorporated (Class B shares), incorporated by reference to Exhibit No.
6(b) to Post-Effective Amendment No. 2 to the Registration Statement on
Form N-1A (File No. 33-53151) filed on June 30, 1995.
(c) Distribution Agreement between the Registrant and Prudential Securities
Incorporated (Class C shares), incorporated by reference to Exhibit No.6(c)
to Post-Effective Amendment No. 2 to the Registration Statement on Form N-
1A (File No. 33-53151) filed on June 30, 1995.
(d) Form of Selected Dealer Agreement, incorporated by reference to Exhibit
6(e) to Pre-Effective Amendment No. 1 to the Registration Statement on Form
N-1A (File No. 33-53131) filed on June 23, 1994.
(e) Form of Distribution Agreement between the Registrant and Prudential
Securities Incorporated (Class Z shares) incorporated by reference to
Exhibit 6(e) to the Registration Statement on Form N-1A (File No. 33-53151)
filed on March 7, 1996.
8. Custodian Contract between the Registrant and Brown Brothers Harriman &
Co., incorporated by reference to Exhibit 8 to the Registration Statement
on Form N-1A (File No. 33-53151) filed on January 6, 1995.
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc., incorporated by reference to
Exhibit 8 to the Registration Statement on Form N-1A (File No. 33-53151)
filed on January 6, 1995.
10. (a) Opinion of Shereff, Friedman, Hoffman & Goodman, LLP, incorporated by
reference to Exhibit 10 to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 33-53151) filed on June 23,
1994.
(b) Opinion of Sullivan & Cromwell is filed herewith.
<PAGE>
11. (a) Consent of Independent Accountants is filed herewith.
(b) Consent of Deloitte & Touche LLP is filed herewith.
13. Purchase Agreement, incorporated by reference to Exhibit 13 to the
Registration Statement on Form N-1A (File No. 33-53151) filed on January
6, 1995.
15. (a) Distribution and Service Plan for Class A Shares, incorporated by
reference to Exhibit 15 to the Registration Statement on Form N-1A (File
No. 33-53151) filed on January 6, 1995.
(b) Distribution and Service Plan for Class B Shares, incorporated by
reference to Exhibit 15 to the Registration Statement on Form N-1A (File
No. 33-53151) filed on January 6, 1995.
(c) Distribution and Service Plan for Class C Shares, incorporated by
reference to Exhibit 15 to the Registration Statement on Form N-1A (File
No. 33-53151) filed on January 6, 1995.
16. Schedule of Computation of Performance Quotations, incorporated by
reference to Exhibit 16 to the Registration Statement on Form N-1A (File
No. 33-53151) filed on January 6, 1995.
17. Financial Data Schedules filed as Exhibit 27 for electronic purposes is
filed herewith.
18. Rule 18f-3 Plan, incorporated by reference to Exhibit 18 to the
Registration Statement on Form N-1A (File No. 33-53151) filed on July 3,
1996.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> EUROPE GROWTH FUND (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 154,448,652
<INVESTMENTS-AT-VALUE> 200,755,486
<RECEIVABLES> 768,331
<ASSETS-OTHER> 6,716,287
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 9,782,017
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 415,137
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 144,680,304
<SHARES-COMMON-STOCK> 13,022,741
<SHARES-COMMON-PRIOR> 13,395,617
<ACCUMULATED-NII-CURRENT> 128,778
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,075,981
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 46,157,887
<NET-ASSETS> (26,418,358)
<DIVIDEND-INCOME> 3,132,002
<INTEREST-INCOME> 301,153
<OTHER-INCOME> 0
<EXPENSES-NET> 3,582,737
<NET-INVESTMENT-INCOME> (149,582)
<REALIZED-GAINS-CURRENT> 15,600,006
<APPREC-INCREASE-CURRENT> 14,880,202
<NET-CHANGE-FROM-OPS> 30,330,626
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (6,991,067)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 563,381,129
<NUMBER-OF-SHARES-REDEEMED> (576,650,878)
<SHARES-REINVESTED> 6,574,997
<NET-CHANGE-IN-ASSETS> 16,644,807
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,254,598)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,401,970
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,582,737
<AVERAGE-NET-ASSETS> 37,834,000
<PER-SHARE-NAV-BEGIN> 13.69
<PER-SHARE-NII> 2.33
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.56)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.46
<EXPENSE-RATIO> 1.36
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> EUROPE GROWTH FUND (CLASS B)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 154,448,652
<INVESTMENTS-AT-VALUE> 200,755,486
<RECEIVABLES> 768,331
<ASSETS-OTHER> 6,716,287
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 9,782,017
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 415,137
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 144,680,304
<SHARES-COMMON-STOCK> 13,022,741
<SHARES-COMMON-PRIOR> 13,395,617
<ACCUMULATED-NII-CURRENT> 128,778
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,075,981
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 46,157,887
<NET-ASSETS> (26,418,358)
<DIVIDEND-INCOME> 3,132,002
<INTEREST-INCOME> 301,153
<OTHER-INCOME> 0
<EXPENSES-NET> 3,582,737
<NET-INVESTMENT-INCOME> (149,582)
<REALIZED-GAINS-CURRENT> 15,600,006
<APPREC-INCREASE-CURRENT> 14,880,202
<NET-CHANGE-FROM-OPS> 30,330,626
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (6,991,067)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 563,381,129
<NUMBER-OF-SHARES-REDEEMED> (576,650,878)
<SHARES-REINVESTED> 6,574,997
<NET-CHANGE-IN-ASSETS> 16,644,807
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,254,598)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,401,970
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,582,737
<AVERAGE-NET-ASSETS> 133,135,000
<PER-SHARE-NAV-BEGIN> 13.49
<PER-SHARE-NII> 2.19
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.56)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.12
<EXPENSE-RATIO> 2.11
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> EUROPE GROWTH FUND (CLASS C)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 154,448,652
<INVESTMENTS-AT-VALUE> 200,755,486
<RECEIVABLES> 768,331
<ASSETS-OTHER> 6,716,287
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 9,782,017
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 415,137
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 144,680,304
<SHARES-COMMON-STOCK> 13,022,741
<SHARES-COMMON-PRIOR> 13,395,617
<ACCUMULATED-NII-CURRENT> 128,778
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,075,981
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 46,157,887
<NET-ASSETS> (26,418,358)
<DIVIDEND-INCOME> 3,132,002
<INTEREST-INCOME> 301,153
<OTHER-INCOME> 0
<EXPENSES-NET> 3,582,737
<NET-INVESTMENT-INCOME> (149,582)
<REALIZED-GAINS-CURRENT> 15,600,006
<APPREC-INCREASE-CURRENT> 14,880,202
<NET-CHANGE-FROM-OPS> 30,330,626
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (6,991,067)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 563,381,129
<NUMBER-OF-SHARES-REDEEMED> (576,650,878)
<SHARES-REINVESTED> 6,574,997
<NET-CHANGE-IN-ASSETS> 16,644,807
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,254,598)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,401,970
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,582,737
<AVERAGE-NET-ASSETS> 8,002,000
<PER-SHARE-NAV-BEGIN> 13.49
<PER-SHARE-NII> 2.19
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.56)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.12
<EXPENSE-RATIO> 2.11
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> EUROPE GROWTH FUND (CLASS Z)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 154,448,652
<INVESTMENTS-AT-VALUE> 200,755,486
<RECEIVABLES> 768,331
<ASSETS-OTHER> 6,716,287
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 9,782,017
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 415,137
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 144,680,304
<SHARES-COMMON-STOCK> 13,022,741
<SHARES-COMMON-PRIOR> 13,395,617
<ACCUMULATED-NII-CURRENT> 128,778
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,075,981
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 46,157,887
<NET-ASSETS> (26,418,358)
<DIVIDEND-INCOME> 3,132,002
<INTEREST-INCOME> 301,153
<OTHER-INCOME> 0
<EXPENSES-NET> 3,582,737
<NET-INVESTMENT-INCOME> (149,582)
<REALIZED-GAINS-CURRENT> 15,600,006
<APPREC-INCREASE-CURRENT> 14,880,202
<NET-CHANGE-FROM-OPS> 30,330,626
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (6,991,067)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 563,381,129
<NUMBER-OF-SHARES-REDEEMED> (576,650,878)
<SHARES-REINVESTED> 6,574,997
<NET-CHANGE-IN-ASSETS> 16,644,807
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,254,598)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,401,970
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,582,737
<AVERAGE-NET-ASSETS> 7,958,000
<PER-SHARE-NAV-BEGIN> 13.68
<PER-SHARE-NII> 2.39
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.56)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.51
<EXPENSE-RATIO> 1.11
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<PAGE>
EXHIBIT 99.(10)(b)
June 27, 1997
Prudential Europe Growth Fund, Inc.,
Gateway Center Three,
100 Mulberry Street,
Newark, New Jersey 07102-4077.
Dear Sirs:
You have requested our opinion in connection with your filing of
Post-Effective Amendment No. 5 to the Registration Statement on Form N-1A (the
"Post-Effective Amendment") under the Securities Act of 1933 (the "Act") and
your registration in connection therewith of 383,676 shares of your Common
Stock, $.01 par value (the "Shares") pursuant to Rule 24e-2 under the Invest-
ment Company Act of 1940.
As your counsel, we are familiar with your organization and corporate
status and the validity of your Common Stock.
We advise you that, in our opinion, when the Post-Effective Amendment
relating to the Shares has become effective under the Act, the Shares, when duly
issued and sold, for not less than the par value thereof and in conformity with
your charter, will be duly authorized and validly issued, fully paid and
nonassessable.
The foregoing opinion is limited to the Federal laws of the United
States and the General Corporation Laws of the State of Maryland, and we are
expressing no opinion as to the effect by the laws of any other jurisdiction.
We have relied as to certain matters on information obtained from
public officials, your officers and other sources believed by us to be
responsible.
We consent to the filing of this opinion with the Securities and
Exchange Commission in connection with the notice referred to above. In giving
such 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.
Very truly yours,
/s/ Sullivan & Cromwell
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EXHIBIT 99.11(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 5 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated June
24, 1997, relating to the financial statements and financial highlights of
Prudential Europe Growth Fund, Inc., which appears in such Statement of
Additional Information, and to the incorporation by reference of our report into
the Prospectus which constitutes part of this Registration Statement. We also
consent to the reference to us under the heading "Custodian, Transfer and
Dividend Disbursing Agent and Independent Accountants" in such Statement of
Additional Information and to the reference to us under the heading "Financial
Highlights" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
June 27, 1997
<PAGE>
EXHIBIT 99.11(b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 5 to Registration
Statement No. 33-53151 of Prudential Europe Growth Fund, Inc. of our report
dated June 13, 1996, appearing in the Statement of Additional Information, which
is included in such Registration Statement, and to the references to us under
the headings "Financial Highlights" in the Prospectus, which is also included in
such Registration Statement.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
New York, New York
June 30, 1997
