<PAGE>
PRUDENTIAL JENNISON GROWTH FUND
PRUDENTIAL JENNISON GROWTH & INCOME FUND
- -------------------------------------------------------------------------------
PROSPECTUS DATED JANUARY 13, 1997
- -------------------------------------------------------------------------------
Prudential Jennison Growth Fund (Growth Fund) and Prudential Jennison Growth &
Income Fund (Growth & Income Fund) (each a Fund and collectively, the Funds)
are each a series of Prudential Jennison Series Fund, Inc. (the Company), a
diversified, open-end, management investment company.
GROWTH FUND'S INVESTMENT OBJECTIVE IS LONG-TERM GROWTH OF CAPITAL. Growth Fund
seeks to achieve its objective by investing primarily in equity securities
(common stock, preferred stock and securities convertible into common stock)
of established companies with above-average growth prospects. Current income,
if any, is incidental. Under normal market conditions, the Growth Fund intends
to invest at least 65% of its total assets in equity securities of companies
that exceed $1 billion in market capitalization. The Growth Fund may also
invest in (i) equity securities of other companies including up to 20% of its
total assets in securities of foreign issuers, (ii) investment grade fixed-
income securities and (iii) obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, including mortgage-backed
securities.
GROWTH & INCOME FUND'S INVESTMENT OBJECTIVE IS LONG-TERM GROWTH OF CAPITAL AND
INCOME, WITH CURRENT INCOME AS A SECONDARY OBJECTIVE. The Growth & Income Fund
seeks to achieve its objectives by investing primarily in common stocks of
established companies with growth prospects believed to be underappreciated by
the market. The Growth & Income Fund may also invest in (i) other common
stocks, preferred stocks and securities convertible into common stock, (ii)
equity and debt securities of foreign issuers limited to 20% of its total
assets, including ADRs, and (iii) fixed-income securities, including corporate
and other debt obligations and obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities. Growth & Income Fund may also
engage in short sales.
Each Fund may engage in various derivative transactions such as using options
on stocks, stock indices and foreign currencies, entering into foreign
currency exchange contracts and the purchase and sale of futures contracts on
stock indices and debt securities and options thereon to hedge each of its
portfolios and to attempt to enhance return. There can be no assurance that
either Fund's investment objectives will be achieved. See "How the Funds
Invest--Investment Objectives and Policies." The Company's address is Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, and its
telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about each Fund that a
prospective investor should know before investing. Additional information
about the Funds has been filed with the Securities and Exchange Commission in
a Statement of Additional Information, dated January 13, 1997, which
information is incorporated herein by reference (is legally considered a part
of this Prospectus) and is available without charge upon request to either
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 OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
WHAT ARE PRUDENTIAL JENNISON GROWTH FUND AND PRUDENTIAL JENNISON GROWTH &
INCOME FUND?
Each Fund 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 objectives.
Technically, each Fund is a series of Prudential Jennison Series Fund, Inc., an
open-end, diversified, management investment company.
WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES?
GROWTH FUND: Growth Fund's investment objective is long-term growth of
capital. It seeks to achieve this objective by investing primarily in equity
securities (common stock, securities convertible into common stock and
preferred stock) of established companies with above-average growth prospects.
Current income, if any, is incidental. See "How the Funds Invest--Investment
Objectives and Policies" at page 8.
GROWTH & INCOME FUND: Growth & Income Fund's primary investment objective is
long-term growth of capital and income, with current income as a secondary
objective. It seeks to achieve its objectives by investing primarily in common
stocks of established companies with growth prospects believed to be
underappreciated by the market. See "How the Funds Invest--Investment
Objectives and Policies" at page 9.
WHAT ARE EACH FUND'S RISK FACTORS AND SPECIAL CHARACTERISTICS?
GROWTH FUND: Securities of the kinds of companies in which the Growth Fund
invests may be subject to significant price fluctuation and above-average risk.
Thus, the Growth Fund may be considered subject to greater investment risks
than are assumed by certain other investment companies. In addition, companies
achieving an earnings growth rate higher than that of S&P 500 companies tend to
reinvest their earnings rather than distribute them. As a result, the Growth
Fund is not likely to receive significant dividend income on its portfolio
securities. Accordingly, an investment in the Growth Fund should not be
considered as a complete investment program and may not be appropriate for all
investors.
Under normal market conditions, the Growth Fund intends to invest at least
65% of its total assets in equity securities of companies that exceed $1
billion in market capitalization. See "How the Funds Invest--Investment
Objectives and Policies" at page 8. The Growth Fund may also invest in (i)
other equity securities including up to 20% of its total assets in securities
of foreign issuers, (ii) investment grade fixed-income securities and (iii)
obligations issued or guaranteed by the U.S. Government, its agencies and
instrumentalities, including mortgage-backed securities. Investing in
securities of foreign companies and countries involves certain risks and
considerations not typically associated with investments in domestic companies.
See "How the Funds Invest--Risk Factors and Special Considerations of Investing
in Foreign Securities" at page 14. The Growth Fund may also engage in various
hedging and return enhancement strategies including using derivatives. See "How
the Funds Invest--Hedging and Return Enhancement Strategies--Risks of Hedging
and Return Enhancement Strategies" at page 18. As with an investment in any
mutual fund, an investment in the Fund can decrease in value and you can lose
money.
2
<PAGE>
GROWTH & INCOME FUND: Growth & Income Fund invests primarily in common stocks
of established companies with growth prospects which are, in the opinion of the
Subadviser (as defined below), underappreciated by the market. These may
include companies that are experiencing important changes in their business
structure and management philosophy. The ability of the Subadviser to
successfully identify these changes will be an important factor in the Growth &
Income Fund's performance record. Also, the Growth & Income Fund's portfolio
holdings may be characterized by volatility somewhat greater than the overall
market. Additionally, although current income is a secondary objective, some of
the Growth & Income Fund's holdings may pay little or no dividend income. See
"How the Funds Invest--Investment Objectives and Policies" at page 9.
In addition, the Growth & Income Fund may invest up to 20% of its total
assets in equity and debt securities of foreign issuers. Investing in
securities of foreign companies and countries involves certain risks and
considerations not typically associated with investments in domestic companies.
See "How the Funds Invest--Risk Factors and Special Considerations of Investing
in Foreign Securities" at page 14. The Growth & Income Fund may invest up to
10% of its total assets in non-investment grade debt securities or in unrated
securities of comparable quality. Securities rated lower than Baa by Moody's
Investors Service or BBB by Standard & Poor's Ratings Group, commonly known as
"junk bonds," are considered speculative and are subject to a greater risk of
loss of principal and interest than higher rated securities as well as price
volatility. See "How the Funds Invest--Risk Factors Relating to Investing in
Debt Securities Rated Below Investment Grade (Junk Bonds)--Growth & Income Fund
Only" at page 15. The Growth & Income Fund may also engage in short sales which
subject the Growth & Income Fund to additional risks. See "How the Funds
Invest--Other Investments and Policies--Short Sales" at page 14. The Growth &
Income Fund may also engage in various hedging and return enhancement
strategies and invest in derivative securities. See "How the Funds Invest--
Hedging and Return Enhancement Strategies--Risks of Hedging and Return
Enhancement Strategies" at page 18. As with an investment in any mutual fund,
an investment in the Growth & Income Fund can decrease in value and you can
lose money.
WHO MANAGES THE FUNDS?
Prudential Mutual Fund Management LLC (PMF or the Manager), is the manager of
each Fund and is compensated for its services at an annual rate of .60 of 1% of
each Fund's average daily net assets. As of December 31, 1996, PMF served as
manager or administrator to 62 investment companies, including 40 mutual funds,
with aggregate assets of approximately $55.2 billion. Jennison Associates
Capital Corp. (Jennison, the Subadviser or the investment adviser) furnishes
investment advisory services in connection with the management of each Fund
under a Subadvisory Agreement with PMF. See "How the Funds are Managed--
Manager" at page 19 and "How the Funds are Managed--Subadviser" at page 19.
WHO DISTRIBUTES EACH 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 Company's Class A, Class B, Class C and Class Z shares and
is paid a distribution and service fee with respect to Class A shares which is
currently being charged at the annual rate of .25 of 1% of the average daily
net assets of the Class A shares and is paid a distribution and service fee
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. Prudential
Securities incurs the expense of distributing each Fund's Class Z shares under
a Distribution Agreement with the Company, none of which is reimbursed or paid
for by the Funds. See "How the Funds are Managed--Distributor" at page 20.
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. There is no minimum initial investment
requirement for investors who qualify to purchase Class Z shares. The minimum
3
<PAGE>
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
Funds" at page 26, and "Shareholder Guide--Shareholder Services" at page 37.
HOW DO I PURCHASE SHARES?
You may purchase shares of either Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from each Fund, through its
transfer agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt of
your purchase order by the Transfer Agent or Prudential Securities plus a sales
charge which may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). Class Z shares are
offered to a limited group of investors at net asset value without any sales
charge. See "How Each Fund Values its Shares" at page 22 and "Shareholder
Guide--How to Buy Shares of the Funds" at page 26.
WHAT ARE MY PURCHASE ALTERNATIVES?
Each Fund offers four classes of shares:
. Class A
Shares: Sold with an initial sales charge of up to 5% of the offering
price.
.Class B
Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from 5%
to zero of the lower of the amount invested or the redemption
proceeds) which will be imposed on certain redemptions made
within six years of purchase. Although Class B shares are
subject to higher ongoing distribution-related expenses than
Class A shares, Class B shares will automatically convert to
Class A shares (which are subject to lower ongoing expenses)
approximately seven years after purchase.
.Class C
Shares: Sold without an initial sales charge but, for one year after
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
Shares: Sold without an initial or contingent deferred sales charge to a
limited group of investors. Class Z shares are not subject to
any ongoing service or distribution expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 27.
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 31.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
Each Fund expects to pay dividends of net investment income, if any, semi-
annually and make distributions of any net capital gains at least annually.
Dividends and distributions will be automatically reinvested in additional
shares of the respective 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 23.
4
<PAGE>
FUND EXPENSES--GROWTH FUND
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES+
Maximum Sales Load
Imposed on Purchases
(as a percentage of
offering price)....... 5% None None None
Maximum Sales Load
Imposed on Reinvested
Dividends............. None None None None
Maximum Deferred Sales
Load (as a percentage
of original purchase
price or redemption
proceeds, whichever is
lower)................ None 5% during the first year, 1% on redemptions None
decreasing by 1% annually to 1% made within one
in the fifth and the sixth years year of purchase
and 0% in the seventh year*
Redemption Fees........ None None None None
Exchange Fee........... None None None None
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of av-
erage net assets)
Management Fees........ .60% .60% .60% .60%
12b-1 Fees (After Re-
duction)............. .25%++ 1.00% 1.00% None
Other Expenses......... .38% .38% .38% .38%
--- --- --- ---
Total Fund Operating
Expenses (After
Reduction)........... 1.23% 1.98% 1.98% .98%
==== ==== ==== ===
</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 re-
turn and (2) redemption at the end of each time
period:
Class A....................................... $62 $87 $114 $191
Class B....................................... $70 $92 $117 $202
Class C....................................... $30 $62 $107 $231
Class Z....................................... $10 $31 $ 54 $120
You would pay the following expenses on the
same investment, assuming no redemption:
Class A....................................... $62 $87 $114 $191
Class B....................................... $20 $62 $107 $202
Class C....................................... $20 $62 $107 $231
Class Z....................................... $10 $31 $ 54 $120
</TABLE>
The above example is based on data for the Growth Fund's fiscal period ended
September 30, 1996. The example should not be considered a representation of
past or future expenses. Actual expenses may be greater or less than those
shown.
The purpose of this table is to assist an investor in understanding the various
types of costs and expenses that an investor in the Growth Fund will bear,
whether directly or indirectly. For more complete descriptions of the various
costs and expenses, see "How the Funds are Managed." "Other Expenses" include
estimated operating expenses of the Growth Fund, such as Directors' and
professional fees, registration fees, reports to shareholders and transfer
agency and custodian (domestic and foreign) fees (but excludes foreign
withholding taxes).
- ------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
** Estimated based upon expenses expected to have been incurred if each Class
had been in existence throughout the fiscal year ended September 30, 1996.
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges (12b-1 fees) 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 Class B and Class C 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 Funds are Managed--Distributor."
++ Although the Class A Distribution and Service Plan provides that the Growth
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 has agreed to limit its
distribution fees with respect to Class A shares of the Growth Fund so as
not to exceed .25 of 1% of the average daily net assets of the Class A
shares for the fiscal year ending September 30, 1997. See "How the Funds are
Managed--Distributor." Total Fund Operating Expenses would be 1.28% absent
this limitation with respect to Class A shares.
5
<PAGE>
FUND EXPENSES--GROWTH & INCOME FUND
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES+
Maximum Sales Load
Imposed on Purchases
(as a percentage of
offering price)....... 5% None None None
Maximum Sales Load Im-
posed on Reinvested
Dividends............. None None None None
Maximum Deferred Sales
Load (as a percentage
of original purchase
price or redemption
proceeds, whichever is
lower)................ None 5% during the first year, 1% on redemptions None
decreasing by 1% annually to made within one
1% in the fifth and year of purchase
the sixth years and
0% in the seventh year*
Redemption Fees........ None None None None
Exchange Fee........... None None None None
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of av-
erage net assets)
Management Fees........ .60% .60% .60% .60%
12b-1 Fees (After Re-
duction)............. .25%++ 1.00% 1.00% None
Other Expenses......... .50% .50% .50% .50%
---- ---- ---- ---
Total Fund Operating
Expenses
(After Reduction).... 1.35% 2.10% 2.10% 1.10%
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
EXAMPLE** ------ -------
<S> <C> <C>
You would pay the following expenses on a $1,000 investment, as-
suming (1) 5% annual return and (2) redemption at the end of
each time period:
Class A........................................................ $63 $91
Class B........................................................ $71 $96
Class C........................................................ $31 $66
Class Z........................................................ $11 $35
You would pay the following expenses on the same investment, as-
suming no redemption:
Class A........................................................ $63 $91
Class B........................................................ $21 $66
Class C........................................................ $21 $66
Class Z........................................................ $11 $35
</TABLE>
The example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
The purpose of this table is to assist an investor in understanding the various
types of costs and expenses that an investor in the Growth & Income Fund will
bear, whether directly or indirectly. For more complete descriptions of the
various costs and expenses, see "How the Funds are Managed." "Other Expenses"
include estimated operating expenses of the Growth & Income Fund for the fiscal
period ending September 30, 1997, such as Directors' and professional fees,
registration fees, reports to shareholders and transfer agency and custodian
(domestic and foreign) fees (but excludes foreign withholding taxes).
- ------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
** Estimated based upon expenses expected to have been incurred if each Class
had been in existence throughout the fiscal year ended September 30, 1996.
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges (12b-1 fees) 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 Class B and Class C 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 Funds are Managed--Distributor."
++ Although the Class A Distribution and Service Plan provides that the Growth
& Income 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 has agreed to limit its
distribution fees with respect to Class A shares of the Growth & Income Fund
so as not to exceed .25 of 1% of the average daily net assets of the Class A
shares for the fiscal year ending September 30, 1997. See "How the Funds are
Managed--Distributor." Total Fund Operating Expenses would be 1.40% absent
this limitation with respect to Class A shares.
6
<PAGE>
FINANCIAL HIGHLIGHTS--GROWTH FUND
(for a share outstanding throughout the periods indicated)
(CLASS A, CLASS B, CLASS C AND CLASS Z SHARES)
The following financial highlights have been audited by Deloitte & Touche LLP,
independent auditors, 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 of the Growth Fund outstanding, total return,
ratios to average net assets and other supplemental data for the periods
indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders." No shares of the Growth & Income Fund were
outstanding during the fiscal period ended September 30, 1996.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
NOVEMBER 2, 1995(a) NOVEMBER 2, 1995(a) NOVEMBER 2, 1995(a) APRIL 15, 1996(a)
THROUGH THROUGH THROUGH THROUGH
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996(d) 1996(d) 1996(d) 1996(d)
------------------- ------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period.... $ 10.00 $ 10.00 $ 10.00 $ 10.32
------- -------- ------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income
(loss)................. (.03) (.10) (.10) (.02)
Net realized and
unrealized gain (loss)
on investment and
foreign currency
transactions........... 1.00 .99 .99 .68
------- -------- ------- --------
Total from investment
operations............. .97 .89 .89 .66
------- -------- ------- --------
Net asset value, end of
period................. $ 10.97 $ 10.89 $ 10.89 $ 10.98
======= ======== ======= ========
TOTAL RETURN(C): ....... 9.70 % 8.90 % 8.90 % 6.40 %
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)........... $85,440 $231,541 $15,281 $362,416
Average net assets
(000).................. $70,667 $162,412 $12,550 $ 26,829
Ratios to average net
assets(b):
Expenses, including
distribution fees..... 1.23 % 1.98 % 1.98 % .98 %
Expenses, excluding
distribution fees..... .98 % .98 % .98 % .98 %
Net investment income
(loss)................ (.37)% (1.12)% (1.12)% (.12)%
Portfolio turnover rate. 42 % 42 % 42 % 42 %
Average commission rate
paid per share......... $ .0611 $ .0611 $ .0611 $ .0611
</TABLE>
- ------------
(a) Commencement of investment operations.
(b) Annualized
(c) 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.
(d) Calculated based upon weighted average shares outstanding during the
period.
7
<PAGE>
HOW THE FUNDS INVEST
INVESTMENT OBJECTIVES AND POLICIES
GROWTH FUND
THE GROWTH FUND'S INVESTMENT OBJECTIVE IS LONG-TERM GROWTH OF CAPITAL. THE
GROWTH FUND SEEKS TO ACHIEVE THIS OBJECTIVE BY INVESTING PRIMARILY IN EQUITY
SECURITIES (COMMON STOCK, PREFERRED STOCK AND SECURITIES CONVERTIBLE INTO
COMMON STOCK) OF ESTABLISHED COMPANIES WITH ABOVE-AVERAGE GROWTH PROSPECTS.
CURRENT INCOME, IF ANY, IS INCIDENTAL. THERE CAN BE NO ASSURANCE THAT THE
GROWTH FUND'S OBJECTIVE WILL BE ACHIEVED. See "Investment Objectives and
Policies" in the Statement of Additional Information.
UNDER NORMAL MARKET CONDITIONS, THE GROWTH FUND INTENDS TO INVEST AT LEAST
65% OF ITS TOTAL ASSETS IN EQUITY SECURITIES OF COMPANIES THAT EXCEED $1
BILLION IN MARKET CAPITALIZATION. COMPANIES WITH MARKET CAPITALIZATIONS IN
EXCESS OF $1 BILLION ARE GENERALLY CONSIDERED MEDIUM TO LARGE CAPITALIZATION
COMPANIES. Stocks will be selected on a company-by-company basis primarily
through the use of fundamental analysis. The Growth Fund's Subadviser looks
for companies that have demonstrated growth in earnings and sales, high
returns on equity and assets, or other strong financial characteristics and,
in the judgment of the Subadviser, are attractively valued. These companies
tend to have a unique market niche, a strong new product profile or superior
management.
The Growth Fund may also invest up to 35% of its total assets in (i) equity
securities of other companies that are undergoing changes in management or
product and marketing dynamics that have not yet been reflected in reported
earnings but that are expected to impact earnings in the intermediate-term--
these securities often lack investor recognition and are often favorably
valued, (ii) other equity-related securities, (iii) equity securities of
foreign issuers (with respect to 20% of its total assets), (iv) obligations
issued or guaranteed by the U.S. Government, its agencies and
instrumentalities, including mortgage-backed securities and (v) investment
grade fixed-income securities.
The effort to achieve superior investment return necessarily involves a risk
of exposure to declining values. Securities in which the Growth Fund may
primarily invest have historically been more volatile than the S&P 500 Index.
Accordingly, during periods when stock prices decline generally, it can be
expected that the value of the Growth Fund will decline more than market
indices.
Securities of the kinds of companies in which the Growth Fund invests may be
subject to significant price fluctuation and above-average risk. In addition,
companies achieving an earnings growth rate higher than that of S&P 500
companies tend to reinvest their earnings rather than distribute them. As a
result, the Growth Fund is not likely to receive significant dividend income
on its portfolio securities. Accordingly, an investment in the Growth Fund
should not be considered as a complete investment program and may not be
appropriate for all investors.
* * * *
8
<PAGE>
GROWTH & INCOME FUND
THE GROWTH & INCOME FUND'S PRIMARY INVESTMENT OBJECTIVE IS LONG-TERM GROWTH
OF CAPITAL AND INCOME, WITH CURRENT INCOME AS A SECONDARY OBJECTIVE. THE
GROWTH & INCOME FUND SEEKS TO ACHIEVE ITS OBJECTIVES BY INVESTING PRIMARILY IN
COMMON STOCKS OF ESTABLISHED COMPANIES WITH GROWTH PROSPECTS BELIEVED TO BE
UNDERAPPRECIATED BY THE MARKET. THERE CAN BE NO ASSURANCE THAT THE GROWTH &
INCOME FUND'S OBJECTIVES WILL BE ACHIEVED. See "Investment Objectives and
Policies" in the Statement of Additional Information.
UNDER NORMAL MARKET CONDITIONS, THE GROWTH & INCOME FUND WILL BE PRIMARILY
INVESTED IN A DIVERSIFIED PORTFOLIO OF COMMON STOCKS. THE GROWTH & INCOME FUND
MAY ALSO INVEST IN PREFERRED STOCKS AND SECURITIES CONVERTIBLE INTO COMMON
STOCK. Stocks will be selected on a company-by-company basis generally through
the use of fundamental analysis. The Growth & Income Fund's Subadviser looks
for companies that have the potential for growth in earnings and dividends
and, in the judgment of the Subadviser, are attractively valued.
The Growth & Income Fund invests primarily in common stocks of established
companies with growth prospects which are, in the opinion of the Subadviser,
underappreciated by the market. These may include companies that are
experiencing important changes in their business structure and management
philosophy. The ability of the Subadviser to successfully identify these
changes will be an important factor in the Growth & Income Fund's performance
record. Also, the Growth & Income Fund's portfolio holdings may be
characterized by volatility somewhat greater than the overall market.
Additionally, although current income is a secondary objective, some of the
Growth & Income Fund's holdings may pay little or no dividend income.
The Growth & Income Fund may also invest in (i) other equity-related
securities, (ii) equity and debt securities of foreign issuers (limited to 20%
of total assets), including ADRs, (iii) investment grade fixed-income
securities, (iv) obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities and (v) fixed-income securities rated below
investment grade (limited to 10% of total assets). Under normal market
conditions, the Growth & Income Fund will not invest more than 30% of its
total assets in fixed-income securities, including corporate and other debt
obligations and U.S. Government securities. The Growth & Income Fund may also
engage in short selling.
* * * *
Each Fund may purchase and sell put and call options on equity securities,
stock indices and foreign currencies, purchase and sell futures contracts on
stock indices, foreign currencies and debt securities and options thereon and
enter into forward foreign currency exchange contracts to hedge its portfolio
and to attempt to enhance return. Each Fund may also lend its portfolio
securities, enter into repurchase agreements and purchase securities on a
when-issued and delayed delivery basis.
Each Fund reserves the right as a defensive measure to hold temporarily
other types of securities without limit, including high quality 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 Jennison,
prevailing market, economic or political conditions warrant. Each 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. See "Other Investments and
Policies" below.
As with an investment in any mutual fund, an investment in either Fund can
decrease in value and you can lose money.
EACH FUND'S INVESTMENT OBJECTIVES ARE FUNDAMENTAL POLICIES AND MAY NOT BE
CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE RESPECTIVE
FUND'S OUTSTANDING VOTING SECURITIES, AS DEFINED IN THE INVESTMENT COMPANY ACT
OF 1940 (INVESTMENT COMPANY ACT). INVESTMENT POLICIES THAT ARE NOT FUNDAMENTAL
MAY BE MODIFIED BY THE BOARD OF DIRECTORS.
9
<PAGE>
THE FOLLOWING POLICIES APPLY TO EACH FUND UNLESS OTHERWISE NOTED.
U.S. GOVERNMENT SECURITIES
Each Fund may invest in securities issued or guaranteed by the U.S. Treasury
or by an agency or instrumentality of the U.S. Government. Not all U.S.
Government securities are backed by the full faith and credit of the United
States. Some are supported only by the credit of the issuing agency. See
"Investment Objectives and Policies--U.S. Government Securities" in the
Statement of Additional Information.
MORTGAGE-BACKED SECURITIES--GROWTH FUND ONLY. Growth Fund may invest in
mortgage-backed securities and other derivative mortgage products, including
those representing an undivided ownership interest in a pool of mortgages,
e.g., Government National Mortgage Association (GNMA), Federal National
Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC)
certificates where the U.S. Government or its agencies or instrumentalities
guarantees the payment of interest and principal of these securities. These
guarantees do not extend to the securities' yield or value, which are likely
to vary inversely with fluctuations in interest rates, nor do these guarantees
extend to the yield or value of Growth Fund's shares. See "Investment
Objectives and Policies--U.S. Government Securities" in the Statement of
Additional Information. These certificates are in most cases "pass-through"
instruments, through which the holder receives a share of all interest and
principal payments from the mortgages underlying the certificate, net of
certain fees.
Mortgage-backed securities are subject to the risk that the principal on the
underlying mortgage loans may be prepaid at any time. Although the extent of
prepayments on a pool of mortgage loans depends on various economic and other
factors, as a general rule prepayments on fixed rate mortgage loans will
increase during a period of falling interest rates and decrease during a
period of rising interest rates. Accordingly, amounts available for
reinvestment by Growth Fund are likely to be greater during a period of
declining interest rates and, as a result, likely to be reinvested at lower
interest rates than during a period of rising interest rates. Mortgage-backed
securities may decrease in value as a result of increases in interest rates
and may benefit less than other fixed-income securities from declining
interest rates because of the risk of prepayment.
COLLATERALIZED MORTGAGE OBLIGATIONS--GROWTH FUND ONLY. Growth Fund may
purchase collateralized mortgage obligations (CMOs) issued by agencies or
instrumentalities of the U.S. Government. A CMO is backed by a portfolio of
mortgages or mortgage-backed securities. The issuer's obligation to make
interest and principal payments is secured by the underlying portfolio of
mortgages or mortgage-backed securities. The issuer of a series of CMOs may
elect to be treated as a Real Estate Mortgage Investment Conduit (REMIC). All
future references to CMOs shall also be deemed to include REMICs.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the underlying mortgage assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on
a monthly, quarterly or semi-annual basis. The principal of and interest on
the underlying mortgage assets may be allocated among the several classes of a
CMO series in a number of different ways. Generally, the purpose of the
allocation of the cash flow of a CMO to the various classes is to obtain a
more predictable cash flow to the individual tranches than exists with the
underlying collateral of the CMO. As a general rule, the more predictable the
cash flow is on a CMO tranche, the lower the anticipated yield will be on that
tranche at the time of issuance relative to prevailing market yields on
mortgage-backed securities.
Growth Fund may also invest in mortgage-backed security strips (MBS strips)
issued by the U.S. Government or its agencies or instrumentalities. MBS strips
are usually structured with two classes that receive different proportions of
the interest and principal distributions on a pool of mortgage assets. A
common type of stripped mortgage security will have one class receiving some
of the interest and most of the principal from the mortgage assets, while the
other class will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive all of the
interest (the interest-only or "IO" class), while the other class will receive
all of the principal (the principal-only or "PO" class). The yields to
maturity on IOs and POs are sensitive to the expected or anticipated rate of
principal payments (including
10
<PAGE>
prepayments) on the related underlying mortgage assets, and principal payments
may have a material effect on yield to maturity. If the underlying mortgage
assets experience greater than anticipated prepayments of principal, Growth
Fund may not fully recoup its initial investment in IOs. Conversely, if the
underlying mortgage assets experience less than anticipated prepayments of
principal, the yield on POs could be materially adversely affected.
In reliance on rules and interpretations of the Securities and Exchange
Commission (SEC), the Growth Fund's investments in certain qualifying CMOs and
REMICs are not subject to the Investment Company Act's limitation on acquiring
interests in other investment companies. See "Investment Objectives and
Policies--U.S. Government Securities--Mortgage-Related Securities Issued by
U.S. Government Agencies and Instrumentalities" in the Statement of Additional
Information.
CORPORATE AND OTHER DEBT OBLIGATIONS
Each Fund may invest in investment grade corporate and other debt
obligations of domestic and foreign issuers, including convertible securities
and money market instruments. See "Money Market Instruments" below. Bonds and
other debt securities are used by issuers to borrow money from investors. The
issuer pays the investor a fixed or variable rate of interest and must repay
the amount borrowed at maturity. Investment grade debt securities are rated
within the four highest quality grades as determined by Moody's Investors
Service (Moody's) (currently Aaa, Aa, A and Baa for bonds), or Standard &
Poor's Ratings Group (S&P) (currently AAA, AA, A and BBB for bonds), or
comparably rated by another nationally recognized statistical rating
organization (NRSRO) or in unrated securities which are of equivalent quality
in the opinion of Jennison. In the event a security (or issuer) held by the
Growth Fund is assigned a rating below investment grade (or, in the view of
Jennison, has declined in credit quality so that it is comparable to a
security rated below investment grade), Jennison will seek to dispose of the
security as soon as reasonably practicable. Securities rated Baa by Moody's,
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. Such lower rated securities are subject to a greater
risk of loss of principal and interest.
NON-INVESTMENT GRADE FIXED-INCOME SECURITIES--GROWTH & INCOME FUND ONLY. Up
to 10% of the total assets of the Growth & Income Fund may be invested in non-
investment grade fixed-income securities. Non-investment grade fixed-income
securities (those rated below Baa by Moody's or BBB by S&P or comparably rated
by another NRSRO or unrated securities determined by Jennison to be of
comparable quality) have speculative characteristics (including the
possibility of default or bankruptcy of the issuers of such securities, market
price volatility based upon interest rate sensitivity, questionable
creditworthiness and relative liquidity of the secondary trading market).
Because these securities have been found to be more sensitive to adverse
economic changes or individual corporate developments and less sensitive to
interest rate changes than higher-rated investments, an economic downturn
could disrupt the market for these securities and adversely affect the value
of these securities and the ability of issuers to repay principal and
interest. See "Risk Factors Relating to Investing in Debt Securities Rated
Below Investment Grade (Junk Bonds)--Growth & Income Fund Only" below.
EQUITY-RELATED SECURITIES. Each Fund may invest in equity-related
securities. Equity-related securities are common stock, preferred stock,
rights, warrants and debt securities or preferred stock which are convertible
or exchangeable for common stock or preferred stock. See "Convertible
Securities" below.
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
11
<PAGE>
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.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security)
or its "conversion value" (i.e., its value upon conversion into its underlying
common stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security
is also influenced by the market value of the security's underlying stock. The
price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of
the underlying stock declines. While no securities investment is without some
risk, investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
In recent years, convertibles have been developed which combine higher or
lower current income with options and other features. Each Fund may invest in
these types of convertible securities.
The Growth & Income Fund may invest in convertible securities which are
rated below investment grade or in unrated securities of comparable quality.
See "Risk Factors Relating to Investing in Debt Securities Rated Below
Investment Grade (Junk Bonds)--Growth & Income Fund Only" below.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements whereby the seller of the
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date is usually within a day or two
of the original purchase, although it may extend over a number of months. A
Fund's repurchase agreements will at all times be fully collateralized in an
amount at least equal to the resale price. In the event of a default or
bankruptcy by a seller, the Fund 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. See "Investment Objectives and Policies--
Repurchase Agreements" in the Statement of Additional Information.
MONEY MARKET INSTRUMENTS
Each Fund may invest in high quality money market instruments, including
commercial paper of a U.S. or non-U.S. company, foreign government securities,
certificates of deposit, bankers' acceptances and time deposits of domestic
and foreign banks, and obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities. These obligations will be U.S.
dollar denominated or denominated in a foreign currency. Money market
instruments typically have a maturity of one year or less as measured from the
date of purchase. Either Fund may invest in money market instruments without
limit for temporary defensive and cash management purposes. To the extent a
Fund otherwise invests in money market instruments, it is subject to the
limitations described above.
OTHER INVESTMENTS AND POLICIES
BORROWING
Each Fund may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) from banks for temporary,
extraordinary or emergency purposes or for the clearance of transactions. Each
Fund may pledge up to 20% of its total assets to secure these borrowings. If a
Fund's asset coverage for borrowings falls below 300%, the Fund will take
prompt action to reduce its borrowings. Neither Fund will purchase portfolio
securities when borrowings exceed 5% of the value of its total assets. See
"Investment Objectives and Policies--Borrowing" in the Statement of Additional
Information.
12
<PAGE>
ILLIQUID SECURITIES
Either Fund may hold up to 10% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven
days, securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities
markets either within or outside of the United States. Restricted securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as
amended (the Securities Act) and privately placed commercial paper that have a
readily available market are not considered illiquid for purposes of this
limitation. The investment adviser will monitor the liquidity of such
restricted securities under the supervision of the Board of Directors. The
Fund's investment in Rule 144A securities could have the effect of increasing
illiquidity to the extent that qualified institutional buyers become, for a
limited time, uninterested in purchasing Rule 144A securities. Repurchase
agreements subject to demand are deemed to have a maturity equal to the
applicable notice period.
PORTFOLIO TURNOVER
Each Fund's portfolio turnover rate is not expected to exceed 100%. High
portfolio turnover (over 100%) may involve correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by the
respective 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
Each Fund may purchase or sell securities (including equity securities) on a
when-issued or delayed delivery basis. When-issued or delayed delivery
transactions arise when securities are purchased or sold by a Fund with
payment and delivery taking place in the future in order to secure what is
considered to be an advantageous price and/or yield to the Fund at the time of
entering into the transaction. While the Funds will only purchase securities
on a when-issued or delayed delivery basis with the intention of acquiring the
securities, the Funds may sell the securities before the settlement date, if
it is deemed advisable. At the time a Fund makes the commitment to purchase
securities on a when-issued or delayed delivery basis, the Fund will record
the transaction and thereafter reflect the value, each day, of such security
in determining the net asset value of the Fund. At the time of delivery of the
securities, the value may be more or less than the purchase price. The Funds'
Custodian will segregate for the respective Fund cash, or other liquid assets,
having a value equal to or greater than such Fund's purchase commitments.
Subject to this requirement, the Funds may purchase securities on such basis
without limit. See "Investment Objectives and Policies--When-Issued and
Delayed Delivery Securities" in the Statement of Additional Information.
SECURITIES LENDING
Each Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral (which may
include a secured letter of credit) in an amount equal to at least 100%,
determined daily, of the market value of the securities loaned which is
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, neither Fund may lend
more than 30% of the value of its total assets. See "Investment Objectives and
Policies--Lending of Securities" in the Statement of Additional Information.
The Funds may pay reasonable administration and custodial fees in connection
with a loan.
13
<PAGE>
SHORT SALES
Each Fund may make short sales "against-the-box." A short sale against-the-
box is when a Fund enters into a short sale of a security which the Fund owns
or has the right to obtain at no added cost. No more than 25% of the Growth &
Income Fund's net assets (determined at the time of the short sale against-
the-box) may be subject to such sales. Growth Fund will only enter into such
sales for the purpose of deferring realization of gain or loss for federal
income tax purposes.
Growth & Income Fund may sell a security it does not own in anticipation of
a decline in the market value of that security (short sales). To complete such
a transaction, the Growth & Income Fund must borrow the security to make
delivery to the buyer. Growth & Income Fund then is obligated to replace the
security borrowed by purchasing it at market price at the time of replacement.
The price at such time may be more or less than the price at which the
security was sold by the Growth & Income Fund. Until the security is replaced,
the Growth & Income Fund is required to pay to the lender any dividends or
interest which accrue during the period of the loan. To borrow the security,
the Growth & Income Fund also may be required to pay a premium, which would
increase the cost of the security sold. The proceeds of the short sale will be
retained by the broker, to the extent necessary to meet margin requirements,
until the short position is closed out. Until the Growth & Income Fund
replaces a borrowed security, the Growth & Income Fund will maintain daily a
segregated account, containing cash, U.S. Government securities, equity
securities or other liquid, unencumbered assets, at such a level that (i) the
amount deposited in the account plus the amount deposited with the broker as
collateral will equal the current value of the security sold short and (ii)
the amount deposited in the segregated account plus the amount deposited with
the broker as collateral will not be less than the market value of the
security at the time it was sold short. The Growth & Income Fund will incur a
loss as a result of the short sale if the price of the security increases
between the date of the short sale and the date on which the Growth & Income
Fund replaces the borrowed security. The Growth & Income Fund will realize a
gain if the security declines in price between those dates. This result is the
opposite of what one would expect from a cash purchase of a long position in a
security. The amount of any gain will be decreased, and the amount of any loss
increased, by the amount of any premium, dividends or interest the Growth &
Income Fund may be required to pay in connection with a short sale. No more
than 20% of the Growth & Income Fund's net assets will be, when added
together: (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. See "Investment Objectives and Policies--Short
Sales" in the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN FOREIGN SECURITIES
FOREIGN SECURITIES INVOLVE CERTAIN RISKS, WHICH SHOULD BE CONSIDERED
CAREFULLY BY AN INVESTOR IN EITHER 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.
ADDITIONAL COSTS COULD BE INCURRED IN CONNECTION WITH THE FUNDS'
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 the security is denominated in a foreign currency, it will be affected by
changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversions between currencies. A
change in the value of any such currency against the U.S. dollar will result
in a corresponding change in the U.S. dollar value of the Funds' securities
denominated in that currency. Such changes also will affect the Funds' income
and distributions to shareholders.
14
<PAGE>
In addition, although a 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 a 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 a Fund incurs
expenses in U.S. dollars and the time such expenses are paid, the amount of
such currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in any
such currency of such expenses at the time they were incurred. A 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 securities denominated in a foreign currency; locking-
in the U.S. dollar equivalent of 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 MARKETS OF
DEVELOPING COUNTRIES INVOLVES EXPOSURE TO ECONOMIES THAT ARE GENERALLY LESS
DIVERSE AND MATURE, AND TO POLITICAL SYSTEMS WHICH CAN BE EXPECTED TO HAVE
LESS STABILITY, THAN THOSE OF DEVELOPED COUNTRIES. HISTORICAL EXPERIENCE
INDICATES THAT THE MARKETS OF DEVELOPING COUNTRIES HAVE BEEN MORE VOLATILE
THAN THE MARKETS OF DEVELOPED COUNTRIES. THE RISKS ASSOCIATED WITH INVESTMENTS
IN FOREIGN SECURITIES, DESCRIBED ABOVE, MAY BE GREATER WITH RESPECT TO
INVESTMENTS IN DEVELOPING COUNTRIES.
RISK FACTORS RELATING TO INVESTING IN DEBT SECURITIES RATED BELOW INVESTMENT
GRADE (JUNK BONDS)--GROWTH & INCOME FUND ONLY
The Growth & Income Fund may invest up to 10% of its total assets in non-
investment grade debt securities. Fixed-income securities are subject to the
risk of an issuer's inability to meet principal and interest payments on the
obligations (credit risk) and may also be subject to price volatility due to
such factors as interest rate sensitivity, market perception of the
creditworthiness of the issuer and general market liquidity (market risk).
Lower rated or unrated (i.e., high yield or high risk) securities (commonly
referred to as junk bonds) are more likely to react to developments affecting
market and credit risk than are more highly rated securities, which react
primarily to movements in the general level of interest rates. The Subadviser
considers both credit risk and market risk in making investment decisions for
the Growth & Income Fund.
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 and, from
time to time, it may be more difficult to value high yield securities than
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 Subadviser 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 Growth & Income 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 Growth &
Income Fund may have to replace the security with a lower yielding security,
resulting in a decreased return for investors. If the Growth & Income 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 its portfolio and increasing the exposure of the Growth &
Income Fund to the risks of high yield securities.
15
<PAGE>
From time to time, federal laws have been enacted which have required the
divestiture by companies of their investments in high yield bonds and have
limited the deductibility of interest by certain corporate issuers of high
yield bonds. These types of laws could adversely affect the Growth & Income
Fund's net asset value and investment practices, the secondary market for high
yield securities, the financial condition of issuers of these securities and
the value of outstanding high yield securities. There is currently no
legislation pending that would adversely impact the market for junk bonds.
However, there can be no assurance that such legislation will not be proposed
or enacted in the future.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
EACH FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES TO REDUCE CERTAIN
RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN. A FUND, AND THUS AN
INVESTOR, MAY LOSE MONEY IF THE FUND IS UNSUCCESSFUL IN ITS USE OF THESE
STRATEGIES. These strategies currently include the use of derivatives, such as
options, forward currency exchange contracts and futures contracts and options
thereon. A Fund's ability to use these strategies may be limited by market
conditions, regulatory limits and tax considerations and there can be no
assurance that any of these strategies will succeed. See "Investment
Objectives and Policies" and "Taxes" in the Statement of Additional
Information. Jennison does not intend to buy all of these instruments or use
all of these strategies to the full extent permitted unless it believes that
doing so will help a Fund achieve its objectives. New financial products and
risk management techniques continue to be developed and either Fund may use
these new investments and techniques to the extent consistent with its
investment objectives and policies.
OPTIONS TRANSACTIONS
EACH FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON
SECURITIES, STOCK INDICES AND CURRENCIES THAT ARE TRADED ON U.S. OR FOREIGN
SECURITIES EXCHANGES OR IN THE OVER-THE-COUNTER (OTC) MARKET TO ENHANCE RETURN
OR TO HEDGE ITS PORTFOLIO. These options will be on equity securities, stock
indices (e.g., S&P 500) and foreign currencies. A Fund may write 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 call
options in an effort to protect against an increase in the price of securities
(or currencies) it intends to purchase. The Funds may also purchase put and
call options to offset previously written put and call options of the same
series. See "Investment Objectives 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 a 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. The Funds will write only "covered" call options and
call options for which they maintain in a segregated account cash or liquid
assets with a value sufficient at all times to cover their respective
obligations.
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. A Fund might, therefore, be obligated to purchase the
underlying securities or currency for more than their current market price.
The Funds will write only put options for which they maintain in a segregated
account cash or liquid assets with a value sufficient at all times to cover
their respective obligations.
FORWARD CURRENCY EXCHANGE CONTRACTS
EACH 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 Funds may enter into such contracts on a spot,
i.e., cash,
16
<PAGE>
basis at the rate then prevailing in the currency exchange market or on a
forward basis, by entering into a forward contract to purchase or sell
currency. A forward contract on foreign currency is an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days agreed upon by the parties from the date of the contract at a price set
on the date of the contract.
THE FUNDS' 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 a 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 Funds may
enter into, the Funds 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 Objectives and Policies--Risks
Related to Forward Foreign Currency Exchange Contracts" in the Statement of
Additional Information.
FUTURES CONTRACTS AND OPTIONS THEREON
EACH FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE TO REDUCE
CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN IN
ACCORDANCE WITH REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION
(CFTC). These futures contracts and related options will be on stock indices
and foreign currencies. A futures contract is an agreement to purchase or sell
an agreed amount of securities or currencies at a set price for delivery in
the future. A stock index futures contract is an agreement to purchase or sell
cash equal to a specific dollar amount times the difference between the value
of a specific stock index at the close of the last trading day of the contract
and the price at which the agreement is made. No physical delivery of the
underlying stocks in the index is made. The Funds may purchase and sell stock
index futures contracts or related options as a hedge against changes in
market conditions.
Neither Fund may purchase or sell futures contracts and related options to
attempt to enhance return if immediately thereafter the sum of the amount of
initial margin deposits on a 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. Each Fund may purchase and sell futures
contracts and related options, without limitation, for bona fide hedging
purposes in accordance with regulations of the CFTC (i.e., to reduce certain
risks of its investments). The value of all futures contracts sold will not
exceed the total market value of the Fund's portfolio.
Futures contracts and related options are generally subject to segregation
and coverage requirements of the CFTC or the SEC. If a Fund does not hold the
security or currency underlying the futures contract, it will be required to
segregate on an ongoing basis with its Custodian cash or liquid assets having
an amount at least equal to its obligations with respect to such futures
contracts.
THE FUNDS' SUCCESSFUL USE OF FUTURES CONTRACTS AND RELATED OPTIONS DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET
AND IS SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements
in the price of a futures contract and the movements in the index or price of
the currencies underlying the futures contract is imperfect and there is a
risk that the value of the indices or currencies underlying the futures
contract may increase or decrease at a greater rate than the related futures
contracts resulting in losses to the Funds. Certain futures exchanges or
17
<PAGE>
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 Funds'
ability to purchase or sell certain futures contracts or related options on
any particular day.
The Funds' 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
FUNDS WOULD NOT BE SUBJECT ABSENT THE USE OF THESE STRATEGIES. A FUND, AND
THUS THE INVESTOR, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE
STRATEGIES. If the Subadviser's predictions of movements in the direction of
the securities, foreign currency and interest rate markets are inaccurate, the
adverse consequences to a 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 Subadviser's ability to predict correctly movements in the
direction of interest rates, securities prices and currency markets; (2)
imperfect correlation between the price of options and futures contracts and
options thereon and movements in the prices of the securities or currencies
being hedged; (3) the fact that skills needed to use these strategies are
different from those needed to select portfolio securities; (4) the possible
absence of a liquid secondary market for any particular instrument at any
time; (5) the possible need to defer closing out certain hedged positions to
avoid adverse tax consequences; and (6) the possible inability of a Fund to
purchase or sell a portfolio security at a time that otherwise would be
favorable for it to do so, or the possible need for a Fund to sell a portfolio
security at a disadvantageous time, due to the need for the Fund to maintain
"cover" or to segregate securities in connection with hedging transactions.
See "Taxes" in the Statement of Additional Information.
The Funds 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
Funds will generally purchase OTC options only if management believes that the
other party to the options will continue to make a market for such options.
However, there can be no assurance that a liquid secondary market will
continue to exist or that the other party will continue to make a market.
Thus, it may not be possible to close an option or futures transaction. The
inability to close options and futures positions also could have an adverse
impact on a Fund's ability to effectively hedge its portfolio. There is also
the risk of loss by a Fund of margin deposits or collateral in the event of
bankruptcy of a broker with whom such Fund has an open position in an option,
a futures contract or related option.
INVESTMENT RESTRICTIONS
The Funds are subject to certain investment restrictions which, like their
investment objectives, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
relevant Fund's outstanding voting securities as defined in the Investment
Company Act. See "Investment Restrictions" in the Statement of Additional
Information.
HOW THE FUNDS ARE MANAGED
THE COMPANY HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUNDS' MANAGER, SUBADVISER AND DISTRIBUTOR, DECIDES UPON
MATTERS OF GENERAL POLICY. THE FUNDS' MANAGER CONDUCTS AND SUPERVISES THE
DAILY BUSINESS OPERATIONS OF THE FUNDS. THE FUNDS' SUBADVISER FURNISHES DAILY
INVESTMENT ADVISORY SERVICES.
18
<PAGE>
Each Fund is responsible for the payment of certain fees and expenses
including, among others, the following: (i) management and distribution fees;
(ii) the fees of unaffiliated Directors; (iii) the fees of the Custodian and
Transfer and Dividend Disbursing Agent; (iv) the fees of the legal counsel and
independent accountants; (v) brokerage commissions incurred in connection with
portfolio transactions; (vi) all taxes and charges of governmental agencies;
(vii) the reimbursement of organization expenses; and (viii) expenses related
to shareholder communications including all expenses of shareholders' and
Board of Directors' meetings and of preparing, printing and mailing reports,
proxy statements and prospectuses to shareholders.
For the fiscal period ended September 30, 1996, the Growth Fund's total
expenses as an annualized percentage of average net assets for Class A, Class
B, Class C and Class Z shares were 1.23%, 1.98%, 1.98% and .98%, respectively.
See "Financial Highlights." No shares of the Growth & Income Fund were
outstanding during this period.
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT LLC (PMF OR THE MANAGER), GATEWAY CENTER
THREE, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER OF THE FUNDS AND IS
COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .60 OF 1% OF EACH FUND'S
AVERAGE DAILY NET ASSETS. PMF is organized in New York as a limited liability
company. It is the successor of Prudential Mutual Fund Management, Inc., which
transferred its assets to PMF in September 1996. For the fiscal year ended
September 30, 1996, the Growth Fund paid management fees to PMF of .60% of the
Fund's average net assets. See "Manager" in the Statement of Additional
Information.
As of December 31, 1996, PMF served as the manager to 40 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $55.2 billion.
Under the Management Agreement with the Company, PMF manages the investment
operations of the Funds and also administers the Funds' corporate affairs. See
"Manager" in the Statement of Additional Information.
SUBADVISER
JENNISON ASSOCIATES CAPITAL CORP. (JENNISON OR THE SUBADVISER), 466
LEXINGTON AVENUE, NEW YORK, NEW YORK, 10017, IS THE SUBADVISER TO THE FUNDS.
It was incorporated in 1969 under the laws of the State of New York. As of
September 30, 1996, Jennison had over $31.3 billion in assets under management
for institutional and mutual fund clients, including over $15.3 billion in
"growth stock" assets, and $231 million in "growth & income" assets.
PURSUANT TO A SUBADVISORY AGREEMENT WITH PMF, JENNISON FURNISHES INVESTMENT
ADVISORY SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUNDS AND IS
COMPENSATED BY PMF FOR ITS SERVICES AT AN ANNUAL RATE OF .30 OF 1% OF EACH
FUND'S AVERAGE DAILY NET ASSETS UP TO AND INCLUDING $300 MILLION AND .25 OF 1%
OF EACH FUND'S AVERAGE DAILY NET ASSETS IN EXCESS OF $300 MILLION.
Under the Subadvisory Agreement, Jennison, subject to the supervision of
PMF, is responsible for managing the assets of the Funds in accordance with
each Fund's respective investment objectives, investment program and policies.
Jennison determines what securities and other instruments are purchased and
sold for the Funds and is responsible for obtaining and evaluating financial
data relevant to the Funds.
DAVID POIESZ IS THE PORTFOLIO MANAGER OF THE GROWTH FUND AND PETER REINEMANN
IS THE ASSOCIATE PORTFOLIO MANAGER OF THE GROWTH FUND. Mr. Poiesz is
responsible for the day-to-day management of the Growth Fund. They are both
Senior Vice Presidents of Jennison and have been involved with the Growth Fund
since its inception in 1995. Mr. Poiesz, also a
19
<PAGE>
Director of Jennison, joined Jennison in 1983 as an equity research analyst
and has been an equity portfolio manager since 1991. Mr. Poiesz also serves as
the Portfolio Manager of the Prudential Jennison Portfolio of the Prudential
Series Fund, Inc., a registered investment company. Mr. Reinemann has been
with Jennison since 1992 as an associate portfolio manager. Prior to that
time, he served as a Vice President at Paribas Asset Management, Inc.
BRADLEY GOLDBERG IS THE PORTFOLIO MANAGER AND PETER REINEMANN AND G. TODD
SILVA ARE ASSOCIATE PORTFOLIO MANAGERS OF THE GROWTH & INCOME FUND. Mr.
Goldberg is an Executive Vice President and Director of Jennison, and is
responsible for the day-to-day management of the Growth & Income Fund. Mr.
Goldberg has been employed as a portfolio manager with Jennison since 1974.
Mr. Goldberg also serves as the Portfolio Manager of the Prudential Active
Balanced Fund, a series of the Prudential Dryden Fund, which is a registered
investment company. Mr. Reinemann, a Senior Vice President and Director,
joined Jennison in 1992 as an associate portfolio manager. Prior to that time,
he served as a Vice President at Paribas Asset Management, Inc. Mr. Silva, a
Senior Vice President of Jennison, joined Jennison in June 1996. He was
previously a Vice President and assistant portfolio manager in the Growth &
Income Group at Scudder, Stevens & Clark Inc. and an equity analyst at Putnam
Investments.
PMF and Jennison are wholly-owned subsidiaries of The Prudential Insurance
Company of America (Prudential), a major diversified insurance and financial
services company.
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE
SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE
LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A,
CLASS B, CLASS C AND CLASS Z SHARES OF THE COMPANY. 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 FUNDS UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (ALSO THE DISTRIBUTOR) INCURS
THE EXPENSES OF DISTRIBUTING EACH FUND'S CLASS A, CLASS B AND CLASS C SHARES.
PRUDENTIAL SECURITIES ALSO INCURS THE EXPENSES OF DISTRIBUTING THE FUND'S
CLASS Z SHARES UNDER THE DISTRIBUTION AGREEMENT, NONE OF WHICH IS REIMBURSED
BY OR PAID FOR BY THE FUNDS. These expenses include commissions and account
servicing fees paid to, or on account of, financial advisers of Prudential
Securities and Pruco Securities Corporation (Prusec), an affiliated broker-
dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks)
which have entered into agreements with the Distributor, advertising expenses,
the cost of printing and mailing prospectuses to potential investors and
indirect and overhead costs of Prudential Securities and Prusec associated
with the sale of each Fund's shares, including lease, utility, communications
and sales promotion expenses.
Under the Plans, the Funds are 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 Funds
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, EACH FUND MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. 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 September 30, 1997.
20
<PAGE>
UNDER THE CLASS B AND CLASS C PLANS, EACH FUND PAYS PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED EXPENSES 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 or Class
C shares of the Funds will be allocated to each class of the respective Fund
based upon the ratio of sales of each class to the sales of Class A, Class B
and Class C shares of such 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 Company, including a
majority of the Directors who are not "interested persons" of the Company (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 a Fund. The Fund will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Funds under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments to dealers (including Prudential Securities) and other persons
which distribute shares of the Funds (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. (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
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purposes of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
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
21
<PAGE>
for the offenses charged in the complaint. If on the other hand, during the
course of the three year period, PSI violates the terms of the agreement, the
U.S. Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may
be obtained at no cost by calling 1-800-225-1852.
The Company is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Funds' assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
FEE WAIVERS AND SUBSIDY
PMF may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of either Fund. Fee
waivers and expense subsidies will increase a 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 Funds provided that the commissions, fees or other remuneration it
receives are fair and reasonable. See "Portfolio Transactions and Brokerage"
in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Funds' portfolio securities
and cash and, in that capacity, maintains certain financial and accounting
books and records pursuant to an agreement with the Company.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent for the
Funds and in those capacities maintains certain books and records for the
Company. PMFS is a wholly-owned subsidiary of PMF. Its mailing address is P.O.
Box 15005, New Brunswick, New Jersey 08906-5005.
HOW EACH FUND VALUES ITS SHARES
EACH 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 EACH 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 Company's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
Each Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase,
sell or redeem shares have been received by the Fund or days on which changes
in the
22
<PAGE>
value of a Fund's portfolio securities do not materially affect its NAV. The
New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. See "Net Asset Value" in the Statement of
Additional Information.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger distribution-
related fee to which Class B and Class C shares are subject. The NAV of Class
Z shares will generally be higher than the NAV of the other three classes
because Class Z shares are not subject to any distribution and/or service
fees. It is expected, however, that the NAV of the four classes will tend to
converge immediately after the recording of dividends, which will differ by
approximately the amount of distribution and/or service fee expense accrual
differential among the classes.
HOW THE FUNDS CALCULATE PERFORMANCE
FROM TIME TO TIME EITHER 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 a Fund would
have increased (decreased) over a specified period of time (i.e., one, five,
or ten years or since inception of the Fund) assuming that all distributions
and dividends by the Fund were reinvested on the reinvestment dates during the
period and less all recurring fees. The "aggregate" total return reflects
actual performance over a stated period of time. "Average annual" total return
is a hypothetical rate of return that, if achieved annually, would have
produced the same aggregate total return if performance had been constant over
the entire period. "Average annual" total return smooths out variations in
performance and takes into account any applicable initial or contingent
deferred sales charges. Neither "average annual" total return nor "aggregate"
total return takes into account any federal or state income taxes which may be
payable upon redemption. The "yield" refers to the income generated by an
investment in a Fund over a one-month or 30-day period. This income is then
"annualized;" that is, the amount of income generated by the investment during
that 30-day period is assumed to be generated each 30-day period for twelve
periods and is shown as a percentage of the investment. The income earned on
the investment is also assumed to be reinvested at the end of the sixth 30-day
period. A Fund also may include comparative performance information in
advertising or marketing the Fund's shares. Such performance information may
include data from Lipper Analytical Services, Inc., Morningstar Publications,
Inc., and other industry publications, business periodicals and market
indices. See "Performance Information" in the Statement of Additional
Information. Further performance information will be contained in each Fund's
annual and semi-annual reports to shareholders, which may be obtained without
charge. See "Shareholder Guide--Shareholder Services--Reports to
Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUNDS
THE GROWTH FUND HAS ELECTED TO QUALIFY AND THE GROWTH & INCOME FUND INTENDS
TO ELECT TO QUALIFY, AND EACH FUND INTENDS TO REMAIN QUALIFIED AS A REGULATED
INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
INTERNAL REVENUE CODE). ACCORDINGLY, THE FUNDS WILL NOT BE SUBJECT TO FEDERAL
INCOME TAXES ON NET INVESTMENT INCOME AND CAPITAL GAINS, IF ANY, THAT THEY
DISTRIBUTE TO THEIR RESPECTIVE SHAREHOLDERS.
23
<PAGE>
The Funds may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). PFICs are foreign corporations which derive a majority of
their income from passive sources. For tax purposes, the Funds' investments in
PFICs are subject to special tax provisions that may result in the taxation of
certain gains realized by the Funds. 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 Funds will be required
to be "marked-to-market" for federal income tax purposes; that is, treated as
having been sold at market value. Sixty percent of any gain or loss recognized
on these "deemed sales" and on actual dispositions may be treated as long-term
capital gain or loss, and the remainder will be treated as short-term capital
gain or loss. See "Taxes" in the Statement of Additional Information.
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 a 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 a 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.
The Funds may incur foreign income taxes in connection with some of its
foreign investments. See "Taxes" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
All dividends out of net investment income, together with distributions of
net short-term capital gains, will be taxable as ordinary income to the
shareholder whether or not reinvested. Any net long-term capital gains
distributed to shareholders will be taxable as such to the shareholder,
whether or not reinvested and regardless of the length of time a shareholder
has owned his or her shares. The maximum long-term capital gains rate for
corporate shareholders is currently the same as the maximum tax rate for
ordinary income. The maximum long-term capital gains rate for individual
shareholders is currently 28% and the maximum tax rate for ordinary income is
39.6%.
Any gain or loss realized upon a sale or redemption of shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, on
shares that are held for six months or less, will be treated as a long-term
capital loss to the extent of any capital gain distributions received by the
shareholder.
A shareholder who acquires shares of a Fund and sells or otherwise disposes
of such shares within 90 days of acquisition may not be allowed to include
certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of such
Fund.
Distributions by the Funds to a shareholder that is a qualified retirement
plan would generally not be taxable to participants of the plan. Distributions
from a qualified retirement plan (or non-qualified arrangement) to a
participant or beneficiary are subject to special rules. These rules vary
greatly with individual situations, therefore potential investors are urged to
consult with their own tax advisers.
The Funds have obtained opinions of counsel to the effect that neither (i)
the conversion of Class B shares into Class A shares nor (ii) the exchange of
Class B or Class C shares for Class A or Class Z shares or the exchange of
Class A shares for Class Z shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.
24
<PAGE>
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Funds are 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 FUNDS EXPECT TO PAY DIVIDENDS OF NET INVESTMENT INCOME, IF ANY, SEMI-
ANNUALLY AND TO MAKE DISTRIBUTIONS OF ANY CAPITAL GAINS IN EXCESS OF NET LONG-
TERM CAPITAL LOSSES AT LEAST ANNUALLY. Dividends paid by the Funds with
respect to each class of shares, to the extent any dividends are paid, will be
calculated in the same manner, at the same time, on the same day and will be
in the same amount except that each class will bear its own distribution
and/or service fee 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 Each Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE
RELEVANT FUND, BASED ON THE NAV OF EACH CLASS ON THE RECORD DATE OR SUCH OTHER
DATE AS THE BOARD OF DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN
WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE
SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election should be submitted to
Prudential Mutual Fund Services, Inc., Attn: Account Maintenance Unit, P.O.
Box 15015, New Brunswick, New Jersey 08906-5015. The Funds will notify their
respective shareholders after the close of the Funds' taxable year both of the
dollar amount and the taxable status of that year's dividends and
distributions on a per share basis. If you hold shares through Prudential
Securities, you should contact your financial adviser to elect to receive
dividends and distributions in cash.
WHEN A FUND GOES "EX-DIVIDEND," ITS NAV IS REDUCED BY THE AMOUNT OF THE
DIVIDEND OR DISTRIBUTION. IF YOU BUY SHARES JUST PRIOR TO THE EX-DIVIDEND DATE
(WHICH GENERALLY OCCURS FOUR BUSINESS DAYS PRIOR TO THE RECORD DATE), THE
PRICE YOU PAY WILL INCLUDE THE DIVIDEND OR DISTRIBUTION AND A PORTION OF YOUR
INVESTMENT WILL BE RETURNED TO YOU AS A TAXABLE DISTRIBUTION. YOU SHOULD,
THEREFORE, CONSIDER THE TIMING OF DIVIDENDS WHEN MAKING YOUR PURCHASES.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE COMPANY WAS INCORPORATED IN MARYLAND ON AUGUST 10, 1995. THE COMPANY IS
AUTHORIZED TO ISSUE 2.5 BILLION SHARES OF COMMON STOCK, $.001 PAR VALUE PER
SHARE, DIVIDED INTO TWO SERIES OR PORTFOLIOS, THE GROWTH FUND AND THE GROWTH &
INCOME FUND. EACH SERIES IS FURTHER DIVIDED INTO FOUR CLASSES, DESIGNATED
CLASS A, CLASS B, CLASS C AND CLASS Z COMMON STOCK. OF THE AUTHORIZED SHARES
OF COMMON STOCK OF EACH FUND, 500 MILLION SHARES CONSIST OF CLASS A COMMON
STOCK, 250 MILLION SHARES CONSIST OF CLASS B COMMON STOCK, 250 MILLION SHARES
CONSIST OF CLASS C COMMON STOCK AND 250 MILLION SHARES CONSIST OF CLASS Z
COMMON STOCK. Each class of Common Stock of each fund represents an interest
in the same assets of such 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
charges and distribution and/or service fees), which may affect performance,
(ii) each class has exclusive voting rights on any matter submitted to
shareholders that relates solely to its arrangement and has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of any other class, (iii) each class has a
different exchange privilege, (iv) only Class B Shares have a conversion
feature and (v) Class Z Shares are offered exclusively for sale to a limited
group of investors. in accordance with the Company's Articles of
Incorporation, the Board
25
<PAGE>
of Directors may authorize the creation of additional series of common stock
and classes within such series, with such preferences, privileges, limitations
and voting and dividend rights as the Board may determine.
The Company's expenses generally are allocated between the Funds on the
basis of relative net assets at the time of allocation, except that expenses
directly attributable to a Fund are charged to such Fund.
The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of each 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 Funds under
certain circumstances as described under "Shareholder Guide--How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except as noted above, and each class bears the
expenses related to the distribution of its shares (with the exception of
Class Z shares, which are not subject to any distribution or service fees).
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 a Fund is entitled to its portion
of all of such Fund's assets after all debts and expenses of such Fund have
been paid. Since Class B and Class C shares generally bear higher distribution
expenses than Class A shares, the liquidation proceeds to shareholders of
those classes are likely to be lower than to Class A shareholders and to Class
Z shareholders, whose shares are not subject to any distribution and/or
service fees. The Company's shares do not have cumulative voting rights for
the election of Directors.
THE COMPANY DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE COMPANY WILL NOT BE REQUIRED TO HOLD MEETINGS
OF SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF 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 COMPANY'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 Company with the SEC
under the Securities Act of 1933, as amended. Copies of the Registration
Statement may be obtained at a reasonable charge from the SEC or may be
examined, without charge, at the office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUNDS
YOU MAY PURCHASE SHARES OF THE FUNDS THROUGH PRUDENTIAL SECURITIES, PRUSEC
OR DIRECTLY FROM EACH FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. Participants in programs
sponsored by Prudential Retirement Services should contact their client
representative for more information about Class Z shares. The purchase price
is the NAV next determined following receipt of an order by the Transfer Agent
or Prudential Securities plus a sales charge which, at your option, may be
imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). Class Z shares are offered to a
limited group of investors at net asset value without any sales charge. See
"Alternative Purchase Plan" below. See also "How Each Fund Values its Shares."
The minimum initial investment for each Fund is $1,000 per class for Class A
and Class B shares and $5,000 for Class C shares, except that the minimum
initial investment for Class C shares may be waived from time to time. There
is no minimum initial investment requirement for 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."
26
<PAGE>
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a stock certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders
who hold their shares through Prudential Securities will not receive stock
certificates.
Each 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" below.
Your dealer is responsible for forwarding payment promptly to the Funds. 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 shares of the Funds may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of either Fund by wire,
you must first telephone PMFS to receive an account number at (800) 225-1852
(toll-free). The following information will be requested: your name, address,
tax identification number, class election, dividend distribution election,
amount being wired and wiring bank. Instructions should then be given by you
to your bank to transfer funds by wire to State Street Bank and Trust Company
(State Street), Boston, Massachusetts, Custody and Shareholder Services
Division, Attention: Prudential Jennison Series Fund, Inc., Prudential
Jennison Growth Fund or Prudential Jennison Growth & Income Fund, as the case
may be, specifying on the wire the account number assigned by PMFS and your
name and identifying the sales charge alternative (Class A, Class B, Class C
or Class Z shares).
If you arrange for receipt by State Street of federal funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Funds
as of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Jennison Series
Fund, Inc., Prudential Jennison Growth Fund or Prudential Jennison Growth &
Income Fund, as the case may be, Class A, Class B, Class C or Class Z shares
and your name and individual account number. It is not necessary to call PMFS
to make subsequent purchase orders utilizing federal funds. The minimum amount
which may be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
EACH FUND OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS
Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE
STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE,
THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT
CIRCUMSTANCES (ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12b-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------ ------------------------ -----------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge .30 of 1% Initial sales charge waived
of 5% of the public offering (currently being or reduced for certain
price charged at a rate purchases
of .25 of 1%)
CLASS B Maximum contingent deferred 1% Shares convert to Class A
sales charge or CDSC of 5% shares approximately seven
of the lesser of the amount years after purchase
invested 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 another class
invested or the redemption
proceeds on redemptions made
within one year of purchase.
CLASS Z None Sold to a limited group of
None investors
</TABLE>
27
<PAGE>
Each class of shares of a Fund represents an interest in the same assets of
such Fund and is identical in all respects, except that (i) each class is
subject to different sales charges and distribution and/or service fees
(except for Class Z shares, which are not subject to any sales charge or
distribution and/or service fee), which may affect performance, (ii) each
class has exclusive voting rights on any matter submitted to shareholders that
relates solely to its arrangements and has separate voting rights on any
matter submitted to shareholders in which the interests of one class differ
from the 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 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 Funds will
receive different compensation for selling Class A, Class B, Class C and Class
Z shares and will generally receive more compensation initially for selling
Class A and Class B shares than for selling Class C or Class Z shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares
automatically convert to Class A shares approximately seven years after
purchase (see "Conversion Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Funds.
If you intend to hold your investment in a 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 an 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.
28
<PAGE>
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested)
as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
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
will pay dealers, financial advisers and other persons which distribute shares
a finders' fee based on a percentage of the net asset value of shares sold by
such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of
either Fund and shares of other Prudential Mutual Funds (excluding money
market funds other than those acquired pursuant to the exchange privilege) may
be aggregated to determine the applicable reduction. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--
Class A Shares" in the Statement of Additional Information.
BENEFIT PLANS. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 or 403(b)(7) of the Internal
Revenue Code (collectively, Benefit Plans), provided that the Benefit Plan has
existing assets of at least $1 million invested in shares of Prudential Mutual
Funds (excluding money market funds other than those acquired pursuant to the
exchange privilege) or 250 eligible employees or participants. In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account recordkeeping (Direct Account Benefit
Plans) and Benefit Plans sponsored by PSI or its subsidiaries (PSI or
Subsidiary Prototype Benefit Plans), Class A shares may be purchased at NAV by
participants who are repaying loans made from such plans to the participant.
PRUARRAY AND SMARTPATH PLANS. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or non-
qualified under the Internal Revenue Code, including pension, profit-sharing,
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code and deferred compensation and annuity plans under Sections 457 or
403(b)(7) of the Internal Revenue Code that participate in the Prudential's
PruArray and SmartPath Programs (benefit plan recordkeeping services)
(hereafter referred to as a PruArray or SmartPath Plan), provided that the
plan has at least $1 million in existing assets or 250 eligible employees or
participants. The term "existing assets" for this purpose includes stock
issued by a PruArray or SmartPath Plan sponsor, shares of non-money market
Prudential Mutual Funds and shares of certain unaffiliated non-money market
mutual funds that participate in the PruArray or SmartPath Program
(Participating Funds). "Existing assets" also include shares of money market
funds acquired by exchange from a Participating Fund, monies invested in The
Guaranteed Interest Account (GIA), a group annuity insurance product issued by
29
<PAGE>
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 Funds), (b) employees of Prudential Securities and PMF
and their subsidiaries and members of the families of such persons who
maintain an "employee related" account at Prudential Securities or the
Transfer Agent, (c) employees 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 and (f) investors who have a business relationship with a financial
adviser who joined Prudential Securities from another investment firm,
provided that (i) the purchase is made within 180 days of the commencement of
the financial adviser's employment at Prudential Securities, or within one
year in the case of Benefit Plans, (ii) the purchase is made with proceeds of
a redemption of shares of any open-end fund sponsored by the financial
adviser's previous employer (other than a money market fund or other no-load
fund which imposes a distribution or service fee of .25 of 1% or less) and
(iii) the financial adviser served as the client's broker on the previous
purchase.
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.
30
<PAGE>
See "How to Sell Your Shares--Contingent Deferred Sales Charges." The
Distributor will pay sales commissions of up to 4% of the purchase price of
Class B shares to dealers, financial advisers and other persons who sell Class
B shares at the time of sale from its own resources. This facilitates the
ability of the Funds 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 "Distributor." In connection with
the sale of Class C shares, the Distributor will pay dealers, financial
advisers and other persons which distribute Class C shares a sales commission
of up to 1% of the purchase price at the time of the sale.
CLASS Z SHARES
Class Z shares are available for purchase by (i) pension, profit sharing or
other employee benefit plans qualified under Section 401 of the Internal
Revenue Code, deferred compensation and annuity plans under Sections 457 and
403(b)(7) of the Internal Revenue Code, and non-qualified plans for which the
relevant Fund is an available option (collectively, Benefit Plans), provided
such Benefit Plans (in combination with other plans sponsored by the same
employer or group of related employers) have at least $50 million in defined
contribution assets; (ii) participants in any fee-based program sponsored by
Prudential Securities (or one of its affiliates) which includes mutual funds
as investment options and for which the relevant Fund is an available option;
and (iii) investors who were, or executed a letter of intent to become,
shareholders of any series of Prudential Dryden Fund (formerly The Prudential
Institutional Fund (Dryden Fund)) on or before one or more series of Dryden
Fund reorganized or who on that date had investments in certain products for
which Dryden Fund provided exchangeability. After a Benefit Plan qualifies to
purchase Class Z shares, all subsequent purchases will be for Class Z shares.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay dealers, financial advisers and other
persons which distribute shares a finders' fee based on a percentage of the
net asset value of shares sold by such persons.
For more information about shares of the Funds, contact your Prudential
Securities financial adviser or Prusec representative or telephone either Fund
at (800) 225-1852. Participants in programs sponsored by Prudential Retirement
Services should contact their client representatives for more information
about Class Z shares.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM SHARES OF EITHER FUND AT ANY TIME FOR CASH AT THE NAV PER
SHARE NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM
BY THE TRANSFER AGENT OR PRUDENTIAL SECURITIES. See "How Each Fund Values its
Shares." In certain cases, however, redemption proceeds will be reduced by the
amount of any applicable CDSC, as described below. See "Contingent Deferred
Sales Charges" below.
IF YOU HOLD SHARES OF A FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST REDEEM
YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED
BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES SIGNED IN THE NAMES(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE
REDEMPTION REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A
CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY
ACCEPTABLE TO THE TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE
ACCEPTED. All correspondence and documents concerning redemptions should be
sent to the respective Fund in care of its Transfer Agent, Prudential Mutual
Fund Services, Inc., Attention: Redemption Services, P.O. Box 15010, New
Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation,
31
<PAGE>
partnership, trust or fiduciary, the signature(s) on the redemption request
and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the
right to request additional information from, and make reasonable inquiries
of, any eligible guarantor institution. For clients of Prusec, a signature
guarantee may be obtained from the agency or office manager of most Prudential
Insurance and Financial Services or Prudential Preferred Financial Services
offices. In the case of redemptions from a PruArray or SmartPath Plan, if the
proceeds of the redemption are invested in another investment option of the
plan, in the name of the record holder and at the same address as reflected in
the Transfer Agent's records, a signature guarantee is not required.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR
WRITTEN REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH
PRUDENTIAL SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE
CREDITED TO YOUR PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE.
Such payment may be postponed or the right of redemption suspended at times
(a) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (b) when trading on such Exchange is restricted, (c)
when an emergency exists as a result of which disposal by a Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for 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 A
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE
OR BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of a Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price
in whole or in part by a distribution in kind of securities from the
investment portfolio of such Fund, in lieu of cash, in conformity with
applicable rules of the SEC. Securities will be readily marketable and will be
valued in the same manner as a regular redemption. See "How Each Fund Values
its Shares." If your shares are redeemed in kind, you would incur transaction
costs in converting the assets into cash. The Company has, however, elected to
be governed by Rule 18f-1 under the Investment Company Act, under which each
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 Funds, 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 Funds
will give any such shareholder 60 days' prior written notice in which to
purchase sufficient additional shares to avoid such redemption. No CDSC will
be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of such Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of redemption. Any 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 affect the federal
tax treatment of any gain realized upon redemption. If the redemption was made
within a 30 day period of the repurchase and if the redemption resulted in a
loss, some or all of the loss, depending on the amount reinvested, may not be
allowed for federal income tax purposes.
32
<PAGE>
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 contingent deferred sales charge
will be paid to and retained by the Distributor. See "How the Funds are
Managed--Distributor" and "Waiver of the Contingent Deferred Sales Charges--
Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of 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 following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------- -------------------------
<S> <C>
First......................................... 5.0%
Second........................................ 4.0%
Third......................................... 3.0%
Fourth........................................ 2.0%
Fifth......................................... 1.0%
Sixth......................................... 1.0%
Seventh....................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results 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 a Fund's 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.
33
<PAGE>
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 certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a tax-
deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service, i.e.,
following voluntary or involuntary termination of employment or following
retirement. Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan unless such
redemptions otherwise qualify as 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 a
Director of the Company.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec, at the time of redemption, that you are entitled to
waiver of the CDSC and provide the Transfer Agent with such supporting
documentation as it may deem appropriate. The waiver will be granted subject
to confirmation of your entitlement. See "Purchase and Redemption of Fund
Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in the
Statement of Additional Information.
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.
Since each 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
34
<PAGE>
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 Each Fund Values its
Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been
made on the last day of the month, or for Class B shares acquired through
exchange, or a series of exchanges, on the last day of the month in which the
original payment for purchases of such Class B shares was made. For Class B
shares previously exchanged for shares of a money market fund, the time period
during which such shares were held in the money market fund will be excluded.
For example, Class B shares held in a money market fund for one year will not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase
of such shares.
The conversion feature is subject to the continuing availability of opinions
of counsel or rulings of the Internal Revenue Service (i) that the dividends
and other distributions paid on Class A, Class B, 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 Funds will continue to be subject, possibly
indefinitely, to their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF EITHER OF THE FUNDS 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 OF THE
COMPANY OR ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV. No sales charge will
be imposed at the time of 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 either 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 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. A FUND OR ITS
35
<PAGE>
AGENTS COULD BE SUBJECT TO LIABILITY IF THEY FAIL TO EMPLOY REASONABLE
PROCEDURES. All exchanges will be made on the basis of the relative NAV of
the two funds next determined after the request is received in good order. The
exchange privilege is available only in states where the exchange may legally
be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. 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 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 either Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares
when they join the 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 either Fund's Class Z shares is an available
option and who wish to transfer their Class Z shares out of the PSI 401(k)
Plan following separation of service (i.e., voluntary or involuntary
termination of employment or retirement) will have their Class Z shares
exchanged for Class A shares at net asset value.
Each Fund reserves the right to reject any exchange order including
exchanges (and market timing transactions) which are of a size and/or
frequency engaged in by one or more accounts acting in concert or otherwise,
that have or may have an adverse effect on the ability of the Subadviser to
manage the portfolio. The determination that such exchanges or activity may
have an adverse effect and the determination to reject any exchange order
shall be in the discretion of the Manager and the Subadviser.
The Exchange Privilege is not a right and may be suspended, terminated or
modified at any time upon 60 days' written notice.
36
<PAGE>
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in either Fund, you
can take advantage of the following additional services and privileges:
. AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTION WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions of a Fund are
automatically reinvested in full and fractional shares of such 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 a 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 registered
representative or the Transfer Agent directly.
. TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both self-
employed individuals and corporate employers. These plans permit either self-
direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or
the Transfer Agent. If you are considering adopting such a plan, you should
consult with your own legal or tax adviser with respect to the establishment
and maintenance of such a plan.
. SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders, which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges." See also "Shareholder Investment
Account--Systematic Withdrawal Plan" in the Statement of Additional
Information.
. REPORTS TO SHAREHOLDERS. The Funds will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Funds will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 (toll-free) or by writing to either Fund at
Gateway Center Three, 100 Mulberry Street, 9th Floor, Newark, New Jersey
07102-4077. In addition, monthly unaudited financial data are available upon
request from either Fund.
. SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Company at
Gateway Center Three, 100 Mulberry Street, 9th Floor, Newark, New Jersey
07102-4077, or by telephone, at (800) 225-1852 (toll-free) or, from outside
the U.S.A. at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
37
<PAGE>
APPENDIX A--INFORMATION ABOUT JENNISON ASSOCIATES CAPITAL CORP.
Jennison has been engaged in the equity investment management business since
1969. As of December 31, 1996, Jennison managed $33.1 billion in assets for
182 clients, including approximately $4.1 billion (12.3%) in mutual funds. Of
the $33.1 billion in assets, $17.8 billion in assets were in equity portfolios
for 96 clients, with an average account size of $185.5 million. Approximately
40% of Jennison's equity clients are "Fortune 500" companies (as defined by
Fortune Magazine in the issue dated April 29, 1996). As of December 31, 1996,
Jennison also managed $0.3 billion in growth and income portfolios, $1.9
billion in balanced portfolios, $3.3 billion in international equity
portfolios, and $9.8 billion in fixed income portfolios.
Jennison has an experienced team of investment professionals. The following
chart shows the total number of equity professionals employed by Jennison, as
of September 30, 1996, including the total number of portfolio managers and
the total number of equity research analysts.
<TABLE>
<CAPTION>
AVERAGE YEARS
AVERAGE YEARS OF EXPERIENCE
# OF EXPERIENCE WITH JENNISON
- ------------- -------------
<C> <S> <C> <C>
17 Total Equity Professionals 21 14
6 Equity Portfolio Managers 24 17
5 Equity Research Analysts 15 6
</TABLE>
JENNISON'S GROWTH STRATEGY:
Growth stocks are stocks of companies that have long-term growth rates in
sales and earnings that are higher than those of the overall economy. Growth
stocks are generally more expensive than the average stock (sell at a higher
price/earnings ratio) because investors are often willing to pay a premium in
order to participate in the superior growth they expect from these companies.
Consequently, these stocks also entail somewhat higher risk if expectations
are not met.
Growth stock investing is subject to market risk. The returns from the S&P
500 Index for the past fifteen years have been particularly favorable from a
historical standpoint and there can be no assurance that this growth in the
overall stock market will continue. Securities in which the Prudential
Jennison Growth Fund (Growth Fund) may primarily invest have historically been
more volatile than the S&P 500 Index. Accordingly, during periods when stock
prices are declining generally, it can be expected that the value of the
Growth Fund will decline more than market indices.
Jennison seeks to select attractive growth companies. The Jennison portfolio
managers' challenge is to select about 60 stocks that are believed to have the
potential to be the best performers among the larger universe of growth
stocks. Consequently, a growth stock portfolio managed by Jennison normally
consists of companies that the firm believes will experience superior earnings
growth over the next 12 to 18 months, on both an absolute and relative basis,
and which appear reasonably valued relative to growth expectations. Of course,
there can be no assurance that these stocks will achieve their growth
potential.
JENNISON'S GROWTH AND INCOME STRATEGY:
Jennison uses a bottom-up approach to research and select attractively
priced growth and income stocks. The Prudential Jennison Growth & Income
Fund's (Growth & Income Fund) stock holdings are selected primarily on the
basis of fundamental analysis. In considering a stock for ownership, a
company's underlying intermediate-term potential growth in sales and earnings
is a critical determining factor. Jennison's growth and income investment
team, in conjunction with Jennison's equity research analysts, focuses on
companies that combine superior current or perceived future earnings dynamics
with attractive valuation characteristics. The common investment discipline
that is required for all holdings is an attractive risk versus reward
relationship. Jennison believes that dividend growth will develop as a result
of improving fundamental characteristics. Of course, there can be no assurance
that the holdings in the portfolio will achieve the investment objective of
the Growth & Income Fund.
A-1
<PAGE>
APPENDIX B--HISTORICAL PERFORMANCE INFORMATION
OF JENNISON ASSOCIATES CAPITAL CORP.
GROWTH EQUITY CHARTS
The chart below demonstrates the total return of $10,000 invested separately
from July 1969 through September 30, 1996 in the Jennison Growth Equity
Composite and the S&P 500 Index. Total return reflects actual performance over
a stated period. Total return shows how much an investment has increased
(decreased) over a specified period of time assuming the reinvestment of
dividends and interest, as appropriate.
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GROWTH EQUITY S&P GROWTH EQUITY S&P
<S> <C> <C> <C> <C> <C>
7/31/69 10000 10000 11/30/83 43538 33940
8/31/69 10278 10401 12/31/83 43154 33758
9/30/69 10648 10224 1/31/84 40920 33579
10/31/69 11220 10664 2/29/84 38717 32399
11/30/69 11257 10300 3/31/84 39439 32949
12/31/69 11261 10199 4/30/84 39261 33270
1/31/70 10828 9420 5/31/84 36874 31430
2/28/70 11093 9917 6/30/84 38952 32105
3/31/70 10946 10017 7/31/84 38083 31721
4/30/70 9678 9111 8/31/84 42487 35226
5/31/70 8955 8562 9/30/84 41795 35222
6/30/70 8821 8216 10/31/84 42146 35365
7/31/70 9248 8818 11/30/84 40700 34955
8/31/70 9636 9210 12/31/84 41935 35885
9/30/70 10533 9602 1/31/85 46596 38693
10/31/70 10328 9491 2/28/85 46755 39165
11/30/70 10727 9943 3/31/85 45671 39188
12/31/70 11175 10597 4/30/85 45358 39148
1/31/71 11648 11026 5/31/85 48780 41429
2/28/71 12060 11126 6/30/85 49706 42079
3/31/71 13140 11622 7/31/85 49461 42043
4/30/71 13652 12044 8/31/85 49040 41671
5/31/71 13380 11543 9/30/85 47148 40358
6/30/71 13343 11638 10/31/85 50498 42243
7/31/71 12411 11157 11/30/85 54953 45127
8/31/71 12886 11560 12/31/85 57454 47311
9/30/71 12766 11569 1/31/86 59365 47563
10/31/71 12067 11086 2/28/86 64409 51111
11/30/71 12225 11058 3/31/86 67625 53994
12/31/71 13416 12101 4/30/86 66825 53409
1/31/72 13968 12320 5/31/86 70934 56242
2/29/72 14709 12632 6/30/86 72024 57185
3/31/72 14867 12796 7/31/86 67697 54008
4/30/72 15103 12852 8/31/86 71042 58003
5/31/72 15530 13172 9/30/86 63340 53193
6/30/72 14772 12882 10/31/86 67678 56291
7/31/72 14639 12912 11/30/86 69226 57648
8/31/72 15174 13357 12/31/86 68157 56161
9/30/72 15074 13386 1/31/87 79378 63716
10/31/72 14995 13510 2/28/87 86429 66221
11/30/72 15535 14127 3/31/87 86931 68157
12/31/72 16269 14395 4/30/87 86320 67535
1/31/73 15748 14149 5/31/87 88322 68112
2/28/73 15203 13619 6/30/87 91741 71578
3/31/73 14974 13693 7/31/87 95113 75204
4/30/73 13699 13166 8/31/87 100897 77993
5/31/73 13662 12950 9/30/87 99074 76307
6/30/73 13789 12903 10/31/87 76112 59849
7/31/73 14854 13426 11/30/87 69685 54891
8/31/73 14453 12967 12/31/87 77086 59100
9/30/73 14766 13523 1/31/88 77003 61666
10/31/73 14791 13539 2/29/88 82021 64439
11/30/73 12944 12032 3/31/88 79088 62467
12/31/73 12922 12282 4/30/88 79287 63239
1/31/74 12367 12193 5/31/88 78918 63661
2/28/74 12533 12184 6/30/88 84823 66633
3/31/74 11949 11936 7/31/88 82493 66467
4/30/74 11657 11507 8/31/88 78207 64118
5/31/74 11367 11159 9/30/88 81463 66859
6/30/74 10736 11033 10/31/88 81196 68811
7/31/74 9673 10214 11/30/88 79624 67727
8/31/74 9036 9331 12/31/88 82131 68906
9/30/74 7925 8258 1/31/89 88226 74030
10/31/74 9271 9646 2/28/89 86867 72073
11/30/74 9020 9175 3/31/89 89163 73791
12/31/74 8795 9032 4/30/89 95149 77743
1/31/75 9541 10181 5/31/89 101581 80723
2/28/75 10362 10830 6/30/89 100088 80304
3/31/75 10673 11105 7/31/89 108867 87638
4/30/75 11250 11671 8/31/89 110615 89263
5/31/75 11801 12227 9/30/89 111910 88909
6/30/75 12235 12811 10/31/89 109944 86921
7/31/75 11440 11984 11/30/89 112680 88606
8/31/75 10973 11774 12/31/89 112520 90740
9/30/75 10518 11408 1/31/90 103297 84737
10/31/75 11122 12153 2/28/90 105511 85676
11/30/75 11498 12496 3/31/90 109515 88006
12/31/75 11295 12394 4/30/90 107123 85901
1/31/76 12555 13902 5/31/90 121461 94095
2/29/76 12334 13786 6/30/90 122879 93536
3/31/76 12781 14252 7/31/90 118183 93208
4/30/76 12471 14138 8/31/90 105883 84794
5/31/76 12336 13978 9/30/90 99067 80667
6/30/76 12945 14594 10/31/90 98011 80324
7/31/76 12829 14522 11/30/90 107038 85539
8/31/76 12682 14496 12/31/90 110769 87902
9/30/76 12969 14872 1/31/91 120335 91725
10/31/76 12567 14593 2/28/91 130395 98289
11/30/76 12555 14534 3/31/91 135409 100671
12/31/76 13000 15351 4/30/91 133438 100890
1/31/77 12114 14625 5/31/91 139274 105268
2/28/77 11830 14310 6/30/91 129632 100439
3/31/77 11813 14208 7/31/91 138602 105116
4/30/77 11817 14267 8/31/91 143712 107598
5/31/77 11729 13987 9/30/91 142548 105805
6/30/77 12593 14678 10/31/91 147642 107224
7/31/77 12421 14497 11/30/91 143164 102900
8/31/77 12441 14249 12/31/91 165158 114673
9/30/77 12358 14271 1/31/92 162336 112537
10/31/77 11968 13708 2/29/92 165874 113991
11/30/77 12575 14130 3/31/92 158990 111777
12/31/77 12625 14234 4/30/92 156171 115058
1/31/78 11831 13418 5/31/92 158910 115622
2/28/78 11688 13133 6/30/92 152207 113901
3/31/78 12087 13533 7/31/92 158778 118560
4/30/78 13234 14757 8/31/92 155473 116133
5/31/78 13632 14885 9/30/92 159512 117493
6/30/78 13801 14688 10/31/92 165810 117901
7/31/78 14768 15548 11/30/92 175579 121907
8/31/78 15367 16017 12/31/92 178311 123407
9/30/78 15041 15967 1/31/93 179505 124438
10/31/78 13450 14571 2/28/93 172107 126155
11/30/78 14173 14884 3/31/93 177735 128797
12/31/78 14611 15179 4/30/93 170358 125682
1/31/79 15177 15857 5/31/93 179944 129029
2/28/79 14662 15336 6/30/93 178956 129423
3/31/79 15621 16256 7/31/93 177230 128903
4/30/79 15781 16358 8/31/93 185272 133784
5/31/79 15419 15999 9/30/93 188444 132765
6/30/79 16033 16691 10/31/93 191982 135510
7/31/79 16249 16912 11/30/93 186543 134216
8/31/79 17752 17887 12/31/93 194783 135838
9/30/79 18084 17961 1/31/94 201643 140471
10/31/79 17241 16817 2/28/94 199451 136656
11/30/79 18795 17608 3/31/94 186175 130700
12/31/79 19335 17995 4/30/94 186245 132377
1/31/80 20944 19127 5/31/94 188107 134534
2/29/80 20939 19116 6/30/94 176770 131250
3/31/80 18865 17248 7/31/94 183921 135561
4/30/80 19543 18053 8/31/94 196528 141106
5/31/80 20566 18974 9/30/94 192866 137644
6/30/80 21258 19579 10/31/94 199352 140740
7/31/80 23732 20936 11/30/94 195130 135610
8/31/80 24794 21140 12/31/94 193660 137623
9/30/80 26434 21775 1/31/95 192337 141192
10/31/80 27107 22209 2/28/95 200916 146692
11/30/80 31236 24569 3/31/95 209914 151024
12/31/80 30302 23843 4/30/95 216367 155451
1/31/81 28232 22835 5/31/95 223508 161672
2/28/81 29012 23225 6/30/95 241416 165439
3/31/81 30804 24161 7/31/95 255170 170930
4/30/81 31737 23686 8/31/95 253957 171358
5/31/81 33511 23740 9/30/95 261453 178587
6/30/81 31256 23605 10/31/95 262077 177950
7/31/81 30402 23648 11/30/95 267288 185761
8/31/81 28569 22281 12/31/95 259830 189339
9/30/81 27490 21186 1/31/96 262138 195782
10/31/81 29635 22323 2/29/96 272384 197585
11/30/81 29783 23246 3/31/96 271297 199500
12/31/81 29149 22658 4/30/96 284123 202441
1/31/82 29065 22359 5/31/96 291604 207571
2/28/82 27348 21101 6/30/96 285744 208362
3/31/82 26911 21009 7/31/96 263877 199120
4/30/82 28280 21952 8/31/96 276370 203318
5/31/82 26812 21207 9/30/96 296545 214760
6/30/82 26269 20889
7/31/82 25931 20510
8/31/82 29071 23024
9/30/82 29383 23302
10/31/82 33569 25976
11/30/82 37315 27037
12/31/82 36820 27555
1/31/83 38090 28584
2/28/83 39526 29228
3/31/83 40937 30316
4/30/83 43170 32699
5/31/83 43931 32416
6/30/83 46197 33670
7/31/83 43663 32668
8/31/83 42994 33171
9/30/83 43866 33624
10/31/83 41750 33234
</TABLE>
- -------
*Inception Date: 7/31/69 = $10,000.
Source: Jennison Associates Capital Corp.
All Jennison composite information, index information, and asset class
performance information rely on data provided by Jennison or from statistical
services, reports, or other sources believed by Jennison to be reliable,
including data from Standard & Poor's and The Wall Street Journal. Such
information, however, has not been verified and is unaudited. Of course, past
performance should not be interpreted as indicative of future performance.
The Jennison composite historical rates of return are time-weighted rates of
total return calculated in accordance with Performance Presentation Standards
of the Association for Investment Management and Research (AIMR). They are
calculated by dividing the period of time under study into subperiods whose
boundaries are the dates of cash and other asset flows into and from the
accounts constituting a given composite and by computing the internal rate of
return for each subperiod. The time-weighted rate of return is the average of
the rates for these subperiods with each rate being given a weight
proportionate to the length of time of its subperiod.
Jennison's results are based on the time-weighted rate of return achieved for
"Growth Equity" accounts managed by Jennison. As of September 30, 1996,
Jennison managed 103 accounts representing approximately $15.3 billion in
assets using a "Growth Equity" strategy. These accounts include the Prudential
Jennison Growth Fund and institutional and other mutual fund accounts whose
investment objectives and techniques are similar to the Prudential Jennison
Growth Fund. The institutional accounts are not registered investment companies
and are not subject to the investment limitations, diversification
requirements, and other restrictions that are imposed on mutual funds by the
Investment Company Act of 1940, as amended (the Investment Company Act) and
Subchapter M of the Internal Revenue Code of 1986, as amended (the Internal
Revenue Code), which, if applicable, may have adversely affected the
performance results of the Jennison Growth Equity Composite. Performance
results are net of Jennison advisory fees and assume the reinvestment of
dividends and distributions. The figures do not reflect the deduction of
operating expenses of mutual funds, such as distribution (Rule 12b-1) fees, or
any applicable sales charges. The net effect of the operating expenses of the
funds on annualized performance, including the compounded effect over time,
will vary by the size of the fee and the accounts investment performance, and
may be substantial. The accounts reflected in the "Growth Equity" performance
data have been determined by Jennison based on the manner in which it prepares
performance data generally.
(footnotes continued on next page)
B-1
<PAGE>
As of September 30, 1996, the "Growth Equity" accounts represented 88% of
all equity assets (approximately $17.3 billion) managed by Jennison, and 49%
of the aggregate assets (approximately $31.3 billion) managed by Jennison. The
only accounts using the "Growth Equity" investment strategy not included in
the composite are not fully discretionary (for example, do not permit certain
types of investments in the account), and individual taxable accounts which
represented approximately 0.1% of Jennison's equity assets under management,
as of September 30, 1996.
The performance of an investment in the S&P 500 Index was measured on a
calendar monthly basis. The S&P 500 Index is a capital-weighted index
representing the aggregate market value of the common equity of 500 stocks
primarily traded on the NYSE. These 500 stocks are composed of 400 industrial,
40 utility, 40 financial, and 20 transportation companies. The weight of each
stock in the index is proportional to its price times the number of shares
outstanding. The S&P 500 Index is an unmanaged index and includes the
reinvestment of all dividends. Investors cannot invest directly in an index.
Common stocks represent the ownership of a corporation, which can fluctuate in
value.
ANNUALIZED TOTAL RETURN DATA
The chart below demonstrates annualized total returns as of the fiscal year
ended September 30, 1996 of the Jennison Growth Equity Composite and the S&P
500 Index. Annualized total return is a hypothetical rate of return that if
achieved annually would have produced the same aggregate total return if
performance had been consistent over the period.
ANNUALIZED TOTAL RETURNS AS OF SEPTEMBER 30, 1996*
<TABLE>
<CAPTION>
JENNISON GROWTH
EQUITY S&P 500
PERIOD COMPOSITE (/1/) INDEX (/2/)
------ --------------- -----------
<S> <C> <C>
Since July 31, 1969 (inception)-1996.......... 13.28% 11.94%
25 Years (1971-1996).......................... 13.40 12.38
20 Years (1976-1996).......................... 16.93 14.27
15 Years (1981-1996).......................... 17.17 16.68
10 Years (1986-1996).......................... 16.68 14.96
7 Years (1989-1996).......................... 14.92 13.42
5 Years (1991-1996).......................... 15.76 15.19
3 Years (1993-1996).......................... 16.30 17.37
1 Year (1995-1996)........................... 13.42 20.25
</TABLE>
Sources: Jennison Associates Capital Corp. for Jennison Growth Equity
Composite and S&P 500 Index.
(/1/) Jennison's results are based on the time-weighted rate of return achieved
for "Growth Equity" accounts managed by Jennison. As of September 30, 1996,
Jennison managed 103 accounts representing approximately $15.3 billion in assets
using a "Growth Equity" strategy. These accounts include Prudential Jennison
Growth Fund and institutional and other mutual fund accounts whose investment
objectives and techniques are similar to the Prudential Jennison Growth Fund.
The institutional accounts are not registered investment companies and are not
subject to the investment limitations, diversification requirements, and other
restrictions that are imposed on mutual funds by the Investment Company Act and
Subchapter M of the Internal Revenue Code, which, if applicable, may have
adversely affected the performance results of the Jennison Growth Equity
Composite. Performance results are net of Jennison advisory fees only and assume
the reinvestment of dividends and distributions. The Composite performance
figures do not reflect the deduction of operating expenses of mutual funds, such
as distribution (Rule 12b-1) fees, or any applicable sales charges. The net
effect of the operating expenses of the funds on annualized performance,
including the compounded effect over time, will vary by the size of the fee and
the accounts investment performance, and may be substantial. As of September 30,
1996, the "Growth Equity" accounts represented 88% of equity assets
(approximately $17.3 billion) managed by Jennison and 49% of the aggregate
assets (approximately $31.3 billion) managed by Jennison. The only accounts
using the "Growth Equity" investment strategy not included in the composite are
not fully discretionary (for example, do not permit certain types of investments
in the account), and individual taxable accounts which represented approximately
0.1% of Jennison's equity assets under management, as of September 30, 1996. The
accounts reflected in the "Growth Equity" performance data have been determined
by Jennison based on the manner in which it prepares performance data generally.
Of course, past performance should not be interpreted as indicative of future
results.
(/2/) The S&P 500 is a capital-weighted index representing the aggregate market
value of the common equity of 500 stocks primarily traded on the NYSE. These 500
stocks are composed of 400 individual, 40 utility, 40 financial, and 40
transportational to its price times the number of shares outstanding. The S&P
500 Index is an unmanaged Index and includes the reinvestment of all dividends.
Investors cannot invest directly in an index. Common stocks represent the
ownership of a corporation, which can fluctuate in value.
* These results are unaudited. Past performance should not be interpreted as
indicative of future performance.
B-2
<PAGE>
Class A, B and C shares of the Growth Fund commenced investment operations
on November 2, 1995; Class Z shares of Growth Fund commenced investment
operations on April 15, 1996. As the Fund has not been in existence for a full
fiscal year, there is no annualized performance. Actual total returns (after
fees and expenses) from inception to September 30, 1996 were 4.22%, 3.90%,
7.90% and 6.40% for Class A, B, C and Z shares, respectively.
On September 20, 1996, the assets and liabilities of Growth Stock Fund (a
series of Prudential Dryden Fund, formerly The Prudential Institutional Fund)
were transferred to the Growth Fund in exchange solely for Class Z shares of
the Growth Fund (the Reorganization). The investment objectives and policies
of the Growth Stock Fund were substantially similar to those of Growth Fund
and both funds had the same investment adviser. Accordingly, if you purchased
shares of Growth Stock Fund at its inception on November 5, 1992, owned such
shares through September 20, 1996 (thereby participating in the
Reorganization), and continued to own Class Z shares received in the
Reorganization through September 30, 1996, your average annual total returns
(after fees and expenses) for the one, three and since inception (November 5,
1992) periods ended September 30, 1996 would have been 12.65%, 14.84% and
16.86%, respectively. In addition, the cumulative total returns for such
periods would have been 12.65%, 51.48% and 83.63%, respectively.
ANNUAL TOTAL RETURN DATA
The chart below demonstrates annual total returns as of September 30, 1996
of the Jennison Growth Equity Composite and the S&P 500 Index for the listed
calendar year. Total return reflects actual performance over a stated period.
Annual total return shows how much an investment has increased (or decreased)
over a one year period assuming the reinvestment of dividends and interest, as
appropriate.
ANNUAL TOTAL RETURNS AS OF SEPTEMBER 30, 1996*
<TABLE>
<CAPTION>
JENNISON
GROWTH EQUITY S&P 500
YEAR COMPOSITE(/1/) INDEX(/2/)
---- -------------- ----------
<S> <C> <C>
1969 (7/31/69 through 12/31/69)....................... 12.61% 1.99
1970.................................................. (.76) 3.91
1971.................................................. 20.06 14.19
1972.................................................. 21.26 18.96
1973.................................................. (20.57) (14.68)
1974.................................................. (31.94) (26.46)
1975.................................................. 28.42 37.23
1976.................................................. 15.10 23.85
1977.................................................. (2.88) (7.28)
1978.................................................. 15.73 6.64
1979.................................................. 32.33 18.55
1980.................................................. 56.72 32.50
1981.................................................. (3.80) (4.97)
1982.................................................. 26.32 21.61
1983.................................................. 17.20 22.51
1984.................................................. (2.82) 6.30
1985.................................................. 37.01 31.84
1986.................................................. 18.63 18.71
1987.................................................. 13.10 5.23
1988.................................................. 6.54 16.59
1989.................................................. 37.00 31.69
1990.................................................. (1.56) (3.13)
1991.................................................. 49.10 30.46
1992.................................................. 7.96 7.62
1993.................................................. 9.24 10.07
1994.................................................. (.58) 1.31
1995.................................................. 34.17 37.58
1996 (1/1/96 through 9/30/96)......................... 14.13 13.43
</TABLE>
- -------
Sources: Jennison Associates Capital Corp. for Jennison Growth Equity
Composite and S&P 500 Index.
(footnotes continued on next page)
B-3
<PAGE>
(/1/) Jennison's results are based on the time-weighted rate of return
achieved for "Growth Equity" accounts managed by Jennison. As of September
30, 1996, Jennison managed 103 accounts representing approximately $15.3
billion in assets using a "Growth Equity" strategy. These accounts include
Prudential Jennison Growth Fund, and institutional and other mutual fund
accounts whose investment objectives and techniques are similar to the
Prudential Jennison Growth Fund. The institutional accounts are not
registered investment companies and are not subject to the investment
limitations, diversification requirements, and other restrictions that are
imposed on mutual funds by the Investment Company Act and Subchapter M of the
Internal Revenue Code, which, if applicable, may have adversely affected the
performance results of the Jennison Growth Equity Composite. Performance
results are net of Jennison advisory fees only and assume the reinvestment of
dividends and distributions. The Composite performance figures do not reflect
the deduction of operating expenses of mutual funds, such as distribution
(Rule 12b-1) fees, or any applicable sales charges. The net effect of the
operating expenses of the funds on annualized performance, including the
compounded effect over time, will vary by the size of the fee and the
accounts' investment performance, and may be substantial. As of September 30,
1996, the "Growth Equity" accounts represented 88% of a equity assets
(approximately $17.3 billion) managed by Jennison and 49% of the aggregate
assets (approximately $31.3 billion) managed by Jennison. The only accounts
using the "Growth Equity" investment strategy not included in the composite
are not fully discretionary (for example, do not permit certain types of
investments in the account), and individual taxable accounts which
represented approximately 0.1% of Jennison's equity assets under management,
as of September 30, 1996. The accounts reflected in the "Growth Equity"
performance data have been determined by Jennison based on the manner in
which it prepares performance data generally. Of course, past performance
should not be interpreted as indicative of future results.
(/2/)The S&P 500 is a capital-weighted index representing the aggregate market
value of the common equity of 500 stocks primarily traded on the NYSE.
These 500 stocks are composed of 400 individual, 40 utility, 40 financial,
and 40 transportational to its price times the number of shares
outstanding. The S&P 500 Index is an unmanaged Index and includes the
reinvestment of all dividends. Investors cannot invest directly in an
index. Common stocks represent the ownership of a corporation, which can
fluctuate in value.
* These results are unaudited. Past performance should not be interpreted as
indicative of future performance.
Class A, B and C shares of the Growth Fund commenced investment operations
on November 2, 1995; Class Z shares commenced investment operations on April
15, 1996. Actual total returns (after fees and expenses) from inception to
September 30, 1996 were 4.22%, 3.90%, 7.90% and 6.40% for Class A, B, C and Z
shares, respectively.
On September 20, 1996, the assets and liabilities of Growth Stock Fund (a
series of Prudential Dryden Fund, formerly The Prudential Institutional Fund)
were transferred to the Growth Fund in exchange solely for Class Z shares of
the Growth Fund. The investment objectives and policies of the Growth Stock
Fund were substantially similar to those of Growth Fund and both funds had the
same investment adviser. Accordingly, if you purchased shares of Growth Stock
Fund at its inception on November 5, 1992, owned such shares through September
20, 1996 (thereby participating in the Reorganization), and continued to own
such Class Z shares received in the Reorganization through September 30, 1996,
your annual total returns (after fees and expenses) would have been:
ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------
<S> <C>
11/5/92-9/30/93.................................................. 21.22 %
9/30/94.......................................................... (0.50)%
9/30/95.......................................................... 35.14 %
9/30/96.......................................................... 12.65 %
</TABLE>
B-4
<PAGE>
GROWTH AND INCOME CHARTS
The chart below demonstrates the total return of $10,000 invested separately
from August 1980 through September 30, 1996 in the Jennison Growth & Income
Composite and the S&P 500 Index. Total return reflects actual performance over
a stated period. Total return shows how much an investment has increased
(decreased) over a specified period of time assuming the reinvestment of
dividends and interest, as appropriate.
TOTAL RETURN OF $10,000
INVESTED FROM AUGUST 1980* -SEPTEMBER 1996
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GROWTH & INCOME GROWTH & INCOME
COMPOSITE (NET) S&P 500 COMPOSITE (NET) S&P 500
<S> <C> <C> <C> <C> <C>
8/31/80 10000 10000 9/30/88 39182 31627
9/30/80 10493 10300 10/31/88 39344 32550
10/31/80 10622 10506 11/30/88 38597 32038
11/30/80 11768 11622 12/31/88 39178 32595
12/31/80 11605 11279 1/31/89 41936 35019
1/31/81 11025 10802 2/28/89 41508 34094
2/28/81 11424 10987 3/31/89 42719 34906
3/31/81 12187 11429 4/30/89 45648 36776
4/30/81 12560 11205 5/31/89 48439 38186
5/31/81 13149 11230 6/30/89 47954 37987
6/30/81 12380 11166 7/31/89 51925 41457
7/31/81 11970 11186 8/31/89 52786 42225
8/31/81 11322 10540 9/30/89 52916 42058
9/30/81 10951 10022 10/31/89 51549 41117
10/31/81 11617 10560 11/30/89 52912 41914
11/30/81 11752 10996 12/31/89 53001 42924
12/31/81 11605 10718 1/31/90 49613 40084
1/31/82 11613 10577 2/28/90 50296 40528
2/28/82 11216 9982 3/31/90 51342 41630
3/31/82 11143 9938 4/30/90 50623 40635
4/30/82 11612 10384 5/31/90 56355 44511
5/31/82 11116 10032 6/30/90 56727 44247
6/30/82 10978 9881 7/31/90 56279 44091
7/31/82 10847 9702 8/31/90 51197 40111
8/31/82 12069 10891 9/30/90 48613 38159
9/30/82 12184 11023 10/31/90 48549 37997
10/31/82 13707 12288 11/30/90 52667 40464
11/30/82 15173 12790 12/31/90 54961 41581
12/31/82 15186 13035 1/31/91 58431 43390
1/31/83 15577 13521 2/28/91 62547 46495
2/28/83 16212 13826 3/31/91 65060 47622
3/31/83 16830 14341 4/30/91 64612 47725
4/30/83 17732 15468 5/31/91 67112 49796
5/31/83 17898 15334 6/30/91 62865 47512
6/30/83 18767 15928 7/31/91 65731 49724
7/31/83 17868 15454 8/31/91 67010 50898
8/31/83 17665 15691 9/30/91 66307 50050
9/30/83 18075 15906 10/31/91 70004 50721
10/31/83 17500 15721 11/30/91 66984 48676
11/30/83 18185 16055 12/31/91 75053 54245
12/31/83 18150 15969 1/31/92 74198 53235
1/31/84 17600 15884 2/29/92 76672 53923
2/29/84 16613 15326 3/31/92 73286 52875
3/31/84 16963 15586 4/30/92 73332 54427
4/30/84 16892 15738 5/31/92 73596 54694
5/31/84 15904 14868 6/30/92 71557 53880
6/30/84 16712 15187 7/31/92 74726 56084
7/31/84 16300 15006 8/31/92 72267 54936
8/31/84 18226 16664 9/30/92 73826 55579
9/30/84 18025 16661 10/31/92 76237 55772
10/31/84 18292 16729 11/30/92 79957 57667
11/30/84 17835 16535 12/31/92 81455 58377
12/31/84 18495 16975 1/31/93 82555 58864
1/31/85 20374 18303 2/28/93 82132 59676
2/28/85 20568 18526 3/31/93 85044 60926
3/31/85 20201 18537 4/30/93 84194 59453
4/30/85 20019 18519 5/31/93 87156 61036
5/31/85 21521 19598 6/30/93 87236 61222
6/30/85 22037 19905 7/31/93 88126 60977
7/31/85 21989 19888 8/31/93 92298 63285
8/31/85 21848 19712 9/30/93 92355 62804
9/30/85 21213 19091 10/31/93 94191 64102
10/31/85 22604 19983 11/30/93 92742 63490
11/30/85 24323 21347 12/31/93 95387 64257
12/31/85 25505 22380 1/31/94 99694 66449
1/31/86 26490 22499 2/28/94 98282 64644
2/28/86 28566 24178 3/31/94 93451 61826
3/31/86 30030 25541 4/30/94 93802 62620
4/30/86 29422 25265 5/31/94 95321 63640
5/31/86 31042 26605 6/30/94 92049 62087
6/30/86 31079 27051 7/31/94 95295 64126
7/31/86 29443 25548 8/31/94 98726 66749
8/31/86 31214 27438 9/30/94 96169 65111
9/30/86 28315 25162 10/31/94 96207 66576
10/31/86 30325 26628 11/30/94 93192 64149
11/30/86 31103 27270 12/31/94 93394 65102
12/31/86 30499 26567 1/31/95 94560 66790
1/31/87 34942 30140 2/28/95 100479 69391
2/28/87 37185 31326 3/31/95 105078 71441
3/31/87 37492 32241 4/30/95 108487 73535
4/30/87 37426 31947 5/31/95 110684 76478
5/31/87 38078 32220 6/30/95 116982 78260
6/30/87 39347 33860 7/31/95 121942 80857
7/31/87 40881 35575 8/31/95 123290 81060
8/31/87 42968 36894 9/30/95 124432 84479
9/30/87 42826 36096 10/31/95 123137 84178
10/31/87 34222 28311 11/30/95 128003 87873
11/30/87 32000 25966 12/31/95 127366 89565
12/31/87 35060 27957 1/31/96 130027 92613
1/31/88 35674 29170 2/29/96 133506 93466
2/29/88 37973 30482 3/31/96 135568 94372
3/31/88 37136 29549 4/30/96 138923 95763
4/30/88 36907 29915 5/31/96 141468 98190
5/31/88 36977 30114 6/30/96 139345 98564
6/30/88 39637 31520 7/31/96 132739 94192
7/31/88 39133 31442 8/31/96 140049 96178
8/31/88 37695 30331 9/30/96 143769 101590
</TABLE>
* Inception Date: 8/31/80 = $10,000
Source: Jennison Associates Capital Corp.
All Jennison composite information, index information, and asset class
performance information rely on data provided by Jennison or from statistical
services, reports, or other sources believed by Jennison to be reliable,
including data from Standard & Poors and The Wall Street Journal. However, such
information has not been verified and is unaudited. Of course, past performance
should not be interpreted as indicative of future performance.
(footnotes continued on next page)
B-5
<PAGE>
The Jennison composite historical rates of return are time-weighted rates of
total return calculated in accordance with Performance Presentation Standards
of the Association for Investment Management and Research (AIMR). They are
calculated by dividing the period of time under study into subperiods whose
boundaries are the dates of cash and other asset flows into and from the
accounts constituting a given composite and by computing the internal rate of
return for each subperiod. The time-weighted rate of return is the average of
the rates for these subperiods with each rate being given a weight
proportionate to the length of time of its subperiod.
Jennison's results are based on the time-weighted rate of return achieved
for "Growth and Income" accounts managed by Jennison. As of September 30,
1996, Jennison managed 2 accounts representing approximately $231 million in
assets using a "Growth & Income" strategy. These accounts consist of
institutional accounts whose investment objectives and techniques are similar
to those of the Prudential Jennison Growth & Income Fund. Performance results
are net of Jennison advisory fees only and assume the reinvestment of
dividends and distributions. As of September 30, 1996, the "Growth and Income"
accounts represented 1.3% of all equity assets (approximately $17.3 billion)
managed by Jennison, and 0.7% of the aggregate assets (approximately $31.3
billion) managed by Jennison. None of the accounts included in the Jennison
Growth & Income Composite is a registered investment company, nor do these
accounts have the ability to engage in short sales. Additionally, the
institutional accounts are not subject to the investment limitations,
diversification requirements, and restrictions that are imposed on mutual
funds by the Investment Company Act and Subchapter M of the Internal Revenue
Code, which, if applicable, may have adversely affected the performance
results of the Jennison Growth & Income Composite. The accounts reflected in
the "Growth and Income" performance data have been determined by Jennison
based on the manner in which it prepares performance data generally.
The performance of an investment in the S&P 500 was measured on a calendar
monthly basis. The S&P 500 is a capital-weighted index representing the
aggregate market value of the common equity of 500 stocks primarily traded on
the NYSE. These 500 stocks are composed of 400 industrial, 40 utility, 40
financial, and 20 transportation companies. The weight of each stock in the
index is proportional to its price times the number of shares outstanding. The
S&P 500 Index is an unmanaged index and includes the reinvestment of all
dividends. Investors cannot invest directly in an index. Common stocks
represent the ownership of a corporation, which can fluctuate in value.
ANNUALIZED TOTAL RETURNS
The chart below demonstrates annualized total returns as of the fiscal year
ended September 30, 1996 of the Jennison Growth and Income Composite and the
S&P 500 Index. Annualized total return is a hypothetical rate of return that
if achieved annually would have produced the same aggregate total return if
performance had been consistent over the period.
ANNUALIZED TOTAL RETURNS AS OF SEPTEMBER 30, 1996*
<TABLE>
<CAPTION>
JENNISON GROWTH &
PERIOD INCOME COMPOSITE(/1/) S&P 500 INDEX(/2/)
------ --------------------- ------------------
<S> <C> <C>
Since August 31, 1980 (incep-
tion)-1996..................... 18.01 15.50
15 Years (1981-1996)............ 18.71 16.68
10 Years (1986-1996)............ 17.63 14.96
7 Years (1989-1996)............ 15.34 13.42
5 Years (1991-1996)............ 16.72 15.19
3 Years (1993-1996)............ 15.88 17.37
1 Year(1995-1996).............. 15.54 20.25
</TABLE>
- -------
Source: Jennison Associates Capital Corp.
(/1/)Jennison's results are based on the time-weighted rate of return achieved
for "Growth and Income" accounts managed by Jennison. As of September 30,
1996, Jennison managed 2 accounts representing approximately $231 million
in assets using a "Growth & Income" strategy. These accounts consist of
institutional accounts whose investment objectives and techniques are
similar to those of Prudential Jennison Growth & Income Fund. Performance
results are net of Jennison advisory fees only and assume the reinvestment
of dividends and distributions. As of September 30, 1996, the "Growth &
Income" accounts represented 1.3% of all equity assets (approximately $17.3
billion) managed by Jennison and 0.7% of the aggregate assets
(approximately $31.3 billion) managed by Jennison. None of the accounts
included in the Jennison Growth & Income Composite is a registered
investment company, nor do these accounts have the ability to engage in
short sales. Additionally, the institutional accounts are not subject to
the investment limitations, diversification requirements, and restrictions
that are imposed on mutual funds by the Investment Company Act and
Subchapter M of the Internal Revenue Code, which, if applicable, may have
adversely affected the performance results of the Jennison Growth & Income
Composite. The accounts reflected in the "Growth & Income" performance data
have been determined by Jennison based on the manner in which it prepares
performance data generally.
(/2/)The S&P 500 is a capital-weighted index representing the aggregate market
value of the common equity of 500 stocks primarily traded on the NYSE.
These 500 stocks are composed of 400 industrial, 40 utility, 40 financial,
and 20 transportation companies. The weight of each stock in the index is
proportional to its price times the number of shares outstanding. The S&P
500 Index is an unmanaged index and includes the reinvestment of all
dividends. Investors cannot invest directly in an index. Common stocks
represent the ownership of a corporation, which can fluctuate in value.
* These results are unaudited. Past performance should not be interpreted as
indicative of future performance.
B-6
<PAGE>
ANNUAL TOTAL RETURN DATA
The chart below demonstrates annual total returns, net of fees, for the
Jennison Growth and Income Composite and the S&P 500 Index for the listed
calendar year. Total return reflects actual performance over a stated period.
Annual total return shows how much an investment has increased (decreased)
over a one year period of time assuming the reinvestment of dividends and
interest, as appropriate.
ANNUAL TOTAL RETURNS*
<TABLE>
<CAPTION>
YEAR JENNISON GROWTH & INCOME COMPOSITE/1/ S&P 500 INDEX/2/
---- ------------------------------------- ----------------
<S> <C> <C>
1980 (8/31/80 through 12/31/80) 16.05% 12.79%
1981 0.00 (4.97)
1982 30.86 21.61
1983 19.52 22.51
1984 1.90 6.30
1985 37.90 31.84
1986 19.58 18.71
1987 14.96 5.23
1988 11.75 16.59
1989 35.28 31.69
1990 3.70 (3.13)
1991 36.56 30.46
1992 8.53 7.62
1993 17.10 10.07
1994 (2.09) 1.31
1995 36.38 37.58
1996
(1/1/96 through 9/30/96) 12.88 13.43
</TABLE>
- -------
Source: Jennison Associates Capital Corp.
/1/Jennison's results are based on the time-weighted rate of return achieved
for "Growth & Income" accounts managed by Jennison. As of June 30, 1996,
Jennison managed 2 accounts representing approximately $231 million in
assets using a "Growth & Income" strategy. These accounts consist of
institutional accounts whose investment objectives and techniques are
substantially similar to those of Prudential Jennison Growth & Income Fund.
Performance results are net of Jennison advisory fees only and assume the
reinvestment of dividends and distributions. As of September 30, 1996, the
"Growth & Income" accounts represented 1.3% of all equity assets
(approximately $17.3 billion) managed by Jennison, and 0.7% of the
aggregate assets (approximately $31.3 billion) managed by Jennison. None of
the accounts included in the Jennison Growth & Income Composite is a
registered investment company, nor do these accounts have the ability to
engage in short sales. Additionally, the institutional accounts are not
subject to the investment limitations, diversification requirements, and
restrictions that are imposed on mutual funds by the Investment Company Act
and Subchapter M of the Internal Revenue Code, which, if applicable, may
have adversely affected the performance results of the Jennison Growth &
Income Composite. The accounts reflected in the "Growth & Income"
performance data have been determined by Jennison based upon the manner in
which it prepares performance data generally.
/2/The S&P 500 Index is a capital-weighted index representing the aggregate
market value of the common equity of 500 stocks primarily traded on the
NYSE. These 500 stocks are composed of 400 industrial, 40 utility, 40
financial and 20 transportation companies. The weight of each stock in the
index is proportional to its price times the number of shares outstanding.
The S&P 500 Index is an unmanaged index and includes the reinvestment of
all dividends. Investors cannot invest directly in an index.
*These results are unaudited. Past performance should not be interpreted as
indicative of future performance.
B-7
<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
either Fund at (800) 225-1852 for a free prospectus. Read the prospectus
carefully before you invest or send money.
TAXABLE BOND FUNDS
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
TAX-EXEMPT BOND
FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Government Plus Fund, Inc.
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small Companies Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
. Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
. Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
. Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
. Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
C-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 either Fund or the Distributor. This Prospectus does
not constitute an offer by either Fund or by the Distributor to sell or a so-
licitation of any offer to buy any of the securities offered hereby in any ju-
risdiction to any person to whom it is unlawful to make such offer in such ju-
risdiction.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS........................................................... 2
What are Each Fund's Risk Factors and Special Characteristics?........... 2
FUND EXPENSES-GROWTH FUND................................................. 5
FUND EXPENSES-GROWTH & INCOME FUND........................................ 6
FINANCIAL HIGHLIGHTS-GROWTH FUND.......................................... 7
HOW THE FUNDS INVEST...................................................... 8
Investment Objectives and Policies....................................... 8
Other Investments and Policies........................................... 12
Risk Factors and Special Considerations of
Investing in Foreign Securities......................................... 14
Risk Factors Relating to Investing in Debt
Securities Rated Below Investment Grade (Junk Bonds)-Growth & Income
Fund Only............................................................... 15
Hedging and Return Enhancement Strategies................................ 16
Investment Restrictions.................................................. 18
HOW THE FUNDS ARE MANAGED................................................. 18
Manager.................................................................. 19
Subadviser............................................................... 19
Distributor.............................................................. 20
Fee Waivers and Subsidy.................................................. 22
Portfolio Transactions................................................... 22
Custodian and Transfer and Dividend Disbursing Agent..................... 22
HOW EACH FUND VALUES ITS SHARES........................................... 22
HOW THE FUNDS CALCULATE PERFORMANCE....................................... 23
TAXES, DIVIDENDS AND DISTRIBUTIONS........................................ 23
GENERAL INFORMATION....................................................... 25
Description of Common Stock.............................................. 25
Additional Information................................................... 26
SHAREHOLDER GUIDE......................................................... 26
How to Buy Shares of the Funds........................................... 26
Alternative Purchase Plan................................................ 27
How to Sell Your Shares.................................................. 31
Conversion Feature--Class B Shares....................................... 34
How to Exchange Your Shares.............................................. 35
Shareholder Services..................................................... 37
APPENDIX A--INFORMATION ABOUT JENNISON ASSOCIATES CAPITAL CORP. .......... A-1
APPENDIX B--HISTORICAL PERFORMANCE INFORMATION OF JENNISON ASSOCIATES
CAPITAL CORP............................................................. B-1
THE PRUDENTIAL MUTUAL FUND FAMILY......................................... C-1
</TABLE>
- --------------------------------------------------------------------------------
MF 172A
<TABLE>
<S> <C>
Growth Fund Cusip Nos.: Growth & Income Cusip Nos.:
Class A: 74437E 10 7 Class A: 74437E 50 3
Class B: 74437E 20 6 Class B: 74437E 60 2
Class C: 74437E 30 5 Class C: 74437E 70 1
Class Z: 74437E 40 4 Class Z: 74437E 80 0
</TABLE>
PRUDENTIAL
JENNISON
GROWTH FUND
AND
PRUDENTIAL
JENNISON
GROWTH &
INCOME
FUND
PROSPECTUS
JANUARY 13, 1997
[LOGO] Prudential
Investments
<PAGE>
PRUDENTIAL JENNISON SERIES FUND, INC.
Statement of Additional Information dated January 13, 1997
Prudential Jennison Series Fund, Inc. (the Company) is an open-end,
diversified, management investment company consisting of two series:
Prudential Jennison Growth Fund (Growth Fund) and Prudential Jennison Growth &
Income Fund (Growth & Income Fund) (each a Fund and collectively the Funds).
The investment objective of Growth Fund is long-term growth of capital. The
Growth Fund seeks to achieve this objective by investing primarily in equity
securities (common stock, preferred stock and securities convertible into
common stock) of established companies with above-average growth prospects.
Current income, if any, is incidental. Under normal market conditions, the
Growth Fund intends to invest at least 65% of its total assets in equity
securities of companies that exceed $1 billion in market capitalization. The
Growth Fund may also invest in (i) equity securities of other companies
including up to 20% of its total assets in securities of foreign issuers, (ii)
investment grade fixed-income securities and (iii) obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities,
including mortgage-backed securities. The Growth Fund may engage in various
derivative transactions, such as using options on stocks, stock indices and
foreign currencies, entering into foreign currency exchange contracts and the
purchase and sale of futures contracts on stock indices and options thereon to
hedge its portfolio and to attempt to enhance return.
The primary investment objective of Growth & Income Fund is long-term growth
of capital and income, with current income as a secondary objective. The
Growth & Income Fund seeks to achieve this objective by investing primarily in
common stocks of established companies with growth prospects believed to be
underappreciated by the market. The Growth & Income Fund may also invest in
(i) other common stocks, preferred stock and securities convertible into
common stock, (ii) equity and debt securities of foreign issuers (with respect
to 20% of its total assets), including ADRs, and (iii) fixed-income
securities, including corporate and other debt obligations and obligations
issued or guaranteed by the U.S. Government, its agencies and
instrumentalities. The Growth & Income Fund may also engage in short sales and
in various derivative transactions, such as using options on stocks, stock
indices and foreign currencies, entering into foreign currency exchange
contracts and the purchase and sale of futures contracts on stock indices and
debt securities and options thereon to hedge its portfolio and to attempt to
enhance return.
There can be no assurance that the Funds' investment objectives will be
achieved. See "Investment Objectives and Policies."
The Company's address is Gateway Center Three, Newark, New Jersey 07102-4077,
and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Funds' Prospectus, dated January 13, 1997, copies
of which may be obtained from the Company upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PAGE PROSPECTUS
----- ---------------
<S> <C> <C>
General Information...................................... B-2 25
Investment Objectives and Policies....................... B-2 8
Investment Restrictions.................................. B-14 18
Directors and Officers................................... B-15 18
Manager.................................................. B-19 19
Distributor.............................................. B-21 20
Portfolio Transactions and Brokerage..................... B-24 22
Purchase and Redemption of Fund Shares................... B-25 26
Shareholder Investment Account........................... B-28 37
Net Asset Value.......................................... B-32 22
Taxes.................................................... B-33 23
Performance Information.................................. B-36 23
Custodian, Transfer and Dividend Disbursing Agent and In-
dependent Accountants................................... B-38 22
Independent Auditors' Report............................. B-39 --
Financial Statements..................................... B-40 --
Description of Security Ratings.......................... A-1 --
Appendix I--Historical Performance Data.................. I-1 --
Appendix II--General Investment Information.............. II-1 --
Appendix III--Information Relating to The Prudential..... III-1 --
</TABLE>
<PAGE>
GENERAL INFORMATION
The Company changed its name from Prudential Jennison Fund, Inc. to
Prudential Jennison Series Fund, Inc., effective on September 10, 1996, in
connection with the offering of a second series, Prudential Jennison Growth &
Income Fund. The existing series of the Company was redesignated Prudential
Jennison Growth Fund.
INVESTMENT OBJECTIVES AND POLICIES
The Company is an open-end, diversified, management investment company
consisting of two series. Each series operates as a separate fund with its own
investment objectives and policies. The investment objective of the Growth
Fund is long-term growth of capital. The Growth Fund seeks to achieve this
objective by investing primarily in equity securities (common stock, preferred
stock and securities convertible into common stock) of established companies
with above-average growth prospects. Current income, if any, is incidental.
Under normal market conditions, the Growth Fund intends to invest at least 65%
of its total assets in equity securities of companies that exceed $1 billion
in market capitalization. The primary investment objective of the Growth &
Income Fund is long-term growth of capital and income, with current income as
a secondary objective. The Growth & Income Fund seeks to achieve its
objectives by investing primarily in common stocks of established companies
with growth prospects believed to be underappreciated by the market. See "How
the Funds Invest--Investment Objectives and Policies" in the Prospectus. There
can be no assurance that the Funds' investment objectives will be achieved.
The term "investment adviser" as used herein refers to Jennison Associates
Capital Corp., the Subadviser. See "Manager" below.
U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES. Each 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. Each Fund may invest in securities issued by agencies of
the U.S. Government or instrumentalities of the U.S. Government except that
the Growth & Income Fund does not intend to invest in mortgage-related
securities. 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, a 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 a Fund may invest which are not
backed by the full faith and credit of the United States include obligations
such as those issued by the Federal Home Loan Bank, the Federal Home Loan
Mortgage Corporation (FHLMC), the Federal National Mortgage Association, the
Student Loan Marketing Association, Resolution Funding Corporation and the
Tennessee Valley Authority, each of which has the right to borrow from the
U.S. Treasury to meet its obligations, and obligations of the Farm Credit
System, the obligations of which may be satisfied only by the individual
credit of the issuing agency. FHLMC investments may include collateralized
mortgage obligations.
Obligations issued or guaranteed as to principal and interest by the U.S.
Government may be acquired by a Fund in the form of custodial receipts that
evidence ownership of future interest payments, principal payments or both on
certain U.S. 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.
B-2
<PAGE>
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Growth 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 Growth Fund's ability to invest in high-yielding mortgage-backed
securities will be adversely affected to the extent that prepayments of
mortgages must be reinvested in securities which have lower yields than the
prepaid mortgages. Moreover, prepayments of mortgages which underlie
securities purchased at a premium could result in capital losses. During
periods of rising interest rates, the rate of prepayment of mortgages
underlying mortgage-backed securities can be expected to decline, extending
the projected average maturity of the mortgage-backed securities. This
maturity extension risk may effectively change a security which was considered
short- or intermediate-term at the time of purchase into a long-term security.
Long-term securities generally fluctuate more widely in response to changes in
interest rates than short- or intermediate-term securities.
Growth 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
Each 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" 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.
OPTIONS ON SECURITIES
Each 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
B-3
<PAGE>
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. A 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 a Fund is "covered" if the Fund owns the security
underlying the option or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its Custodian) upon conversion
or exchange of other securities held in its portfolio. A call option is also
covered if the Fund holds on a share-for-share basis a call on the same
security as the call written where the exercise price of the call held is
equal to or less than the exercise price of the call written. A Fund may also
write a call option or write a put option if it maintains cash or liquid
assets with a value equal to the exercise price in a segregated account with
its Custodian. A Fund may also write a put option if it 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.
A Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; a Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option
will generally reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option may be
offset in whole or in part if the Fund holds the underlying security by
appreciation of the underlying security owned by the Fund.
A 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, each
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
B-4
<PAGE>
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.
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 a 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 a 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 a 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.
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 a 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 a 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
B-5
<PAGE>
institution by an exchange of special procedures which may interfere with the
timely execution of customers' orders. Each Fund intends to purchase and sell
only those options which are cleared by clearinghouses whose facilities are
considered to be adequate to handle the volume of options transactions.
RISKS OF OPTIONS ON INDICES
A 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, a 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 policy of each Fund
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. A
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
a 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, a Fund will write call options on indices only
under the circumstances described below under "Limitations on Purchase and
Sale of Stock Options, Options on Stock Indices and Foreign Currencies and
Futures Contracts and Related Options."
Price movements in a Fund's portfolio probably will not correlate precisely
with movements in the level of the index and, therefore, a 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 a 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 a Fund in the opposite direction as the
market would be likely to occur for only a short period or to a small degree.
Unless a 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 a Fund fails
to anticipate an exercise, it may have to borrow from a bank (in amounts not
exceeding 20% of such Fund's total assets) pending settlement of the sale of
securities in its portfolio and would incur interest charges thereon.
When a 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, a 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 a Fund
would be able to deliver the underlying securities in settlement, a Fund may
have to sell part of its investment portfolio in order to make settlement in
cash, and the
B-6
<PAGE>
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 a Fund has written is "covered" by an index call held by the
Fund with the same strike price, the Fund will bear the risk that the level of
the index may decline between the close of trading on the date the exercise
notice is filed with the clearing corporation and the close of trading on the
date the Fund exercises the call it holds or the time the Fund sells the call
which, in either case, would occur no earlier than the day following the day
the exercise notice was filed.
If a 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 a
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 RELATED TO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Each Fund may enter into forward foreign currency exchange contracts in
several circumstances. When a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, or when a 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, a 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, a 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. If
a Fund enters into a hedging transaction as described above, the transaction
will be "covered" by the position being hedged, or the Fund's Custodian will
place cash, U.S. Government securities, equity securities or other liquid,
unencumbered assets into a segregated account of the Fund in an amount equal
to the value of the Fund's total assets committed to the consummation of
forward foreign currency exchange contracts (less the value of the 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
so that the value of the account will, at all times, equal the amount of the
Fund's net commitments with respect to such contracts.
A Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, a 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
B-7
<PAGE>
the market value of the security is less than the amount of foreign currency
that a 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 a 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 a 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.
Each Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. Of course, a 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 a 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 a 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 a Fund at one rate, while offering a lesser rate of exchange
should the Fund desire to resell that currency to the dealer.
FUTURES CONTRACTS
As a purchaser of a futures contract, a Fund incurs an obligation to take
delivery of a specified amount of the obligation underlying the futures
contract at a specified time in the future for a specified price. As a seller
of a futures contract, a Fund incurs an obligation to deliver the specified
amount of the underlying obligation at a specified time in return for an
agreed upon price. The Growth & Income Fund may purchase futures contracts on
debt securities, including U.S. Government securities, aggregates of debt
securities, stock indices and foreign currencies. The Growth Fund may purchase
futures contracts on stock indices and foreign currencies.
A Fund will purchase or sell futures contracts for the purpose of hedging its
portfolio (or anticipated portfolio) securities against changes in prevailing
interest rates. If the investment adviser anticipates that interest rates may
rise and, concomitantly, the price of the Fund's portfolio securities may
fall, a Fund may sell a futures contract. If declining interest rates are
anticipated, a Fund may purchase a futures contract to protect against a
potential increase in the price of securities the Fund intends to purchase.
Subsequently, appropriate securities may be purchased by a Fund in an orderly
fashion; as securities are purchased, corresponding futures positions would be
terminated by offsetting sales of contracts. In addition, futures contracts
will be bought or sold in order to close out a short or long position in a
corresponding futures contract.
Although most futures contracts call for actual delivery or acceptance of
securities or cash, the contracts usually are closed out before the settlement
date without the making or taking of delivery. A futures contract sale is
closed out by effecting a futures contract purchase for the same aggregate
amount of the specific type of security and the same delivery date. If the
sale price exceeds the offsetting purchase price, the seller would be paid the
difference and would realize a gain. If the offsetting purchase price exceeds
the sale price, the seller would pay the difference and would realize a loss.
Similarly,
B-8
<PAGE>
a futures contract purchase is closed out by effecting a futures contract sale
for the same aggregate amount of the specific type of security (or currency)
and the same delivery date. If the offsetting sale price exceeds the purchase
price, the purchaser would realize a gain, whereas if the purchase price
exceeds the offsetting sale price, the purchaser would realize a loss. There
is no assurance that a Fund will be able to enter into a closing transaction.
When a Fund enters into a futures contract it is initially required to
deposit with its Custodian, in a segregated account in the name of the broker
performing the transaction, an "initial margin" of cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets equal to
approximately 2-3% of the contract amount. Initial margin requirements are
established by the exchanges on which futures contracts trade and may, from
time to time, change. In addition, brokers may establish margin deposit
requirements in excess of those required by the exchanges.
Initial margin in futures transactions is different from margin in securities
transactions in that initial margin does not involve the borrowing of funds by
a brokers' client but is, rather, a good faith deposit on a futures contract
which will be returned to a Fund upon the proper termination of the futures
contract. The margin deposits made are marked-to-market daily and a Fund may
be required to make subsequent deposits into the segregated account,
maintained at its Custodian for that purpose, of cash or liquid assets, called
"variation margin," in the name of the broker, which are reflective of price
fluctuations in the futures contract.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
There are several risks in connection with the use of futures contracts as a
hedging device. 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 market trends by
the investment adviser may still not result in a successful hedging
transaction.
Although a 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 a 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. Currently, index futures contracts are available
on various U.S. and foreign securities indices.
Successful use of futures contracts by a 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 the securities market
generally. If a 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. A 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 a 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
B-9
<PAGE>
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. 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.
LIMITATIONS ON PURCHASE AND SALE OF STOCK OPTIONS, OPTIONS ON STOCK INDICES
AND FOREIGN CURRENCIES AND FUTURES CONTRACTS AND RELATED OPTIONS
Each Fund may write put and call options on stocks only if they are covered
as described above, and such options must remain covered so long as the Fund
is obligated as a writer. A Fund will write put options on stock indices and
foreign currencies only if they are covered by segregating with the Fund's
Custodian an amount of cash or liquid assets equal to the aggregate exercise
price of the puts. A Fund will not enter into futures contracts or related
options if the aggregate initial margin and premiums exceed 5% of the
liquidation value of such Fund's total assets, taking into account unrealized
profits and losses on such contracts, provided, however, that in the case of
an option that is in-the-money, the in-the-money amount may be excluded in
computing such 5%. The above restriction does not apply to the purchase or
sale of futures contracts and related options for bona fide hedging purposes,
within the meaning of regulations of the Commodity Futures Trading Commission.
Neither Fund intends 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. See "How the Funds Invest--Hedging and
Return Enhancement Strategies--Options Transactions" in the Prospectus.
Except as described below, a 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 a Fund writes a
call option on a broadly-based stock market index, the Fund will segregate or
put into escrow with its Custodian, or pledge to a broker as collateral for
the option, cash, U.S. Government securities, equity securities or other
liquid, unencumbered assets or a portfolio of stocks substantially replicating
the movement of the index, in the judgment of the Fund's investment adviser,
with a market value at the time the option is written of not less than 100% of
the current index value times the multiplier times the number of contracts.
If a 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, and that, in the
judgment of the investment adviser, substantially replicate the movement of
the index with a market value at the time the option is written of not less
than 100% of the current index value times the multiplier times the number of
contracts. Such stocks will include stocks which represent at least 50% of the
weighting of the industry or market segment index and will represent at least
50% of the Fund's holdings in that industry or market segment. No individual
security will represent more than 15% of the amount so segregated, pledged or
escrowed in the case of broadly-based stock market index options or 25% of
such amount in the case of industry or market segment index options. If at the
close of business on any day the market value of such qualified securities so
segregated, escrowed or pledged falls below 100% of the current index value
times the multiplier times the number of contracts, the Fund will so
segregate, escrow or pledge an amount in cash, U.S. Government securities,
equity securities or other liquid, unencumbered assets equal in value to the
difference. In addition, when a 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 or liquid assets 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 a 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
B-10
<PAGE>
the call written if the difference is maintained by the Fund in cash or liquid
assets in a segregated account with its Custodian, it will not be subject to
the requirements described in this paragraph.
POSITION LIMITS. Transactions by a 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 a 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, a 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 foreign 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, a 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.
A Fund will make commitments for such when-issued transactions only with the
intention of actually acquiring the securities. The Fund's Custodian will
maintain, in a separate account of the Fund, cash or liquid assets having a
value equal to or greater than such commitments. If a 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
Each Fund may make short sales of securities or maintain a short position,
provided that at all times when a short position is open the Fund owns an
equal amount of such securities or securities convertible into or
exchangeable, without payment of any further consideration, for an equal
amount of the securities of the same issuer as the securities sold short (a
short sale against-the-box), and that not more than 25% of the Fund's net
assets (determined at the time of the short sale) may be subject to such
sales. Short sales will be made primarily to defer realization of gain or loss
for federal tax purposes. As a matter of current operating policy, the Growth
Fund will not engage in short sales other than short sales against-the-box.
The Growth & Income Fund will engage in short sales, including short sales
against-the-box. See "How the Funds Invest--Other Investments and Policies--
Short Sales" in the Prospectus and "Investment Restrictions" below.
REPURCHASE AGREEMENTS
Each Fund's repurchase agreements will be collateralized by U.S. Government
obligations. A Fund will enter into repurchase transactions only with parties
meeting creditworthiness standards approved by the Company's Board of
Directors. The investment adviser will monitor the creditworthiness of such
parties, under the general supervision of the Board of Directors of the
Company. In the event of a default or bankruptcy by a seller, a 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>
LENDING OF SECURITIES
Consistent with applicable regulatory requirements, a 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
(including a letter of credit) 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 a 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. 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, a 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. A 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.
BORROWING
A Fund may borrow an amount equal to no more than 20% of the value of its
total assets (calculated at the time of the borrowing) from banks for
temporary, extraordinary or emergency purposes or for the clearance of
transactions. A Fund may pledge up to 20% of its total assets to secure these
borrowings. If a Fund's asset coverage for borrowings falls below 300%, the
Fund will take prompt action to reduce its borrowings. If the 300% asset
coverage should decline as a result of market fluctuations or other reasons,
the Fund may be required to sell portfolio securities to reduce the debt and
restore the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time. Such liquidations could
cause the Fund to realize gains on securities held for less than three months.
Because no more than 30% of a Fund's gross income may be derived from the sale
or disposition of securities held for less than three months to maintain the
Fund's status as a regulated investment company under the Internal Revenue
Code of 1986, as amended (the Internal Revenue Code), such gains would limit
the ability of the Fund to sell other securities held for less than three
months that the Fund might wish to sell. See "Taxes." A Fund will not purchase
portfolio securities when borrowings exceed 5% of the value of its total
assets.
Borrowing for investment purposes is generally known as "leveraging."
Leveraging exaggerates the effect on net asset value of any increase or
decrease in the market value of a Fund's portfolio. Money borrowed for
leveraging will be subject to interest costs which may or may not be recovered
by appreciation of the securities purchased and may exceed the income from the
securities purchased. In addition, a Fund may be required to maintain minimum
average balances in connection with such borrowing or pay a commitment fee to
maintain a line of credit which would increase the cost of borrowing over the
stated interest rate.
ILLIQUID SECURITIES
Neither Fund may hold more than 10% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other
illiquid securities, including securities that are illiquid by virtue of the
absence of a readily available market (either within or outside of the United
States) or legal or contractual restrictions on resale. Historically, illiquid
B-12
<PAGE>
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 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.
The staff of the SEC has taken the position, which the Funds will follow,
that purchased over-the-counter (OTC) options and the assets used as "cover"
for written OTC options are illiquid securities unless the Fund and the
counterparty have provided for the Fund, at the Fund's election, to unwind the
OTC option. The exercise of such an option would ordinarily involve the
payment by the Fund of an amount designed to reflect the counterparty's
economic loss from an early termination, but does allow the Fund to treat the
securities used as "cover" as liquid.
SECURITIES OF OTHER INVESTMENT COMPANIES
Each Fund may invest up to 10% of its total assets in securities of other
investment companies. Generally, a Fund does not intend to invest more than 5%
of its total assets in such securities. If a Fund does invest in securities of
other investment
B-13
<PAGE>
companies, shareholders of the Fund may be subject to duplicate management and
advisory fees. See "Investment Restrictions."
PORTFOLIO TURNOVER
As a result of the investment policies described above, each Fund may engage
in a substantial number of portfolio transactions, but neither Fund's
portfolio turnover rate is expected to exceed 100%. 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 a Fund. In addition, high portfolio
turnover may also mean that a proportionately greater amount of distributions
to shareholders will be taxed as ordinary income rather than long-term capital
gains compared to investment companies with lower portfolio turnover. See
"Portfolio Transactions and Brokerage" and "Taxes."
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies are
those which cannot be changed without the approval of the holders of a
majority of a Fund's outstanding voting securities. A "majority of the Fund's
outstanding voting securities," when used in this Statement of Additional
Information, means with respect to each Fund, 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.
Each Fund may not:
1. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); provided that
the deposit or payment by the Fund of initial or maintenance margin in
connection with futures or options is not considered the purchase of a
security on margin.
2. Make short sales of securities or maintain a short position if, when added
together, more than 25% of the value of the Fund's net assets would be (i)
deposited as collateral for the obligation to replace securities borrowed to
effect short sales and (ii) allocated to segregated accounts in connection
with short sales. Short sales "against-the-box" are not subject to this
limitation.
3. Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow from banks up to 20% of the value of its total assets
(calculated when the loan is made) for temporary, extraordinary or emergency
purposes or for the clearance of transactions. The Fund may pledge up to 20%
of the value of its total assets to secure such borrowings. For purposes of
this restriction, the purchase or sale of securities on a when-issued or
delayed delivery basis, forward foreign currency exchange contracts and
collateral 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, with respect to Growth & Income Fund, futures
contracts on debt securities, and forward foreign currency exchange contracts
are not deemed to be commodities or commodity contracts.)
B-14
<PAGE>
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. Neither Fund has adopted a fundamental
investment policy with respect to investments in restricted securities. See
"Illiquid Securities."
8. Make investments for the purpose of exercising control or management.
9. Invest in securities of other investment companies, except by purchases in
the open market involving only customary brokerage commissions and as a result
of which the Fund will not hold more than 3% of the outstanding voting
securities of any one investment company, will not have invested more than 5%
of its total assets in any one investment company and will not have invested
more than 10% of its total assets (determined at the time of investment) in
such securities of one or more investment companies, or except as part of a
merger, consolidation or other acquisition.
10. Invest in interests in oil, gas or other mineral exploration or
development programs, except that the Fund may invest in the securities of
companies which invest in or sponsor such programs.
11. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities limited to 30% of the Fund's total assets.
12. Purchase more than 10% of all outstanding voting securities of any one
issuer.
Whenever any fundamental investment policy or investment restriction states a
maximum percentage of a Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that a Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt
action to reduce its borrowings, as required by applicable law.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
NAME, ADDRESS POSITION WITH
AND AGE (1) COMPANY PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
------------- ------------- -----------------------------------------
<S> <C> <C>
Edward D. Beach (71) Director President and Director of BMC Fund, Inc., a
closed-end investment company; prior thereto,
Vice Chairman of Broyhill Furniture Industries,
Inc.; Certified Public Accountant; Secretary
and Treasurer of Broyhill Family Foundation,
Inc.; Member 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.; President and Director
of Global Utility Fund, Inc.; Director of The
High Yield Income Fund, Inc.
Delayne Dedrick Gold Director Marketing and Management Consultant; Director of
(58) The High Yield Income Fund, Inc.
*Robert F. Gunia (50) Vice President Comptroller, Prudential Investments (since May
and Director 1996); Executive Vice President and Treasurer,
Prudential Mutual Fund Management LLC (PMF);
Senior Vice President (since March 1987) of
Prudential Securities Incorporated (Prudential
Securities); Director (since June 1987),
Prudential Mutual Fund Services, Inc. (PMFS);
formerly Chief Administrative Officer (July
1990-September 1996), Director (January 1989-
September 1996), Executive Vice President,
Treasurer and Chief Financial Officer (June
1987-September 1996) of Prudential Mutual Fund
Management, Inc.; Vice President and Director
of The Asia Pacific Fund, Inc. (since May
1989); Director of The High Yield Income Fund,
Inc.
</TABLE>
B-15
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS
AND AGE (1) POSITION WITH COMPANY PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
------------- --------------------- -----------------------------------------
<S> <C> <C>
Donald D. Lennox (77) Director Chairman (since February 1990) and Director
(since April 1989) of International Imaging
Materials, Inc. (thermal transfer ribbon
manufacturer); Retired Chairman, Chief
Executive Officer and Director of Schlegel
Corporation (industrial manufacturing) (March
1987-February 1989); Director of Gleason
Corporation, Personal Sound Technologies, Inc.
and The High Yield Income Fund, Inc.
Douglas H. McCorkindale Director Vice Chairman, Gannett Co. Inc. (publishing and
(57) media) (since March 1984); Director of Gannett
Co. Inc., Frontier Corporation and Continental
Airlines, Inc.
*Mendel A. Melzer (35) Director Chief Investment Officer (since October 1996) of
751 Broad St. Prudential Mutual Funds; formerly Chief
Newark, NJ 07102 Financial Officer (November 1995-September
1996) of Prudential Investments, 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.
Thomas T. Mooney (54) Director President of the Greater Rochester Metro Chamber
of Commerce; former Rochester City Manager;
Trustee of Center for Governmental Research,
Inc.; Director of Blue Cross of Rochester,
Monroe County Water Authority, Rochester Jobs,
Inc., Executive Service Corps of Rochester,
Monroe County Industrial Development
Corporation, Northeast Midwest Institute, The
Business Council of New York State, First
Financial Fund, Inc., The High Yield Income
Fund, Inc. and The High Yield Plus Fund, Inc.
Stephen P. Munn (54) Director Chairman (since January 1994), Director and
President (since 1988) and Chief Executive
Officer (1988-December 1993) of Carlisle
Companies Incorporated (manufacturer of
industrial products).
*Richard A. Redeker (53) President and Director Employee of Prudential Investments; formerly
President, Chief Executive Officer and
Director (October 1993-September 1996) of
Prudential Mutual Fund Management, Inc.,
Executive Vice President, Director and Member
of the Operating Committee (1993-September
1996), Prudential Securities, Director
(October 1993-September 1996) of Prudential
Securities Group, Inc., Executive Vice
President, The Prudential Investment
Corporation (January 1994-September 1996),
Director (January 1994-September 1996),
Prudential Mutual Fund Distributors, Inc. and
Prudential Mutual Fund Services, Inc., and
Senior Executive Vice President and Director
of Kemper Financial Services, Inc. (September
1978-September 1993); President and Director
of The High Yield Income Fund, Inc.
</TABLE>
B-16
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS POSITION WITH
AND AGE (1) COMPANY PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
------------- ------------- -----------------------------------------
<S> <C> <C>
Robin B. Smith (57) Director Chairman (since August 1996) and Chief Executive
Officer (since January 1988), formerly
President (September 1981-August 1996) of
Publishers Clearing House; Director of
BellSouth Corporation, The Omnicom Group, Inc.,
Texaco Inc., Spring Industries Inc. and Kmart
Corporation.
Louis A. Weil, III (55) Director Publisher and Chief Executive Officer (since
January 1996) and Director (since September
1991) of Central Newspapers, Inc.; Chairman of
the Board (since January 1996), Publisher and
Chief Executive Officer (August 1991-December
1995) of Phoenix Newspapers, Inc.; formerly
Publisher of Time Magazine (May 1989-March
1991); formerly President, Publisher & CEO of
The Detroit News (February 1986-August 1989);
formerly member of the Advisory Board, Chase
Manhattan Bank-Westchester; Director of The
High Yield Income Fund, Inc.
Clay T. Whitehead (57) Director President of National Exchange Inc. (new
business development firm) (since May 1983).
S. Jane Rose (50) Secretary Senior Vice President (since December 1996),
PMF; formerly Senior Vice President (January
1991-September 1996) and Senior Counsel (June
1987-September 1996) of Prudential Mutual Fund
Management, Inc.; Senior Vice President and
Senior Counsel of Prudential Securities (since
July 1992); formerly Vice President and
Associate General Counsel of Prudential
Securities.
Eugene S. Stark (38) Treasurer and First Vice President (since December 1996) of
Principal Financial PMF; formerly First Vice President (January
and Accounting 1990-September 1996)) of Prudential Mutual Fund
Officer Management, Inc.
Ellyn C. Vogin (35) Assistant Secretary Vice President (since December 1996) of PMF;
formerly Vice President and Associate General
Counsel (March 1995-September 1996) of
Prudential Mutual Fund Management, Inc.; Vice
President and Associate General Counsel of
Prudential Securities (since March 1995); prior
thereto, associated with the law firm of
Fulbright & Jaworski L.L.P.
Stephen M. Ungerman (43) Assistant Treasurer Tax Director of Prudential Investments and the
Private Asset Group of The Prudential Insurance
Company of America (since March 1996); First
Vice President of Prudential Mutual Fund
Management, Inc. (February 1993-September
1996); prior thereto, Senior Tax Manager of
Price Waterhouse (1981-January 1993).
</TABLE>
- -------
(1) Unless otherwise stated, the address is c/o Prudential Mutual Fund
Management LLC, Gateway Center Three, Newark, New Jersey 07102-4077.
* "Interested" director, as defined in the Investment Company Act, by reason
of his or her affiliation with Prudential, Prudential Securities, or PMF.
Directors and officers of the Company are also trustees, directors and
officers of some or all of the other investment companies distributed by
Prudential Securities.
B-17
<PAGE>
The officers conduct and supervise the daily business operations of the
Company, while the Directors, in addition to their functions set forth under
"Manager" and "Distributor," oversee such actions and decide on general
policy.
Pursuant to the Management Agreement with the Company, the Manager pays all
compensation of officers and employees of the Company as well as the fees and
expenses of all Directors of the Company who are affiliated persons of the
Manager.
The Company pays each of its Directors who is not an affiliated person of PMF
or Jennison Associates Capital Corp. (Jennison or the Subadviser) annual
compensation of $7,500, in addition to certain out-of-pocket expenses.
Directors may receive their Directors' fees pursuant to a deferred fee
agreement with the Company. Under the terms of the agreement, the Company
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 (the T-bill rate) or,
pursuant to a Securities and Exchange Commission (SEC) exemptive order, at the
daily rate of return of a Fund (the Fund rate). Payment of the interest so
accrued is also deferred and accruals become payable at the option of the
Director. The Company's obligation to make payments of deferred Directors'
fees, together with interest thereon, is a general obligation of the Company.
Currently, Ms. Smith has agreed to defer her fees at the Fund rate.
The Board of Directors has adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 72, except that retirement is being phased in for Directors who were age 68
or older as of December 31, 1993. Under this phase-in provision, Messrs. Beach
and Lennox are scheduled to retire on December 31, 1999 and December 31, 1997,
respectively.
The following table sets forth estimated aggregate compensation to be paid by
the Company to the Directors for the fiscal year ended September 30, 1996 and
the aggregate compensation paid to such Directors for service on the Boards of
other investment companies managed by Prudential Mutual Fund Management LLC
(Fund Complex) for the calendar year ended December 31, 1995. In October 1996,
Shareholders elected a new Board of Directors of the Company. Below is listed
all Directors who have served the Company during its most recent fiscal year
as well as the new Directors who took office after the Shareholder meeting in
October.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL 1995
COMPENSATION
PAID TO BOARD
PENSION OR RETIREMENT MEMBERS
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM COMPANY
COMPENSATION AS PART OF COMPANY BENEFITS UPON AND FUND
NAME AND POSITION FROM COMPANY EXPENSES RETIREMENT COMPLEX
- ----------------- ------------ --------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Beach, Edward D.--Direc-
tor -- None N/A $183,500(22/43)*
Dorsey, Eugene C.**--
Former Director $7,500 None N/A $ 85,783(10/34)*
Gold, Delayne D.--Direc-
tor -- None N/A $183,250(24/45)*
Gunia, Robert F.(/1/)--
Vice President and Di-
rector -- None N/A --
Lennox, Donald D.--Di-
rector -- None N/A $ 86,250(10/22)*
McCorkindale, Douglas
H.--Director -- None N/A $ 63,750(7/10)
Melzer, Mendel A.(/1/)--
Director -- None N/A --
Mooney, Thomas T.--Di-
rector -- None N/A $125,625(14/19)*
Munn, Stephen P.--Direc-
tor -- None N/A $ 39,375(6/8)*
Redeker, Richard
A.(/1/)--President and
Director $ 0 None N/A $ 0
Smith, Robin B.**--Di-
rector $7,500 None N/A $100,741(10/19)*
Weil, III, Louis A.--Di-
rector -- None N/A $ 93,750(11/16)*
Whitehead, Clay T.--Di-
rector -- None N/A $ 35,500(4/5)*
</TABLE>
- -------
* Indicates number of funds/portfolios in Fund Complex (including the Company)
to which aggregate compensation relates.
(1) Directors who are "interested" do not receive compensation from the Fund
Complex (including the Company).
** Aggregate compensation from the Fund Complex for the year ended December
31, 1995, including accrued interest, amounted to approximately $85,783 and
$100,741 for each of Mr. Dorsey and Ms. Smith, respectively.
B-18
<PAGE>
As of November 8, 1996, the Directors and officers of the Company, as a
group, owned less than 1% of the outstanding common stock of each Fund.
As of November 8, 1996, beneficial owners, directly or indirectly of more
than 5% of any class of shares of the Growth Fund were: Pru Defined
Contribution SVCS, FBO Non-Trust Accounts, Attn: John Surdy, 30 Scranton
Office Park, Moosic, Pennsylvania owned approximately 22,943,920 Class Z
shares (or approximately 68.6% of the outstanding Class Z shares); and
Prudential Trust Company, FBO Pru-DC Trust Accounts, Attn: John Surdy, 30
Scranton Office Park, Moosic, Pennsylvania owned approximately 9,099,820 Class
Z shares (or approximately 27.2% of the outstanding Class Z shares). As of
November 8, 1996, beneficial owners, directly or indirectly of more than 5% of
any class of shares of the Growth & Income Fund were: Dr. Cecil H. Hale, 4100
Jackson Avenue, Apt. 212, Austin, Texas owned approximately 100,000 Class A
shares (or approximately 5.2% of the outstanding Class A shares); Bradley L.
Goldberg, 502 Orienta Avenue, Mamaroneck, New York owned approximately 138,380
Class A shares (or approximately 7.3% of the outstanding Class A shares);
James M. Rodney TTEE, James M. Rodney Trust, UA DTD 06/07/79, 725 Hanna,
Birmingham, Michigan owned approximately 32,500 Class C shares (or
approximately 7.7% of the outstanding Class C shares); Dr. Gerald F. Green
TTEE, Infants Children & Youth LMTD, MPP Plan DTD 01/07/81, P.O. Box L508,
Langhorne, Pennsylvania owned approximately 15,356 Class Z shares (or
approximately 55.0% of the outstanding Class Z shares); Mr. David L. Noble &
Mrs. Wilma R. Noble JT TEN, 307 Duncaster Drive, Houston, Texas owned 4,581
Class Z shares (or approximately 16.4% of the outstanding Class Z shares); Mr.
Henry E. Todd & Mrs. Jane H. Todd JTTEN, 690 Amster Green Drive, Dunwoody,
Georgia owned 1,522 Class Z shares (or approximately 5.5% of the outstanding
Class Z shares); Mr. Robert E. Lee TTEE, Profit Sharing PS Plan, DTD 06/01/89,
FBO Bob Lees Inc., 1631 4th Street North, St. Petersburg, Florida owned 1,534
Class Z shares (or approximately 5.5% of the outstanding Class Z shares); and
Mr. Clark Johnson TTEE, Clark Johnson Co. Inc., Money Purchase Pension Plan,
DTD 10/01/81, 14747 Artesia Blvd. Ste. 2E, La Miranda, California owned 3,160
Class Z shares (or approximately 11.3% of the outstanding Class Z shares).
As of November 8, 1996, Prudential Securities was the record holder for other
beneficial owners of 6,218,382 Class A shares (approximately 80.5% of such
shares outstanding), 16,708,081 Class B shares (approximately 75.9% of such
shares outstanding), 1,268,383 Class C shares (approximately 89.2% of such
shares outstanding) and for those holders with less than 1% of the outstanding
Class Z shares of Growth Fund; and 1,897,302 Class A shares (approximately
99.6% of such shares outstanding), 3,221,972 Class B shares (approximately
99.2% of such shares outstanding) and 421,184 Class C shares (approximately
100% of such shares outstanding) of Growth & Income Fund. 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 Company is Prudential Mutual Fund Management LLC (PMF or
the Manager), Gateway Center Three, Newark, New Jersey 07102-4077. PMF serves
as manager to all of the other investment companies that, together with the
Funds, comprise the Prudential Mutual Funds. See "How the Funds are Managed--
Manager" in the Prospectus. As of December 31, 1996, PMF managed and/or
administered open-end and closed-end management investment companies with
assets of approximately $55.2 billion. According to the Investment Company
Institute, as of August 31, 1996, the Prudential Mutual Funds were the 17th
largest family of mutual funds in the United States.
PMF is a subsidiary of Prudential Securities Incorporated and The Prudential
Insurance Company of America (Prudential). PMF has three wholly-owned
subsidiaries: Prudential Mutual Fund Distributors, Inc., Prudential Mutual
Fund Services, Inc. (PMFS or the Transfer Agent) and Prudential Mutual Fund
Investment Management. PMFS serves as the transfer agent for the Prudential
Mutual Funds and, in addition, provides customer service, recordkeeping and
management and administration services to qualified plans.
B-19
<PAGE>
Pursuant to the Management Agreement with the Company (the Management
Agreement), PMF, subject to the supervision of the Company's Board of
Directors and in conformity with the stated policies of each Fund, manages
both the investment operations of each Fund and the composition of each Fund's
portfolio, including the purchase, retention, disposition and loan of
securities and other assets. In connection therewith, PMF is obligated to keep
certain books and records of the Company. PMF also administers the Company's
corporate affairs and, in connection therewith, furnishes the Company with
office facilities, together with those ordinary clerical and bookkeeping
services which are not being furnished by State Street Bank and Trust Company,
the Funds' custodian (the Custodian), and PMFS, the Funds' transfer and
dividend disbursing agent. The management services of PMF for the Funds are
not exclusive under the terms of the Management Agreement and PMF is free to,
and does, render management services to others.
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .60 of 1% of each 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 a Fund (including the fees of PMF,
but excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and
enforced pursuant to the statutes or regulations of any jurisdiction in which
the Fund's shares are qualified for offer and sale, the compensation due to
PMF will be reduced by the amount of such excess. Reductions in excess of the
total compensation payable to PMF will be paid by PMF to the Company.
Currently, the Company believes that there are no such expense limitations.
In connection with its management of the corporate affairs of the Company,
PMF bears the following expenses:
(a) the salaries and expenses of all personnel of the Company and the
Manager, except the fees and expenses of Directors who are not affiliated
persons of PMF or the Company's investment adviser;
(b) all expenses incurred by PMF or by the Company in connection with
managing the ordinary course of a Fund's business, other than those assumed by
a Fund as described below; and
(c) the fees payable to the Subadviser pursuant to the Subadvisory Agreement
between PMF and Jennison (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Company 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 Company'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 each Fund and of pricing each Fund's shares,
(d) the charges and expenses of legal counsel and independent accountants for
the Company, (e) brokerage commissions and any issue or transfer taxes
chargeable to the Company in connection with its securities transactions, (f)
all taxes and corporate fees payable by the Company to governmental agencies,
(g) the fees of any trade associations of which the Company may be a member,
(h) the cost of stock certificates representing shares of the Company, (i) the
cost of fidelity and liability insurance, (j) certain organization expenses of
the Company and the fees and expenses involved in registering and maintaining
registration of the Company and of its shares with the SEC, registering the
Company as a broker or dealer and qualifying its shares under state securities
laws, including the preparation and printing of each 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
Company's business and (m) distribution fees.
B-20
<PAGE>
The Management Agreement provides that PMF will not be liable for any error
of judgment or for any loss suffered by a 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, including a majority of the Directors who are not parties to the
contract or interested persons of any such parties as defined in the
Investment Company Act, on April 9, 1996.
PMF has entered into the Subadvisory Agreement with Jennison, a wholly-owned
subsidiary of Prudential. The Subadvisory Agreement provides that Jennison
will furnish investment advisory services in connection with the management of
the Company. In connection therewith, Jennison is obligated to keep certain
books and records of each Fund. Under the Subadvisory Agreement, Jennison,
subject to the supervision of PMF, is responsible for managing the assets of
each Fund in accordance with its investment objectives, investment program and
policies. Jennison determines what securities and other instruments are
purchased and sold for each Fund and is responsible for obtaining and
evaluating financial data relevant to each Fund. PMF continues to have
responsibility for all investment advisory services pursuant to the Management
Agreement. Under the Subadvisory Agreement, PMF compensates Jennison for its
services at an annual rate of .30 of 1% of each Fund's average daily net
assets up to and including $300 million and .25 of 1% of the Fund's average
daily net assets in excess of $300 million.
For the fiscal period from November 2, 1995 (commencement of investment
operations) through September 30, 1996, PMF received from Growth Fund
management fees of $1,418,805, of which $709,402 was paid to Jennison
Associates. The Growth & Income Fund was not offered during the fiscal year
ended September 30, 1996.
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 Company, PMF or Jennison upon not more than 60 days', nor less than 30
days', written notice. The Subadvisory Agreement provides that it will
continue in effect for a period of more than two years from its execution only
so long as such continuance is specifically approved at least annually in
accordance with the requirements of the Investment Company Act. The Subsidiary
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 parties as defined in the Investment Company Act, on April 9, 1996.
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 Company.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the
Company under Rule 12b-1 under the Investment Company Act and a distribution
agreement (the Distribution Agreement), Prudential Securities (also the
Distributor) incurs the expenses of distributing the Company's Class A, Class
B and Class C shares. See "How the Funds are Managed--Distributor" in the
Prospectus. Prudential Securities serves as the Distributor of Class Z shares
and incurs the expenses of distributing the Class Z shares under a
Distribution Agreement with the Company, none of which are reimbursed by or
paid for by the Fund.
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
B-21
<PAGE>
(asset-based sales charge). On April 9 and July 9, 1996, the Board of
Directors of the Company, including a majority of the Directors who are not
interested persons of the Company and who have no direct or indirect financial
interest in the operation of the Plans or any agreement related thereto (Rule
12b-1 Directors), at a meeting called for the purpose of voting on each Plan,
approved the Class A, Class B and Class C Plan and the Distribution Agreement
with respect to Growth Fund and Growth & Income Fund, respectively. No shares
of the Growth & Income Fund were outstanding during the fiscal period ended
September 30, 1996.
Class A Plan. For the fiscal period from November 2, 1995 (commencement of
investment operations of the Growth Fund) through September 30, 1996, Growth
Fund paid distribution fees of $161,221 to Prudential Securities 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
of the Growth Fund. In addition, for the same period, Prudential Securities
received approximately $909,000 in initial sales charges with respect to the
sale of Class A shares.
Class B Plan. For the fiscal period from November 2, 1995 (commencement of
investment operations of the Growth Fund) through September 30, 1996,
Prudential Securities received $1,482,118 from the Growth Fund under the Class
B Plan and spent approximately $3,614,000 in distributing Class B shares of
the Growth Fund. It is estimated that of the latter amount, approximately
$118,000 (3.3%) was spent on printing and mailing of prospectuses to other
than current shareholders; $1,429,000 (39.5%) on compensation to Pruco
Securities Corporation, an affiliated broker-dealer (Prusec), for commissions
to its representatives and other expenses, including an allocation on account
of overhead and other branch office distribution-related expenses, incurred by
it for distribution of shares; and $2,067,000 (57.2%) on the aggregate of (i)
payments of commissions and account servicing fees to financial advisers
($673,700 or 18.6%) and (ii) an allocation on account of overhead and other
branch office distribution-related expenses ($1,393,300 or 38.6%). 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 Growth 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 Growth Fund shares; and (d) other
incidental expenses relating to branch promotion of Growth Fund shares.
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 same period, Prudential Securities
received approximately $350,000 in contingent deferred sales charges
attributable to Class B shares.
Class C Plan. For the fiscal period from November 2, 1995 (commencement of
investment operations of the Growth Fund) through September 30, 1996,
Prudential Securities received $114,523 from Growth Fund under the Class C
Plan and spent approximately $78,000 in distributing Class C shares of Growth
Fund. It is estimated that of the latter amount approximately 10.9% ($8,500)
was spent on printing and mailing of prospectuses to other than current
shareholders; 11.0% ($8,600) on compensation to Prusec for commissions to its
representative and other expenses, including an allocation of overhead and
other branch office distribution-related expenses, incurred by it for
distribution of shares of the Growth Fund; 78.1% ($60,900) on the aggregate of
(i) payments of commission and account servicing fees to financial advisors
39.6% ($30,900) and (ii) an allocation of overhead and other branch office
distribution-related expenses 38.5% ($30,000).
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 same period, Prudential Securities
received approximately $10,000 in contingent deferred sales charges
attributable to Class C shares.
The Class A, Class B and Class C Plans will continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority 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
B-22
<PAGE>
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. A 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 a 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 Company has agreed to indemnify
Prudential Securities to the extent permitted by applicable law against
certain liabilities under the Securities Act.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and
a limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition
or investment objectives. It was also alleged that the safety, potential
returns and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing
properties and aircraft leasing ventures. The SEC Order (i) included findings
that PSI's conduct violated the federal securities laws and that an order
issued by the SEC in 1986 requiring PSI to adopt, implement and maintain
certain supervisory procedures had not been complied with; (ii) directed PSI
to cease and desist from violating the federal securities laws and imposed a
$10 million civil penalty; and (iii) required PSI to adopt certain remedial
measures including the establishment of a Compliance Committee of its Board of
Directors. Pursuant to the terms of the SEC settlement, PSI established a
settlement fund in the amount of $330,000,000 and procedures, overseen by a
court approved Claims Administrator, to resolve legitimate claims for
compensatory damages by purchasers of the partnership interests. PSI has
agreed to provide additional funds, if necessary, for that purpose. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action. In settling the
above referenced matters, PSI neither admitted nor denied the allegations
asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and
other improper conduct resulting in pecuniary losses and other harm to
investors residing in Texas with respect to purchases and sales of limited
partnership interests during the period of January 1, 1980 through December
31, 1990. Without admitting or denying the allegations, PSI consented to a
reprimand, agreed to cease and desist from future violations, and to provide
voluntary donations to the State of Texas in the aggregate amount of
$1,500,000. The firm agreed to suspend solicitation of new customer accounts,
the general solicitation of new accounts, and the offer for sale of securities
in or from PSI's North Texas office to new customers during a period of twenty
consecutive business days, and agreed that its other Texas offices would be
subject to the same restrictions for a period of five consecutive business
days. PSI also agreed to institute training programs for its securities
salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. and PSI entered into
agreements with the United States Attorney deferring prosecution (provided PSI
complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the Fund established by the SEC and executed a
stipulation providing for a
B-23
<PAGE>
reversion of such funds to the United States Postal Inspection Service. PSI
further agreed to obtain a mutually acceptable outside director to sit on the
Board of Directors of PSG and the Compliance Committee of PSI. The new
director serves as an independent "ombudsman" whom PSI employees can call
anonymously with complaints about ethics and compliance. Prudential Securities
reports any allegations or instances of criminal conduct and material
improprieties to the new director. The new director submits compliance reports
which identify any such allegations or instances of criminal conduct and
material improprieties every three months and shall continue to do so for a
three-year period.
NASD MAXIMUM SALES CHARGE RULE
Pursuant to rules of the NASD, the Distributor is required to limit aggregate
initial sales charges, deferred sales charges and asset-based sales charges to
6.25% of total gross sales of each class of shares. 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 a 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.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities, futures
and options on securities and futures for the Company, 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. A Fund will not deal with
Prudential Securities or any affiliate in any transaction in which Prudential
Securities or any affiliate acts as principal, except in accordance with rules
of the SEC. 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 a 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 Company, will not significantly affect a
Fund's ability to pursue its present investment objective. However, in the
future in other circumstances, a 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 a 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 a 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
B-24
<PAGE>
investment activities, and some of such services obtained in connection with
the execution of transactions for a 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 a 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 a 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 a 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
Company's Board of Directors from time to time as to the extent and
continuation of this practice. The allocation or orders among brokers and the
commission rates paid are reviewed periodically by the Company's Board of
Directors. The Company will not pay up for research in principal transactions.
Subject to the above considerations, Prudential Securities (or any affiliate)
may act as a securities broker or futures commission merchant for the Company.
In order for Prudential Securities (or any affiliate) to effect any portfolio
transactions for a 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 Company, 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, as amended, Prudential Securities may not retain compensation for
effecting transactions on a national securities exchange for a Fund unless the
Fund has expressly authorized the retention of such compensation. Prudential
Securities must furnish to a 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. The Growth Fund paid
commissions of $436,218 for the fiscal period ended September 30, 1996, none
of which was paid to Prudential Securities or any of its affiliates.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of each 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
each Fund are offered to a limited group of investors at net asset value
without any sales charges. See "Shareholder Guide--How to Buy Shares of the
Funds" in the Prospectus.
Each class represents an interest in the same assets of a Fund and is
identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service fees (except for Class Z shares,
which are not subject to any sales charge or distribution and/or service
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
"Distributor" and "Shareholder Investment Account--Exchange Privilege."
B-25
<PAGE>
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Company 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
net asset value of Growth Fund at September 30, 1996, the maximum offering
price of Growth Fund's shares is as follows:
<TABLE>
<CAPTION>
PRUDENTIAL JENNISON
GROWTH FUND(1)
-------------------
<S> <C>
CLASS A
Net asset value and redemption price per Class A share..... $10.97
Maximum sales charge (5% of offering price)................ .58
------
Offering price to public................................... $11.55
======
CLASS B
Net asset value, redemption price and offering price per
Class B share*............................................ $10.89
======
CLASS C
Net asset value, redemption price and offering price per
Class C share*............................................ $10.89
======
CLASS Z
Net asset value, offering price and redemption price per
Class Z share............................................. $10.98
======
</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.
(1) The Growth & Income Fund did not commence investment operations until
November 1996.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of a 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 or group
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 a Fund and shares of other Prudential Mutual Funds (excluding money
market funds other than those acquired pursuant to the exchange privilege) to
determine the reduced sales charge. The value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly
with the Transfer Agent or through Prudential Securities. The value of
existing holdings for purposes of determining the reduced sales charge is
calculated using the maximum offering or price (net asset value plus maximum
sales charge) as of the previous business day. See "How Each Fund Values Its
Shares" in the Prospectus. The Distributor must be notified at the time of
purchase that the investor is entitled to a reduced sales charge. The reduced
sales charges will be granted subject to confirmation of the investor's
holdings. Rights of Accumulation are not available to individual participants
in any retirement or group plans.
LETTERS OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors), including retirement and group plans,
who enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of a 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 a Fund and
shares of other Prudential Mutual Funds (excluding money market funds other
than those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the
Transfer Agent or through Prudential Securities.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number
of investments over a thirteen-month period, and in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant
enrollment goal over a thirteen-month period. Each investment made during the
period, in the case of an Investment Letter of Intent, will receive the
reduced sales charge applicable to the amount represented by the goal, as if
it were a single investment. In the case of a Participant Letter of Intent,
each investment made during the period will be made at net asset value.
Escrowed Class A shares totaling 5% of the dollar amount of the Letter of
Intent will be held by the Transfer Agent in the name of the purchaser, except
in the case of retirement and group plans where the employer or plan sponsor
will be responsible for paying any applicable sales charge. The effective date
of an Investment Letter of Intent (except in the case of retirement and group
plans) may be back-dated up to 90 days, in order that any investments made
during this 90-day period, valued at the purchaser's cost, can be applied to
the fulfillment of the Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Company to sell, the indicated amount. Similarly, the Participant
Letter of Intent does not obligate the retirement or group plan to enroll the
indicated number of eligible employees or participants. In the event the
Letter of Intent goal is not achieved within the thirteen-month period, the
purchaser (or the employer or plan sponsor in the case of any retirement or
group plan) is required to pay the difference between the sales charge
otherwise applicable to the purchases made during this period and sales
charges actually paid. Such payment may be made directly to the Distributor
or, if not paid, the Distributor will liquidate sufficient escrowed shares to
obtain such difference. Investors electing to purchase Class A shares of a
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
individual participants in any retirement or group plans.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge is waived under circumstances described
in the Prospectus. See "Shareholder Guide--How to Sell Your Shares--Waiver of
Contingent Deferred Sales Charges--Class B Shares" in the Prospectus. In
connection with these waivers, the Transfer Agent will require you to submit
the supporting documentation set forth below.
<TABLE>
<C> <S>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death
certificate or, in the case of a trust, a
copy of the grantor's death certificate,
plus a copy of the trust agreement
identifying the grantor.
Disability--An individual will be A copy of the Social Security
considered disabled if he or she Administration award letter or a letter
is unable to engage in any sub- from a physician on the physician's
stantial gainful activity by letterhead stating that the shareholder
reason of any medically deter- (or, in the case of a trust, the grantor)
minable physical or mental im- is permanently disabled. The letter must
pairment which can be expected also indicate the date of disability.
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 Plan A letter signed by the plan
administrator/trustee indicating the reason
for the distribution.
Excess Contributions A letter from the shareholder (for an IRA)
or the plan administrator/trustee on
company letterhead indicating the amount of
the excess and whether or not taxes have
been paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents as
it may deem appropriate.
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. Each Fund makes
available to its shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. For the convenience of
investors, all dividends and distributions are automatically reinvested in
full and fractional shares of the applicable Fund. An investor may direct the
Transfer Agent in writing not less than five full business days prior to the
record date to have subsequent dividends or distributions sent in cash rather
than reinvested. In the case of recently purchased shares for which
registration instructions have not been received on the record date, cash
payment will be made directly to the dealer. Any shareholder who receives a
cash payment representing
B-28
<PAGE>
a dividend or distribution may reinvest such dividend or distribution at net
asset value by returning the check or the proceeds to the Transfer Agent
within 30 days after the payment date. Such investment will be made at the net
asset value per share next determined after receipt of the check or proceeds
by the Transfer Agent.
EXCHANGE PRIVILEGE. The Company makes available to its shareholders the
Exchange Privilege. The Company makes available to its shareholders the
privilege of exchanging their shares of a Fund for shares of certain other
Prudential Mutual Funds, including one or more specified money market funds,
subject in each case to the minimum investment requirements of such funds.
Shares of such other Prudential Mutual Funds may also be exchanged for shares
of a Fund. All exchanges are made on the basis of relative net asset value
next determined after 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 a Fund may exchange their Class A shares for shares
of certain other Prudential Mutual Funds, shares of Prudential Government
Securities Trust (Short-Intermediate Term Series) and shares of the money
market funds specified below. No fee or sales load will be imposed upon the
exchange. Shareholders of money market funds who acquired such shares upon
exchange of Class A shares may use the Exchange Privilege only to acquire
Class A shares of the Prudential Mutual Funds participating in the Exchange
Privilege.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New York Money Market Series)
(New Jersey Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A shares)
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of a Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential Mutual Funds and shares of Prudential Special Money Market Fund,
Inc., a money market fund. No CDSC will be payable upon such exchange, but a
CDSC may be payable upon the redemption of the Class B and Class C shares
acquired as a result of the exchange. The applicable sales charge will be that
imposed by the fund in which shares were initially purchased and the purchase
date will be deemed to be the date of the initial purchase, rather than the
date of the exchange.
Class B and Class C shares of a Fund may also be exchanged for shares of
Prudential Special Money Market Fund, Inc. without imposition of any CDSC at
the time of exchange. Upon subsequent redemption from such money market fund
or after re-exchange into a 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
B-29
<PAGE>
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 a Fund from a
money market fund during the month (and are held in the Fund at the end of the
month), the entire month will be included in the CDSC holding period.
Conversely, if shares are exchanged into a money market fund prior to the last
day of the month (and are held in the money market fund on the last day of the
month), the entire month will be excluded from the CDSC holding period. For
purposes of calculating the seven year holding period applicable to the Class
B conversion feature, the time period during which Class B shares were held in
a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class
B or Class C exchange privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of the Fund, respectively, without subjecting such shares to any CDSC. Shares
of any fund participating in the Class B or Class C exchange privilege that
were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares of other funds, respectively, without
being subject to any CDSC.
CLASS Z. CLASS Z SHARES MAY BE EXCHANGED FOR CLASS Z SHARES OF OTHER
PRUDENTIAL MUTUAL FUNDS.
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Funds' Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on 60 days' notice, and any fund, including a Fund, or
the Distributor, has the right to reject any exchange application relating to
such fund's shares.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a fixed
amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average
cost per share is lower than it would be if a constant number of shares were
bought at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.(/1/)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(/2/)
<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>
- -------
(/1/)Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition,
fees, room and board for the 1993-1994 academic year.
(/2/)The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of a Fund.
The investment return and principal value of an investment will fluctuate
so that an investor's shares when redeemed may be worth more or less than
their original cost.
B-30
<PAGE>
See "Automatic Savings Accumulation Plan."
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP, an investor may
arrange to have a fixed amount automatically invested in shares of a Fund
monthly by authorizing his or her bank account or Prudential Securities
Account (including a Command Account) to be debited to invest specified dollar
amounts in shares of a Fund. The investor's bank must be a member of the
Automatic Clearing House System. Stock certificates are not issued to ASAP
participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders through Prudential Securities or the Transfer Agent. Such
withdrawal plan provides for monthly or quarterly checks in any amount, except
as provided below, up to the value of the shares in the shareholder's account.
Withdrawals of Class B or Class C shares may be subject to a CDSC. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and
(iii) the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment Account--
Automatic Reinvestment of Dividends and Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may
be terminated at any time, and the Distributor reserves the right to initiate
a fee of up to $5 per withdrawal, upon 30 days' written notice to the
shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any gain
or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares
are inadvisable because of the sales charges applicable to (i) the purchase of
Class A shares and (ii) the withdrawal of Class B and Class C shares. Each
shareholder should consult his or her own tax adviser with regard to the tax
consequences of the plan, particularly if used in connection with a retirement
plan.
TAX-DEFERRED RETIREMENT PLANS. Various qualified retirement plans, including
a 401(k) plan, self-directed individual retirement accounts and "tax-deferred
accounts" under Section 403(b)(7) of the Internal Revenue Code are available
through the Distributor. These plans are for use by both self-employed
individuals and corporate employers. These plans permit either self-direction
of accounts by participants, or a pooled account arrangement. Information
regarding the establishment of these plans, and the administration, custodial
fees an 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
B-31
<PAGE>
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 a Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated.
Earnings in the IRA account will be subject to tax when withdrawn from the
account.
MUTUAL FUND PROGRAMS
From time to time, a Fund or the Company may be included in a mutual fund
program with other Prudential Mutual Funds. Under such a program, a group of
portfolios will be selected and thereafter marketed collectively. Typically,
these programs are created with an investment theme, e.g., to seek greater
diversification, protection from interest rate movements or access to
different management styles. In the event such a program is instituted, there
may be a minimum investment requirement for the program as a whole. A Fund may
waive or reduce the minimum initial investment requirements in connection with
such a program.
The mutual funds in the program may be purchased individually or as a part of
a program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, investors should consult their Prudential
Securities Financial Advisor or Prudential/Pruco Securities Representative
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
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 Company. In
accordance with procedures adopted by the Company's Board of Directors, the
value of investments listed on a securities exchange and NASDAQ National
Market System securities (other than options on stock and stock indices) are
valued at the last sales price on the day of valuation, or, if there was no
sale on such day, the mean between the last bid and asked prices on such day,
as provided by a pricing service. Corporate bonds (other than convertible debt
securities) and U.S. Government securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued on the basis of
valuations provided by a pricing service which uses information with respect
to transactions in bonds, quotations from bond dealers, agency ratings, market
transactions in comparable securities and various relationships between
securities in determining value. Convertible debt securities that are actively
traded in the over-the-counter market, including listed securities for which
the primary 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 or
B-32
<PAGE>
independent pricing agents. Options on stock and stock indices traded on an
exchange are valued at the mean between the most recently quoted bid and asked
prices on the respective exchange and futures contracts and options thereon
are valued at their last sales prices as of the close of the commodities
exchange or board of trade. Should an extraordinary event, which is likely to
affect the value of the security, occur after the close of an exchange on
which a portfolio security is traded, such security will be valued at fair
value considering factors determined in good faith by the investment adviser
under procedures established by and under the general supervision of the Board
of Directors.
Securities or other assets for which market quotations are not readily
available are valued at their fair value as determined in good faith by the
Board of Directors. Short-term debt securities are valued at cost, with
interest accrued or discount amortized to the date of maturity, if their
original maturity was 60 days or less, unless this is determined by the Board
of Directors not to represent fair value. Short-term securities with remaining
maturities of 60 days or more, for which market quotations are readily
available, are valued at their current market quotations as supplied by an
independent pricing agent or principal market maker. Each 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 a 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 a 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 or Class Z shares as a result of the larger distribution-related
fee to which Class B and Class C shares are subject and the net asset value of
Class A shares will generally be lower than that of Class Z shares because
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, if any, which will
differ by approximately the amount of the distribution and/or service fee
expense accrual differential among the classes.
TAXES
Each 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 and gains which are distributed to shareholders, and permits net
long-term capital gains of the Fund (i.e., the excess of net long-term capital
gains over net short-term capital losses) to be treated as long-term capital
gains of the shareholders, regardless of how long shareholders have held their
shares in the Fund.
Qualification as a regulated investment company requires, among other things,
that (a) at least 90% of a 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 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
B-33
<PAGE>
issuer, and (ii) not more than 25% of the value of its assets is invested in
the securities of any one issuer (other than U.S. Government securities); and
(d) the Fund distribute to its shareholders at least 90% of its net investment
income (including short-term capital gains) other than long-term capital gains
in each year.
Gains or losses on sales of securities by a Fund will be treated as long-term
capital gains or losses if the securities have been held by it for more than
one year except in certain cases where the Fund acquires a put or writes a
call thereon or makes a short sale against-the-box. Other gains or losses on
the sale of securities will be short-term capital gains or losses. Gains and
losses on the sale, lapse or other termination of options on securities will
generally be treated as gains and losses from the sale of securities (assuming
they do not qualify as Section 1256 contracts). If an option written by a 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 a 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 a Fund's
transactions may be subject to wash sale, short sale, conversion transaction
and straddle provisions of the Internal Revenue Code. In addition, debt
securities acquired by a Fund may be subject to original issue discount and
market discount rules.
Special rules apply to most options on stock indices, futures contracts and
options thereon, and forward foreign currency exchange contracts in which a
Fund may invest. See "Investment Objectives 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 a Fund's
taxable year; that is, treated as having been sold at market value. Except
with respect to forward foreign currency exchange contracts, 60% of any gain
or loss recognized on such deemed sales and on actual dispositions will be
treated as long-term capital gain or loss, and the remainder will be treated
as short-term capital gain or loss.
Gain or loss on the sale, lapse or other termination of options on stock and
on narrowly-based stock indices will be capital gain or loss and will be long-
term or short-term depending upon the holding period of the option. In
addition, positions which are part of a straddle will be subject to certain
wash sale and short sale provisions of the Internal Revenue Code. In the case
of a straddle, a Fund may be required to defer the recognition of losses on
positions it holds to the extent of any unrecognized gain on offsetting
positions held by the Fund. The conversion transaction rules may apply to
certain transactions to treat all or a portion of the gain thereon as ordinary
income rather than as capital gain.
A Fund's ability to hold foreign currencies or engage in hedging activities
may be limited by the 30% short-short rule discussed above.
A "passive foreign investment company" (PFIC) is a foreign corporation that,
in general, meets either of the following tests: (a) at least 75% of its gross
income is passive or (b) an average of at least 50% of its assets produce, or
are held for the production of, passive income. If a Fund acquires and holds
stock in a PFIC beyond the end of the year of its acquisition, the Fund will
be subject to federal income tax on a portion of any "excess distribution"
received on the stock or of any gain from disposition of the stock
(collectively, PFIC income), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders. Proposed Treasury regulations
provide that a Fund may make a "mark-to-market" election with respect to any
stock it holds of a PFIC. If the election is in effect, at the end of the
Fund's taxable year, the Fund will recognize the amount of gains, if any, with
respect to PFIC stock. No loss will be recognized on PFIC stock.
Alternatively, a Fund may elect to treat any PFIC in which it invests as a
"qualified electing fund," in which case, in lieu of the foregoing tax and
interest obligation, the Fund will be required to include in income each year
its pro rata share of the qualified electing fund's annual ordinary earnings
and net capital gain, even if they are not distributed to the Fund; those
amounts would be subject to the distribution requirements applicable to the
Fund described above. It may be very difficult, if not impossible, to make
this election because of certain requirements thereof.
B-34
<PAGE>
Under the Internal Revenue Code, gains or losses attributable to fluctuations
in exchange rates which occur between the time a Fund accrues interest or
other receivables or accrues expenses or other liabilities denominated in a
foreign currency and the time the Fund actually collects such receivables or
pays such liabilities are treated as ordinary income or ordinary loss.
Similarly, gains or losses on forward foreign currency exchange contracts or
dispositions of debt securities denominated in a foreign currency attributable
to fluctuations in the value of the foreign currency between the date of
acquisition of the security and the date of disposition also are treated as
ordinary gain or loss. These gains, referred to under the Internal Revenue
Code as "Section 988" gains or losses, increase or decrease the amount of a
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, a 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 may purchase debt securities that contain original issue discount.
Original issue discount that accrues in a taxable year is treated as income
earned by the Fund and therefore is subject to the distribution requirements
of the Internal Revenue Code.
Because the original issue discount income earned by the Fund in a taxable
year may not be represented by cash income, the Fund may have to dispose of
other securities and use the proceeds to make distributions to satisfy the
Internal Revenue Code's distribution requirements.
Each Fund is required to distribute 98% of its ordinary income in the same
calendar year in which it is earned. Each 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, a Fund will be subject to a nondeductible 4% excise tax on the
undistributed amount. For purposes of this excise tax, income on which a 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 a 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 a Fund by a
shareholder will be disallowed to the extent the shares are replaced within
the 61-day period beginning 30 days before the disposition of shares. Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of a Fund and sells or otherwise disposes
of such shares within 90 days of acquisition may not be allowed to include
certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of such
Fund.
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 or a foreign
entity (foreign shareholder) are subject to a 30% (or lower treaty rate)
withholding tax upon the gross amount of the dividends unless the dividends
are effectively connected with a U.S. trade or business conducted by the
foreign shareholder. Capital gain dividends paid to a foreign shareholder are
generally not subject to withholding tax. A foreign shareholder will, however,
be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.
B-35
<PAGE>
Dividends received by corporate shareholders are eligible for a dividends-
received deduction of 70% to the extent a Fund's income is derived from
qualified dividends received by the Fund from domestic corporations. Interest
income, capital gain net income, gain or loss from Section 1256 contracts
(described above), dividend income from foreign corporations and income from
other sources will not constitute qualified dividends. Individual shareholders
are not eligible for the dividends-received deduction.
Income received by a 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 a Fund will be subject, since the amount of the
Fund's assets to be invested in various countries will vary. A Fund does not
expect to meet the requirements of the Internal Revenue Code for "passing-
through" to its shareholders any foreign income taxes paid.
Foreign shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a Fund.
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. A 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
Funds Calculate Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P ( 1 + T )n = ERV
Where:P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value 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).
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 the period from November 2, 1995
(commencement of investment operations) to September 30, 1996 for the Class A,
Class B and Class C shares of Growth Fund was 4.2%, 3.9% and 7.9%,
respectively. The average annual total return for Class Z shares of Growth
Fund from April 15, 1996 (commencement of investment operations) to September
30, 1996 was 6.4%. Shares of Growth & Income Fund were not offered during the
fiscal period ended September 30, 1996.
On September 20, 1996, the assets and liabilities of Growth Stock Fund (a
series of Prudential Dryden Fund, formerly The Prudential Institutional Fund)
were transferred to the Growth Fund in exchange solely for Class Z shares of
the Growth Fund (the Reorganization). The investment objectives and policies
of the Growth Stock Fund were substantially similar to those of Growth Fund
and both funds had the same investment adviser. Accordingly, if you purchased
shares of Growth Stock Fund at its inception on November 5, 1992, owned such
shares through September 20, 1996 (thereby participating in the
Reorganization), and continued to own Class Z shares received in the
Reorganization through September 30, 1996, your average annual total returns
(after fees and expenses) for the one, three and since inception (November 5,
1992) periods ended September 30, 1996 would have been 12.65%, 14.84% and
16.86%, respectively. In addition, the aggregate total returns for such
periods would have been 12.65%, 51.48% and 83.63%, respectively.
B-36
<PAGE>
AGGREGATE TOTAL RETURN. A Fund may also advertise its aggregate total return.
Aggregate total return is determined separately for Class A, Class B, Class C
and Class Z shares. See "How the Funds Calculate Performance" in the
Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in a 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).
Aggregate total return does not take into account any federal or state income
taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges. The aggregate total return for the period
from November 2, 1995 (commencement of investment operations) to September 30,
1996 for the Class A, Class B and Class C shares of Growth Fund was 9.7%, 8.9%
and 8.9%, respectively. The aggregate total return for Class Z shares of
Growth Fund from April 15, 1996 (commencement of investment operations) to
September 30, 1996 was 6.4%. Shares of Growth & Income Fund were not offered
during the fiscal period ended September 30, 1996.
From time to time, the performance of a Fund may be measured against various
indices. Set forth below is a chart which compares the performance of
different types of investments over the long term and the rate of
inflation./1/
[CHART]
PERFORMANCE COMPARISON OF
DIFFERENT TYPES OF
INVESTMENTS OVER THE LONG TERM
(1/1926 - 12/1994)
COMMON STOCKS - 10.2%
LONG-TERM GOVT. BONDS - 4.8%
INFLATION - 3.1%
- -------
/1/Source: Ibbotson Associates Stocks, Bonds, Bills and Inflation--1995
Yearbook (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. Common stock
returns are based on the Standard and Poor's 500 Stock Index, a market-
weighted, unmanaged index of 500 common stocks in a variety of industry
sectors. It is a commonly used indicator of broad stock price movements.
This chart is for illustrative purposes only and is not intended to
represent the performance of any particular investment or fund. Investors
cannot invest directly in an index. Past performance is not a guarantee of
future results.
B-37
<PAGE>
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of each
Fund and cash and in that capacity maintains certain financial and accounting
books and records pursuant to an agreement with the Company. Subcustodians
provide custodial services for a Fund's foreign assets held outside the United
States. See "How the Funds are Managed--Custodian and Transfer and Dividend
Disbursing Agent" in the Prospectus.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of each
Fund. PMFS is a wholly-owned subsidiary of PMF. PMFS provides customary
transfer agency services to each 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 of $9.50, a new account set-up fee for each manually
established account of $2.00 and a monthly inactive zero balance account fee
per shareholder account of $.20. For the fiscal period ended September 30,
1996, Growth Fund incurred fees of approximately $312,000 for the services of
PMFS. PMFS is also reimbursed for its out-of-pocket expenses, including, but
not limited to, postage, stationery, printing, allocable communication
expenses and other costs. Growth & Income Fund did not commence investment
operations until November 1996.
Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281,
serves as the Company's independent accountants, and in that capacity audits
the annual financial statements of each Fund.
B-38
<PAGE>
Independent Auditors' Report PRUDENTIAL JENNISON GROWTH FUND
================================================================================
The Shareholders and Board of Directors
Prudential Jennison Growth Fund
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Jennison Growth Fund as of September
30, 1996, the related statements of operations and of changes in net assets, and
the financial highlights for the period November 2, 1995 (commencement of
investment operations) to September 30, 1996. 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 audit.
We conducted our audit 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 September 30, 1996 by
correspondence with the custodian and brokers; where replies were not received
from brokers, we performed other auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Jennison
Growth Fund as of September 30, 1996, the results of its operations, the changes
in its net assets and its financial highlights for the respective stated period,
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
November 4, 1996
- --------------------------------------------------------------------------------
B-39
<PAGE>
Portfolio of Investments as of
September 30, 1996 PRUDENTIAL JENNISON GROWTH FUND
================================================================================
Shares Description Value (Note 1)
- ---------------------------------------------------------------
LONG-TERM INVESTMENTS--99.1%
COMMON STOCKS--99.1%
- ---------------------------------------------------------------
Aerospace/Defense--2.9%
215,900 Boeing Co. $ 20,402,550
- ---------------------------------------------------------------
Airlines--1.5%
144,300 Delta Airlines, Inc. 10,389,600
- ---------------------------------------------------------------
Apparel--1.4%
78,700 NIKE, Inc., Class B 9,562,050
- ---------------------------------------------------------------
Banks & Financial Services--1.6%
135,200 Chase Manhattan Corp. 10,832,900
- ---------------------------------------------------------------
Beverages--1.2%
285,300 PepsiCo, Inc. 8,059,725
- ---------------------------------------------------------------
Biotechnology--0.6%
219,232 Chiron Corp. (a) 4,165,408
- ---------------------------------------------------------------
Business Services--8.8%
323,250 CUC International, Inc. (a) 12,889,594
377,600 Eagle River Interactive, Inc. (a) 3,870,400
127,033 First Data Corp. 10,369,068
235,000 Manpower, Inc. 7,813,750
263,600 Omnicom Group 12,323,300
199,000 Reuters Holdings PLC (ADR) (United
Kingdom) 13,780,750
------------
61,046,862
- ---------------------------------------------------------------
Cellular Communications--0.9%
186,800 Vodafone Group PLC (ADR) (United
Kingdom) 6,374,550
- ---------------------------------------------------------------
Computer Systems/Peripherals--4.8%
119,300 Dell Computer Corp. (a) 9,275,575
311,000 Hewlett-Packard Co. $ 15,161,250
160,000 Seagate Technology, Inc. (a) 8,940,000
------------
33,376,825
- ---------------------------------------------------------------
EDP Software & Services--11.0%
245,600 America Online, Inc. (a) 8,749,500
315,325 Computer Associates International,
Inc. 18,840,669
162,200 Electronic Data Systems Corp.,
(New) 9,955,025
199,700 Intuit, Inc. (a) 6,290,550
290,400 Macromedia, Inc. (a) 6,025,800
127,800 Microsoft Corp. (a) 16,853,625
174,400 SAP AG (ADR) (Germany) 9,897,200
------------
76,612,369
- ---------------------------------------------------------------
Electrical Equipment--1.3%
256,700 Picturetel Corp. (a) 9,048,675
- ---------------------------------------------------------------
Financial Companies--0.5%
96,500 Federal National Mortgage Assn. 3,365,438
- ---------------------------------------------------------------
Health Care Services--3.4%
267,900 Healthsouth Corp. (a) 10,280,663
345,200 PhyCor, Inc. (a) 13,139,175
------------
23,419,838
- ---------------------------------------------------------------
Household & Personal Care Products--4.2%
245,400 Gillette Co. 17,699,475
126,100 Kimberly-Clark Corp. 11,112,563
------------
28,812,038
- ---------------------------------------------------------------
Hotels--2.0%
497,200 Hilton Hotels Corp. 14,108,050
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-40
<PAGE>
Portfolio of Investments as of
September 30, 1996 PRUDENTIAL JENNISON GROWTH FUND
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<S> <C> <C>
Industrial Technology/Instruments--2.1%
204,100 KLA Instruments Corp. (a) $ 4,592,250
220,200 Symbol Technologies, Inc. (a) 10,129,200
------------
14,721,450
- ------------------------------------------------------------
Insurance--5.0%
80,600 CIGNA Corp. 9,661,925
181,900 MGIC Investment Corp. 12,255,512
260,432 Mutual Risk Management, Ltd. 7,552,528
84,500 UNUM Corp. 5,418,563
------------
34,888,528
- ------------------------------------------------------------
Machinery--1.0%
187,000 Harnischfeger Industries, Inc. 7,059,250
- ------------------------------------------------------------
Media--4.8%
118,000 Clear Channel Communications, Inc.
(a) 10,443,000
252,200 Disney (Walt) Co. 15,983,175
219,350 Infinity Broadcasting Corp., Class
A (a) 6,909,525
------------
33,335,700
- ------------------------------------------------------------
Networking--6.8%
301,800 3Com Corp. (a) 18,126,862
130,300 Ascend Communications, Inc. (a) 8,616,088
327,600 Cisco Systems, Inc. (a) 20,331,675
------------
47,074,625
- ------------------------------------------------------------
Oil Services--1.3%
111,700 Schlumberger, Ltd. 9,438,650
- ------------------------------------------------------------
Pharmaceuticals--10.0%
101,400 Astra AB (Sweden) 4,285,261
82,600 Astra AB Class A (ADR) (Sweden) 3,484,688
80,800 Ciba-Geigy AG (ADR) (Switzerland) 5,140,900
4,190 Ciba-Geigy AG (Switzerland) 5,358,176
252,100 Johnson & Johnson Co. 12,920,125
162,900 Lilly (Eli) & Co. 10,507,050
181,200 Pfizer, Inc. $ 14,337,450
220,500 SmithKline Beecham PLC (ADR)
(United Kingdom) 13,422,937
------------
69,456,587
- ------------------------------------------------------------
Publishing--1.5%
144,000 Scholastic Corp. (a) 10,440,000
- ------------------------------------------------------------
Restaurants--1.1%
249,000 Lone Star Steakhouse & Saloon, Inc. (a) 7,578,938
- ------------------------------------------------------------
Retail--9.2%
373,700 AutoZone, Inc. (a) 10,837,300
267,200 Corporate Express, Inc. 10,387,400
182,500 Gap, Inc. 5,269,687
245,633 Home Depot, Inc. 13,970,377
278,400 Kohl's Corp. 10,022,400
163,400 Saks Holdings, Inc. 5,719,000
482,400 Sunglass Hut Int'l., Inc. (a) 7,688,250
------------
63,894,414
- ------------------------------------------------------------
Electronic Components--5.4%
279,800 Intel Corp. 26,703,412
223,700 International Rectifier Corp. (a) 3,103,838
341,600 LSI Logic Corp.(a) 7,942,200
------------
37,749,450
- ------------------------------------------------------------
Telecommunications Equipment--4.5%
355,900 Ericsson (L.M.) Telephone Co., Inc.
(ADR) (Sweden) 9,030,962
216,800 Nokia Corp. (ADR) (Finland) 9,593,400
178,400 Tellabs, Inc.(a) 12,599,500
------------
31,223,862
- ------------------------------------------------------------
Telephones--0.3%
76,800 MCI Communications Corp. 1,968,000
------------
Total long-term investments
(cost $579,362,421) 688,406,332
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-41
<PAGE>
PRUDENTIAL JENNISON GROWTH FUND
Portfolio of Investments as of September 30, 1996
================================================================================
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
- -------------------------------------------------------------------
SHORT-TERM INVESTMENTS--1.0%
Commercial Paper--1.0%
P1 $ 6,602 Ford Motor Credit Co.,
5.36%, 10/1/96
(cost $6,602,000) $ 6,602,000
U.S. Government Security
United States Treasury
Bill
135 5.14%, 12/26/96
(cost $133,342) 133,342
------------
Total short-term
investments
(cost $6,735,342) 6,735,342
------------
- -------------------------------------------------------------------
Total Investments--100.1%
(cost $586,097,763; Note 4) 695,141,674
Liabilities in excess
of other assets--(0.1%) (464,318)
------------
Net Assets--100% $694,677,356
============
- ---------------
(a) Non-income producing security.
ADR--American Depository Receipt.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-42
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL JENNISON GROWTH FUND
================================================================================
<TABLE>
<CAPTION>
Assets September 30, 1996
------------------
<S> <C>
Investments, at value (cost $586,097,763)....................................... $695,141,674
Cash............................................................................ 453,117
Receivable for investments sold................................................. 5,671,677
Receivable for Fund shares sold................................................. 3,372,066
Dividends and interest receivable............................................... 370,243
Deferred expenses and other assets.............................................. 187,623
------------
Total assets................................................................. 705,196,400
------------
Liabilities
Payable for investments purchased............................................... 6,147,013
Payable for Fund shares reacquired.............................................. 3,222,198
Accrued expenses and other liabilities.......................................... 592,921
Management fee payable.......................................................... 346,672
Distribution fees payable....................................................... 210,240
------------
Total liabilities............................................................ 10,519,044
------------
Net Assets...................................................................... $694,677,356
============
Net assets were comprised of:
Common stock, at par......................................................... $ 63,469
Paid-in capital in excess of par............................................. 594,746,508
------------
594,809,977
Accumulated net realized loss on investments................................. (9,176,492)
Net unrealized appreciation on investments................................... 109,043,871
------------
Net assets, September 30, 1996.................................................. $694,677,356
============
Class A:
Net asset value and redemption price per share
($85,439,568 / 7,790,185 shares of common stock issued and outstanding)... $10.97
Maximum sales charge (5.0% of offering price)................................ .58
------
Maximum offering price to public............................................. $11.55
======
Class B:
Net asset value, offering price and redemption price per share
($231,541,269 / 21,258,423 shares of common stock issued and outstanding). $10.89
======
Class C:
Net asset value, offering price and redemption price per share
($15,280,552 / 1,402,944 shares of common stock issued and outstanding.... $10.89
======
Class Z:
Net asset value, offering price and redemption price per share
($362,415,967 / 33,017,749 shares of common stock issued and outstanding.. $10.98
======
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-43
<PAGE>
PRUDENTIAL JENNISON GROWTH FUND
Statement of Operations
================================================================================
November 2, 1995(a)
Through
Net Investment Income September 30, 1996
------------------
Income
Dividends (net of foreign
witholding taxes of $54,311).... $ 1,662,651
Interest........................... 480,129
-------------
Total income.................... 2,142,780
-------------
Expenses
Distribution fee--Class A.......... 161,221
Distribution fee--Class B.......... 1,482,118
Distribution fee--Class C.......... 114,523
Management fee..................... 1,418,805
Transfer agent's fees and
expenses........................ 377,000
Registration fees.................. 245,000
Reports to shareholders............ 140,000
Custodian's fees and expenses...... 112,000
Amortization of deferred
organization expense............ 44,589
Legal fees and expenses............ 42,000
Audit fees and expenses............ 25,000
Directors' fees.................... 22,500
Miscellaneous...................... 4,861
-------------
Total expenses.................. 4,189,617
-------------
Net investment loss................... (2,046,837)
-------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized loss on investment
transactions....................... (9,176,492)
Net unrealized appreciation of
investments........................ 36,196,257
-------------
Net gain on investments............... 27,019,765
-------------
Net Increase in Net Assets Resulting
from Operations....................... $ 24,972,928
=============
- ---------------
(a) Commencement of investment operations.
PRUDENTIAL JENNISON GROWTH FUND
Statement of Changes in Net Assets
================================================================================
November 2, 1995(a)
Increase (Decrease) Through
in Net Assets September 30, 1996
------------------
Operations
Net investment loss................ $ (2,046,837)
Net realized loss on investment
transactions.................... (9,176,492)
Net unrealized appreciation on
investments..................... 36,196,257
-------------
Net increase in net assets
resulting from operations....... 24,972,928
-------------
Fund share transactions (net of share
conversion) (Note 5)
Net proceeds from shares sold...... 819,026,956
Cost of shares reacquired.......... (149,422,528)
-------------
Net increase in net assets from
Fund share transactions......... 669,604,428
-------------
Total increase........................ 694,577,356
Net Assets
Beginning of period................... 100,000
-------------
End of period......................... $ 694,677,356
=============
- ---------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-44
<PAGE>
Notes to Financial Statements PRUDENTIAL JENNISON GROWTH FUND
================================================================================
Prudential Jennison Growth Fund (the "Series") is a separately managed series
of Prudential Jennison Series Fund, Inc., formerly Prudential Jennison Fund,
Inc. (the "Fund"). The Fund was incorporated in Maryland on August 10, 1995
and is registered under the Investment Company Act of 1940 as a diversified,
open-end management investment company. The Series had no significant operations
other than the issuance of 3,334 shares of Class A and 3,333 shares of each
Class B and Class C common stock for $100,000 on September 13, 1995 to
Prudential Mutual Fund Management LLC. ("PMF"). Investment operations
commenced on November 2, 1995.
The Series' investment objective is to achieve long-term growth of capital by
investing primarily in equity securities (common stock, preferred stock and
securities convertible into common stock) of established companies with
above-average growth prospects.
- --------------------------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Series in the preparation of its financial statements.
Security Valuation: Securities listed on a securities exchange (other than
options on securities and indices) are valued at the last sales price on the day
of valuation, or, if there was no sale on such day, at the average of readily
available closing bid and asked prices on such day as provided by a pricing
service. 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 by an 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 average of the most recently quoted bid and
asked prices provided by a principle market maker or dealer. Options on
securities and indices traded on an exchange are valued at the average of the
most recently quoted bid and asked prices provided by the respective exchange.
Futures contracts and options thereon are valued at the last sales price as of
the close of business of the exchange. 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 at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 p.m., New York time.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains or losses on sales of securities are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date; interest income is recorded on the accrual basis. Expenses are
recorded on the accrual basis which may require the use of certain estimates by
management.
Net investment income (loss), other than distribution fees, and realized and
unrealized gains or losses are allocated daily to each class of shares based
upon the relative proportion of net assets of each class at the beginning of
the day.
Dividends and Distributions: The Series expects to pay dividends of net
investment income, if any, semi-annually and to make distributions of any net
capital gains at least annually. Dividends and distributions are recorded on
the ex-dividend date. Income distributions and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles.
Reclassification of Capital Accounts: The Series accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. During the period ended
September 30, 1996, the Series reclassified current net operating losses by
decreasing accumulated net investment loss and decreasing paid-in capital by
$2,046,837. Net investment income, net realized gains, and net assets were not
affected by this change.
Taxes: It is the Series' policy to meet the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable net income to its shareholders. Therefore, no federal income tax
provision is required.
Withholding taxes on foreign dividends have been provided for in accordance with
the Series' understanding of the applicable country's tax rules and rates.
Deferred Organization Expenses: Approximately $250,000 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
Series commenced investment operations.
- --------------------------------------------------------------------------------
B-45
<PAGE>
Notes to Financial Statements PRUDENTIAL JENNISON GROWTH FUND
================================================================================
Note 2. Agreements
The Fund has a management agreement with PMF. Pursuant to a subadvisory
agreement between PMF and Jennison Associates Capital Corp. (``Jennison''),
Jennison furnishes investment advisory services in connection with the
management of the Fund. Under the subadvisory agreement, Jennison, subject to
the supervision of PMF, is responsible for managing the assets of the Series in
accordance with its investment objectives, and policies.
The management fee paid PMF will be computed daily and payable monthly, at an
annual rate of .60 of 1% of the average daily net assets of the Series. PMF pays
Jennison a subadvisory fee at an annual rate of .30 of 1% of the average daily
net assets of the Series up to and including $300 million and .25 of 1% of such
assets in excess of $300 million. PMF also pays the cost of compensation of
officers and employees of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The Fund has a distribution agreement with Prudential Securities Incorporated
(``PSI''), which acts as the distributor of the Class A, Class B and Class C
shares, pursuant to plans of distribution, (the ``Class A, B and C Plans'')
regardless of expenses actually incurred by them. The distribution fees are
accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C shares, respectively.
With respect to the Class A Plan, PSI has agreed to limit its
distribution-related costs to .25 of 1% of average daily net assets for the
fiscal year ended September 30, 1996. With respect to the Class B and Class C
Plans, the Fund compensates PSI for its distribution-related costs at an annual
rate of 1% of the average daily net assets.
PSI has advised the Series that it has received approximately $909,000 in
front-end sales charges resulting from sales of Class A shares during the period
ended September 30, 1996. From these fees, PSI paid such sales charges to
affiliated broker-dealers, which in turn paid commissions to salespersons and
incurred other distribution costs.
PSI has advised the Series that for the period ended September 30, 1996, it
received approximately $350,000 and $10,000 in contingent deferred sales charges
imposed upon certain redemptions by Class B and C shareholders, respectively.
PMF, Jennison and PSI are wholly-owned subsidiaries of The Prudential Insurance
Company of America.
- --------------------------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. ("PMFS"), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the period ended September 30,
1996, the Fund incurred fees of approximately $312,000 for the services of PMFS.
As of September 30, 1996, approximately $41,000 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- --------------------------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the period ended September 30, 1996 were $441,740,023 and $121,903,591,
respectively.
The federal income tax cost basis of the Fund's investments at September 30,
1996, was $589,584,288 and, accordingly, net unrealized appreciation of
investments for federal income tax purposes was $105,557,386 (gross unrealized
appreciation-$127,649,114; gross unrealized depreciation--$22,091,728).
The Fund will elect to treat net capital losses of approximately $6,706,000
incurred in the eleven month period ended September 30, 1996 as having been
incurred in the following year.
- --------------------------------------------------------------------------------
Note 5. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class B shares automatically convert to
Class A shares on a quarterly basis approximately seven years after purchase. A
special exchange privilege is also available for shareholders who qualified to
purchase Class A shares at net asset value. Class C shares are sold with a
contingent deferred sales charge of 1% during the first year. 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 for sale to specific
categories of investors.
There are 2.5 billion shares of $.001 par value common stock authorized which
are divided into four classes, designated Class A, Class B, Class C and Class Z,
each of which consists of 1 billion, 500 million, 500 million and 500 million
authorized shares, respectively.
- --------------------------------------------------------------------------------
B-46
<PAGE>
Notes to Financial Statements PRUDENTIAL JENNISON GROWTH FUND
================================================================================
Transactions in shares of common stock for the period November 2, 1995
(commencement of investment operations) through September 30, 1996 were as
follows:
Class A Shares Amount
- ------- ----------- -------------
Shares sold........................ 18,039,463 $ 185,913,237
Shares reacquired.................. (10,367,758) (108,741,785)
----------- -------------
Net increase in shares outstanding
before conversion................ 7,671,705 77,171,452
Shares issued upon conversion from
Class B.......................... 115,146 1,214,220
----------- -------------
Net increase in shares
outstanding...................... 7,786,851 $ 78,385,672
=========== =============
Class B
- -------
Shares sold........................ 23,516,319 $ 240,060,319
Shares reacquired.................. (2,146,698) (22,165,141)
----------- -------------
Net increase in shares outstanding
before conversion................ 21,369,621 217,895,178
Shares reacquired upon conversion
into Class A..................... (114,531) (1,214,220)
----------- -------------
Net increase in shares
outstanding...................... 21,255,090 $ 216,680,958
=========== =============
Class C
- -------
Shares sold........................ 1,610,012 $ 16,355,793
Shares reacquired.................. (210,401) (2,163,259)
----------- -------------
Net increase in shares
outstanding...................... 1,399,611 $ 14,192,534
=========== =============
Class Z
- -------
April 15, 1996(a) through
September 30, 1996
Shares sold........................ 2,971,624 $ 32,570,435
Shares issued due to merger (Note 6) 31,510,396 344,127,172
Shares reacquired.................. (1,464,271) (16,352,343)
----------- -------------
Net increase in shares
outstanding...................... 33,017,749 $ 360,345,264
=========== =============
(a) Commencement of offering of Class Z shares.
Of the shares outstanding at September 30, 1996, PMF and affiliates owned
5,633,139 shares of the Fund.
- ------------------------------------------------------------
Note 6. Acquisition of The Prudential Institutional Fund--Growth Stock Fund
On September 20, 1996, the Fund acquired all of the net assets of The Prudential
Institutional Fund--Growth Stock Fund (``Growth Stock Fund'') in exchange for
Class Z shares of the Fund pursuant to a plan of reorganization approved by
Growth Stock Fund shareholders on September 6, 1996. The acquisition was
accomplished by a tax-free exchange of 31,510,396 Class Z shares of the Fund
(valued at $344,127,172 in the aggregate) for 19,673,729 shares of Growth Stock
Fund outstanding on September 20, 1996. The aggregate net assets of the Fund and
Growth Stock immediately before the acquisition were $347,516,537 and
$344,127,172 (including $72,847,614 of net unrealized appreciation for the
Growth Stock Fund), respectively, thereby resulting in combined net assets of
$691,643,709 immediately after the reorganization.
- --------------------------------------------------------------------------------
B-47
<PAGE>
Financial Highlights PRUDENTIAL JENNISON GROWTH FUND
================================================================================
<TABLE>
<CAPTION>
Class A Class B Class C Class Z
------------- ------------- ------------- -------------
November 2, November 2, November 2, April 15,
1995(a) 1995(a) 1995(a) 1996(a)
Through Through Through Through
September 30, September 30, September 30, September 30,
1996(d) 1996(d) 1996(d) 1996(d)
------------- ------------- ------------- -------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period...... $ 10.00 $ 10.00 $ 10.00 $ 10.32
------- --------- ------- ---------
Income from investment operations
Net investment loss....................... (.03) (.10) (.10) (.02)
Net realized and unrealized gain on .68
investment transactions................. 1.00 .99 .99
------- --------- ------- ---------
Total from investment operations....... .97 .89 .89 .66
------- --------- ------- ---------
Net asset value, end of period............ $ 10.97 $ 10.89 $ 10.89 $ 10.98
======= ========= ======= =========
TOTAL RETURN(c)........................... 9.70% 8.90% 8.90% 6.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)........... $85,440 $ 231,541 $15,281 $ 362,416
Average net assets (000).................. $70,667 $ 162,412 $12,550 $ 26,829
Ratios to average net assets(b):
Expenses, including distribution fees.. 1.23% 1.98% 1.98% .98%
Expenses, excluding distribution fees.. .98% .98% .98% .98%
Net investment loss.................... (.37)% (1.12)% (1.12)% (.12)%
Portfolio turnover rate................... 42% 42% 42% 42%
Average commission rate paid per share.... $ .0611 $ .0611 $ .0611 $ .0611
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) 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.
(d) Calculated based upon weighted average shares outstanding during the period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-48
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
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 edged." 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 the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation 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 the 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 some time 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.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
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.
SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. 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 highest rated issues only in small degree.
A-1
<PAGE>
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB: Debt 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 in higher-rated categories.
BB, B, CCC AND CC: Debt rated BB, B, CCC and CC is regarded, on balance, as
having predominantly speculative characteristics with respect to capacity to
pay interest and repay principal. BB indicates the least 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 or major risk exposures to adverse conditions.
COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
DUFF & PHELPS CREDIT RATING CO.
LONG-TERM DEBT AND PREFERRED STOCK RATINGS
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA: High credit quality. Protection factors are strong. Risk is modest but
may vary sightly from time to time because of economic conditions.
A: Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB: Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB: Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B: Below investment grade and possessing risk that obligations will not be
met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
Duff & Phelps refines each generic rating classification from AA through B
with a "+" or a "-".
CCC: Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
SHORT-TERM DEBT RATINGS
DUFF 1 +: Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury short-
term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors
are minor.
DUFF 1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
A-2
<PAGE>
APPENDIX I--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the
rate of inflation.
(CHART)
Value of $1,000 invested on 1/1/26 through 6/30/96
Stocks (S&P 500) - $1,227,490
U.S. (Long-Term) Treasury Bonds - $31,622
U.S. (30 day) Treasury Bills - $13,192
U.S. Inflation - $8,741
Source: Ibbotson Associates' EnCORR Software, Chicago, Illinois. All rights
reserved. This example is for illustrative purposes only and is not intended
to represent the past, present, or future performance of the Fund. Small-sized
stock performance for the period 1926-1980 is based on a historical series
composed of stocks making up the 5th quintile of the New York Stock Exchange;
thereafter, the index reflects the total return achieved by Dimensional Fund
Advisors (DFA) Small Company Fund. Source of mid-sized stock performance:
University of Chicago's Center for Research in Security Prices (CRSP). Mid-
sized stocks are comprised of an index of medium-sized companies listed on the
New York Stock Exchange (NYSE). All eligible companies listed on the NYSE are
ranked by market capitalization and then split into ten equally populated
groups, or deciles. The 3-5 decile represents mid-sized companies in this
example. Large-sized stock total return is based on the Standard & Poor's 500
Index, a market-weighted index made up of 500 of the largest stocks in the
U.S. based upon their stock market value. Past performance is not indicative
of future results. Investors cannot buy or invest directly in market indices.
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.
I-1
<PAGE>
Set forth below is historical performance data relating to various sectors of
the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate
bonds, U.S. high yield bonds and world government bonds on an annual basis
from 1987 through 1995. The total returns of the indices include accrued
interest, plus the price changes (gains or losses) of the underlying
securities during the period mentioned. The data is provided to illustrate the
varying historical total returns and investors should not consider this
performance data as an indication of the future performance of the Fund or of
any sector in which the Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information
has not been verified. The figures do not reflect the operating expenses and
fees of a mutual fund. See "Fund Expenses" in the Prospectus. The net effect
of the deduction of the operating expenses of a mutual fund on these
historical total returns, including the compounded effect over time, could be
substantial.
(CHART)
<TABLE>
<CAPTION>
Year '87 '88 '89 '90 '91 '92 '93 '94 '95
- ---- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Bonds 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% -3.4% 18.4%
Mortgage Securities 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% -1.6% 16.8%
U.S. Corporate Bonds 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% -3.9% 22.3%
U.S. High Yield
Corporate Bonds 5.0% 12.5% 0.8% -9.6% 46.2% 15.8% 17.1% -1.0% 19.2%
World Government
Bonds 35.2% 2.3% -3.4% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6%
Difference between
highest and lowest
return in percent 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5
</TABLE>
- -------
/1/Lehman Brothers Treasury Bond Index is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.
/2/Lehman Brothers Mortgage-Backed Securities Index is an unmanaged index that
includes over 600 15-and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
/3/Lehman Brothers Corporate Bond Index includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
/4/Lehman Brothers High Yield Bond Index is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one
year.
/5/Salomon Brothers World Government Index (Non U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
I-2
<PAGE>
This chart illustrates the This chart shows the growth of a
performance of major world stock hypothetical $10,000 investment
markets for the period from 1986 made in the stocks representing
through 1995. It does not the S&P 500 stock index with and
represent the performance of any without reinvested dividends.
Prudential Mutual Fund.
(CHART)
(CHART)
Hong Kong - 23.8% Capital Appreciation and Reinvesting
Belgium - 20.7% Dividends - $186,208
Sweden - 19.4% Capital Appreciation Only - $66,913
Netherlands - 19.3%
Spain - 17.9%
Switzerland - 17.1%
France - 15.3%
U.K. - 15.0%
U.S. - 14.8%
Japan - 12.8%
Austria - 10.9%
Germany - 10.7%
Source: Stocks, Bonds, Bills, and
Source: Morgan Stanley Capital Inflation 1995 Yearbook, Ibbotson
International (MSCI) Used with Associates, Chicago (annually
permission. Morgan Stanley Country updates work by Roger G. Ibbotson
indices are unmanaged indices and Rex A. Sinquefield). Used with
which include those stocks making permission. All rights reserved.
up the largest two-thirds of each This chart is used for
country's total stock market illustrative purposes only and is
capitalization. Returns reflect not intended to represent the
the reinvestment of all past, present or future
distributions. This chart is for performance of any Prudential
illustrative purposes only and is Mutual Fund. Common stock total
not indicative of the past, return is based on the Standard &
present or future performance of Poor's 500 Stock Index, a market-
any specific investment. Investors value-weighted index made up of
cannot invest directly in stock 500 of the largest stocks in the
indices. U.S. based upon their stock market
value. Investors cannot invest
directly in indices.
WORLD STOCK MARKET CAPITALIZATION BY REGION
(CHART)
World Total: $9.2 Trillion
Canada - 2.2%
U.S. - 40.8%
Pacific Basin - 28.7%
Europe - 28.3%
Source: Morgan Stanley Capital
International, December 1995. Used
with permission. This chart represents
the capitalization of major world
stock markets as measured by the
Morgan Stanley Capital International
(MSCI) World Index. The total market
capitalization is based on the value
of 1579 companies in 22 countries
(representing approximately 60% of the
aggregate market value of the stock
exchanges). This chart is for
illustrative purposes only and does
not represent the allocation of any
Prudential Mutual Fund.
I-3
<PAGE>
The chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.
(CHART)
- -------
Source: Stocks, Bonds, Bills, and Inflation 1996 Yearbook, Ibbotson
Associates, Chicago (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. The chart illustrates
the historical yield of the long-term U.S. Treasury Bond from 1926-1995.
Yields represent that of an annually renewed one-bond portfolio with a
remaining maturity of approximately 20 years. This chart is for illustrative
purposes and should not be construed to represent the yields of any Prudential
Mutual Fund.
I-4
<PAGE>
The following chart, although not relevant to share ownership in a Fund, may
provide useful information about the effects of a hypothetical investment
diversified over different asset portfolios. The chart shows the range of
annual total returns for major stock and bond indices for the period from
December 31, 1975 through December 31, 1995. The horizontal "Best Returns
Zone" band shows that a hypothetical blended portfolio constructed of one-
third U.S. stocks (S&P 500), one-third foreign stocks (EAFE Index), and one-
third U.S. bonds (Lehman Index) would have eliminated the "highest highs" and
"lowest lows" of any single asset class.
(CHART)
- -------
*Source: Prudential Investment Corporation based on data from Lipper
Analytical New Application (LANA). Past performance is not indicative of
future results. The S&P 500 Index is a weighted, unmanaged index comprised of
500 stocks which provides a broad indication of stock price movements. The
Morgan Stanley EAFE Index is an unmanaged index comprised of 20 overseas stock
markets in Europe, Australia, New Zealand and the Far East. The Lehman
Aggregate Index includes all publicly-issued investment grade debt with
maturities over one year, including U.S. government and agency issues, 15 and
30 year fixed-rate government agency mortgage securities, dollar denominated
SEC registered corporate and government securities, as well as asset-backed
securities. Investors cannot invest directly in stock or bond market indices.
I-5
<PAGE>
APPENDIX II--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns,
while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable
returns. Owning a portfolio of securities mitigates the individual risks (and
returns) of any one security. Additionally, diversification among types of
securities reduces the risks and (general returns) of any one type of
security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to
changes in interest rates. When interest rates fall, bond prices generally
rise. Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of
interest rate changes on the bond's (or the bond portfolio's) price. Duration
differs from effective maturity in that duration takes into account call
provisions, coupon rates and other factors. Duration measures interest rate
risk only and not other risks, such as credit risk and, in the case of non-
U.S. dollar denominated securities, currency risk. Effective maturity measures
the final maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will
fluctuate. However, owning a security for a long period of time may help
investors offset short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth
of assets. The long-term investment results of compounding may be greater than
that of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
II-1
<PAGE>
APPENDIX III--INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating
to the Prudential Mutual Funds. See "How the Funds are Managed--Manager" in
the Prospectus. The data will be used in sales materials relating to the
Prudential Mutual Funds. Unless otherwise indicated, the information is as of
December 31, 1995 and is subject to change thereafter. All information relies
on data provided by The Prudential Investment Corporation (PIC) or from other
sources believed by the Manager to be reliable. Such information has not been
verified by either 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 1996, Institutional Investor ranked Prudential the fifth
largest institutional money manager of the 300 largest money management
organizations in the United States as of December 31, 1995. As of December 31,
1995, Prudential had more than $314 billion in assets under management.
Prudential Investments, a business group of The 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.
- -------
/1/Prudential Investments, a business group of PIC, serves as the Subadviser
to substantially all of the Prudential Mutual Funds. Wellington Management
Company serves as the subadviser to Global Utility Fund, Inc., Nicholas-
Applegate Capital Management as subadviser to Nicholas-Applegate Fund, Inc.,
Jennison Associates Capital Corp. as the subadviser to Prudential Jennison
Series Fund, Inc. and BlackRock Financial Management, Inc. as subadviser to
The BlackRock Government Income Trust. There are multiple subadvisers for The
Target Portfolio Trust.
/2/As of December 31, 1994.
III-1
<PAGE>
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 Growth Fund, a
growth-style equity fund managed by Jennison Associates Capital Corp., a
premier institutional equity manager and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of
its kind in the country) along with 100 or so other high yield bonds, which
may be considered for purchase./3/ Non-investment grade bonds, also known as
junk bonds or high yield bonds, are subject to a greater risk of loss of
principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential
mutual fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions
in foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
- -------
/3/As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
III-2
<PAGE>
Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).
Trading Data./4/ On an average day, Prudential Mutual Funds' U.S. and foreign
equity trading desks traded $77 million in securities representing over 3.8
million shares with nearly 200 different firms. Prudential Mutual Funds' bond
trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds
tracked by Lipper even have in assets./5/ Prudential Mutual Funds' money
market desk traded $3.2 billion in money market securities on an average day,
or over $800 billion a year. They made a trade every 3 minutes of every
trading day. In 1994, the Prudential Mutual Funds effected more than 40,000
trades in money market securities and held on average $20 billion of money
market securities./6/
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services, Inc., the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On
an annual basis, that represents approximately 1.8 million telephone calls
answered.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for
its clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI./7/
Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment areas.
Prudential Securities is the only Wall Street firm to have its own in-house
Certified Financial Planner (CFP) program. In the December 1995 issue of
Registered Rep, an industry publication, Prudential Securities' Financial
Advisor training programs received a grade of A- (compared to an industry
average of B+).
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey.
Five Prudential Securities' analysts were ranked as first-team finishers./8/
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architect SM, 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.
- -------
/4/Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios of
the Prudential Series Fund and institutional and non-US accounts managed by
Prudential Mutual Fund Investment Management, a division of PIC, for the year
ended December 31, 1995.
/5/Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate U.S.
Government, Short Investment Grade Debt, Intermediate Investment Grade Debt,
General U.S. Treasury, General U.S. Government and Mortgage funds.
/6/As of December 31, 1994.
/7/As of December 31, 1994.
/8/On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores are
produced by taking the number of votes awarded to an individual analyst and
weighting them based on the size of the voting institution. In total, the
magazine sends its survey to approximately 2,000 institutions and a group of
European and Asian institutions.
III-3
<PAGE>
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.
III-4
