AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 30, 2002
REGISTRATION NOS. 33-42391
811-6391
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 / /
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 18 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 //
AMENDMENT NO. 20 /X/
(Check appropriate box or boxes)
PRUDENTIAL PACIFIC GROWTH FUND, INC.
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 802-6469
JONATHAN D. SHAIN, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102
(Name and Address of Agent for Service)
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX):
/X/ immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of Rule 485
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
/ / this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
PROSPECTUS
DECEMBER 30, 2002
PRUDENTIAL
PACIFIC GROWTH FUND, INC.
FUND TYPE
Global stock
OBJECTIVE
Long-term growth of capital
IMPORTANT CHANGE
See "How to Exchange Your Shares"
section for details.
As with all mutual funds, the Securities
and Exchange Commission has not approved or
disapproved the Fund's shares nor has the
SEC determined that this prospectus is
complete or accurate. It is a criminal
offense to state otherwise.
Prudential Financial is a service mark of
The Prudential Insurance Company of
America, Newark, NJ, and its affiliates.
[PRUDENTIAL FINANCIAL LOGO]
TABLE OF CONTENTS
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1 RISK/RETURN SUMMARY
1 Investment Objective and Principal Strategies
1 Principal Risks
3 Evaluating Performance
5 Fees and Expenses
7 HOW THE FUND INVESTS
7 Investment Objective and Policies
8 Other Investments and Strategies
11 Investment Risks
14 HOW THE FUND IS MANAGED
14 Board of Directors
14 Manager
15 Investment Adviser
15 Portfolio Manager
15 Distributor
16 FUND DISTRIBUTIONS AND TAX ISSUES
16 Distributions
17 Tax Issues
18 If You Sell or Exchange Your Shares
20 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND
20 How to Buy Shares
30 How to Sell Your Shares
34 How to Exchange Your Shares
36 Telephone Redemptions and Exchanges
36 Expedited Redemption Privilege
37 FINANCIAL HIGHLIGHTS
38 Class A Shares
39 Class B Shares
40 Class C Shares
41 Class Z Shares
42 THE PRUDENTIAL MUTUAL FUND FAMILY
FOR MORE INFORMATION (Back Cover)
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PRUDENTIAL PACIFIC GROWTH FUND, INC. [TELEPHONE ICON]
(800) 225-1852
RISK/RETURN SUMMARY
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This section highlights key information about the PRUDENTIAL PACIFIC GROWTH
FUND, INC., which we refer to as "the Fund." Effective June 30, 2003, the name
of the Fund will change to Strategic Partners Pacific Growth Fund, Inc.
Additional information follows this summary.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is LONG-TERM GROWTH OF CAPITAL. This means we look for
investments that we think will increase in value over a period of years. We
normally invest at least 80% of the Fund's investable assets (net assets plus
any borrowings made for investment purposes) in equity-related securities,
primarily common stock, of companies doing business in or domiciled in the
Pacific Basin region, including Japan, Australia, Hong Kong, Singapore, South
Korea, Malaysia, Thailand, Indonesia, the Philippines and New Zealand. The
equity-related securities in which the Fund primarily invests are common stocks.
We also may use derivatives for hedging or to improve the Fund's returns. There
is no limit on the percentage of the Fund's assets that may be invested in any
single country.
To achieve our objective of long-term growth of capital, we look for
securities that are undervalued and/or show growth potential. While we make
every effort to achieve our objective, we can't guarantee success.
In selecting securities for the Fund, we use a bottom-up approach based on a
company's growth potential, and we focus the Fund's portfolio on those areas
within the Pacific Basin with the most attractive prospects. Generally, we
consider selling a security when the security no longer displays the conditions
for growth, is no longer undervalued, or falls short of expectations.
The Fund will provide 60 days' prior written notice to shareholders of a
change in its non-fundamental policy of investing at least 80% of its investable
assets in equity-related securities of companies doing business in or domiciled
in the Pacific Basin region.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Since the Fund
invests primarily in equity-related securities, principally common stock, there
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WE'RE GROWTH INVESTORS
WE LOOK PRIMARILY FOR STOCKS THAT WE BELIEVE ARE UNDERVALUED AND/OR WILL GROW
FASTER--AND EARN BETTER PROFITS--THAN OTHER COMPANIES. WE ALSO LOOK FOR
COMPANIES WITH STRONG COMPETITIVE ADVANTAGES, EFFECTIVE RESEARCH, PRODUCT
DEVELOPMENT, STRONG MANAGEMENT OR FINANCIAL STRENGTH.
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1
RISK/RETURN SUMMARY
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is the risk that the value of a particular security could go down and cause you
to lose money. Also, because the Fund invests primarily in a single region of
the world, its investments are geographically concentrated. This can result in
more pronounced risks based upon economic conditions that impact the Pacific
Basin region more or less than other regions in the world.
In addition to an individual security losing value, the value of equity
markets as a whole could go down. Investing in foreign securities presents
additional risks, since foreign political, economic and legal systems may be
less stable than those of the U.S. and foreign stock markets could decline. The
changing value of foreign currencies could also affect both the value of the
assets we hold and our performance. In the case of investments in emerging
market securities, these risks are heightened and may result in greater
volatility in the value of your investment.
Since 1997, economic conditions in East and Southeast Asia have weakened
dramatically and several countries are experiencing recessions. These conditions
have resulted in declines in share prices and market averages, as well as lower
values of foreign currencies compared to the U.S. dollar. Thus, the Fund's net
asset value has been adversely affected by declines of both share prices and
currency values. Although some countries and markets in the region appear to
have emerged from these conditions, we cannot guarantee that we will
successfully identify those countries and markets that will sustain economic
recovery in the region.
Some of our investment strategies--such as using derivatives--also involve
above-average risks. The Fund may use risk management techniques to try to
preserve assets or enhance return. Derivatives may not fully offset the
underlying positions and this could result in losses to the Fund that would not
otherwise have occurred.
There is always the risk that investments will not perform as we thought
they would. Like any mutual fund, an investment in the Fund could lose value,
and you could lose money. The Fund does not represent a complete investment
program. For more detailed information about the risks associated with the Fund,
see "How the Fund Invests--Investment Risks."
An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
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2 PRUDENTIAL PACIFIC GROWTH FUND, INC. [TELEPHONE ICON] (800) 225-1852
RISK/RETURN SUMMARY
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EVALUATING PERFORMANCE
A number of factors--including risk--affect how the Fund performs. The following
bar chart shows the Fund's performance for each full calendar year of operation.
The bar chart and table below demonstrate the risk of investing in the Fund by
showing how returns can change from year to year and by showing how the Fund's
average annual total returns for 1 year, 5 years and since inception compare
with a stock index and a group of similar mutual funds. Past performance, before
and after taxes, is not an indication that the Fund will achieve similar results
in the future.
ANNUAL RETURNS(1) (CLASS A SHARES)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
1993 66.55%
1994 -8.79%
1995 5.36%
1996 2.40%
1997 -32.53%
1998 -0.89%
1999 68.15%
2000 -47.81%
2001 -19.53%
BEST QUARTER: 23.84% (2nd quarter of 1999) WORST QUARTER: -23.97% (4th quarter
of 1997)
(1) THESE ANNUAL RETURNS DO NOT INCLUDE SALES CHARGES. IF THE SALES CHARGES
WERE INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN.
WITHOUT THE DISTRIBUTION AND SERVICE (12b-1) FEE WAIVER, THE ANNUAL
RETURNS WOULD HAVE BEEN LOWER, TOO. THE TOTAL RETURN OF THE CLASS A
SHARES FROM 1-1-02 TO 10-31-02 WAS -10.29%.
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3
RISK/RETURN SUMMARY
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AVERAGE ANNUAL TOTAL RETURNS(1) (AS OF 12-31-01)
RETURN BEFORE TAXES 1 YR 5 YR SINCE INCEPTION
Class B shares -20.26% -13.09% -1.95% (since 7-24-92)
Class C shares -17.75% -13.01% -9.22% (since 8-1-94)
Class Z shares -15.18% -12.05% -10.40% (since 3-1-96)
CLASS A SHARES
RETURN BEFORE TAXES -19.53% -13.05% -1.69% (since 7-24-92)
RETURN AFTER TAXES ON DISTRIBUTIONS(2) -19.53% -13.74% -2.30% (since 7-24-92)
RETURN AFTER TAXES ON DISTRIBUTIONS
AND SALE OF FUND SHARES(2) -11.89% -9.86% -1.39% (since 7-24-92)
INDEX (REFLECTS NO DEDUCTION FOR FEES, EXPENSES OR TAXES)
MSCI AC Asia Pacific Free Gross
Index(3) -20.64% -7.66% **(3)
MSCI AC Pacific Free Index(4) -21.84% -8.84% **(4)
Lipper Average(5) -20.08% -7.37% **(5)
(1) THE FUND'S RETURNS ARE AFTER DEDUCTION OF SALES CHARGES AND EXPENSES.
WITHOUT THE MANAGEMENT FEE WAIVER OR EXPENSE REIMBURSEMENT, THE RETURNS
WOULD HAVE BEEN LOWER.
(2) AFTER-TAX RETURNS ARE CALCULATED USING THE HISTORICAL HIGHEST INDIVIDUAL
FEDERAL MARGINAL INCOME TAX RATES AND DO NOT REFLECT THE IMPACT OF STATE
AND LOCAL TAXES. ACTUAL AFTER-TAX RETURNS DEPEND ON AN INVESTOR'S TAX
SITUATION AND MAY DIFFER FROM THOSE SHOWN. AFTER-TAX RETURNS SHOWN ARE NOT
RELEVANT TO INVESTORS WHO HOLD THEIR FUND SHARES THROUGH TAX-DEFERRED
ARRANGEMENTS, SUCH AS 401(K) PLANS OR INDIVIDUAL RETIREMENT ACCOUNTS.
AFTER-TAX RETURNS ARE SHOWN ONLY FOR CLASS A SHARES. AFTER-TAX RETURNS FOR
OTHER CLASSES WILL VARY DUE TO DIFFERING SALES CHARGES AND EXPENSES. PAST
PERFORMANCE, BEFORE AND AFTER TAXES, DOES NOT MEAN THAT THE FUND WILL
ACHIEVE SIMILAR RESULTS IN THE FUTURE.
(3) THE MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) ALL COUNTRY (AC) ASIA
PACIFIC FREE GROSS INDEX IS AN UNMANAGED, WEIGHTED INDEX COMPRISING
APPROXIMATELY 950 SECURITIES LISTED ON THE STOCK EXCHANGES OF AUSTRALIA,
HONG KONG, JAPAN, MALAYSIA, SINGAPORE, INDONESIA, SRI LANKA, CHINA (FREE),
PAKISTAN, TAIWAN, INDIA, KOREA, THE PHILIPPINES AND THAILAND. THE FUND HAS
DISCONTINUED THE USE OF THIS INDEX AS ITS BENCHMARK. THESE RETURNS DO NOT
INCLUDE THE EFFECT OF ANY SALES CHARGES OR OPERATING EXPENSES OF A MUTUAL
FUND. THESE RETURNS WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF SALES
CHARGES AND OPERATING EXPENSES. MSCI AC ASIA PACIFIC FREE GROSS INDEX
RETURNS SINCE THE INCEPTION OF EACH CLASS ARE 0.53% FOR CLASS A, 0.53% FOR
CLASS B, -6.46% FOR CLASS C AND -7.92% FOR CLASS Z SHARES.
(4) THE MSCI AC PACIFIC FREE INDEX IS AN UNMANAGED, FREE FLOAT-ADJUSTED MARKET
CAPITALIZATION INDEX THAT IS DESIGNED TO MEASURE INTERNATIONAL EQUITY
COUNTRIES: AUSTRALIA, CHINA, HONG KONG, INDONESIA, JAPAN, MALAYSIA, NEW
ZEALAND, THE PHILIPPINES, SINGAPORE, TAIWAN AND THAILAND. THE FUND'S
BENCHMARK CHANGED TO THIS INDEX BECAUSE IT BETTER REFLECTS THE COUNTRIES
THAT THE INVESTMENT ADVISER SEEKS TO POSITION THE PORTFOLIO IN, BASED ON
THE FUND'S MANDATE. THESE RETURNS DO NOT INCLUDE THE EFFECT OF ANY SALES
CHARGES OR OPERATING EXPENSES OF A MUTUAL FUND. THESE RETURNS WOULD BE
LOWER IF THEY INCLUDED THE EFFECT OF SALES CHARGES AND OPERATING EXPENSES.
THE MSCI AC PACIFIC FREE INDEX RETURNS SINCE THE INCEPTION OF EACH CLASS
ARE -0.71% FOR CLASS A, -0.71% FOR CLASS B, -7.62% FOR CLASS C AND -9.08%
FOR CLASS Z SHARES.
(5) THE LIPPER AVERAGE IS UNMANAGED, IS BASED ON THE AVERAGE RETURN FOR ALL
FUNDS IN EACH SHARE CLASS FOR THE ONE-YEAR, FIVE-YEAR, AND SINCE INCEPTION
PERIODS IN THE LIPPER PACIFIC REGION FUNDS CATEGORY AND DOES NOT INCLUDE
THE EFFECT OF ANY SALES CHARGES OR TAXES. THESE RETURNS WOULD BE LOWER IF
THEY INCLUDED THE EFFECT OF SALES CHARGES AND TAXES. LIPPER RETURNS SINCE
THE INCEPTION OF EACH CLASS ARE 1.78% FOR CLASS A, 1.78% FOR CLASS B,
-4.41% FOR CLASS C AND -6.07% FOR CLASS Z SHARES. SOURCE: LIPPER, INC.
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4 PRUDENTIAL PACIFIC GROWTH FUND, INC. [TELEPHONE ICON] (800) 225-1852
RISK/RETURN SUMMARY
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FEES AND EXPENSES
These tables show the sales charges, fees and expenses that you may pay if you
buy and hold shares of each share class of the Fund--Class A, B, C and Z. Each
share class has different sales charges--known as loads--and expenses, but
represents an investment in the same fund. Class Z shares are available only to
a limited group of investors. For more information about which share class may
be right for you, see "How to Buy, Sell and Exchange Shares of the Fund."
SHAREHOLDER FEES(1) (PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS B CLASS C CLASS Z
Maximum sales charge (load)
imposed on purchases (as a
percentage of offering
price) 5% None 1%(2) None
Maximum deferred sales
charge (load) (as a
percentage of the lower of
original purchase price or
sale proceeds) 1%(3) 5%(4) 1%(5) None
Maximum sales charge (load)
imposed on reinvested
dividends and other
distributions None None None None
Redemption fees None None None None
Exchange fee None None None None
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
CLASS A CLASS B CLASS C CLASS Z
Management fees .75% .75% .75% .75%
+ Distribution and service
(12b-1) fees .30% 1.00% 1.00% None
+ Other expenses 1.39% 1.39% 1.39% 1.39%
= Total annual Fund
operating expenses 2.44% 3.14% 3.14% 2.14%
- Waivers and/or
reimbursements .05%(6) None None None
= NET ANNUAL FUND OPERATING
EXPENSES 2.39%(6) 3.14% 3.14% 2.14%
(1) YOUR BROKER MAY CHARGE YOU A SEPARATE OR ADDITIONAL FEE FOR PURCHASES AND
SALES OF SHARES.
(2) INVESTORS WHO PURCHASE CLASS C SHARES THROUGH CERTAIN UNAFFILIATED
BROKER-DEALERS MAY PURCHASE CLASS C SHARES WITHOUT PAYING THE 1% INITIAL
SALES CHARGE.
(3) INVESTORS WHO PURCHASE $1 MILLION OR MORE OF CLASS A SHARES ARE NOT SUBJECT
TO AN INITIAL SALES CHARGE BUT ARE SUBJECT TO A CONTINGENT DEFERRED SALES
CHARGE (CDSC) OF 1% FOR SHARES REDEEMED WITHIN 12 MONTHS OF PURCHASE. THIS
CHARGE IS WAIVED FOR ALL SUCH CLASS A SHAREHOLDERS OTHER THAN THOSE WHO
PURCHASED THEIR SHARES THROUGH CERTAIN BROKER-DEALERS THAT ARE NOT
AFFILIATED WITH PRUDENTIAL FINANCIAL, INC. (PRUDENTIAL).
(4) THE CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B SHARES DECREASES BY
1% ANNUALLY TO 1% IN THE FIFTH AND SIXTH YEARS AND 0% IN THE SEVENTH YEAR.
CLASS B SHARES AUTOMATICALLY CONVERT TO CLASS A SHARES APPROXIMATELY SEVEN
YEARS AFTER PURCHASE.
(5) THE CDSC FOR CLASS C SHARES IS 1% FOR SHARES REDEEMED WITHIN 18 MONTHS OF
PURCHASE.
(6) FOR THE FISCAL YEAR ENDING OCTOBER 31, 2003, THE FUND'S DISTRIBUTOR HAS
CONTRACTUALLY AGREED TO REDUCE ITS DISTRIBUTION AND SERVICE (12b-1) FEES
FOR CLASS A SHARES TO .25 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE
CLASS A SHARES.
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5
RISK/RETURN SUMMARY
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EXAMPLE
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same, except for the Distributor's
reduction of distribution and service (12b-1) fees for Class A shares during the
first year. Although your actual costs may be higher or lower, based on these
assumptions, your costs would be:
1 YR 3 YRS 5 YRS 10 YRS
Class A shares $730 $1,218 $1,731 $3,134
Class B shares $817 $1,269 $1,745 $3,211
Class C shares $514 $1,059 $1,728 $3,514
Class Z shares $217 $ 670 $1,149 $2,472
You would pay the following expenses on the same investment if you did not sell
your shares:
1 YR 3 YRS 5 YRS 10 YRS
Class A shares $730 $1,218 $1,731 $3,134
Class B shares $317 $ 969 $1,645 $3,211
Class C shares $414 $1,059 $1,728 $3,514
Class Z shares $217 $ 670 $1,149 $2,472
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6 PRUDENTIAL PACIFIC GROWTH FUND, INC. [TELEPHONE ICON] (800) 225-1852
HOW THE FUND INVESTS
-------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is LONG-TERM GROWTH OF CAPITAL. This means we
look to build an investment portfolio which, though potentially volatile in the
short term, has the potential for significant capital appreciation over the
longer term. While we make every effort to achieve our objective, we can't
guarantee success.
In pursuing our objective, we normally invest primarily (at least 80% of the
Fund's investable assets) in EQUITY-RELATED SECURITIES OF COMPANIES DOING
BUSINESS IN, OR DOMICILED IN, THE PACIFIC BASIN REGION. Companies doing business
in the Pacific Basin region include companies that derive a significant portion
of their revenues from sales made in the Pacific Basin region or have principal
executive offices or significant properties located in that region. The Pacific
Basin region includes, but is not limited to, Japan, Australia, Hong Kong,
Singapore, South Korea, Malaysia, Thailand, Indonesia, the Philippines and New
Zealand. In addition to these countries, the Fund may invest directly in
companies doing business in or domiciled in Taiwan, India, Pakistan, Vietnam and
the People's Republic of China if and when each of their stock markets becomes
open to direct foreign investment.
In addition to common stock, equity-related securities include, but are not
limited to, preferred stock, rights that can be exercised to obtain stock,
warrants, debt securities or preferred stock convertible into or exchangeable
for common or preferred stock and interests in master limited partnerships. The
Fund may also invest in American Depositary Receipts (ADRs). ADRs represent an
equity investment in a foreign company or some other foreign issuer that are
usually issued by a U.S. bank or trust company and are valued in U.S. dollars.
We consider ADRs to be equity-related securities. The Fund may invest up to 20%
of its investable assets in equity-related securities of non-Pacific Basin
companies and in fixed-income obligations.
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OUR GROWTH STRATEGY
WE LOOK FOR COMPANIES THAT HAVE THE POTENTIAL TO PRODUCE STRONG GROWTH IN
EARNINGS AND/OR SALES, AND WHOSE STOCK PRICES DO NOT REFLECT THIS POTENTIAL FOR
FUTURE GROWTH. THESE COMPANIES USUALLY HAVE A UNIQUE MARKET NICHE, A STRONG NEW
PRODUCT PROFILE OR WHAT WE BELIEVE TO BE SUPERIOR MANAGEMENT. WE ANALYZE
COMPANIES USING BOTH FUNDAMENTAL AND QUANTITATIVE TECHNIQUES.
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7
HOW THE FUND INVESTS
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In selecting securities for the Fund, we use a bottom-up approach based on a
company's growth potential, and we focus the Fund's portfolio on those areas
within the Pacific Basin with the most attractive near-term prospects.
Generally, we consider selling a security when the security no longer displays
the conditions for growth, is no longer undervalued, or falls short of
expectations.
For more information, see "How the Fund Invests--Investment Risks" and the
Statement of Additional Information (SAI), "Description of the Fund, Its
Investments and Risks." The SAI contains additional information about the Fund.
To obtain a copy, see the back cover page of this prospectus.
The Fund's investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Fund's Board of Directors can change
investment policies that are not fundamental.
OTHER INVESTMENTS AND STRATEGIES
In addition to the principal strategies discussed above, we may also use the
following investment strategies to try to increase the Fund's returns or protect
its assets if market conditions warrant.
MONEY MARKET INSTRUMENTS, BONDS AND OTHER FIXED-INCOME OBLIGATIONS
Under normal conditions, the Fund may invest up to 20% of investable assets in
MONEY MARKET INSTRUMENTS, BONDS and OTHER FIXED-INCOME OBLIGATIONS. Money market
instruments and bonds are known as fixed-income securities because issuers of
these securities are obligated to pay interest, if any, and principal.
Typically, fixed-income securities don't increase or decrease in value in
relation to an issuer's financial condition or business prospects as stock may,
although their value does fluctuate inversely to changes in interest rates
generally. Corporations and governments issue money market instruments and bonds
to raise money. The Fund may buy obligations of companies, foreign countries or
the U.S. Government. Money market instruments include the commercial paper and
short-term obligations of foreign and domestic corporations, banks and
governments and their agencies.
The Fund will purchase only money market instruments that have received one
of the two highest short-term debt ratings from Moody's Investors Service, Inc.
(Moody's), Standard & Poor's Ratings Services (S&P), or another nationally
recognized statistical rating organization (NRSRO). For bonds and other
long-term fixed-income obligations, we may invest in "investment-grade"
obligations. An obligation is investment-grade, if it has
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8 PRUDENTIAL PACIFIC GROWTH FUND, INC. [TELEPHONE ICON] (800) 225-1852
HOW THE FUND INVESTS
------------------------------------------------
received one of the top four long-term debt ratings from an NRSRO. Obligations
rated in the fourth category (Baa for Moody's or BBB for S&P) have speculative
characteristics and are subject to a greater risk of loss of principal and
interest. We may also invest in obligations that are not rated, but which we
believe to be of comparable quality.
After a security has been purchased by the Fund, it may be assigned a lower
rating or cease to be rated. This does not mean that the Fund must sell the
security, but the investment adviser will consider such an event in deciding
whether the Fund should continue to hold the security in its portfolio.
The Fund may also invest up to 25% of its net assets in foreign convertible
debt obligations having a minimum rating of at least "B" by an NRSRO. These
lower-rated obligations are referred to as high-yield or "junk" bonds, and their
value is more likely to react to developments affecting market or credit risk
than higher-rated debt obligations, which react primarily to movements in the
general level of interest rates. In particular, "junk" bond investments may
increase or decrease in value due to an issuer's financial condition.
For more information about bonds and bond ratings, see the SAI, "Appendix
I--Description of Security Ratings."
TEMPORARY DEFENSIVE INVESTMENTS
In response to adverse market, economic or political conditions, we may
temporarily invest up to 100% of the Fund's investable assets in money market
instruments. Investing heavily in these securities limits our ability to achieve
capital appreciation and our investment objective, but can help to preserve the
Fund's assets when the equity markets are unstable.
REPURCHASE AGREEMENTS
The Fund may also use REPURCHASE AGREEMENTS, pursuant to which a party agrees to
sell a security to the Fund and then repurchase it at an agreed-upon price at a
stated time. This creates a fixed return for the Fund and is, in effect, a loan
by the Fund. The Fund uses repurchase agreements for cash management purposes
only.
DERIVATIVE STRATEGIES
We may use alternative investment strategies--including DERIVATIVES--to try to
improve the Fund's returns. We may use hedging techniques to try to
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9
HOW THE FUND INVESTS
------------------------------------------------
protect its assets. We cannot guarantee that these strategies will work, that
the instruments necessary to implement these strategies will be available or
that the Fund will not lose money. Derivatives--such as futures, options,
foreign currency forward contracts and options on futures--involve costs and can
be volatile. A futures contract is an agreement to buy or sell a set quantity of
an underlying product at a future date, or to make or receive a cash payment
based on the value of a securities index. An option is the right to buy or sell
securities in exchange for a premium. A foreign currency forward contract is an
obligation to buy or sell a given currency on a future date and at a set price.
With derivatives, the investment adviser tries to predict whether the underlying
asset, rate or index--a security, market index, currency, interest rate or some
other benchmark--will go up or down at some future date. We may use derivatives
to try to reduce risk or to increase return taking into account the Fund's
overall investment objective. The investment adviser will consider other factors
(such as cost) in deciding whether to employ any particular strategy or use any
particular instrument. Any derivatives we may use may not match or correspond
exactly with the Fund's actual portfolio holdings.
ADDITIONAL STRATEGIES
The Fund follows certain policies when it BORROWS MONEY (the Fund can borrow up
to 33 1/3% of the value of its total assets), LENDS ITS SECURITIES to others for
cash management purposes (the Fund can lend up to 33 1/3% of the value of its
total assets, including collateral received in the transaction), and HOLDS
ILLIQUID SECURITIES (the Fund may hold up to 15% of its net assets in illiquid
securities, including securities with legal or contractual restrictions, those
without a readily available market and repurchase agreements with maturities
longer than seven days). The Fund is subject to certain investment restrictions
that are fundamental policies, which means they cannot be changed without
shareholder approval. For more information about these restrictions, see the
SAI.
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10 PRUDENTIAL PACIFIC GROWTH FUND, INC. [TELEPHONE ICON] (800) 225-1852
HOW THE FUND INVESTS
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INVESTMENT RISKS
As noted previously, all investments involve risk, and investing in the Fund is
no exception. This chart outlines the key risks and potential rewards of the
principal strategies of the Fund and certain other non-principal investments the
Fund may make. Unless otherwise noted, the Fund's ability to engage in a
particular type of investment is expressed as a percentage of total assets. For
more information, see "Description of the Fund, Its Investments and Risks" in
the SAI.
INVESTMENT TYPE
% OF FUND'S ASSETS RISKS POTENTIAL REWARDS
----------------------------------------------------------------------------------------------------------------------------
PACIFIC BASIN EQUITY- -- Geographically concentrated -- Rewards associated with foreign
RELATED SECURITIES investments can result in more securities in general and equity-
pronounced risks based upon economic related securities, as described
AT LEAST 80% OF INVESTABLE ASSETS; UP conditions that impact that region below
TO 100% either more or less than other
regions in the world
-- Investments in emerging market
securities are subject to greater
volatility and price declines
-- Other risks associated with foreign
securities in general and equity-
related securities, as described
below
----------------------------------------------------------------------------------------------------------------------------
FOREIGN SECURITIES IN GENERAL -- Foreign markets, economies and -- Investors can participate in the
political systems, particularly growth of foreign markets through
AT LEAST 80% OF INVESTABLE ASSETS; UP those in developing countries, may investments in companies operating
TO 100% not be as stable as those in the in those markets
U.S. -- May profit from changing values of
-- Currency risk--changing values of foreign currencies
foreign currencies -- Opportunities for diversification
-- May be less liquid than U.S. stocks
and bonds
-- Differences in foreign laws,
accounting standards, public
information and custody and
settlement practices generally
result in less reliable information
on foreign investments and more risk
----------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
11
HOW THE FUND INVESTS
------------------------------------------------
INVESTMENT TYPE (CONT'D)
% OF FUND'S ASSETS RISKS POTENTIAL REWARDS
----------------------------------------------------------------------------------------------------------------------------
COMMON STOCK AND OTHER EQUITY-RELATED -- Individual stocks could lose value -- Historically, stocks have
SECURITIES -- The equity markets could go down, outperformed other investments over
resulting in a decline in the value the long term
FOR U.S. COMPANIES, UP TO 20% OF of the Fund's investments -- Generally, economic growth leads to
INVESTABLE ASSETS, USUALLY LESS -- Companies that pay dividends may not higher corporate profits, which
do so if they don't have profits or leads to an increase in stock
FOR FOREIGN COMPANIES, AT LEAST 80% OF adequate cash flow prices, known as capital
INVESTABLE ASSETS; UP TO 100% -- Changes in economic or political appreciation
conditions, both domestic and -- May be a source of dividend income
international, may result in a
decline in value of the Fund's
investments
----------------------------------------------------------------------------------------------------------------------------
FIXED-INCOME OBLIGATIONS -- The Fund's holdings, share price, -- Bonds have generally outperformed
yield and total return may fluctuate money market instruments over the
UP TO 20% OF INVESTABLE ASSETS in response to bond market movements long term with less risk than stocks
-- Credit risk--the risk that an issuer -- Most bonds will rise in value when
will default, leaving the Fund with interest rates fall
unpaid interest or principal. The -- A source of regular interest income
lower an instrument's quality, the -- Investment grade obligations have a
higher its potential volatility lower risk of default
-- Market risk--the risk that the market -- Generally more secure than stock
value of an investment may move up since companies must pay their debts
or down, sometimes rapidly or before paying dividends to
unpredictably. Market risk may stockholders
affect an industry, a sector or the -- Junk bonds offer higher yields and
market as a whole higher potential gains than
-- Interest rate risk--the risk that the investment-grade bonds.
value of most bonds will fall when
interest rates rise; the longer a
bond's maturity and the lower its
credit quality, the more its value
typically falls. It can lead to
price volatility
-- Junk bonds have a higher risk of
default, tend to be less liquid, are
more volatile and may be more
difficult to value.
----------------------------------------------------------------------------------------------------------------------------
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12 PRUDENTIAL PACIFIC GROWTH FUND, INC. [TELEPHONE ICON] (800) 225-1852
HOW THE FUND INVESTS
------------------------------------------------
INVESTMENT TYPE (CONT'D)
% OF FUND'S ASSETS RISKS POTENTIAL REWARDS
----------------------------------------------------------------------------------------------------------------------------
DERIVATIVES -- The value of derivatives (such as -- The Fund could make money and protect
futures and options) that are used against losses if the investment
PERCENTAGE VARIES to hedge a portfolio security is analysis proves correct
determined independently from that -- Derivatives that involve leverage
security and could result in a loss could generate substantial gains at
to the Fund when the price movement low cost
of a derivative used as a hedge does -- One way to manage the Fund's
not correlate with a change in the risk/return balance is by locking in
value of the portfolio security. the value of an investment ahead of
-- Derivatives may not have the intended time
effects and may result in losses or -- Hedges that correlate well with an
missed opportunities underlying position can reduce or
-- The other party to a derivatives eliminate investment income or
contract could default capital gains at low cost
-- Derivatives can increase share price
volatility and those that involve
leverage could magnify losses
-- Certain types of derivatives involve
costs that can reduce returns
----------------------------------------------------------------------------------------------------------------------------
ILLIQUID SECURITIES -- May be difficult to value precisely -- May offer a more attractive yield or
-- May be difficult to sell at the time potential for growth than more
UP TO 15% OF NET ASSETS or price desired widely traded securities
----------------------------------------------------------------------------------------------------------------------------
MONEY MARKET INSTRUMENTS -- Limits potential for capital -- May preserve the Fund's assets
appreciation and achieving our
UP TO 100% OF INVESTABLE ASSETS ON A objective
TEMPORARY BASIS -- Credit risk and market risk, as
described above
----------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
13
HOW THE FUND IS MANAGED
-------------------------------------
BOARD OF DIRECTORS
The Fund's Board of Directors oversees the actions of the Manager, Investment
Adviser and Distributor and decides on general policies. The Board also oversees
the Fund's officers who conduct and supervise the daily business operations of
the Fund.
MANAGER
PRUDENTIAL INVESTMENTS LLC (PI)
100 MULBERRY STREET, GATEWAY CENTER THREE
NEWARK, NJ 07102
Under a management agreement with the Fund, PI manages the Fund's investment
operations and administers its business affairs. PI also is responsible for
supervising the Fund's investment adviser. For the fiscal year ended
October 31, 2002, the Fund paid PI management fees of .75% of the Fund's average
daily net assets.
PI and its predecessors have served as manager or administrator to
investment companies since 1987. As of June 30, 2002, PI, a wholly-owned
subsidiary of Prudential Financial, Inc. (Prudential), served as the investment
manager to all of the Prudential U.S. and offshore open-end investment
companies, and, as the administrator to closed-end investment companies, with
aggregate assets of approximately $93.07 billion.
Subject to the supervision of the Board, PI is responsible for conducting
the initial review of prospective investment advisers for the Fund. In
evaluating a prospective investment adviser, PI considers many factors,
including the firm's experience, investment philosophy and historical
performance. PI is also responsible for monitoring the performance of the Fund's
investment adviser.
PI and the Fund operate under an exemptive order (the Order) from the
Securities and Exchange Commission (Commission) that generally permits PI to
enter into or amend agreements with investment advisers without obtaining
shareholder approval each time. This authority is subject to certain conditions,
including the requirement that the Board of Directors must approve any new or
amended agreements with an investment adviser. Shareholders of the Fund still
have the right to terminate these agreements at any time by a vote of the
majority of outstanding shares of the Fund. The Fund will notify shareholders of
any new investment adviser or material amendments to advisory agreements
pursuant to the Order.
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14 PRUDENTIAL PACIFIC GROWTH FUND, INC. [TELEPHONE ICON] (800) 225-1852
HOW THE FUND IS MANAGED
------------------------------------------------
INVESTMENT ADVISER
JF INTERNATIONAL MANAGEMENT INC. (JFIMI) is the Fund's Investment Adviser and
has served as such since May 5, 2001. JFIMI, located at 21st Floor, Charter
House, 8 Connaught Road, Central, Hong Kong, is a registered investment adviser
and a member of JPMorgan Fleming Asset Management (JPMFAM) which was created
following the merger between Chase Manhattan and JPMorgan. JPMFAM carries out
its business activities in the Asia Pacific region under the name JF Asset
Management (JFAM). As of October 31, 2002, JFAM's total assets under management
were approximately $32 billion.
PORTFOLIO MANAGER
ROGER P.F. ELLIS has served as the portfolio manager of the Fund since
May 5, 2001. Mr. Ellis is the Chief Investment Officer and the head of the
Pacific Regional Group of JFAM. He has been with the JF organization for
12 years.
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Fund's
shares under a Distribution Agreement with the Fund. The Fund has Distribution
and Service Plans under Rule 12b-1 under the Investment Company Act of 1940, as
amended (the 1940 Act). Under the Plans and the Distribution Agreement, PIMS
pays the expenses of distributing the Fund's Class A, B, C and Z shares and
provides certain shareholder support services. The Fund pays distribution and
other fees to PIMS as compensation for its services for each class of shares
other than Class Z. These fees--known as 12b-1 fees--are shown in the "Fees and
Expenses" table. Class A, Class B and Class C shares are subject to a 12b-1 fee
of up to .30%, 1.00% and 1.00%, respectively. Because these fees are paid from
the Fund's assets on an ongoing basis, over time these fees will increase the
cost of your investment and may cost you more than paying other types of sales
charges.
--------------------------------------------------------------------------------
15
FUND DISTRIBUTIONS
AND TAX ISSUES
-------------------------------------
Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the Fund distributes DIVIDENDS of ordinary income and any
realized net CAPITAL GAINS to shareholders. These distributions are subject to
income taxes, unless you hold your shares in a 401(k) plan, an Individual
Retirement Account (IRA) or some other qualified tax-deferred plan or account.
Dividends and distributions from the Fund also may be subject to state and local
income taxes.
Also, if you sell shares of the Fund for a profit, you may have to pay
capital gains taxes on the amount of your profit, again unless you hold your
shares in a qualified tax-deferred plan or account.
The following briefly discusses some of the important federal tax issues you
should be aware of, but is not meant to be tax advice. For tax advice, please
speak with your tax adviser.
DISTRIBUTIONS
The Fund distributes DIVIDENDS of any net investment income to shareholders,
typically once a year. For example, if the Fund owns ACME Corp. stock and the
stock pays a dividend, the Fund will pay out a portion of this dividend to its
shareholders, assuming the Fund's income is more than its costs and expenses.
The dividends you receive from the Fund will be taxed as ordinary income,
whether or not they are reinvested in the Fund.
The Fund also distributes any realized net CAPITAL GAINS to
shareholders--typically once a year. Capital gains are generated when the Fund
sells its assets for a profit. For example, if the Fund bought 100 shares of
ACME Corp. stock for a total of $1,000 and sold the shares more than one year
later for a total of $1,500, the Fund has net long-term capital gains of $500,
which it will pass on to shareholders (assuming the Fund's total gains are
greater than any losses it may have). Capital gains are taxed differently
depending on how long the Fund holds the security--if a security is held more
than one year before it is sold, LONG-TERM capital gains generally are taxed at
a maximum rate of up to 20%, but if the security is held one year or less,
SHORT-TERM capital gains are taxed at rates of up to 38.6%. Different rates
apply to corporate shareholders.
For your convenience, Fund distributions of dividends and net capital gains
are AUTOMATICALLY REINVESTED in the Fund without any sales charge. If you ask us
to pay the distributions in cash, we will send you a check if your account is
with the Transfer Agent. Otherwise, if your account is with a
-------------------------------------------------------------------
16 PRUDENTIAL PACIFIC GROWTH FUND, INC. [TELEPHONE ICON] (800) 225-1852
FUND DISTRIBUTIONS
AND TAX ISSUES
------------------------------------------------
broker, you will receive a credit to your account. Either way, the distributions
will be subject to income taxes unless your shares are held in a qualified or
tax-deferred plan or account. For more information about automatic reinvestment
and other shareholder services, see "Step 4: Additional Shareholder Services" in
the next section.
TAX ISSUES
FORM 1099
Every year, you will receive a FORM 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year. If you own shares
of the Fund as part of a qualified or tax-deferred plan or account, your taxes
are deferred, so you will not receive a Form 1099. However, you will receive a
Form 1099 when you take any distributions from your qualified or tax-deferred
plan or account.
Fund distributions are generally taxable to you in the calendar year in
which they are received, except when we declare certain dividends in October,
November or December of a calendar year and actually pay them in January of the
following year. In such cases, the dividends are treated as if they were paid on
December 31 of the prior year. Corporate shareholders generally are eligible for
the 70% dividends-received deduction for certain dividends paid by the Fund.
WITHHOLDING TAXES
If federal tax law requires you to provide the Fund with your tax identification
number and certifications as to your tax status, and you fail to do this, or if
you are otherwise subject to backup withholding, we will withhold and pay to the
U.S. Treasury a portion (currently 30%, but declining to 28% by 2006) of your
distributions and sale proceeds. Dividends of net investment income and net
short-term capital gains paid to a nonresident foreign shareholder generally
will be subject to a U.S. withholding tax of 30%. This rate may be lower,
depending on any tax treaty the U.S. may have with the shareholder's country.
--------------------------------------------------------------------------------
17
FUND DISTRIBUTIONS
AND TAX ISSUES
------------------------------------------------
IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of the Fund just before the record date for a distribution
(the date that determines who receives the distribution), we will pay that
distribution to you. As explained above, the distribution may be subject to
income or capital gains taxes. You may think you've done well, since you bought
shares one day and soon thereafter received a distribution. That is not so,
because when dividends are paid out, the value of each share of the Fund
decreases by the amount of the dividend to reflect the payout (although this may
not be apparent because the value of each share of the Fund will also be
affected by market changes, if any). The distribution you receive makes up for
the decrease in share value. However, the timing of your purchase does mean that
part of your investment came back to you as taxable income.
RETIREMENT PLANS
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts, contributions are not tax deductible, but
distributions from the plan may be tax free. Please contact your financial
adviser for information on a variety of Prudential mutual funds that are
suitable for retirement plans offered by Prudential.
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of the Fund for a profit, you have REALIZED A CAPITAL
GAIN, which is subject to tax unless you hold shares in a qualified or tax-
deferred plan or account. The amount of tax you pay depends on how long you
owned your shares and when you bought them. If you sell shares of the Fund for a
loss, you may have a capital loss, which you may use to offset certain capital
gains you have. If you sell shares and realize a loss, you will not be permitted
to use the loss to the extent you replace the shares (including pursuant to the
reinvestment of a dividend) within a 61-day
[CHART]
===> + $ CAPITAL GAIN
(taxes owed)
$
RECEIPTS OR
FROM SALE
===> - $ CAPITAL LOSS
(offset against gain)
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18 PRUDENTIAL PACIFIC GROWTH FUND, INC. [TELEPHONE ICON] (800) 225-1852
FUND DISTRIBUTIONS
AND TAX ISSUES
------------------------------------------------
period (beginning 30 days before the sale of the shares). If you acquire shares
of the Fund and sell your shares within 90 days, you may not be allowed to
include certain sales charges incurred in acquiring the shares for purposes of
calculating gain or loss realized upon the sale of the shares.
Exchanging your shares of the Fund for the shares of another Prudential
mutual fund is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the taxes
described above.
Any gain or loss you may have from selling or exchanging Fund shares will
not be reported on the Form 1099. However, proceeds from the sale or exchange
will be reported on Form 1099-B. Therefore, unless you hold your shares in a
qualified tax-deferred plan or account, you or your financial adviser should
keep track of the dates on which you buy and sell--or exchange--Fund shares, as
well as the amount of any gain or loss on each transaction. For tax advice,
please see your tax adviser.
AUTOMATIC CONVERSION OF CLASS B SHARES
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares--which happens automatically approximately seven years after
purchase--is not a "taxable event" because it does not involve an actual sale of
your Class B shares. This opinion, however, is not binding on the Internal
Revenue Service (IRS). For more information about the automatic conversion of
Class B shares, see "Class B Shares Convert to Class A Shares After
Approximately Seven Years" in the next section.
--------------------------------------------------------------------------------
19
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
-------------------------------------
HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Fund for you, call Prudential Mutual Fund Services LLC
(PMFS) at (800) 225-1852 or contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 8179
PHILADELPHIA, PA 19101
You may purchase shares by check or wire. We do not accept cash or money
orders. To purchase by wire, call the number above to obtain an application.
After PMFS receives your completed application, you will receive an account
number. For additional information about purchasing shares of the Fund, see the
back cover page of this prospectus. We have the right to reject any purchase
order (including an exchange into the Fund) or suspend or modify the Fund's sale
of its shares.
STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C and Class Z
shares of the Fund, although Class Z shares are available only to a limited
group of investors.
Multiple share classes let you choose a cost structure that better meets
your needs. With Class A shares, you pay the initial sales charge at the time of
purchase, but the operating expenses each year are lower than the expenses of
Class B and Class C shares. The Class A CDSC is waived for all Class A
shareholders other than those who purchased their shares, in an amount of
$1 million or more, from certain broker-dealers not affiliated with Prudential.
With Class B shares, you only pay a sales charge if you sell your shares within
six years (that is why it is called a Contingent Deferred Sales Charge, or
CDSC), but the operating expenses each year are higher than the Class A share
expenses. With Class C shares, you pay a 1% front-end sales charge and a 1% CDSC
if you sell within 18 months of purchase, but the operating expenses are also
higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:
-- The amount of your investment,
-- The length of time you expect to hold the shares and the impact of
the varying distribution fees. Over time, the fees will increase the
cost of your investment and may cost you more than paying other types
of sales charges,
-- The different sales charges that apply to each share class--
Class A's front-end sales charge vs. Class B's CDSC vs. Class C's low
front-end sales charge and low CDSC,
-------------------------------------------------------------------
20 PRUDENTIAL PACIFIC GROWTH FUND, INC. [TELEPHONE ICON] (800) 225-1852
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
-- Whether you qualify for any reduction or waiver of sales charges
-- The fact that if you are purchasing Class B shares in an amount of
$100,000 or more, other share classes may be more beneficial given
your circumstances; you should read the SAI, "Purchase, Redemption,
and Pricing of Fund Shares", or consult with your financial adviser
in order to make this determination,
-- The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase, and
-- Whether you qualify to purchase Class Z shares.
See "How to Sell Your Shares" for a description of the impact of CDSCs.
SHARE CLASS COMPARISON. Use this chart to help you compare the Fund's different
share classes. The discussion following this chart will tell you whether you are
entitled to a reduction or waiver of any sales charges.
CLASS A CLASS B CLASS C CLASS Z
Minimum purchase $1,000 $1,000 $2,500 None
amount(1)
Minimum amount for $100 $100 $100 None
subsequent
purchases(1)
Maximum initial sales 5% of the public None 1% of the public None
charge offering price offering
price(2)
Contingent Deferred 1%(5) If sold during: 1% on sales made None
Sales Charge (CDSC)(3) Year 1 5% within 18 months
Year 2 4% of purchase(3)
Year 3 3%
Year 4 2%
Years 5/6 1%
Year 7 0%
Annual distribution and .30 of 1% 1% 1% None
service (12b-1) fees (.25 of 1%
(shown as a percentage currently)
of average net
assets)(4)
(1) THE MINIMUM INITIAL INVESTMENT REQUIREMENTS DO NOT APPLY TO CERTAIN
RETIREMENT AND EMPLOYEE SAVINGS PLANS AND CUSTODIAL ACCOUNTS FOR MINORS.
THE MINIMUM INVESTMENT FOR PURCHASES MADE THROUGH THE AUTOMATIC INVESTMENT
PLAN IS $50. FOR MORE INFORMATION, SEE "ADDITIONAL SHAREHOLDER
SERVICES--AUTOMATIC INVESTMENT."
(2) 1.01% OF THE NET AMOUNT INVESTED. INVESTORS WHO PURCHASE CLASS C SHARES
THROUGH CERTAIN BROKER-DEALERS NOT AFFILIATED WITH PRUDENTIAL MAY PURCHASE
CLASS C SHARES WITHOUT PAYING THE 1% SALES CHARGE.
(3) FOR MORE INFORMATION ABOUT THE CDSC AND HOW IT IS CALCULATED, SEE "HOW TO
SELL YOUR SHARES--CONTINGENT DEFERRED SALES CHARGES (CDSC)."
--------------------------------------------------------------------------------
21
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
(4) THESE DISTRIBUTION FEES ARE PAID FROM THE FUND'S ASSETS ON A CONTINUOUS
BASIS. THE SERVICE FEE FOR CLASS A, CLASS B AND CLASS C SHARES IS .25 OF
1%. THE DISTRIBUTION FEE FOR CLASS A SHARES IS LIMITED TO .30 OF 1%
(INCLUDING THE .25 OF 1% SERVICE FEE). CLASS B AND CLASS C SHARES PAY A
DISTRIBUTION FEE (IN ADDITION TO THE SERVICE FEE) OF .75 OF 1%. FOR THE
FISCAL YEAR ENDING OCTOBER 31, 2003, THE DISTRIBUTOR HAS CONTRACTUALLY
AGREED TO REDUCE ITS DISTRIBUTION AND SERVICE FEES (12B-1 FEES) TO .25 OF
1% OF THE AVERAGE DAILY NET ASSETS OF CLASS A SHARES.
(5) INVESTORS WHO PURCHASE $1 MILLION OR MORE OF CLASS A SHARES AND SELL THESE
SHARES WITHIN 12 MONTHS OF PURCHASE ARE SUBJECT TO A CDSC OF 1%. THIS
CHARGE IS WAIVED FOR ALL SUCH CLASS A SHAREHOLDERS OTHER THAN THOSE WHO
PURCHASED THEIR SHARES THROUGH CERTAIN BROKER-DEALERS THAT ARE NOT
AFFILIATED WITH PRUDENTIAL.
REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid paying
Class A's initial sales charge.
INCREASE THE AMOUNT OF YOUR INVESTMENT. You can reduce Class A's sales charge by
increasing the amount of your investment. This table shows you how the sales
charge decreases as the amount of your investment increases.
SALES CHARGE AS % OF SALES CHARGE AS % OF DEALER
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED REALLOWANCE
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 million and above* None None None
* IF YOU INVEST $1 MILLION OR MORE, YOU CAN BUY ONLY CLASS A SHARES, UNLESS
YOU QUALIFY TO BUY CLASS Z SHARES. IF YOU PURCHASE $1 MILLION OR MORE OF
CLASS A SHARES, YOU WILL BE SUBJECT TO A 1% CDSC FOR SHARES REDEEMED WITHIN
12 MONTHS OF PURCHASE. THIS CHARGE IS WAIVED FOR ALL SUCH CLASS A
SHAREHOLDERS OTHER THAN THOSE WHO PURCHASED THEIR SHARES THROUGH CERTAIN
BROKER-DEALERS THAT ARE NOT AFFILIATED WITH PRUDENTIAL.
To satisfy the purchase amounts above, you can:
-- Invest with a group of investors who are related to you;
-- Buy the Class A shares of two or more Prudential mutual funds at the
same time;
-- Use your RIGHTS OF ACCUMULATION, which allow you to combine (1) the
value of Prudential mutual fund shares you already own (excluding
money market funds not acquired through the exchange
-------------------------------------------------------------------
22 PRUDENTIAL PACIFIC GROWTH FUND, INC. [TELEPHONE ICON] (800) 225-1852
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
privilege), (2) the value of money market shares you have received
for shares of other Prudential mutual funds exchanged in an exchange
transaction, and (3) the value of the shares you are purchasing for
purposes of determining the applicable sales charge (note: you must
notify the Transfer Agent at the time of purchase if you qualify for
Rights of Accumulation); or
-- Sign a LETTER OF INTENT, stating in writing that you or an eligible
group of related investors will invest a specific dollar amount in
the Fund or other Prudential mutual funds within 13 months.
The Distributor may reallow the Class A sales charge to other dealers.
BENEFIT PLANS. Certain group retirement and savings plans may purchase Class A
shares without the initial sales charge, provided that they meet the required
minimum amount of assets, average account balance or number of eligible
employees. For more information about these requirements, call Prudential at
(800) 353-2847.
MUTUAL FUND PROGRAMS. The initial sales charge will be waived for investors in
certain programs sponsored by broker-dealers, investment advisers and financial
planners who have agreements with Prudential Investments Advisory Group relating
to:
-- Mutual fund "wrap" or asset allocation programs, where the sponsor
places Fund trades and charges its clients a management, consulting
or other fee for its services; and
-- Mutual fund "supermarket" programs where the sponsor links its
customers' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
--------------------------------------------------------------------------------
23
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
OTHER TYPES OF INVESTORS. Other investors may pay no sales charges, including
certain officers, employees or agents of Prudential and its affiliates,
Prudential mutual funds, the subadvisers of the Prudential mutual funds and
registered representatives and employees of brokers that have entered into a
selected dealer agreement with the Distributor. To qualify for a reduction or
waiver of the sales charge, you must notify the Transfer Agent or your broker at
the time of purchase. For more information about reducing or eliminating
Class A's sales charge, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Reduction and Waiver of Initial Sales Charge--Class A Shares."
WAIVING CLASS C'S INITIAL SALES CHARGE
BENEFIT PLANS. Certain group retirement plans may purchase Class C shares
without the initial sales charge.
INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential
Securities or one of its affiliates. These purchases must be made within 60 days
of the redemption. To qualify for this waiver, you must
-- Purchase your shares through an account at Prudential Securities
Incorporated (PSI),
-- Purchase your shares through a COMMAND Account or an Investor Account
with Pruco Securities Corporation (Prusec), or
-- Purchase your shares through another broker.
This waiver is not available to investors who purchase shares directly from
the Transfer Agent. If you are entitled to the waiver, you must notify your
broker, who may require any supporting documents it considers appropriate.
OTHER. Investors who purchase Class C shares through certain broker-dealers that
are not affiliated with Prudential may purchase Class C shares without paying
the initial sales charge.
-------------------------------------------------------------------
24 PRUDENTIAL PACIFIC GROWTH FUND, INC. [TELEPHONE ICON] (800) 225-1852
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
QUALIFYING FOR CLASS Z SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class Z shares,
provided that they meet the required minimum for amount of assets, average
account balance or number of eligible employees. For more information about
these requirements, call Prudential at (800) 353-2847.
MUTUAL FUND PROGRAMS. Class Z shares can also be purchased by participants in
any fee-based program or trust program sponsored by Prudential or an affiliate
that includes the Fund as an available option. Class Z shares can also be
purchased by investors in certain programs sponsored by broker-dealers,
investment advisers and financial planners who have agreements with Prudential
Investments Advisory Group relating to:
-- Mutual fund "wrap" or asset allocation programs, where the sponsor
places Fund trades and charges its clients a management, consulting
or other fee for its services; and
-- Mutual fund "supermarket" programs where the sponsor links its
clients' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
OTHER TYPES OF INVESTORS. Class Z shares of the Fund can also be purchased by
any of the following:
-- Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available option;
-- The Prudential Securities Cash Balance Pension Plan, an
employee-defined benefit plan sponsored by Prudential Securities;
-- Current and former directors/trustees of the Prudential Mutual Funds
(including the Fund); and
-- Prudential, with an investment of $10 million or more.
--------------------------------------------------------------------------------
25
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
PAYMENT TO THIRD PARTIES
In connection with the sale of shares, the Manager, the Distributor or one of
their affiliates may pay brokers, financial advisers and other persons a
commission of up to 4% of the purchase price for Class B shares, up to 2% of the
purchase price for Class C shares, and a finder's fee for Class A or Class Z
shares from their own resources based on a percentage of the net asset value of
shares sold or otherwise. The Distributor or one of its affiliates may make
ongoing payments, from its own resources, to brokers, financial advisers and
other persons for providing recordkeeping or otherwise facilitating the
maintenance of shareholder accounts.
CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you purchased with reinvested
dividends and other distributions. Since the 12b-1 fees for Class A shares are
lower than for Class B shares, converting to Class A shares lowers your Fund
expenses.
Class B shares acquired through the reinvestment of dividends or
distributions will be converted to Class A shares according to the procedures
utilized by the broker-dealer through which the Class B shares were purchased,
to the extent the shares are carried on the books of the broker-dealer and the
broker-dealer provides subaccounting services to the Fund. Otherwise, the
procedures utilized by PMFS, or its affiliates, will be used. The use of
different procedures may result in a timing differential in the conversion of
Class B shares acquired through the reinvestment of dividends and distributions.
When we do the conversion, you will get fewer Class A shares than the number
of converted Class B shares if the price of the Class A shares is higher than
the price of Class B shares. The total dollar value will be the same, so you
will not have lost any money by getting fewer Class A shares. We do the
conversions quarterly, not on the anniversary date of your purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Conversion Feature--Class B Shares."
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26 PRUDENTIAL PACIFIC GROWTH FUND, INC. [TELEPHONE ICON] (800) 225-1852
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of the Fund is based on the share value. The
share value of a mutual fund--known as the NET ASSET VALUE or NAV--is determined
by a simple calculation: it's the total value of the Fund (assets minus
liabilities) divided by the total number of shares outstanding. For example, if
the value of the investments held by fund XYZ (minus its liabilities) is $1,000
and there are 100 shares of fund XYZ owned by shareholders, the price of one
share of the fund--or the NAV--is $10 ($1,000 divided by 100).
The Fund's portfolio securities are valued based upon market quotations or,
if not readily available, at fair value as determined in good faith under
procedures established by the Fund's Board.
The Fund also may use fair value pricing if it determines that a market
quotation is not reliable based, among other things, on events that occur after
the quotation is derived or after the closing of the primary market on which the
security is traded, but before the time that the Fund's NAV is determined. This
use of fair value pricing most commonly occurs with securities that are
primarily traded outside the U.S., but also may occur with U.S.-traded
securities. The fair value of a portfolio security that the Fund uses to
determine its NAV may differ from security's quoted or published price. If the
Fund needs to implement fair value pricing after the NAV publishing deadline but
before capital shares are processed, the NAV you receive may differ from the
published NAV price. For purposes of computing the Fund's NAV, we will value the
Fund's futures contracts 15 minutes after the close of regular trading on the
New York Stock Exchange (NYSE). Except when we fair value securities or as noted
below, we normally value each foreign security held by the Fund as of the close
of the security's primary market.
We determine the Fund's NAV once each business day at the close of regular
trading on the NYSE, usually 4:00 p.m. New York time. The NYSE
-------------------------------------------------------------------
MUTUAL FUND SHARES
THE NAV OF MUTUAL FUND SHARES CHANGES EVERY DAY BECAUSE THE VALUE OF A FUND'S
PORTFOLIO CHANGES CONSTANTLY. FOR EXAMPLE, IF FUND XYZ HOLDS ACME CORP. STOCK IN
ITS PORTFOLIO AND THE PRICE OF ACME STOCK GOES UP, WHILE THE VALUE OF THE FUND'S
OTHER HOLDINGS REMAINS THE SAME AND EXPENSES DON'T CHANGE, THE NAV OF FUND XYZ
WILL INCREASE.
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--------------------------------------------------------------------------------
27
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
is closed on most national holidays and Good Friday. We do not price, and you
will not be able to purchase or redeem, the Fund's shares on days when the NYSE
is closed but the primary markets for the Fund's foreign securities are open,
even though the value of these securities may have changed.
Conversely, the Fund will ordinarily price its shares, and you may purchase
and redeem shares, on days that the NYSE is open but foreign securities markets
are closed. We may not determine the Fund's NAV on days when we have not
received any orders to purchase, sell or exchange Fund shares, or when changes
in the value of the Fund's portfolio do not materially affect its NAV. Most
national newspapers report the NAVs of most mutual funds, which allows investors
to check the prices of mutual funds daily.
WHAT PRICE WILL YOU PAY FOR SHARES OF THE FUND?
For Class A and Class C shares, you'll pay the public offering price, which
is the NAV next determined after we receive your order to purchase, plus an
initial sales charge (unless you're entitled to a waiver). For Class B and
Class Z shares, you will pay the NAV next determined after we receive your order
to purchase (remember, there are no up-front sales charges for these share
classes). Your broker may charge you a separate or additional fee for purchases
of shares.
Unless regular trading on the NYSE closes before 4:00 p.m., your order to
purchase must be received by 4:00 p.m. New York time in order to receive that
day's NAV. In the event that regular trading on the NYSE closes before
4:00 p.m. New York time, you will receive the following day's NAV if your order
to purchase is received after the close of regular trading on the NYSE.
STEP 4: ADDITIONAL SHAREHOLDER SERVICES
As a Fund shareholder, you can take advantage of the following services and
privileges:
AUTOMATIC REINVESTMENT. As we explained in the "Fund Distributions and Tax
Issues" section, the Fund pays out--or distributes--its net investment income
and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Fund at NAV. If you want your
distributions paid in cash, you can indicate this preference on your
application, notify your broker or notify the Transfer Agent in writing (at the
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28 PRUDENTIAL PACIFIC GROWTH FUND, INC. [TELEPHONE ICON] (800) 225-1852
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
address below) at least five business days before the date we determine who
receives dividends.
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTENTION: ACCOUNT MAINTENANCE
P.O. BOX 8159
PHILADELPHIA, PA 19101
AUTOMATIC INVESTMENT PLAN. You can make regular purchases of the Fund for as
little as $50 by having the funds automatically withdrawn from your bank or
brokerage account at specified intervals.
RETIREMENT PLAN SERVICES. Prudential offers a wide variety of retirement plans
for individuals and institutions, including large and small businesses. For
information on IRAs, including Roth IRAs, or SEP-IRAs for a one-person business,
please contact your financial adviser. If you are interested in opening a 401(k)
or other company-sponsored retirement plan (SIMPLEs, SEP plans, Keoghs,
403(b) plans, pension and profit-sharing plans), your financial adviser will
help you determine which retirement plan best meets your needs. Complete
instructions about how to establish and maintain your plan and how to open
accounts for you and your employees will be included in the retirement plan kit
you receive in the mail.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available that will
provide you with monthly, quarterly, semi-annual or annual redemption checks.
Remember, the sale of Class A (in certain cases), Class B and Class C shares may
be subject to a CDSC. The Systematic Withdrawal Plan is not available to
participants in certain retirement plans. Please contact PMFS at (800) 225-1852
for more details.
REPORTS TO SHAREHOLDERS. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Fund. To reduce Fund expenses, we may send one
annual shareholder report, one semi-annual shareholder report and one annual
prospectus per household, unless you instruct us or your broker otherwise. If
each Fund shareholder in your household would like to receive a copy of the
Fund's prospectus, shareholder report and proxy statement, please call us toll
free at
--------------------------------------------------------------------------------
29
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
(800) 225-1852. We will begin sending additional copies of these documents
within 30 days of receipt of your request.
HOW TO SELL YOUR SHARES
You can sell your shares of the Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Fund--also known as redeeming your shares--the
price you will receive will be the NAV next determined after the Transfer Agent,
the Distributor or your broker receives your order to sell (less any applicable
CDSC). If your broker holds your shares, your broker must receive your order to
sell by 4:00 p.m., New York time, to process the sale on that day. In the event
that regular trading on the NYSE closes before 4:00 p.m. New York time, you will
receive the following day's NAV if your order to sell is received after the
close of regular trading on the NYSE. If your broker does not hold your shares,
contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTENTION: REDEMPTION SERVICES
P.O. BOX 8149
PHILADELPHIA, PA 19101
Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent, the Distributor or your broker receives your sell
order. If you hold shares through a broker, payment will be credited to your
account. If you are selling shares you recently purchased with a check, we may
delay sending you the proceeds until your check clears, which can take up to 10
days from the purchase date. You can avoid delay if you purchase shares by wire,
certified check or cashier's check. Your broker may charge a separate or
additional fee for sales of shares.
RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of the Fund, or
when we may delay paying you the proceeds from a sale. As permitted by the
Commission, this may happen during unusual market conditions or emergencies when
the Fund can't determine the value of its assets or sell its holdings. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Sale
of Shares."
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30 PRUDENTIAL PACIFIC GROWTH FUND, INC. [TELEPHONE ICON] (800) 225-1852
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
If you are selling more than $100,000 of shares, you want the check sent to
someone or some place that is not in our records, or you are a business or a
trust and you hold your shares directly with the Transfer Agent, you may have to
have the signature on your sell order signature guaranteed by an "eligible
guarantor institution." An "eligible guarantor institution" includes any bank,
broker-dealer or credit union. For more information, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Sale of Shares."
CONTINGENT DEFERRED SALES CHARGES (CDSC)
If you sell Class B shares within six years of purchase or Class C shares within
18 months of purchase (one year for Class C shares purchased before November 2,
1998), you will have to pay a CDSC. In addition, if you purchase $1 million or
more of Class A shares through certain broker-dealers that are not affiliated
with Prudential, although you are not subject to an intial sales charge, you are
subject to a 1% CDSC for shares redeemed within 12 months of purchase. To keep
the CDSC as low as possible, we will sell amounts representing shares in the
following order:
-- Amounts representing shares you purchased with reinvested dividends
and distributions,
-- Amounts representing the increase in NAV above the total amount of
payments for such shares made during the past 12 months for Class A
shares (in certain cases), six years for Class B shares (five years
for Class B shares purchased before January 22, 1990) and 18 months
for Class C shares (one year for Class C shares purchased before
November 2, 1998), and
-- Amounts representing the cost of shares held beyond the CDSC period
(12 months for Class A shares (in certain cases), six years for
Class B shares and 18 months for Class C shares).
Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid--or at least
minimize--the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts representing the cost
of shares held for the longest period of time within the applicable CDSC period.
--------------------------------------------------------------------------------
31
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
As we noted in the "Share Class Comparison" chart, the CDSC for Class B
shares is 5% in the first year, 4% in the second, 3% in the third, 2% in the
fourth and 1% in the fifth and sixth years. The rate decreases on the first day
of the month following the anniversary date of your purchase, not on the
anniversary date itself. The CDSC is 1% for Class C shares--which is applied to
shares sold within 18 months of purchase (or one year for Class C shares
purchased before November 2, 1998). As previously noted, in certain cases,
Class A shares are subject to a CDSC of 1% that is applied to Class A shares
sold within 12 months of purchase. The Class A CDSC is waived for all such
Class A investors other than those who purchased their shares from certain
broker-dealers that are not affiliated with Prudential. For both Class B
and Class C shares, the CDSC is calculated using the lesser of the original
purchase price or the redemption proceeds. For purposes of determining how long
you've held your shares, all purchases during the month are grouped together and
considered to have been made on the last day of the month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after initial purchase, excluding any
time shares were held in a money market fund.
WAIVER OF THE CDSC--CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
-- After a shareholder is deceased or disabled (or, in the case of a
trust account, the death or disability of the grantor). This waiver
applies to individual shareholders as well as shares owned in joint
tenancy, provided the shares were purchased before the death or
disability;
-- To provide for certain distributions--made without IRS penalty--from
a tax-deferred retirement plan, IRA or Section 403(b) custodial
account; and
-- On certain redemptions affected through a Systematic Withdrawal Plan.
For more information on the above and other waivers, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Waiver of the Contingent Deferred Sales
Charges--Class B Shares."
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32 PRUDENTIAL PACIFIC GROWTH FUND, INC. [TELEPHONE ICON] (800) 225-1852
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
WAIVER OF THE CDSC--CLASS C SHARES
PRUDENTIAL RETIREMENT PLANS. The CDSC will be waived for purchases of Class C
shares by both qualified and nonqualified retirement and deferred compensation
plans participating in a PruArray Plan and other plans if Prudential also
provides administrative or recordkeeping services. The CDSC will also be waived
on redemptions from Benefit Plans sponsored by Prudential and its affiliates to
the extent that the redemption proceeds are invested in The Guaranteed
Investment Account (a group annuity insurance product sponsored by Prudential),
The Guaranteed Insulated Separate Account (a separate account offered by
Prudential), and shares of The Stable Value Fund (an unaffiliated bank
collective fund).
OTHER BENEFIT PLANS. The CDSC will be waived on redemptions from Benefit Plans
holding shares through a broker not affiliated with Prudential and for which the
broker provides administrative or recordkeeping services.
REDEMPTION IN KIND
If the sales of Fund shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of the Fund's net assets, we can then give you
securities from the Fund's portfolio instead of cash. If you want to sell the
securities for cash, you would have to pay the costs charged by a broker.
SMALL ACCOUNTS
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your account.
We would do this to minimize the Fund's expenses paid by other shareholders. We
will give you 60 days' notice, during which time you can purchase additional
shares to avoid this action. This involuntary sale does not apply to
shareholders who own their shares as part of a 401(k) plan, an IRA or some other
qualified or tax-deferred plan or account.
90-DAY REPURCHASE PRIVILEGE
After you redeem your shares, you have a 90-day period during which you may
reinvest into your account any of the redemption proceeds in shares of the same
Fund and account without paying an initial sales charge. Also, if you paid a
CDSC when you redeemed your shares, we will credit your account with the
appropriate numbers of shares to reflect the amount of
--------------------------------------------------------------------------------
33
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
the CDSC you paid. In order to take advantage of this one-time privilege, you
must notify the Transfer Agent or your broker at the time of the repurchase. See
the SAI, "Purchase, Redemption and Pricing of Fund Shares--Sale of Shares."
RETIREMENT PLANS
To sell shares and receive a distribution from a retirement account, call your
broker or the Transfer Agent for a distribution request form. There are special
distribution and income tax withholding requirements for distributions from
retirement plans and you must submit a withholding form with your request to
avoid delay. If your retirement plan account is held for you by your employer or
plan trustee, you must arrange for the distribution request to be signed and
sent by the plan administrator or trustee. For additional information, see the
SAI.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Fund for shares of the same class in certain
other Prudential mutual funds--including certain money market funds--if you
satisfy the minimum investment requirements. For example, you can exchange Class
A shares of the Fund for Class A shares of another Prudential mutual fund, but
you can't exchange Class A shares for Class B, Class C or Class Z shares.
Class B and Class C shares may not be exchanged into money market funds other
than the Special Money Market Fund, Inc. After an exchange, the CDSC at
redemption will be calculated from the first day of the month after the initial
purchase, excluding any time shares were held in a money market fund. We may
change the terms of any exchange privilege after giving you 60 days' notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX: 8157
PHILADELPHIA, PA 19101
There is no sales charge for such exchanges. However, if you exchange--and
then sell--Class B shares within approximately six years of your original
purchase or Class C shares within 18 months of your original purchase, you must
still pay the applicable CDSC. If you have exchanged
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34 PRUDENTIAL PACIFIC GROWTH FUND, INC. [TELEPHONE ICON] (800) 225-1852
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
Class B shares into a money market fund, the time you hold the shares in the
money market account will not be counted in calculating the required holding
periods for CDSC liability.
Remember, as we explained in the section entitled "Fund Distributions and
Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange are
worth more than the amount that you paid for them, you may have to pay capital
gains tax. For additional information about exchanging shares, see the SAI,
"Shareholder Investment Account--Exchange Privilege."
If you own Class B or Class C shares and qualify to purchase Class A shares
of any Prudential mutual fund without paying an initial sales charge, we will
exchange your Class B or Class C shares which are not subject to a CDSC for
Class A shares unless you elect otherwise. We make such exchanges on a quarterly
basis if you qualify for this exchange privilege. You must notify the Transfer
Agent that you are eligible for this special exchange privilege. We have
obtained a legal opinion that this exchange is not a "taxable event" for federal
income tax purposes. This opinion is not binding on the IRS. Effective June 16,
2003 the special exchange privilege that allows eligible Class B or Class C
shareholders to exchange their shares for Class A shares will be discontinued.
FREQUENT TRADING
Frequent trading of Fund shares in response to short-term fluctuations in the
market--also known as "market timing"--may make it very difficult to manage the
Fund's investments. When market timing occurs, the Fund may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Fund's performance may be hurt. When large dollar amounts are
involved, market timing can also make it difficult to use long-term investment
strategies because we cannot predict how much cash the Fund will have to invest.
When, in our opinion, such activity would have a disruptive effect on portfolio
management, the Fund reserves the right to refuse purchase orders and exchanges
into the Fund by any person, group or commonly controlled account. The decision
will be based upon dollar amount, volume or frequency of trading. The Fund will
notify a market timer of rejection of an exchange or purchase order. If the Fund
allows a market timer to trade Fund shares, it may require the market timer to
enter into a written agreement to follow certain procedures and limitations.
--------------------------------------------------------------------------------
35
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
------------------------------------------------
TELEPHONE REDEMPTIONS AND EXCHANGES
You may redeem your shares if the proceeds of the redemption do not exceed
$100,000 or exchange your shares in any amount by calling the Fund at
(800) 225-1852 before 4 p.m. New York time to receive a redemption or exchange
amount based on that day's NAV. Certain restrictions apply; please see the
section entitled "Restrictions on Sales" for additional information. In the
event that regular trading on the NYSE closes before 4:00 p.m. New York time,
you will receive the following day's NAV if your order to sell or exchange is
received after the close of regular trading on the NYSE.
The Transfer Agent will record your telephone instructions and request
specific account information before redeeming or exchanging shares. The Fund
will not be liable if it follows instructions that it reasonably believes are
made by the shareholder. If the Fund does not follow reasonable procedures, it
may be liable for losses due to unauthorized or fraudulent telephone
instructions.
In the event of drastic economic or market changes, you may have difficulty
in redeeming or exchanging your shares by telephone. If this occurs, you should
consider redeeming or exchanging your shares by mail or through your broker.
The telephone redemption and exchange privileges may be modified or
terminated at any time. If this occurs, you will receive a written notice from
the Fund.
EXPEDITED REDEMPTION PRIVILEGE
If you have selected the Expedited Redemption Privilege, you may have your
redemption proceeds sent directly to your bank account. Expedited redemption
requests may be made by telephone or letter, must be received by the Fund prior
to 4 p.m. New York time to receive a redemption amount based on that day's NAV
and are subject to the terms and conditions regarding the redemption of shares.
In the event that regular trading on the NYSE closes before 4:00 p.m., you will
receive the following day's NAV if your order to sell is received after the
close of regular trading on the NYSE. For more information, see "Purchase,
Redemption and Pricing of Fund Shares--Expedited Redemption Privilege" in the
SAI. The Expedited Redemption Privilege may be modified or terminated at any
time without notice.
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36 PRUDENTIAL PACIFIC GROWTH FUND, INC. [TELEPHONE ICON] (800) 225-1852
FINANCIAL HIGHLIGHTS
-------------------------------------
The financial highlights are intended to help you evaluate the Fund's financial
performance for the past 5 years. The TOTAL RETURN in each chart represents the
rate that a shareholder would have earned on an investment in that share class
of the Fund, assuming reinvestment of all dividends and other distributions. The
information is for each share class for the periods indicated.
A copy of the Fund's annual reports along with the Fund's audited financial
statements and independent accountant's reports is available, upon request, at
no charge as described on the back cover of this Prospectus.
--------------------------------------------------------------------------------
37
FINANCIAL HIGHLIGHTS
------------------------------------------------
CLASS A SHARES
The financial highlights for the five years ended October 31, 2002 were audited
by PricewaterhouseCoopers LLP, independent accountants, whose report was
unqualified.
CLASS A SHARES(3) (FISCAL YEARS ENDED 10-31)
PER SHARE OPERATING
PERFORMANCE 2002 2001 2000 1999 1998
NET ASSET VALUE,
BEGINNING OF YEAR $6.83 $9.70 $14.01 $9.14 $12.22
INCOME/LOSS FROM
INVESTMENT OPERATIONS:
Net investment income
(loss) (.03) (.09) (.09) (.04) .06
Net realized and
unrealized gain (loss)
on investment and
foreign currency
transactions (.21) (2.78) (4.01) 4.99 (1.88)
TOTAL FROM INVESTMENT
OPERATIONS (.24) (2.87) (4.10) 4.95 (1.82)
LESS DISTRIBUTIONS:
Dividends from net
investment income -- -- (.16) (.08) --
Distributions in excess
of net investment
income -- -- (.05) -- (.40)
Distributions from net
realized gains -- -- -- -- (.86)
TOTAL DISTRIBUTIONS -- -- (.21) (.08) (1.26)
NET ASSET VALUE, END OF
YEAR $6.59 $6.83 $9.70 $14.01 $9.14
TOTAL RETURN(1) (3.51)% (29.59)% (29.82)% 55.11% (15.53)%
---------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 2002 2001 2000 1999 1998
NET ASSETS, END OF YEAR
(000) $25,106 $28,615 $50,141 $49,338 $22,624
AVERAGE NET ASSETS (000) $29,077 $34,919 $53,389 $31,281 $26,845
RATIOS TO AVERAGE NET
ASSETS:
Total expenses(2) 2.39% 2.60% 1.60% 1.72% 1.70%
Operating expenses,
including distribution
and service (12b-1)
fees(2) 2.39% 2.58% 1.57% 1.72% 1.70%
Operating expenses,
excluding distribution
and service (12b-1)
fees 2.14% 2.33% 1.32% 1.47% 1.45%
Net investment income
(loss) (.48)% (1.12)% (.70)% (.34)% .63%
FOR CLASS A, B, C, AND Z
SHARES:
Portfolio turnover rate 155% 158% 93% 104% 94%
---------------------------------------------------------------------------
(1) 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 YEAR REPORTED AND INCLUDES REINVESTMENT OF DIVIDENDS AND
DISTRIBUTIONS.
(2) THE DISTRIBUTOR OF THE FUND CONTRACTUALLY AGREED TO LIMIT ITS DISTRIBUTION
AND SERVICE (12b-1) FEES TO .25 OF 1% OF THE AVERAGE DAILY NET ASSETS OF
THE CLASS A SHARES.
(3) CALCULATED BASED UPON WEIGHTED AVERAGE SHARES OUTSTANDING DURING THE YEAR.
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38 PRUDENTIAL PACIFIC GROWTH FUND, INC. [TELEPHONE ICON] (800) 225-1852
FINANCIAL HIGHLIGHTS
------------------------------------------------
CLASS B SHARES
The financial highlights for the five years ended October 31, 2002 were audited
by PricewaterhouseCoopers LLP, independent accountants, whose report was
unqualified.
CLASS B SHARES(2) (FISCAL YEARS ENDED 10-31)
PER SHARE OPERATING
PERFORMANCE 2002 2001 2000 1999 1998
NET ASSET VALUE,
BEGINNING OF YEAR $6.45 $9.30 $13.50 $8.79 $11.77
INCOME/LOSS FROM
INVESTMENT OPERATIONS:
Net investment loss (.09) (.15) (.19) (.12) (.01)
Net realized and
unrealized gain (loss)
on investment and
foreign currency
transactions (.17) (2.70) (3.87) 4.84 (1.82)
TOTAL FROM INVESTMENT
OPERATIONS (.26) (2.85) (4.06) 4.72 (1.83)
LESS DISTRIBUTIONS:
Dividends from net
investment income -- -- (.09) (.01) --
Distributions in excess
of net investment
income -- -- (.05) -- (.29)
Distributions from net
realized gains -- -- -- -- (.86)
TOTAL DISTRIBUTIONS -- -- (.14) (.01) (1.15)
NET ASSET VALUE, END OF
YEAR $6.19 $6.45 $9.30 $13.50 $8.79
TOTAL RETURN(1) (4.03)% (30.72)% (30.40)% 54.28% (16.32)%
--------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 2002 2001 2000 1999 1998
NET ASSETS, END OF YEAR
(000) $10,840 $16,314 $51,004 $107,769 $74,457
AVERAGE NET ASSETS (000) $14,322 $28,834 $96,019 $85,193 $91,983
RATIOS TO AVERAGE NET
ASSETS:
Total expenses 3.14% 3.35% 2.35% 2.47% 2.45%
Operating expenses,
including distribution
and service (12b-1)
fees 3.14% 3.33% 2.32% 2.47% 2.45%
Operating expenses,
excluding distribution
and service (12b-1)
fees 2.14% 2.33% 1.32% 1.47% 1.45%
Net investment loss (1.32)% (1.90)% (1.43)% (1.09)% (.12)%
--------------------------------------------------------------------------------
(1) 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 YEAR REPORTED AND INCLUDES REINVESTMENT OF DIVIDENDS AND
DISTRIBUTIONS.
(2) CALCULATED BASED UPON WEIGHTED AVERAGE SHARES OUTSTANDING DURING THE YEAR.
--------------------------------------------------------------------------------
39
FINANCIAL HIGHLIGHTS
------------------------------------------------
CLASS C SHARES
The financial highlights for the five years ended October 31, 2002 were audited
by PricewaterhouseCoopers LLP, independent accountants, whose report was
unqualified.
CLASS C SHARES(2) (FISCAL YEARS ENDED 10-31)
PER SHARE OPERATING
PERFORMANCE 2002 2001 2000 1999 1998
NET ASSET VALUE,
BEGINNING OF YEAR $6.49 $9.30 $13.50 $8.79 $11.77
INCOME/LOSS FROM
INVESTMENT OPERATIONS:
Net investment loss (.08) (.15) (.19) (.12) (.01)
Net realized and
unrealized gain (loss)
on investment and
foreign currency
transactions (.19) (2.66) (3.87) 4.84 (1.82)
TOTAL FROM INVESTMENT
OPERATIONS (.27) (2.81) (4.06) 4.72 (1.83)
LESS DISTRIBUTIONS:
Dividends from net
investment income -- -- (.09) (.01) --
Distributions in excess
of net investment
income -- -- (.05) -- (.29)
Distributions from net
realized gains -- -- -- -- (.86)
TOTAL DISTRIBUTIONS -- -- (.14) (.01) (1.15)
NET ASSET VALUE, END OF
YEAR $6.22 $6.49 $9.30 $13.50 $8.79
TOTAL RETURN(1) (4.16)% (30.29)% (30.40)% 54.28% (16.32)%
---------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 2002 2001 2000 1999 1998
NET ASSETS, END OF YEAR
(000) $2,061 $2,176 $6,040 $7,073 $1,654
AVERAGE NET ASSETS (000) $2,299 $3,035 $7,376 $3,103 $2,276
RATIOS TO AVERAGE NET
ASSETS:
Total expenses 3.14% 3.35% 2.35% 2.47% 2.45%
Operating expenses,
including distribution
and service (12b-1)
fees 3.14% 3.33% 2.32% 2.47% 2.45%
Operating expenses,
excluding distribution
and service (12b-1)
fees 2.14% 2.33% 1.32% 1.47% 1.45%
Net investment loss (1.23)% (1.90)% (1.42)% (1.09)% (.12)%
---------------------------------------------------------------------------
(1) 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 YEAR REPORTED AND INCLUDES REINVESTMENT OF DIVIDENDS AND
DISTRIBUTIONS.
(2) CALCULATED BASED UPON WEIGHTED AVERAGE SHARES OUTSTANDING DURING THE YEAR.
-------------------------------------------------------------------
40 PRUDENTIAL PACIFIC GROWTH FUND, INC. [TELEPHONE ICON] (800) 225-1852
FINANCIAL HIGHLIGHTS
------------------------------------------------
CLASS Z SHARES
The financial highlights for the five years ended October 31, 2002 were audited
by PricewaterhouseCoopers LLP, independent accountants, whose report was
unqualified.
CLASS Z SHARES(2) (--FISCAL YEARS ENDED 10-31)
PER SHARE OPERATING
PERFORMANCE 2002 2001 2000 1999 1998
NET ASSET VALUE,
BEGINNING OF YEAR $6.85 $9.75 $14.12 $9.17 $12.28
INCOME/LOSS FROM
INVESTMENT OPERATIONS:
Net investment income
(loss) (.01) (.07) (.06) -- .08
Net realized and
unrealized gain (loss)
on investment and
foreign currency
transactions (.23) (2.83) (4.08) 5.06 (1.89)
TOTAL FROM INVESTMENT
OPERATIONS (.24) (2.90) (4.14) 5.06 (1.81)
LESS DISTRIBUTIONS:
Dividends from net
investment income -- -- (.18) (.11) --
Distributions in excess
of dividends from net
investment income -- -- (.05) -- (.44)
Distributions from net
realized gains -- -- -- -- (.86)
TOTAL DISTRIBUTIONS -- -- (.23) (.11) (1.30)
NET ASSET VALUE, END OF
YEAR $6.61 $6.85 $9.75 $14.12 $9.17
TOTAL RETURN(1) (3.50)% (29.89)% (29.75)% 56.05% (15.36)%
-------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 2002 2001 2000 1999 1998
NET ASSETS, END OF YEAR
(000) $922 $1,147 $3,767 $43,311 $12,429
AVERAGE NET ASSETS (000) $1,068 $2,107 $33,479 $22,811 $15,099
RATIOS TO AVERAGE NET
ASSETS:
Total expenses 2.14% 2.35% 1.35% 1.47% 1.45%(3)
Operating expenses 2.14% 2.33% 1.32% 1.47% 1.45%(3)
Net investment income
(loss) (.18)% (.86)% (.40)% (.03)% .82%(3)
-------------------------------------------------------------------------------------
(1) 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 YEAR REPORTED AND INCLUDES REINVESTMENT OF DIVIDENDS AND
DISTRIBUTIONS.
(2) CALCULATED BASED UPON WEIGHTED AVERAGE SHARES OUTSTANDING DURING THE YEAR.
--------------------------------------------------------------------------------
41
THE PRUDENTIAL MUTUAL FUND FAMILY
-------------------------------------
Prudential offers a broad range of mutual funds designed to meet your individual
needs. For information about these funds, contact your financial adviser or call
us at (800) 225-1852. Please read the prospectus carefully before you invest or
send money.
PRUDENTIAL MUTUAL FUNDS
-------------------------------------------------------------
STOCK FUNDS
LARGE CAPITALIZATION STOCK FUNDS
PRUDENTIAL 20/20 FOCUS FUND
PRUDENTIAL EQUITY FUND, INC.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL STOCK INDEX FUND
PRUDENTIAL TAX-MANAGED FUNDS
PRUDENTIAL TAX-MANAGED EQUITY FUND
PRUDENTIAL VALUE FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH FUND
SMALL-TO-MID-CAPITALIZATION STOCK
FUNDS
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
PRUDENTIAL SMALL COMPANY FUND, INC.
PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC.
PRUDENTIAL U.S. EMERGING GROWTH FUND, INC.
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON EQUITY OPPORTUNITY FUND
SECTOR STOCK FUNDS
PRUDENTIAL NATURAL RESOURCES FUND, INC.
PRUDENTIAL REAL ESTATE SECURITIES FUND
PRUDENTIAL SECTOR FUNDS, INC.
PRUDENTIAL FINANCIAL SERVICES FUND
PRUDENTIAL HEALTH SCIENCES FUND
PRUDENTIAL TECHNOLOGY FUND
PRUDENTIAL UTILITY FUND
GLOBAL/INTERNATIONAL STOCK FUNDS
PRUDENTIAL EUROPE GROWTH FUND, INC.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
PRUDENTIAL WORLD FUND, INC.
PRUDENTIAL GLOBAL GROWTH FUND
PRUDENTIAL INTERNATIONAL VALUE FUND
PRUDENTIAL JENNISON INTERNATIONAL GROWTH FUND
BALANCED/ALLOCATION FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL ACTIVE BALANCED FUND
BOND FUNDS
TAXABLE BOND FUNDS
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
PRUDENTIAL HIGH YIELD FUND, INC.
PRUDENTIAL SHORT-TERM CORPORATE BOND FUND, INC.
INCOME PORTFOLIO
PRUDENTIAL TOTAL RETURN BOND FUND, INC.
MUNICIPAL BOND FUNDS
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
CALIFORNIA INCOME SERIES
PRUDENTIAL MUNICIPAL BOND FUND
HIGH INCOME SERIES
INSURED SERIES
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
NEW JERSEY SERIES
NEW YORK SERIES
PENNSYLVANIA SERIES
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
-------------------------------------------------------------------
42 PRUDENTIAL PACIFIC GROWTH FUND, INC. [TELEPHONE ICON] (800) 225-1852
------------------------------------------------
GLOBAL/INTERNATIONAL BOND FUND
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
CASH ACCUMULATION TRUST
LIQUID ASSETS FUND
NATIONAL MONEY MARKET FUND
PRUDENTIAL GOVERNMENT SECURITIES TRUST
MONEY MARKET SERIES
U.S. TREASURY MONEY MARKET SERIES
PRUDENTIAL INSTITUTIONAL LIQUIDITY PORTFOLIO, INC.
INSTITUTIONAL MONEY MARKET SERIES
PRUDENTIAL MONEYMART ASSETS, INC.
MUNICIPAL MONEY MARKET FUNDS
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
NEW YORK MONEY MARKET SERIES
TAX-FREE MONEY MARKET FUNDS
COMMAND TAX-FREE FUND
PRUDENTIAL TAX-FREE MONEY FUND, INC.
OTHER MONEY MARKET FUNDS
COMMAND GOVERNMENT FUND
COMMAND MONEY FUND
SPECIAL MONEY MARKET FUND, INC.*
MONEY MARKET SERIES
STRATEGIC PARTNERS
MUTUAL FUNDS**
-----------------------------
STRATEGIC PARTNERS ASSET ALLOCATION FUNDS
STRATEGIC PARTNERS CONSERVATIVE GROWTH FUND
STRATEGIC PARTNERS MODERATE GROWTH FUND
STRATEGIC PARTNERS HIGH GROWTH FUND
STRATEGIC PARTNERS STYLE SPECIFIC FUNDS
STRATEGIC PARTNERS LARGE CAPITALIZATION GROWTH FUND
STRATEGIC PARTNERS LARGE CAPITALIZATION VALUE FUND
STRATEGIC PARTNERS SMALL CAPITALIZATION GROWTH FUND
STRATEGIC PARTNERS SMALL CAPITALIZATION VALUE FUND
STRATEGIC PARTNERS INTERNATIONAL EQUITY FUND
STRATEGIC PARTNERS TOTAL RETURN BOND FUND
STRATEGIC PARTNERS OPPORTUNITY FUNDS
STRATEGIC PARTNERS FOCUSED GROWTH FUND
STRATEGIC PARTNERS NEW ERA GROWTH FUND
STRATEGIC PARTNERS FOCUSED VALUE FUND
STRATEGIC PARTNERS MID-CAP VALUE FUND
SPECIAL MONEY MARKET FUND, INC.*
MONEY MARKET SERIES
*This fund is not a direct purchase money fund and is only an exchangeable
money fund.
**Not exchangeable with the Prudential mutual funds.
--------------------------------------------------------------------------------
43
Notes
-------------------------------------------------------------------
44 PRUDENTIAL PACIFIC GROWTH FUND, INC. [TELEPHONE ICON] (800) 225-1852
Notes
--------------------------------------------------------------------------------
45
FOR MORE INFORMATION
Please read this prospectus before you invest in the Fund and keep it for future
reference. For information or shareholder questions contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 8098
PHILADELPHIA, PA 19101
(800) 225-1852
(732) 482-7555 (Calling from outside the U.S.)
Outside Brokers should contact:
Prudential Investment Management
Services LLC
P.O. Box 8310
Philadelphia, PA 19101
(800) 778-8769
Visit Prudential's website at:
www.prudential.com
Additional information about the Fund
can be obtained without charge and can
be found in the following documents:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
(incorporated by reference into this prospectus)
ANNUAL REPORT
(contains a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during the last fiscal year)
SEMI-ANNUAL REPORT
You can also obtain copies of Fund documents from the Securities and Exchange
Commission as follows:
BY MAIL
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-0102
BY ELECTRONIC REQUEST
publicinfo@sec.gov
(The SEC charges a fee to copy documents.)
IN PERSON
Public Reference Room in
Washington, DC
(For hours of operation, call
1-202-942-8090)
VIA THE INTERNET
on the EDGAR Database at
http://www.sec.gov
Fund Symbols Nasdaq CUSIP
------ -----
Class A PRPAX 743941106
Class B PRPBX 743941205
Class C PRPCX 743941304
Class Z PPGZX 743941403
MF157A Investment Company Act File No.
811-6391
PRUDENTIAL PACIFIC GROWTH FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 30, 2002
Prudential Pacific Growth Fund, Inc. (the Fund) is an open-end, diversified
management investment company whose investment objective is long-term growth of
capital. The Fund seeks to achieve this objective by investing primarily in
equity-related securities (primarily common stock) of companies doing business
in or domiciled in the Pacific Basin region. Under normal circumstances, the
Fund intends to invest at least 80% of its investable assets in such securities.
The Fund may invest in equity-related securities of other companies and fixed
income obligations. The Fund may also engage in various transactions involving
derivatives, such as those involving options on stock, stock indices, foreign
currencies and futures contracts on foreign currencies and groups of currencies
so as to hedge its portfolio and to attempt to enhance return. There can be no
assurance that the Fund's investment objective will be achieved. See
"Description of the Fund, Its Investments and Risks." Effective June 30, 2003,
the name of the Fund will change to Strategic Partners Pacific Growth Fund, Inc.
The Fund's address is 100 Mulberry Street, Gateway Center Three, Newark, NJ
07102, and its telephone number is (800) 225-1852.
This Statement of Additional Information (SAI) is not a prospectus and should be
read in conjunction with the Fund's Prospectus dated December 30, 2002. A copy
of the Prospectus may be obtained at no charge, from the Fund upon request at
the address or telephone number noted above.
The Fund's financial statements for the fiscal year ended October 31, 2002 are
incorporated into this SAI by reference to the Fund's 2002 annual report to
shareholders (File No. 811-6391). You may obtain a copy of the Fund's annual
report at no charge by request to the Fund at the address or telephone number
noted above.
TABLE OF CONTENTS
PAGE
Fund History B-2
Description of the Fund, Its Investments and Risks B-2
Investment Restrictions B-13
Management of the Fund B-15
Control Persons and Principal Holders of Securities B-20
Investment Advisory and Other Services B-20
Brokerage Allocation and Other Practices B-24
Capital Stock and Organization B-25
Purchase, Redemption and Pricing of Fund Shares B-26
Shareholder Investment Account B-35
Net Asset Value B-39
Taxes, Dividends and Distributions B-40
Performance Information B-43
Financial Statements B-45
Appendix I--Description of Security Ratings I-1
Appendix II--General Investment Information II-1
Appendix III--Historical Performance Data III-1
MF157B
FUND HISTORY
The Fund was organized under the laws of Maryland on August 14, 1991 as a
corporation.
DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS
CLASSIFICATION
The Fund is a diversified open-end management investment company.
INVESTMENT STRATEGIES, POLICIES AND RISKS
The Fund's investment objective is long-term growth of capital. It seeks to
achieve this objective by investing primarily in equity-related securities
(common stock, preferred stock, rights, warrants, debt securities or preferred
stock convertible into or exchangeable for common stock or preferred stock and
interests in master limited partnerships, among others) of companies doing
business in or domiciled in the Pacific Basin region, including, but not limited
to, Japan, Australia, Hong Kong, Singapore, South Korea, Malaysia, Thailand,
Indonesia, the Philippines and New Zealand. There can be no assurance that the
Fund's investment objective will be achieved. For a further description of the
Fund's investment objective and policies, see "How the Fund Invests--Investment
Objective and Policies" in the Prospectus.
EQUITY-RELATED SECURITIES
The Fund invests primarily in equity-related securities. Equity-related
securities include common stock, preferred stock, rights, warrants, debt
securities or preferred stock convertible into or exchangeable for common stock
or preferred stock and interests in master limited partnerships, among others.
With respect to equity-related securities, the Fund may purchase American
Depositary Receipts ("ADRs"). ADRs are U.S. dollar-denominated certificates
issued by a United States bank or trust company and represent the right to
receive securities of a foreign issuer deposited in a domestic bank or foreign
branch of a United States bank and traded on a United States exchange or in an
over-the-counter market. Generally, ADRs are in registered form. There are no
fees imposed on the purchase or sale of ADRs when purchased from the issuing
bank or trust company in the initial underwriting, although the issuing bank or
trust company may impose charges for the collection of dividends and the
conversion of ADRs into the underlying securities. Investment in ADRs has
certain advantages over direct investment in the underlying foreign securities
since: (1) ADRs are U.S. dollar-denominated investments that are registered
domestically, easily transferable, and for which market quotations are readily
available; and (2) issuers whose securities are represented by ADRs are usually
subject to auditing, accounting, and financial reporting standards comparable to
those of domestic issuers.
The Fund may purchase sponsored or unsponsored ADRs. In a sponsored program, the
foreign issuer arranges for the bank or trust company to hold the underlying
foreign securities and issue the dollar-denominated certificates. An unsponsored
program is not initiated or "sponsored" by the foreign issuer. As such, there
may be less information available about a foreign issuer for which an
unsponsored program was initiated than a foreign issuer that participates in a
sponsored program.
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 stock in a corporation's capital structure, but are usually
subordinated to similar nonconvertible securities. While providing a fixed
income stream (generally higher in yield than the income derivable from a common
stock but lower than that afforded by a similar nonconvertible security), a
convertible security also affords an investor the opportunity, through its
conversion feature, to participate in the capital appreciation dependent upon a
market price advance in the convertible security's underlying common stock. The
Fund may invest up to 25% of its net assets in foreign convertible securities
having a minimum rating of at least "B" by a nationally recognized statistical
rating organization.
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
B-2
value of the underlying stock declines. While no securities investment is
without some risk, investments in convertible securities generally entail less
risk than investments in the common stock of the same issuer.
WARRANTS
The Fund may invest up to 5% of its net assets in warrants. A warrant gives the
holder thereof the right to subscribe by a specified date to a stated number of
shares of stock of the issuer at a fixed price. Warrants tend to be more
volatile than the underlying stock, and if at a warrant's expiration date the
stock is trading at a price below the price set in the warrant, the warrant will
expire worthless. Conversely, if at the expiration date the underlying stock is
trading at a price higher than the price set in the warrant, the Fund can
acquire the stock at a price below its market value.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
From time to time, in the ordinary course of business, the Fund may purchase or
sell securities on a when-issued or delayed delivery basis. When-issued or
delayed delivery transactions arise when securities are purchased or sold by the
Fund with payment and delivery taking place as much as a month or more in the
future in order to secure what is considered to be an advantageous price and
yield to the Fund at the time of entering into the transaction. The Fund's
custodian, State Street Bank and Trust Company (Custodian), will segregate cash
or other liquid unencumbered assets marked-to-market daily, having a value equal
to or greater than the Fund's purchase commitments. The securities so purchased
are subject to market fluctuation and no interest accrues to the purchaser
during the period between purchase and settlement. At the time of delivery of
the securities the value may be more or less than the purchase price and an
increase in the percentage of the Fund's assets committed to the purchase of
securities on a when-issued or delayed delivery basis may increase the
volatility of the Fund's net asset value. If the Fund chooses to dispose of the
when-issued security prior to its receipt of, and payment for, the security, it
could, as with the disposition of any other portfolio security, incur a gain or
loss due to market fluctuations.
SHORT SALES AGAINST-THE-BOX
A short sale against-the-box is a short sale in which the Fund owns an equal
amount of the securities sold short or securities convertible into or
exchangeable for, with or without payment of any further consideration, such
securities; provided that if further consideration is required in connection
with the conversion or exchange, cash or other liquid assets, in an amount equal
to such consideration must be segregated for an equal amount of the securities
of the same issuer as the securities sold short. As a matter of current
operating policy, the Fund will not engage in short sales other than short sales
against-the-box. This means that the Fund may make short sales of securities or
maintain a short position, provided that at all times when a short position is
open the Fund owns an equal amount of such securities or securities convertible
into or exchangeable for, without payment of any further consideration, an equal
amount of the securities of the same issuer as the securities sold short (a
short sale against-the-box). Not more than 25% of the Fund's net assets
(determined at the time of the short sale) may be subject to such sales. The
Fund does not intend to have more than 5% of its net assets (determined at the
time of the short sale) subject to short sales against-the-box during the coming
year.
U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES. The Fund is permitted to invest in U.S. Treasury
securities, including bills, notes, bonds and other debt securities issued by
the U.S. Treasury Department. These instruments are direct obligations of the
U.S. Government and, as such, are backed by the "full faith and credit" of the
United States. They differ primarily in their interest rates, the lengths of
their maturities and the dates of their issuances.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in securities issued by agencies of the
U.S. government or instrumentalities of the U.S. government. These obligations,
including those which are guaranteed by federal agencies or instrumentalities,
may or may not be backed by the full faith and credit of the United States.
Obligations of the Government National Mortgage Association (GNMA), the Farmers
Home Administration and the Small Business Administration are backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the Fund must look principally
to the agency issuing or guaranteeing the obligation for ultimate repayment and
may not be able to assert a claim against the United States if the agency or
instrumentality does not meets its commitments. Securities in which the Fund may
invest which are not backed by the full faith and credit of the United States
include obligations such as those issued by the Federal Home Loan Bank, the
Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage
Association, the Student Loan Marketing Association, Resolution Funding
Corporation and the Tennessee Valley Authority, each of which has the right to
borrow from the U.S. Treasury to meet its obligations, and obligations of the
Farm Credit System, the obligations of which may be satisfied only by the
individual credit of the issuing agency. FHLMC investments may include
collateralized mortgage obligations.
B-3
Obligations issued or guaranteed as to principal and interest by the U.S.
Government may be acquired by the Fund in the form of custodial receipts that
evidence ownership of future interest payments, principal payments or both on
certain United States treasury notes or bonds. Such notes and bonds are held in
custody by a bank on behalf of the owners. These custodial receipts are commonly
referred to as Treasury strips.
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in mortgage-backed securities, including
those which represent undivided ownership interest in pools of mortgages. The
U.S. Government or the issuing agency or instrumentality guarantees the payment
of interest on and principal of these securities. However, the guarantees do not
extend to the yield or value of the securities nor do the guarantees extend to
the yield or value of the Fund's shares. These securities are in most cases
pass-through instruments through which the holders receive a share of all
interest and principal payments from the mortgages underlying the securities,
net of certain fees. Because the prepayment characteristics of the underlying
mortgages vary, it is not possible to predict accurately the average life of a
particular issue of pass-through certificates. Mortgage-backed securities are
often subject to more rapid repayment than their maturity date would indicate as
a result of the pass-through of prepayments of principal on the underlying
mortgage obligations. During periods of declining interest rates, prepayment of
mortgages underlying mortgage-backed securities can be expected to accelerate.
The Fund's ability to invest in high-yielding mortgage-backed securities will be
adversely affected to the extent that prepayments of mortgages must be
reinvested in securities which have lower yields than the prepaid mortgages.
Moreover, prepayments of mortgages which underlie securities purchased at a
premium could result in capital losses. During periods of rising interest rates,
the rate of prepayment of mortgages underlying mortgage-backed securities can be
expected to decline, extending the projected average maturity of the
mortgage-backed securities. This maturity extension risk may effectively change
a security which was considered short- or intermediate-term at the time of
purchase into a long-term security. Long-term securities generally fluctuate
more widely in response to changes in interest rates than short- or
intermediate-term securities.
The Fund may invest in both Adjustable Rate Mortgage Securities (ARMs), which
are pass-through mortgage securities collateralized by adjustable rate
mortgages, and Fixed-Rate Mortgage Securities (FRMs), which are collateralized
by fixed-rate mortgages.
The values of U.S. Government securities (like those of other fixed-income
securities generally) will change as interest rates fluctuate. During periods of
falling U.S. interest rates, the values of U.S. Government securities generally
rise and, conversely, during periods of rising interest rates, the values of
such securities generally decline. The magnitude of these fluctuations will
generally be greater for securities with longer-term maturities.
SECURITIES OF FOREIGN ISSUERS
The value of the Fund's foreign investments may be significantly affected by
changes in currency exchange rates. The dollar value of a foreign security
generally decreases when the value of the dollar rises against the foreign
currency in which the security is denominated and tends to increase when the
value of the dollar falls against such currency. In addition, the value of the
Fund's assets may be affected by losses and other expenses incurred in
converting between various currencies in order to purchase and sell foreign
securities and by currency restrictions and exchange control regulation.
The economies of many of the countries in which the Fund may invest are not as
developed as the economy of the U.S. and may be subject to significantly
different forces. Political or social instability, expropriation or confiscatory
taxation, and limitations on the removal of funds or other assets, could also
adversely affect the value of investments.
Foreign companies are generally not subject to the regulatory controls imposed
on U.S. issuers and, in general, there is less publicly available information
about foreign securities than is available about domestic securities. Many
foreign companies are not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to domestic companies. Income from foreign securities owned by the Fund may be
reduced by a withholding tax at the source which would reduce dividend income
payable to shareholders.
Brokerage commission rates in foreign countries, which are generally fixed
rather than subject to negotiation as in the U.S. are likely to be higher. The
securities markets in many of the countries in which the Fund may invest will
have substantially less trading volume than the principal U.S. markets. As a
result, the securities of some companies in these countries may be less liquid
and more volatile than comparable U.S. securities. There is generally less
government regulation and supervision of foreign stock exchanges, brokers and
issuers, which may make it difficult to enforce contractual obligations.
FOREIGN DEBT SECURITIES
The Fund is permitted to invest in foreign corporate and government debt
securities. "Foreign government debt securities" include debt securities issued
or guaranteed, as to payment of principal and interest, by governments,
quasi-governmental entities,
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governmental agencies, supranational entities and other governmental entities
(collectively, Government Entities) of foreign countries denominated in the
currency of another such country.
A "supranational entity" is an entity constituted by the national governments of
several countries to promote economic development. Examples of such
supranational entities include, among others, the World Bank (International Bank
for Reconstruction and Development), the European Investment Bank and the Asian
Development Bank. Debt securities of quasi-governmental issuers include, among
others, the Province of Ontario and the City of Stockholm. Foreign government
debt securities shall also include debt securities of Government Entities
denominated in Euros. A European Currency Unit represents specified amounts of
the currencies of certain of the member states of the European Community.
Foreign government debt securities shall also include mortgage-backed securities
issued by foreign Government Entities including quasi-governmental entities.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements, pursuant to which the seller of
the security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and at a price in excess of the purchase price, reflecting an
agreed upon rate of return effective for the period of time the Fund's money is
invested in the repurchase agreement. The repurchase date is usually within a
day or two of the original purchase, although it may extend over a number of
months. The Fund's repurchase agreements will be collateralized by U.S.
Government obligations. The Fund will enter into repurchase transactions only
with parties meeting creditworthiness standards approved by the Fund's Board of
Directors. The Fund's investment adviser will monitor the creditworthiness of
such parties, under the general supervision of the Board of Directors. In the
event of a default or bankruptcy by a seller, the Fund will promptly seek to
liquidate the collateral. To the extent that the proceeds from any sale of such
collateral upon a default in the obligation to repurchase are less than the
repurchase price, the Fund will suffer a loss.
The Fund participates in a joint repurchase agreement account with other
investment companies managed by Prudential Investments LLC (PI) pursuant to an
order of the Securities and Exchange Commission (Commission). On a daily basis,
any uninvested cash balances of the Fund may be aggregated with those of such
investment companies and invested in one or more repurchase agreements. Each
fund participates in the income earned or accrued in the joint account based on
the percentage of its investment.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and financial institutions, provided
that outstanding loans do not exceed in the aggregate 33 1/3% 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 line of credit) that is equal to at least 100% of the market value,
determined daily, of the loaned securities. 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. The advantage of such loans is that the Fund continues
to receive payments in lieu of the interest and dividends of the loaned
securities, while at the same time earning interest either directly from the
borrower or on the collateral which will be invested in short-term obligations.
A loan may be terminated by the borrower on one business day's notice or by the
Fund at any time. If the borrower fails to maintain the requisite amount of
collateral, the loan automatically terminates, and the Fund could use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases loss of rights in the
collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will only be made to firms determined to be
creditworthy pursuant to procedures approved by the Board of Directors of the
Fund. On termination of the loan, the borrower is required to return the
securities to the Fund, and any gain or loss in the market price during the loan
would inure to the Fund.
Since voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such rights if the matters
involved would have a material effect on the Fund's investment in the securities
which are the subject of the loan. The Fund will pay reasonable finders',
administrative and custodial fees in connection with a loan of its securities or
may share the interest earned on collateral with the borrower.
BORROWING
The Fund may borrow up to 33 1/3% of the value of its total assets (calculated
when the loan is made) from banks for temporary, extraordinary or emergency
purposes or for the clearance of transactions. The Fund may pledge up to 33 1/3%
of its total assets to secure these borrowings. If the Fund borrows to invest in
securities, any investment gains made on the securities in excess of interest
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paid on the borrowing will cause the net asset value of the shares to rise
faster than would otherwise be the case. On the other hand, if the investment
performance of the additional securities purchased fails to cover their cost
(including any interest paid on the money borrowed) to the Fund, the net asset
value of the Fund's shares will decrease faster than would otherwise be the
case. This is the speculative factor known as "leverage." The Fund does not
intend to borrow more than 5% of its total assets for investment purposes unless
this policy is changed by the Board of Directors.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities. If the
Fund were to exceed this limit, the investment adviser would take prompt action
to reduce the Fund's holdings in illiquid securities to no more than 15% of its
net assets, as required by applicable law. Illiquid securities include
repurchase agreements which have a maturity of longer than seven days, certain
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable (either within or
outside of the United States).
Historically, illiquid securities have included certain 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.
A large institutional market has developed for certain securities that are not
registered under the Securities Act, including repurchase agreements, commercial
paper, foreign securities, municipal securities and corporate bonds and notes.
Institutional investors depend on an efficient institutional market in which the
unregistered security can be readily resold or on an issuer's ability to honor a
demand for repayment. The fact that there are contractual or legal restrictions
on resale to the general public or to certain institutions may not be indicative
of the liquidity of such investments.
Rule 144A 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.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market are not considered illiquid for purposes of this limitation under
procedures established by the Board of Directors. 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 (such as, 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, (1) 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 (2) 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 Commission has taken the position that purchased
over-the-counter options and the assets used as "cover" for written
over-the-counter options are illiquid securities unless the Fund and the
counterparty have provided for the Fund, at the Fund's election, to unwind the
over-the-counter option. The exercise of such an option ordinarily would 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
assets used as "cover" as "liquid."
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of its total assets in securities of other
non-affiliated investment companies. In addition, the Fund may purchase shares
of affiliated investment companies. See "Investment Restrictions." Generally the
Fund does not intend to invest in
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such securities. If the Fund does invest in securities of other investment
companies, shareholders of the Fund may be subject to duplicate management and
advisory fees.
RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
OPTIONS ON SECURITIES
The Fund may purchase and write (i.e., sell) put and call options on securities
that are traded on U.S. or foreign securities exchanges or that are traded in
the over-the-counter markets. A call option is a short-term contract pursuant to
which the purchaser, in return for a premium paid, has the right to buy the
security underlying the option at a specified exercise price at any time during
the term of the option. The writer of the call option, who receives the premium,
has the obligation, upon exercise of the option, to deliver the underlying
security against payment of the exercise price. A put option is a similar
contract which gives the purchaser, in return for a premium, the right to sell
the underlying security at a specified price during the term of the option. The
writer of the put, who receives the premium, has the obligation to buy the
underlying security upon exercise at the exercise price. The Fund will write put
options only when the investment adviser desires to invest in the underlying
security. The premium paid by the purchaser of an option will reflect, among
other things, the relationship of the exercise price to the market price and
volatility of the underlying security, the remaining term of the option, supply
and demand and interest rates.
The Fund will write only "covered" options. A call option written by the Fund is
"covered" if the Fund owns the security underlying the option or has an absolute
and immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated account
by its Custodian) upon conversion or exchange of other securities held in its
portfolio. A call option is also covered if the Fund holds on a share-for-share
basis a call on the same security as the call written where the exercise price
of the call held is equal to or less than the exercise price of the call
written, or greater than the exercise price of the call written if the
difference is maintained by the Fund in cash or liquid assets in a segregated
account with its Custodian. A put option written by the Fund is "covered" if the
Fund maintains cash or liquid assets with a value equal to the exercise price in
a segregated account with its Custodian, or else holds on a share-for-share
basis a put of the same security as the put written where the exercise price of
the put held is equal to or greater than the exercise price of the put written.
If the writer of an option wishes to terminate the obligation, he or she may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be cancelled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after he or she had been notified of the exercise of an option. Similarly, an
investor who is the holder of an option may liquidate his or her position by
effecting a "closing sale transaction." This is accomplished by selling an
option of the same series as the option previously purchased. There is no
guarantee that either a closing purchase or a closing sale transaction can be
effected. To secure the obligation to deliver the underlying security in the
case of a call option, the writer of the option is generally required to pledge
for the benefit of the broker the underlying security or other assets in
accordance with the rules of the relevant exchange or clearinghouse, such as The
Options Clearing Corporation (OCC), an institution created to interpose itself
between buyers and sellers of options in the United States. Technically, the
clearinghouse assumes the other side of every purchase and sale transaction on
an exchange and, by doing so, guarantees the transaction.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option; the Fund will realize a loss from
a closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to purchase
the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option may be offset in whole or in
part by any appreciation of the underlying security if the Fund holds the
underlying security in its portfolio.
The Fund may also purchase a "protective put," that is, 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 INDEXES. In addition to options on securities, the Fund
may also purchase and sell put and call options on securities indexes traded on
U.S. or foreign securities exchanges or traded in the over-the-counter markets.
Options on securities indexes are similar to options on securities except that,
rather than the right to take or make delivery of a security at a specified
price, an option on a securities index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level
B-7
of the securities index upon which the option is based is greater than, in the
case of a call, or less than, in the case of a put, the exercise price of the
option. This amount of cash is equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars
times a specified multiple (the multiplier). The writer of the option is
obligated, in return for the premium received, to make delivery of this amount.
Unlike for equity securities options, all settlements are in cash, and gain or
loss depends on price movements in the securities market generally (or in a
particular industry or segment of the market) rather than price movements in
individual securities.
The multiplier for an index option performs a function similar to the unit of
trading for a stock option. It determines the total dollar value per contract of
each point in the difference between the exercise price of an option and the
current level of the underlying index. A multiplier of 100 means that a
one-point difference will yield $100. Options on different indexes may have
different multipliers. Because exercises of index options are settled in cash, a
call writer cannot determine the amount of its settlement obligations in advance
and, unlike call writing on specific stocks, cannot provide in advance for, or
cover, its potential settlement obligations by acquiring and holding the
underlying securities. In addition, unless the Fund has other liquid assets
which are sufficient to satisfy the exercise of a call, the Fund would be
required to liquidate portfolio securities or borrow in order to satisfy the
exercise.
Because the value of an index option depends upon movements in the level of the
index rather than the price of a particular security, whether the Fund will
realize a gain or loss on the purchase or sale of an option on an index depends
upon movements in the level of security prices in the market generally or in an
industry or market segment rather than movements in the price of a particular
security. Accordingly, successful use by the Fund of options on indexes 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 or
market segment. This requires different skills and techniques than predicting
changes in the price of individual stocks. The investment adviser currently uses
such techniques in conjunction with the management of other mutual funds.
RISKS OF TRANSACTIONS IN OPTIONS
An option position may be closed out only on an exchange, board of trade or
other trading facility which provides a secondary market for an option of the
same series. Although the Fund will generally purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option, or at any particular time, and for some options no secondary
market on an exchange or otherwise may exist. In such event it might not be
possible to effect offsetting transactions in particular options, with the
result that the Fund would have to exercise its options in order to realize any
profit and would incur brokerage commissions upon the exercise of call options
and upon the subsequent disposition of underlying securities acquired through
the exercise of call options or upon the purchase of underlying securities for
the exercise of put options. If the Fund as a covered call option writer is
unable to effect an offsetting 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 options exchange
include the following: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (4) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (5) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle current
trading volume; or (6) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on that exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders. The Fund intends to purchase and sell only those options which are
cleared by clearinghouses whose facilities are considered to be adequate to
handle the volume of options transactions.
RISKS OF OPTIONS ON INDEXES
The Fund's purchase and sale of options on indexes will be subject to risks
described above under "Risks of Transactions in Options." In addition, the
distinctive characteristics of options on indexes 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 index options also may be interrupted in certain
circumstances, such as if trading were halted in a substantial number of stocks
included in the index. If this occurred, the Fund would not be able to close out
options which it had purchased or written and, if restrictions on exercise were
imposed, may be unable to exercise an option it holds, which could result in
substantial losses to the Fund. It is the Fund's policy to
B-8
purchase or write options only on indices which include a number of stocks
sufficient to minimize the likelihood of a trading halt in the index.
The ability to establish and close out positions on such options will be subject
to the development and maintenance of a liquid secondary market. It is not
certain that this market will develop in all index option contracts. The Fund
will not purchase or sell any index option contract unless and until, in the
investment adviser's opinion, the market for such options has developed
sufficiently that the risk in connection with such transactions is not
substantially greater than the risk in connection with options on securities in
the index.
SPECIAL RISKS OF WRITING CALLS ON INDEXES
Because exercises of index options are settled in cash, a call writer, such as
the Fund, cannot determine the amount of its settlement obligations in advance
and, unlike call writing on specific stocks, cannot provide in advance for, or
cover, its potential settlement obligations by acquiring and holding the
underlying securities. However, the Fund will write call options on indexes only
under the circumstances described below under "Limitations on Purchase and Sale
of Stock Options and Options on Stock Indexes, Foreign Currencies and Futures
Contracts on Foreign Currencies."
Price movements in the Fund's portfolio probably will not correlate precisely
with movements in the level of the index and, therefore, the Fund bears the risk
that the price of the securities held by the Fund may not increase as much as
the index. In such event, the Fund would bear a loss on the call which is not
completely offset by movements in the price of the Fund's portfolio. It is also
possible that the index may rise when the Fund's portfolio of stocks does not
rise. If this occurred, the Fund would experience a loss on the call which is
not offset by an increase in the value of its portfolio and might also
experience a loss in its portfolio. However, because the value of a diversified
portfolio will, over time, tend to move in the same direction as the market,
movements in the value of the Fund in the opposite direction as the market would
be likely to occur for only a short period or to a small degree.
Unless the Fund has other liquid assets which are sufficient to satisfy the
exercise of a call, the Fund would be required to liquidate portfolio securities
in order to satisfy the exercise. Because an exercise must be settled within
hours after receiving the notice of exercise, if the Fund fails to anticipate an
exercise, it may have to borrow from a bank (in amounts not exceeding 33 1/3 of
the Fund's total assets) pending settlement of the sale of securities in its
portfolio and would incur interest charges thereon.
When the Fund has written a call on an index, 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 to
generate cash to settle the exercise. As with stock options, the Fund will not
learn that an index option has been exercised until the day following the
exercise date but, unlike a call on stock where the Fund would be able to
deliver the underlying securities in settlement, the Fund may have to sell part
of its investment portfolio in order to make settlement in cash, and the price
of such investments might decline before they can be sold. This timing risk
makes certain strategies involving more than one option substantially more risky
with index options than with stock options. For example, even if an index call
which the Fund has written is "covered" by an index call held by the Fund with
the same strike price, the Fund will bear the risk that the level of the index
may decline between the close of trading on the date the exercise notice is
filed with the clearing corporation and the close of trading on the date the
Fund exercises the call it holds or the time the Fund sells the call which, in
either case, would occur no earlier than the day following the day the exercise
notice was filed.
If the Fund holds an index option and exercises it before final determination of
the closing index value for that day, it runs the risk that the level of the
underlying index may change before closing. If such a change causes the
exercised option to fall out-of-the-money, the Fund will be required to pay the
difference between the closing index value and the exercise price of the option
(times the applicable multiplier) to the assigned writer. Although the Fund may
be able to minimize this risk by withholding exercise instructions until just
before the daily cutoff time or by selling rather than exercising an option when
the index level is close to the exercise price, it may not be possible to
eliminate this risk entirely because the cutoff times for index options may be
earlier than those fixed for other types of options and may occur before
definitive closing index values are announced.
RISKS OF OPTIONS ON FOREIGN CURRENCIES
Options on foreign currencies involve the currencies of two nations and,
therefore, developments in either or both countries affect the values of such
options. These risks include government actions affecting currency valuation and
the movements of currencies from one country to another. The quantity of
currency underlying option contracts represent odd lots in a market dominated by
transactions between banks; this can mean extra transaction costs upon exercise.
Option markets may be closed while round-the-clock interbank currency markets
are open, and this can create price and rate discrepancies.
RISKS RELATED TO FOREIGN CURRENCY FORWARD CONTRACTS
B-9
A foreign currency forward contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. The Fund may enter into foreign currency forward contracts in
several circumstances. When the Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, or when the Fund
anticipates the receipt of dividends or interest payments in a foreign currency
with respect to a security 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 U.S. dollars, for the purchase or sale of the amount of foreign
currency involved in the underlying transactions, the Fund may be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
Additionally, when the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract for a fixed amount of U.S.
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 denominated in foreign currencies will also change as a consequence
of market movements in the value of those securities between the date on which
the forward contract is entered into and the date it matures. The projection of
short-term currency market movement is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain. The Fund does
not intend to enter into such forward contracts to protect the value of its
portfolio securities on a regular or continuous basis. The Fund does not intend
to enter into such forward contracts or maintain a net exposure to such
contracts where the consummation of the contracts would obligate the Fund to
deliver an amount of foreign currency in excess of the value of the Fund's
portfolio securities or other assets denominated in that currency. However, the
Manager and Subadviser believe that it is important to have the flexibility to
enter into such forward contracts when they determine that the best interests of
the Fund will thereby be served. The Fund's Custodian will segregate cash or
other liquid 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 foreign
currency forward contracts. If the value of the securities segregated declines,
additional cash or securities will be segregated on a daily basis so that the
value of the account will equal the amount of the Fund's commitments with
respect to such contracts.
The Fund generally will not enter into a forward contract with a term of greater
than one year. At the maturity of a forward contract, the Fund may either sell
the portfolio security and make delivery of the foreign currency, or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract with the same currency
trader obligating it to purchase, on the same maturity date, the same amount of
the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the forward contract.
Accordingly, if a decision is made to sell the security and make delivery of the
foreign currency and if the market value of the security is less than the amount
of foreign currency that the Fund is obligated to deliver, then it would be
necessary for the Fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase).
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. Should forward contract prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent that the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward contract prices increase,
the Fund will suffer a loss to the extent that the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in foreign currency forward contracts will generally be
limited to the transactions described above. Of course, the Fund is not required
to enter into such transactions with regard to its foreign currency-dominated
securities. It also should be recognized that this method of protecting the
value of the Fund's portfolio securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities which are unrelated to exchange rates. Additionally, although such
contracts tend to minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time they tend to limit any potential gain which
might result should the value of such currency increase.
Although the Fund values its assets daily in terms of U.S. dollars, it does not
intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors should
be aware of the costs of currency conversion. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference (the spread) between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS
B-10
The Fund may purchase and sell financial futures contracts which are traded on a
commodities exchange or board of trade. 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. There are several risks in connection with the use of
futures contracts as a hedging device. In the case of futures contracts on
currencies, due to the imperfect correlation between the price of futures
contracts and movements in the underlying currency or group of currencies, the
price of a futures contract may move more or less than the price of the
currencies being hedged. In the case of futures contracts on securities indices,
one party agrees to deliver to another an amount of cash equal to a specific
dollar amount times the difference between the value of a specific securities
index at the close of the last trading day of the contract and the price at
which the agreement is made. The correlation between the price of the futures
contract and the movements in the index may not be perfect. Therefore, a correct
forecast of currency rates, market trends or international political trends by
the investment adviser may still not result in a successful hedging transaction.
Although the Fund will purchase or sell futures contracts only on exchanges
where there appears to be an adequate secondary market, there is no assurance
that a liquid secondary market on an exchange will exist for any particular
contract or at any particular time. Accordingly, there can be no assurance that
it will be possible, at any particular time, to close out a futures position. In
the event the Fund could not close out a futures position and the value of such
position declined, the Fund would be required to continue to make daily cash
payments of variation margin. There is no guarantee that the price movements of
the portfolio securities denominated in foreign currencies will, in fact,
correlate with the price movements in the futures contract and thus provide an
offset to losses on a futures contract.
Successful use of futures contracts by the Fund is also subject to the ability
of the Fund's investment adviser to predict correctly movements in the direction
of markets and other factors affecting currencies or the securities market
generally. For example, if the Fund had hedged against the possibility of an
increase in currency rates which would adversely affect the price of securities
in its portfolio and the price of such securities increases instead, the Fund
will lose part or all of the benefit of the increased value of its securities
because it will have offsetting losses in its futures positions. In addition, in
such situations, if the Fund has insufficient cash to meet daily variation
margin requirements, it may need to sell securities to meet such requirements.
Such sales of securities will not necessarily be at increased prices that
reflect the rising market. The Fund may have to sell securities at a time when
it is disadvantageous to do so.
The hours of trading of futures contracts may not conform to the hours during
which the Fund may trade the underlying securities. To the extent that the
futures markets close before the securities markets, significant price and rate
movements can take place in the securities markets that cannot be reflected in
the futures markets.
OPTIONS ON FUTURES CONTRACTS
An option on a futures contract gives the purchaser the right, but not the
obligation, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option exercise period. The writer of the
option is required upon exercise to assume an offsetting futures position (a
short position if the option is a call and a long position if the option is a
put). Upon exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by delivery
of the accumulated cash balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. Currently options can
be purchased or written with respect to futures contracts on various foreign
currencies, including the Australian Dollar, British Pound, Canadian Dollar,
Japanese Yen, Swiss Franc, West German Mark and Eurodollars. With respect to
stock indices, options are traded on futures contracts for various U.S. and
foreign stock indices including the S&P 500 Stock Index and the New York Stock
Exchange (NYSE) Composite Index.
The holder or writer of an option may close out its position by selling or
purchasing an offsetting option of the same series. There is no guarantee that
such close out transactions can be effected.
LIMITATIONS ON PURCHASE AND SALE OF STOCK OPTIONS AND OPTIONS ON STOCK INDEXES,
FOREIGN CURRENCIES AND FUTURES CONTRACTS ON FOREIGN CURRENCIES
The Fund may write put and call options on stocks only if they are covered, and
such options must remain covered so long as the Fund is obligated as a writer.
The Fund will write put options on stock indexes and foreign currencies and
futures contracts on foreign currencies only if they are covered by segregating
with the Fund's Custodian an amount of cash, U.S. government securities, or
other liquid assets equal to the aggregate exercise price of the puts. The Fund
will not enter into futures contracts or related options if the aggregate
initial margin and premiums exceed 5% of the liquidation value of the Fund's
total assets, taking into account unrealized profits and losses on such
contracts, provided, however, that in the case of an option that is
in-the-money, the in-the-money amount may be excluded in computing such 5%. The
above restriction does not apply to the purchase or sale of futures contracts
and related
B-11
options for BONA FIDE hedging purposes within the meaning of regulations of the
Commodities Futures Trading Commission (CFTC). The Fund does not intend to
purchase options on equity securities or securities indices if the aggregate
premiums paid for such outstanding options would exceed 10% of the Fund's total
assets.
Except as described below, the Fund will write call options on indexes only if
on such date it holds a portfolio of stocks at least equal to the value of the
index times the multiplier times the number of contracts. When the Fund writes a
call option on a broadly-based stock market index, the Fund will segregate or
put into escrow with its Custodian, or pledge to a broker as collateral for the
option, cash, U.S. Government securities, or other liquid assets with a market
value at the time the option is written of not less than 100% of the current
index value times the multiplier times the number of contracts.
If the Fund has written an option on an industry or market segment index, it
will segregate or put into escrow with its Custodian, or pledge to a broker as
collateral for the option, at least ten "qualified securities," all of which are
stocks of issuers in such industry or market segment, with a market value at the
time the option is written of not less than 100% of the current index value
times the multiplier times the number of contracts. Such stocks will include
stocks which represent at least 50% of the weighting of the industry or market
segment index and will represent at least 50% of the Fund's holdings in that
industry or market segment. No individual security will represent more than 15%
of the amount so segregated, pledged or escrowed in the case of broadly-based
stock market index options or 25% of such amount in the case of industry or
market segment index options. If at the close of business on any day the market
value of such qualified securities so segregated, escrowed or pledged falls
below 100% of the current index value times the multiplier times the number of
contracts, the Fund will so segregate, escrow or pledge an amount in cash or
other liquid assets equal in value to the difference. In addition, when the Fund
writes a call on an index which is in-the-money at the time the call is written,
the Fund will segregate with its Custodian or pledge to the broker as collateral
cash or other 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 the Fund
holds a call on the same index as the call written where the exercise price of
the call held is equal to or less than the exercise price of the call written,
or greater than the exercise price of the call written if the difference is
maintained by the Fund in cash or other liquid assets in a segregated account
with its Custodian, it will not be subject to the requirements described in this
paragraph.
The Fund may engage in futures contracts and options on futures transactions as
a hedge against changes, resulting from market or political conditions, in the
value of the currencies to which the Fund is subject or to which the Fund
expects to be subject in connection with future purchases. The Fund may engage
in such transactions when they are economically appropriate for the reduction of
risks inherent in the ongoing management of the Fund. The Fund may write options
on futures contracts to realize through the receipt of premium income a greater
return than would be realized in the Fund's portfolio securities alone.
POSITION LIMITS. Transactions by the Fund in futures contracts and options will
be subject to limitations, if any, established by each of the exchanges, boards
of trade or other trading facilities (including Nasdaq) governing the maximum
number of options in each class which may be written or purchased by a single
investor or group of investors acting in concert, regardless of whether the
options are written on the same or different exchanges, boards of trade or other
trading facilities or are held or written in one or more accounts or through one
or more brokers. Thus, the number of futures contracts and options which the
Fund may write or purchase may be affected by the futures contracts and options
written or purchased by other investment advisory clients of the investment
adviser. An exchange, board of trade or other trading facility may order the
liquidations of positions found to be in excess of these limits, and it may
impose certain other sanctions.
SEGREGATED ASSETS
The Fund segregates with its Custodian, State Street Bank and Trust Company,
cash, U.S. Government securities, equity securities (including foreign
securities), debt securities or other liquid, unencumbered assets equal in value
to its obligations in respect of potentially leveraged transactions. These
include when-issued and delayed delivery securities, futures contracts, written
options and options on futures contracts (unless otherwise covered). If
collateralized or otherwise covered, in accordance with Commission guidelines,
these will not be deemed to be senior securities. The assets segregated will be
marked-to-market daily.
TEMPORARY DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
When conditions dictate a defensive strategy, the Fund may invest without limit
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 or
foreign governments and their agencies or instrumentalities and repurchase
agreements maturing in seven days or less. In addition to the risks typically
associated with money market instruments, such as credit
B-12
risk and market risk, money market instruments issued by foreign issuers may be
subject to additional 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.
PORTFOLIO TURNOVER
As a result of the investment policies described above, the Fund may engage in a
substantial number of portfolio transactions. The portfolio turnover rate is
generally the percentage computed by dividing the lesser of portfolio purchases
or sales (excluding all securities, including options, whose maturities or
expiration date at acquisition were one year or less) by the monthly average
value of the portfolio. High portfolio turnover (over 100%) involves
correspondingly greater brokerage commissions and other transaction costs, which
are borne directly by the Fund. In addition, high portfolio turnover may also
mean that a proportionately greater amount of distributions to shareholders will
be taxed as ordinary income rather than long-term capital gains compared to
investment companies with lower portfolio turnover. See "Taxes, Dividends and
Distributions."
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies are
those that cannot be changed without the approval of the holders of a majority
of the Fund's outstanding voting securities. A "majority of the Fund's
outstanding voting securities" when used in this SAI, means the lesser of (1)
67% or more of the voting shares of the Fund represented at a meeting at which
more than 50% of the outstanding voting shares of the Fund are present in person
or represented by proxy, or (2) more than 50% of the outstanding voting shares
of the Fund.
The Fund may not:
(1) Purchase the securities of any issuer if, as a result, the Fund would fail
to be a diversified company within the meaning of the Investment Company Act of
1940, as amended (1940 Act), and the rules and regulations promulgated
thereunder, as each may be amended from time to time except to the extent that
the Fund may be permitted to do so by exemptive order, Commission release,
no-action letter or similar relief or interpretations (collectively, the 1940
Act Laws, Interpretations and Exemptions).
(2) Issue senior securities or borrow money or pledge its assets, except as
permitted by the 1940 Act Laws, Interpretations and Exemptions. For purposes of
this restriction, the purchase or sale of securities on a when-issued or delayed
delivery basis, reverse repurchase agreements, dollar rolls, short sales,
derivative and hedging transactions such as interest rate swap transactions, and
collateral arrangements with respect thereto, and transactions similar to any of
the foregoing and collateral arrangements with respect thereto, 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.
(3) Buy or sell real estate, except that investment in securities of issuers
that invest in real estate and investments in mortgage-backed securities,
mortgage participations or other instruments supported or secured by interests
in real estate are not subject to this limitation, and except that the Fund may
exercise rights relating to the securities, including the right to enforce
security interests and to hold real estate acquired by reason of such
enforcement until that real estate can be liquidated in an orderly manner.
(4) Buy or sell physical commodities or contracts involving physical
commodities. The Fund may purchase and sell (a) derivative, hedging and similar
instruments such as financial futures contracts and options thereon, and (b)
securities or instruments backed by, or the return from which is linked to,
physical commodities or currencies, such as forward currency exchange contracts,
and the Fund may exercise rights relating to such instruments, including the
right to enforce security interests and to hold physical commodities and
contracts involving physical commodities acquired as a result of the Fund's
ownership of instruments supported or secured thereby until they can be
liquidated in an orderly manner.
(5) Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws. The Fund has not adopted a fundamental
investment policy with respect to investments in restricted securities. See
"Description of the Fund, Its Investments and Risks - Illiquid Securities."
The Fund may make loans, including loans of assets of the Fund, repurchase
agreements, trade claims, loan participations or similar investments, or as
permitted by the 1940 Act Laws, Interpretations and Exemptions. The acquisition
of bonds, debentures, other debt securities or instruments, or participations or
other interests therein and investments in government obligations, commercial
paper, certificates of deposit, bankers' acceptances or instruments similar to
any of the foregoing will not be considered the making of a loan, and is
permitted if consistent with the Fund's investment objective.
B-13
For purposes of Investment Restriction 1, the Fund will currently not purchase
any security (other than obligations of the U.S. Government, its agencies or
instrumentalities) if as a result, with respect to 75% of the Fund's total
assets, (a) more than 5% of the Fund's total assets (determined at the time of
investment) would be invested in securities of a single issuer and (b) the Fund
would own more than 10% of the outstanding voting securities of any single
issuer.
Whenever any fundamental investment policy or investment restriction states a
maximum percentage of the Fund's assets, it is intended that, if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total asset values will not be considered a
violation of such policy. However, if the Fund's asset coverage for borrowings
permitted by Investment Restriction 2 falls below 300%, the Fund will take
prompt action to reduce its borrowings, as required by the 1940 Act Laws,
Interpretations and Exemptions.
Although not fundamental, the Fund has the following investment restrictions.
The Fund may not:
(1) Make investments for the purpose of exercising control or management.
(2) 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.
B-14
MANAGEMENT OF THE FUND
Information pertaining to the Directors of the Fund is set forth below.
Directors who are not deemed to be "interested persons" of the Fund as defined
in the 1940 Act, are referred to as "Independent Directors". Directors who are
deemed to be "interested persons" of the Fund are referred to as "Interested
Directors". "Fund Complex" consists of the Fund and any other investment
companies managed by Prudential Investments LLC (PI).
INDEPENDENT DIRECTORS
NUMBER OF
PORTFOLIOS IN
TERM OF FUND
POSITION OFFICE*** AND COMPLEX OTHER DIRECTORSHIPS
WITH THE LENGTH OF PRINCIPAL OCCUPATIONS DURING PAST OVERSEEN BY HELD BY THE
NAME, ADDRESS** AND AGE FUND TIME SERVED FIVE YEARS DIRECTOR DIRECTOR****
----------------------- -------- ------------- --------------------------------- ------------- -------------------
Delayne Dedrick Gold (64) Director Since 1992 Marketing Consultant. 89 --
Robert E. La Blanc (68) Director Since 1992 President (since 1981) of Robert E. La 74 Director of Storage
Blanc Associates, Inc. Technology Corporation
(telecommunications); formerly General (technology) (since
Partner at Salomon Brothers and 1979), Chartered
Vice-Chairman of Continental Telecom; Semiconductor
Trustee of Manhattan College. Manufacturing, Ltd.
(Singapore) (since
1998), Titan Corporation
(electronics) (since
1995), Computer
Associates
International, Inc.
(software company)
(since 2002); Director
(since 1999) of First
Financial Fund, Inc. and
Director (since April
1999) of The High Yield
Plus Fund, Inc.
Robin B. Smith (63) Director Since 1996 Chairman and Chief Executive Officer 69 Director of BellSouth
(since August 1996) of Publishers Corporation (since
Clearing House (direct marketing), 1992), and Kmart
formerly President and Chief Executive Corporation (retail)
Officer (January 1988-August 1996) of (since 1996).
Publishers Clearing House.
Stephen Stoneburn (59) Director Since 1996 President and Chief Executive Officer 74 --
(since June 1996) of Quadrant Media
Corp. (a publishing company); formerly
President (June 1995-June 1996) of
Argus Integrated Media, Inc.; Senior
Vice President and Managing Director
(January 1993-1995) of Cowles Business
Media and Senior Vice President of
Fairchild Publications, Inc
(1975-1989).
Nancy H. Teeters (72) Director Since 1996 Economist; formerly Vice President and 72 --
Chief Economist of International
Business Machines Corporation;
formerly Director of Inland Steel
Industries (July 1984-1999); formerly
Governor of The Federal Reserve
B-15
(September 1978-June 1984).
Clay T. Whitehead (64) Director Since 1992 President (since 1983) of National 91 Director (since 2000) of
Exchange Inc. (new business First Financial Fund,
development firm). Inc. and Director (since
2000) of The High Yield
Plus Fund, Inc.
INTERESTED DIRECTORS
NUMBER OF
PORTFOLIOS IN
TERM OF FUND
POSITION OFFICE*** AND COMPLEX OTHER DIRECTORSHIPS
WITH THE LENGTH OF PRINCIPAL OCCUPATIONS DURING PAST OVERSEEN HELD BY THE
NAME, ADDRESS** AND AGE FUND TIME SERVED FIVE YEARS BY DIRECTOR DIRECTOR****
----------------------- -------- ------------- --------------------------------- ------------- -------------------
*Robert F. Gunia (56) Director Since 1996 Executive Vice President and Chief 112 Vice President and
and Vice Administrative Officer (since June Director (since May
President 1999) of PI; Executive Vice President 1989) of The Asia
and Treasurer (since January 1996) of Pacific Fund, Inc.
PI; President (since April 1999) of
Prudential Investment Management
Services LLC (PIMS); Corporate Vice
President (since September 1997) of
The Prudential Insurance Company of
America (Prudential); formerly Senior
Vice President (March 1987-May 1999)
of Prudential Securities Incorporated
(PSI); formerly Chief Administrative
Officer (July 1989-September 1996),
Director (January 1989-September 1996)
and Executive Vice President,
Treasurer and Chief Financial Officer
(June 1987-December 1996) of
Prudential Mutual Fund Management,
Inc. (PMF); Vice President and
Director (since May, 1992) of
Nicholas-Applegate Fund, Inc.
*David R. Odenath, Jr. Director Since 1999 President, Chief Executive Officer and 115 --
(45) and Chief Operating Officer (since June
President 1999) of PI; Senior Vice President
(since June 1999) of
Prudential; formerly
Senior Vice President
(August 1993-May 1999)
of PaineWebber Group,
Inc.
*Judy A. Rice (54) Director Since 2000 Executive Vice President (since 1999) 111 --
and Vice of PI; formerly various positions to
President Senior Vice President (1992-1999) of
Prudential Securities; and various
positions to Managing Director
(1975-1992) of Salomon Smith Barney;
Member of Board of Governors of the
Money Management Institute; Member of
the Prudential Securities Operating
Council and a Member of the Board of
Directors for the National Association
for Variable Annuities.
B-16
Information pertaining to the Officers of the Funds who are not also Directors
is set forth below.
OFFICERS
TERM OF
OFFICE*** AND
LENGTH OF
NAME, ADDRESS** AND AGE POSITION WITH FUND TIME SERVED PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
----------------------- ------------------ ------------- --------------------------------------------
Grace C. Torres (43) Treasurer and Principal Since 1997 Senior Vice President (since January 2000) of PI; formerly
Financial and First Vice President (December 1996-January 2000) of PI and
Accounting Officer First Vice President (March 1993-1999) of Prudential
Securities.
Jonathan D. Shain (44) Secretary Since 2001 Vice President and Corporate Counsel (since August 1998) of
Prudential; formerly Attorney with Fleet Bank, N.A.
(January 1997-July 1998) and Associate Counsel (August
1994-January 1997) of New York Life Insurance Company.
Marguerite E. H. Morrison (46) Assistant Secretary Since 2002 Vice President and Chief Legal Officer-Mutual Funds and
Unit Investment Trusts (since August 2000) of Prudential;
Senior Vice President and Assistant Secretary (since
February 2001) of PI; Vice President and Assistant
Secretary of PIMS (since October 2001), previously Vice
President and Associate General Counsel (December
1996-February 2001) of PI and Vice President and Associate
General Counsel (September 1987-September 1996) of
Prudential Securities.
Maryanne Ryan (38) Anti-Money Laundering Since 2002 Vice President, Prudential (since November 1998) and First
Compliance Officer Vice President, Prudential Securities (March 1997-May 1998).
* "Interested" Director, as defined in the 1940 Act, by reason of employment
with the Manager (PI), the Subadviser (Prudential Investment Management, Inc. or
PIM) or the Distributor (Prudential Investment Management Services LLC or PIMS).
** Unless otherwise noted, the address of the Directors and Officers is c/o:
Prudential Investments LLC, 100 Mulberry Street, Gateway Center Three, Newark,
NJ 07102.
*** There is no set term of office for Directors and Officers. The Independent
Directors have adopted a retirement policy, which calls for the retirement of
Directors on December 31 of the year in which they reach the age of 75. The
table shows the number of years for which they have served as Director and/or
Officer.
**** This column includes only directorships of companies required to register
or file reports with the Commission under the Securities Exchange Act of 1934
(that is, "public companies") or other investment companies registered under the
1940 Act.
The Fund has Directors who, in addition to overseeing the actions of the Fund's
Manager, Subadviser and Distributor, decide upon matters of general policy in
accordance with the laws of the State of Maryland and the 1940 Act. In addition
to their functions set forth under "Investment Advisory and Other
Services--Manager and Investment Adviser" and "Principal Underwriter,
Distributor and Rule 12b-1 Plans", the Directors also review the actions of the
Fund's Officers, who conduct and supervise the daily business operations of the
Fund. Pursuant to the Fund's Articles of Incorporation, the Directors may
contract for advisory and management services for the Fund or for any of its
series (or class thereof). Any such contract may permit the Manager to delegate
certain or all of its duties under such contracts to qualified investment
advisers and administrators.
Directors and Officers of the Fund are also trustees, directors and officers of
some or all of the other investment companies advised by the Fund's Manager and
distributed by PIMS.
Pursuant to a Management Agreement with the Fund, the Manager pays all
compensation of Officers and employees of the Fund as well as the fees and
expenses of all Interested Directors of the Fund.
STANDING BOARD COMMITTEES
B-17
The Board of Directors has established two standing committees in connection
with the governance of the Fund--Audit and Nominating.
The Audit Committee consists of all of the Independent Directors. The
responsibilities of the Audit Committee are to assist the Board of Directors in
overseeing the Fund's independent accountants, accounting policies and
procedures, and other areas relating to the Fund's auditing processes. The scope
of the Audit Committee's responsibility is oversight. It is management's
responsibility to maintain appropriate systems for accounting and internal
control and the independent accountants' responsibility to plan and carry out a
proper audit. The Audit Committee met four times during the fiscal year ended
October 31, 2002.
The Nominating Committee consists of all of the Independent Directors. This
committee interviews and recommends to the Board persons to be nominated for
election as Directors by the Fund's shareholders and selects and proposes
nominees for election by the Board between annual meetings. This Committee does
not normally consider candidates proposed by shareholders for election as
Directors. The Nominating Committee also reviews the independence of Directors
serving on the Board and recommends to the Board Independent Directors to be
selected for membership on Board Committees. The Nominating Committee reviews
each Director's investment in the Fund, matters relating to Director
compensation and expenses and compliance with the Fund's retirement policy. The
Nominating Committee did not meet during the fiscal year ended October 31, 2002.
In addition to the two standing committees of the Fund, the Board of Directors
has also approved Director participation in an Executive Committee designed to
coordinate the governance of all of the mutual funds in the Prudential mutual
fund complex. The role of the Executive Committee is solely advisory and
consultative, without derogation of any of the duties or responsibilities of the
Board of Directors. The following Independent Directors serve on the Executive
Committee: Robert E. La Blanc and Clay T. Whitehead. Independent Directors from
other funds in the Prudential mutual fund complex also serve on the Executive
Committee. The responsibilities of the Executive Committee include: facilitating
communication and coordination between the Independent Directors and fund
management on issues that affect more than one fund; serving as a liaison
between the Boards of Directors/Directors of funds and fund management;
developing, in consultation with outside counsel and management, draft agendas
for Board meetings; reviewing and recommending changes to Board practices
generally and monitoring and supervising the performance of legal counsel to the
funds generally and the Independent Directors.
The Fund pays each of its Independent Directors annual compensation in addition
to certain out-of-pocket expenses. Directors who serve on the Committees may
receive additional compensation. The amount of compensation paid to each
Independent Director may change as a result of the introduction of additional
funds upon whose Boards the Directors may be asked to serve.
Independent Directors may defer receipt of their Directors' fees pursuant to a
deferred fee agreement with the Fund. Under the terms of such agreement, the
Fund accrues deferred Directors' fees daily, which, in turn, accrues interest at
a rate equivalent to the prevailing rate of 90-day U.S. Treasury bills at the
beginning of each calendar quarter or, at the daily rate of return of any
Prudential mutual fund chosen by the Director. The Fund's obligation to make
payments of deferred Directors' fees, together with interest thereon is a
general obligation of the Fund.
The Fund has no retirement or pension plan for its Directors.
The following table sets forth the aggregate compensation paid by the Fund for
the fiscal year ended October 31, 2002 to the Independent Directors. The table
also shows aggregate compensation paid to those Directors for service on the
Fund's Board and the Board of any other investment company in the Fund Complex,
for the calendar year ended December 31, 2001.
COMPENSATION TABLE
AGGREGATE COMPENSATION TOTAL 2001 COMPENSATION FROM FUNDS AND
NAME AND POSITION FROM FUND FUND COMPLEX PAID TO INDEPENDENT DIRECTORS
----------------- ---------------------- ------------------------------------------
Delayne Dedrick Gold -- Director $ 1,238 $ 173,000 (37/89)*
Robert E. La Blanc -- Director $ 1,238 $ 115,333 (18/74)*
Robin B. Smith -- Director** $ 1,238 $ 114,500 (26/69)*
Stephen Stoneburn -- Director $ 1,238 $ 110,332 (18/74)*
Nancy H. Teeters -- Director $ 1,238 $ 118,000 (25/72)*
Clay T. Whitehead -- Director $ 1,238 $ 173,000 (30/91)*
* Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
B-18
** Although the last column shows the total amount paid to Directors from the
Fund Complex during the calendar year ended December 31, 2001, such compensation
was deferred at the election of this Director, in total or in part, under the
Fund's deferred fee agreement. Including accrued interest on amounts deferred
through December 31, 2001, the total amount of deferred compensation for the
year amounted to $80,106 for Robin B. Smith.
Directors and Officers who are interested do not receive compensation from the
Fund or any other fund in the Fund Complex and therefore are not shown in the
Compensation table.
The following table sets forth the dollar range of equity securities in the Fund
beneficially owned by a Director, and, on an aggregate basis, in all registered
investment companies overseen by a Director in the Fund Complex as of December
31, 2001.
DIRECTOR SHARE OWNERSHIP TABLE
INDEPENDENT DIRECTORS
AGGREGATE DOLLAR RANGE OF EQUITY
SECURITIES IN ALL REGISTERED INVESTMENT
DOLLAR RANGE OF EQUITY SECURITIES COMPANIES OVERSEEN BY DIRECTOR IN
NAME OF DIRECTOR IN THE FUND FUND COMPLEX
---------------- --------------------------------- ---------------------------------------
Delayne Dedrick Gold -- Over $100,000
Robert E. La Blanc $10,001-$50,000 Over $100,000
Robin B. Smith $1-$10,000 Over $100,000
Stephen Stoneburn $1-$10,000 Over $100,000
Nancy H. Teeters -- $1-$10,000
Clay T. Whitehead -- $50,001-$100,000
INTERESTED DIRECTORS
AGGREGATE DOLLAR RANGE OF EQUITY
SECURITIES IN ALL REGISTERED INVESTMENT
DOLLAR RANGE OF EQUITY SECURITIES COMPANIES OVERSEEN BY DIRECTOR IN
NAME OF DIRECTOR IN THE FUND FUND COMPLEX
---------------- --------------------------------- ---------------------------------------
Robert F. Gunia -- Over $100,000
David R. Odenath, Jr. -- Over $100,000
Judy A. Rice -- Over $100,000
The following table sets forth information regarding each class of securities
owned beneficially or of record by each Independent Director, and his/her
immediate family members, in an investment adviser or principal underwriter of
the Fund or a person (other than a registered investment company) directly or
indirectly "controlling", "controlled by", or "under common control with"
(within the meaning of the 1940 Act) an investment adviser or principal
underwriter of the Fund as of December 31, 2001.
NAME OF OWNERS AND TITLE OF VALUE OF PERCENT OF
NAME OF DIRECTOR RELATIONSHIPS TO DIRECTOR COMPANY CLASS SECURITIES CLASS
---------------- ------------------------- ------- -------- ---------- ----------
Delayne Dedrick Gold -- -- -- -- --
Robert E. La Blanc -- -- -- -- --
Robin B. Smith -- -- -- -- --
Stephen Stoneburn -- -- -- -- --
Nancy H. Teeters -- -- -- -- --
Clay T. Whitehead -- -- -- -- --
B-19
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of December 13, 2002, the Directors and Officers of the Fund, as a group,
beneficially owned less than 1% of the outstanding shares of Common Stock of the
Fund.
As of December 13, 2002, the beneficial owners, directly or indirectly, of more
than 5% of the outstanding Common Stock of the Fund were:
NUMBER OF SHARES /
NAME ADDRESS CLASS % OF CLASS
---- ------- ----- -----------------
Frontier Trust Company; FBO ST. 700 17th Street, Suite 300, Denver CO 80202 C 189,690 / 9.8%
Charles Trading, Inc.
Raymond James and Assoc Inc; FBO 880 Carillon Pkwy, St. Petersburg FL 33716 Z 14,503 / 13.8%
Delta Blacktop, Bin # 79681948
Prudential Retirement Services PO Box 9999, Scranton PA 18507 Z 11,092 / 10.6%
Administrator for Plan 300006
Nassau County
Bo Du 1941 Flint Rd, Diamond Bar CA 91765 Z 19,272 / 18.3%
As of December 13, 2002, Prudential Securities was the record holder for other
beneficial owners of the following:
CLASS NUMBER OF SHARES / % OF CLASS
----- -----------------------------
A 2,156,104 / 56.8%
B 1,034,797 / 66.4%
C 139,943 / 43.2%
Z 122,458 / 100%
INVESTMENT ADVISORY AND OTHER SERVICES
(a) MANAGER AND INVESTMENT ADVISER
The Manager of the Fund is Prudential Investments LLC (PI or the Manager), 100
Mulberry Street, Gateway Center Three, Newark, NJ 07102. The Manager serves as
manager to all of the other investment companies that, together with the Fund,
comprise the Prudential mutual funds. See "How the Fund is Managed-Manager" in
the Prospectus. As of June 30, 2002, PI served as the investment manager to all
of the Prudential U.S. and offshore open-end investment companies, and as the
administrator to closed-end investment companies, with aggregate assets of
approximately $93.07 billion.
PI is a wholly owned subsidiary of PIFM Holdco, Inc., which is a wholly-owned
subsidiary of Prudential Asset Management Holding Company, which is a
wholly-owned subsidiary of Prudential Financial, Inc. (Prudential). Prudential
Mutual Fund Services LLC (the Transfer Agent or PMFS), an affiliate of the
Manager, serves as the transfer agent and dividend-disbursing agent for the
Prudential mutual funds and, in addition, provides customer service,
recordkeeping and management and administrative services to qualified plans.
Pursuant to a Management Agreement with the Fund (the Management Agreement), the
Manager, subject to the supervision of the Fund's Board of Directors and in
conformity with the stated policies of the Fund, manages both the investment
operations of the Fund and the composition of the Fund's portfolios, including
the purchase, retention, disposition and loan of securities and other assets. In
connection therewith, the Manager is obligated to keep certain books and records
of the Fund. PI is authorized to enter into subadvisory agreements for
investment advisory services in connection with the management of the Fund. PI
will continue to have responsibility for all investment advisory services
performed pursuant to any such subadvisory agreements.
PI will review the performance of any subadvisers and make recommendations to
the Board of Directors with respect to the retention of the subadvisers, and the
renewal of any subadvisory agreements. PI also administers the Fund's corporate
affairs and, in connection therewith, furnishes the Fund with office facilities,
together with those ordinary clerical and bookkeeping services which are not
being furnished by State Street Bank & Trust Company, the Fund's Custodian, and
PMFS. The management services of PI for the Fund are not exclusive under the
terms of the Management Agreement and PI is free to, and does, render management
services to others.
B-20
For its services, PI receives, pursuant to the Management Agreement, a fee at an
annual rate of .75 of 1% of the Fund's average daily net assets. The fee is
computed daily and payable monthly.
In connection with its management of the corporate affairs of the Fund, PI bears
the following expenses:
(1) the salaries and expenses of all personnel of the Fund and the Manager,
except the fees and expenses of Independent Directors;
(2) all expenses incurred by the Manager or by the Fund in connection with
managing the ordinary course of the Fund's business, other than those assumed by
the Fund, as described below; and
(3) the costs and expenses payable to any Subadviser pursuant to any subadvisory
agreement between the Manager and a Subadviser.
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses; (1) the fee payable to the Manager, (2) the
fees and expenses of Independent Directors, (3) the fees and certain expenses of
its Custodian and Transfer Agent, including the cost of providing records to the
Manager in connection with its obligation of maintaining required records of the
Fund and of pricing the Fund's shares, (4) the charges and expenses of its legal
counsel and independent accountants, (5) brokerage commissions, if any, and any
issue or transfer taxes chargeable to the Fund in connection with its securities
transactions, (6) all taxes and corporate fees payable by the Fund to
governmental agencies, (7) the fees of any trade association of which it is a
member, (8) the cost of stock certificates representing its shares, (9) the cost
of fidelity and liability insurance, (10) the fees and expenses involved in
registering and maintaining registration of the Fund and of its shares with the
Commission, including the preparation and printing of its registration
statements and prospectuses for such purposes, and the fees and expenses of
registration and notice filings made in accordance with state securities laws,
(11) allocable communications expenses with respect to investor services and all
expenses of shareholders' and Directors' meetings and of preparing, printing and
mailing report, proxy statements and prospectuses to shareholders, (12)
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of its business, and (13) distribution and
service fees.
The Management Agreement also provides that the Manager will not be liable for
any error of judgment or for any loss suffered by the Fund in connection with
the matters to which the Management Agreement relates, except a loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation for
services or 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 (as defined in the 1940 Act), and that it may be terminated without
penalty by either party upon not more than 60 days' or less than 30 days'
written notice. The Management Agreement provides that it 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
accordance with the requirements of the 1940 Act.
For the fiscal years ended October 31, 2002, 2001 and 2000, PI received
management fees from the Fund of $350,748, $516,710 and $1,426,965,
respectively.
PI has entered into a Subadvisory Agreement with JF International Management
Inc. (JFIMI or Subadviser). JFIMI furnishes investment advisory services in
connection with the management of the Fund. In connection therewith, JFIMI is
obligated to keep certain books and records of the Fund. PI continues to have
responsibility for all investment advisory services pursuant to the Management
Agreement and supervises JFIMI's performance of such services. JFIMI is paid by
PI at an annual rate in the amount .50% of the first $250 million of net assets
and .45% of net assets in excess of $250 million of the Fund's average daily net
assets.
The Subadvisory Agreement provides that it will terminate in the event of its
assignment (as defined in the 1940 Act) or upon the termination of the
Management Agreement. The Subadvisory Agreement may be terminated by the Fund,
PI or JFIMI 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 by the Board of Directors at least annually in accordance
with the requirements of the 1940 Act. As discussed in the Prospectus, PI
employs Advisers under a "manager-of-managers" structure that allows PI to
replace the investment adviser or amend the Subadvisory Agreement without
seeking shareholder approval.
(b) MATTERS CONSIDERED BY THE BOARD
The Management and Subadvisory Agreements were last approved by the Board of
Directors, including all of the Independent Directors on May 22, 2002 at a
meeting called for that purpose. In approving the Management and Subadvisory
Agreements, the Board primarily considered, with respect to the Fund, the nature
and quality of the services provided under the Agreements and the
B-21
overall fairness of the Agreements to the Fund. The Board requested and
evaluated reports from the Manager and the Subadviser that addressed specific
factors designed to inform the Board's consideration of these and other issues.
With respect to the nature and quality of the services provided by the Manager
and the Subadviser, respectively, the Board considered the performance of the
Fund in comparison to relevant market indices and the performance of a peer
group of investment companies pursuing broadly similar strategies, and reviewed
reports prepared by an unaffiliated organization applying various statistical
and financial measures of fund performance compared to such indices and peer
groups of funds. The Board also evaluated the division of responsibilities among
the Manager and its affiliates, and the capabilities of the personnel providing
services. The Board also considered the quality of brokerage execution provided
by the Manager and Subadviser. The Board reviewed the Manager's and the
Subadviser's use of brokers or dealers in fund transactions that provided
research and other services to them, and the benefits derived by the Fund from
such services. The Board also considered the Manager's and the Subadviser's
positive compliance history, as neither the Manager nor the Subadviser has been
subject to any significant compliance problems.
With respect to the overall fairness of the Management and Subadvisory
Agreements, the Board primarily considered the fee structure of the Agreements
and the profitability of the Manager and the Subadviser and their affiliates
from their association with the Fund. The Board reviewed information from an
independent data service about the rates of compensation paid to investment
advisers, and overall expense ratios, for funds comparable in size, character
and investment strategy to the Fund. The Board also considered that the Fund's
fee structure provides for a reduction of payments resulting from economies of
scale. The Board also evaluated the aggregate amount and structure of fees paid
by the Manager to the Subadviser. In concluding that the direct and indirect
benefits accruing to the Manager, the Subadviser and their affiliates, by virtue
of their relationship to the Fund, were reasonable in comparison with the costs
of the provision of investment advisory services and the benefits accruing to
the Fund, the Board reviewed specific data as to the Manager's and the
Subadviser's profit or loss on the Fund for the recent period and carefully
examined their cost allocation methodology. With respect to profitability, the
Manager and the Subadviser discussed with the Board the allocation methodologies
for intercompany revenues and expenses (not including the costs of distributing
shares or providing shareholder services) in order to approximate their
respective profits from the Management or Subadvisory fees. The Board understood
that neither the Manager nor the Subadviser uses these profitability analyses in
the management of their businesses other than in connection with the approval or
continuation of management or advisory agreements, at least in part because they
exclude significant costs and include certain revenues that judicial
interpretations have required in the context of Board approval of mutual fund
advisory agreements. These matters were also considered at the meeting of the
Independent Directors.
PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12b-1 PLANS
Prudential Investment Management Services LLC (PIMS or the Distributor), 100
Mulberry Street, Gateway Center Three, Newark, NJ 07102, acts as the distributor
of the shares of the Fund. See "How the Fund is Managed--Distributor" in the
Prospectus.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the Class
B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund under
Rule 12b-1 under the 1940 Act and a distribution agreement (the Distribution
Agreement), the Distributor incurs the expenses of distributing the Fund's Class
A, Class B and Class C shares. PIMS serves as the Distributor of the Class Z
shares and incurs the expenses of distributing the Fund's Class Z shares under a
Distribution Agreement with the Fund, none of which are reimbursed or paid for
by the Fund. See "How the Fund is Managed--Distributor" in the Prospectus.
The Class A Plan provides that (1) up to .25 of 1% of the daily net assets of
the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (2) 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. The Class B and Class C Plans
provide for the payment to the Distributor of (1) an asset-based sales charge of
..75 of 1% of the average daily net assets of each of the Class B and Class C
shares and (2) a service fee of .25 of 1% of the average daily net assets of
each of the Class B and Class C shares.
The distribution and/or service fees may also be used by the Distributor to
compensate dealers on a continuing basis in consideration for the distribution,
marketing, administrative and other services and activities provided by dealers
with respect to the promotion of the sale of the Fund's shares and the
maintenance of related shareholder accounts.
CLASS A PLAN. For the fiscal year ended October 31, 2002, PIMS collectively
received payments of $72,693 from the Fund, under the Class A Plan. These
amounts were expended on commission credits to Prudential Securities
Incorporated (PSI) and Pruco Securities Corporation, an affiliated broker-dealer
(Prusec), for payments of commissions and account servicing fees to financial
advisers and other persons who sell Class A shares. For the fiscal year ended
October 31, 2002, PSI and PIMS also collectively received approximately $8,100
in initial sales charges.
CLASS B PLAN. For the fiscal year ended October 31, 2002, PIMS collectively
received $143,222 from the Fund under the Class B Plan and spent approximately
$93,300, in distributing the Class B shares of the Fund. It is estimated that of
the latter amounts
B-22
approximately $8,800 (9.4%), was spent on printing and mailing of prospectuses
to other than current shareholders; $21,700 (23.3%), on compensation to Prusec
for commissions to its representatives and other expenses, including an
allocation on account of overhead and other branch office distribution-related
expenses incurred by it for distribution of Class B shares; and $62,800 (67.3%),
on the aggregate of (1) payments of commissions and account servicing fees to
its financial advisers $39,500 (42.3%) and (2) an allocation on account of
overhead and other branch office distribution-related expenses $23,300 (25.0%).
The term "overhead and other branch office distribution-related expenses" as
used herein represents (1) the expenses of operating Prusec's and PSI's branch
offices in connection with the sale of Fund shares, including lease costs, the
salaries and employee benefits of operations and sales support personnel,
utility costs, communications costs and the costs of stationery and supplies,
(2) the costs of client sales seminars, (3) expenses of mutual fund sales
coordinators to promote the sale of Fund shares, and (4) other incidental
expenses relating to branch promotion of Fund sales.
The Distributor also receives the proceeds of contingent deferred sales charges
paid by holders of Class B shares upon certain redemptions of Class B shares.
For the fiscal year ended October 31, 2002, PSI and PIMS collectively received
approximately $46,400 in contingent deferred sales charges.
CLASS C PLAN. For the fiscal year ended October 31, 2002, PIMS collectively
received $22,994 from the Fund under the Class C Plan and spent approximately
$18,100 in distributing the Class C shares of the Fund. It is estimated that of
the latter amounts approximately $1,200 (6.6%), was spent on printing and
mailing of prospectuses to other than current shareholders; $100 (0.6%) was
spent on compensation to Prusec for commissions to its representatives and other
expenses, including an allocation on account of overhead and other branch office
distribution-related expenses incurred by it for distribution of Class C shares;
and $16,800 (92.8%), on the aggregate of (1) payments of commissions and account
servicing fees to its financial advisers $16,600 (91.7%), and (2) an allocation
on account of overhead and other branch office distribution-related expenses
$200 (1.1%). For the fiscal year ended October 31, 2002, PIMS also collectively
received approximately $300 in initial sales charges.
The Distributor also receives the proceeds of contingent deferred sales charges
paid by investors upon certain redemptions of Class C shares. For the fiscal
year ended October 31, 2002, PSI and PIMS collectively received contingent
deferred sales charges of approximately $1,200.
The Class A, Class B and Class C Plans will continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority vote of the Directors who
are not interested persons of the Fund and who have no direct or indirect
financial interest in the Class A, Class B and Class C Plan or in any agreement
related to the Plans (the Rule 12b-1 Directors), cast in person at a meeting
called for the purpose of voting on such continuance. The Plans may each be
terminated at any time, without penalty, by the vote of a majority of the Rule
12b-1 Directors or by the vote of the holders of a majority of the outstanding
shares of the applicable class on not more than 30 days' written notice to any
other party to the Plans. The Plans may not be amended to increase materially
the amounts to be spent for the services described therein without approval by
the shareholders of the applicable class (by both Class A and Class B
shareholders, voting separately, in the case of material amendments to the Class
A Plan), and all material amendments are required to be approved by the Board of
Directors in the manner described above. Each Plan will automatically terminate
in the event of its assignment. The Fund will not be contractually obligated to
pay expenses incurred under any Plan if it is terminated or not continued.
Pursuant to each Plan, the Board of Directors will review at least quarterly a
written report of the distribution expenses incurred on behalf of each class of
shares of the Fund by the Distributor. The report includes an itemization of the
distribution expenses and the purposes of such expenditures. In addition, as
long as the Plans remain in effect, the selection and nomination of Rule 12b-1
Directors shall be committed to the Rule 12b-1 Directors.
In addition to distribution and service fees paid by the Fund under the Class A,
Class B and Class C Plans, the Manager (or one of its affiliates) may make
payments out of its own resources to dealers and other persons which distribute
shares of the Fund (including Class Z shares). Such payments may be calculated
by reference to the net asset value of shares sold by such persons or otherwise.
FEE WAIVERS/SUBSIDIES
PI may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. In addition,
the Distributor has contractually agreed to waive a portion of its distribution
and service (12b-1) fees for the Class A shares as described in the prospectus.
Fee waivers and subsidies will increase the Fund's total return.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the National Association of
Securities Dealers, Inc. (NASD), the Distributor is required to limit aggregate
initial sales charges, deferred sales charges and asset-based sales charges to
6.25% of total gross sales of each class of shares. Interest charges on
unreimbursed distribution expenses equal to the prime rate plus one percent per
annum may be added to the 6.25% limitation. Sales from the reinvestment of
dividends and distributions are not required to be
B-23
included in the calculation of the 6.25% limitation. The annual asset-based
sales charge on shares of the Fund may not exceed .75 of 1% per class. The 6.25%
limitation applies to the Fund rather than on a per shareholder basis. If
aggregate sales charges were to exceed 6.25% of total gross sales of any class,
all sales charges on shares of that class would be suspended.
OTHER SERVICE PROVIDERS
State Street Bank and Trust Company, One Heritage Drive, North Quincy, MA 02171,
serves as Custodian for the Fund's portfolio securities and cash and, in that
capacity, maintains certain financial and accounting books and records pursuant
to an agreement with the Fund. Subcustodians provide custodial services for the
Fund's foreign assets held outside the United States.
Prudential Mutual Fund Services LLC (PMFS), 194 Wood Avenue South, Iselin, NJ
08830, serves as the transfer and dividend disbursing agent of the Fund. PMFS is
an affiliate of PI. PMFS provides customary transfer agency services to the
Fund, including the handling of shareholder communications, the processing of
shareholder transactions, the maintenance of shareholder account records, the
payment of dividends and distributions and related functions. For these
services, PMFS receives an annual fee per shareholder account, a new account
set-up fee for each manually established account and a monthly inactive zero
balance account fee per shareholder account. PMFS is also reimbursed for its
out-of-pocket expenses, including but not limited to postage, stationery,
printing, allocable communication expenses and other costs. For the fiscal year
ended October 31, 2002, the Fund incurred fees of approximately $194,500 for the
services of PMFS.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, NY 10036,
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.
CODE OF ETHICS
The Board of Directors has adopted a Code of Ethics. In addition, the Manager,
Subadviser and Distributor have each adopted a Code of Ethics (collectively, the
Codes). The Codes permit personnel subject to the Codes to invest in securities
including securities that may be purchased or held by the Fund. However, the
protective provisions of the Codes prohibit certain investments and limit such
personnel from making investments during periods when the Fund is making such
investments. The Codes are on public file with, and are available from, the
Commission.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Manager is responsible for decisions to buy and sell securities, futures and
options on securities and futures for the Fund, the selection of brokers,
dealers and futures commission merchants to effect the transactions and the
negotiation of brokerage commissions, if any. The term "Manager" as used in this
section includes the Subadviser. On a national securities exchange,
broker-dealers may receive negotiated brokerage commissions on Fund portfolio
transactions, including options and the purchase and sale of underlying
securities upon the exercise of options. On foreign securities exchanges,
commissions may be fixed. Orders may be directed to any broker or futures
commission merchant including, to the extent and in the manner permitted by
applicable law, PSI and its affiliates.
Equity securities traded in the over-the-counter market and bonds, including
convertible bonds, are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments and U.S.
Government agency securities may be purchased directly from the issuer, in which
case no commissions or discounts are paid. The Fund will not deal with PSI or
any affiliate in any transaction in which PSI or any affiliate acts as
principal. Thus, it will not deal with PSI acting as market maker, and it will
not execute a negotiated trade with PSI if execution involves PSIs' acting as
principal with respect to any part of the Fund's order.
In placing orders for portfolio securities of the Fund, the Manager is required
to give primary consideration to obtaining the most favorable price and
efficient execution. Within the framework of this policy, the Manager will
consider the research and investment services provided by brokers, dealers or
futures commission merchants who effect or are parties to portfolio transactions
of the Fund, the Manager or the Manager's other clients. Such research and
investment services are those which brokerage houses customarily provide to
institutional investors and include statistical and economic data and research
reports on particular companies and industries. Such services are used by the
Manager in connection with all of its investment activities, and some of such
services obtained in connection with the execution of transactions for the Fund
may be used in managing other investment accounts. Conversely, brokers, dealers
or futures commission merchants furnishing such services may be selected for the
execution of transactions of such other accounts, whose aggregate assets are far
larger than the Fund's, and the services furnished by such brokers, dealers or
futures commission merchants may be used by the Manager in providing investment
management for the Fund. Commission rates are
B-24
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 PSI, for particular
transactions than might be charged if a different broker had been selected, on
occasions when, in the Manager's opinion, this policy furthers the objective of
obtaining best price and execution. In addition, the Manager is authorized to
pay higher commissions on brokerage transactions for the Fund to brokers other
than Prudential Securities in order to secure research and investment services
described above, subject to review by the Fund's Board of Directors from time to
time as to the extent and continuation of this practice. The allocation or
orders among brokers and the commission rates paid are reviewed periodically by
the Fund's Board of Directors. The Fund will not pay up for research in
principal transactions.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which PSI, or any affiliate, during the existence of the syndicate,
is a principal underwriter (as defined in the 1940 Act), except in accordance
with rules of the Commission. This limitation, in the opinion of the Fund, will
not significantly affect the Fund's ability to pursue its present investment
objective. However, in the future in other circumstances, the Fund may be at a
disadvantage because of this limitation in comparison to other funds with
similar objectives but not subject to such limitations.
Subject to the above considerations, an affiliated broker may act as a
securities broker or futures commission merchant for the Fund. In order for an
affiliated broker to effect any portfolio transactions for the Fund, the
commissions, fees or other remuneration received by the affiliated broker 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 the affiliated broker to receive no more than the remuneration which would
be expected to be received by an unaffiliated broker or futures commission
merchant in a commensurate arm's-length transaction. Furthermore, the Board of
Directors of the Fund, including a majority of the noninterested Directors, has
adopted procedures which are reasonably designed to provide that any
commissions, fees or other remuneration paid to the affiliated broker are
consistent with the foregoing standard. In accordance with Section 11(a) of the
Securities Exchange Act of 1934 (as amended), PSI may not retain compensation
for effecting transactions on a national securities exchange for the Fund unless
the Fund has expressly authorized the retention of such compensation. PSI must
furnish to the Fund at least annually a statement setting forth the total amount
of all compensation retained by PSI from transactions effected for the Fund
during the applicable period. Brokerage and futures transactions with PSI (or
any affiliate) are also subject to such fiduciary standards as may be imposed
upon PSI (or such affiliate) by applicable law.
The table presented below shows certain information regarding the payment of
commissions by the Fund, including the amount of such commissions paid to PSI,
for the three fiscal years ended October 31, 2002.
FISCAL YEARS ENDED OCTOBER 31
2002 2001 2000
Total brokerage commissions paid by the Fund $ 287,928 $ 258,741 $ 1,010,490
Total brokerage commissions paid to PSI $ -0- $ -0- $ -0-
Total brokerage commissions paid to JF International
Management Inc. (JFIMI) $ 1,035 $ 3,519 $ -0-
Percentage of total brokerage commissions paid to PSI -0-% -0-% -0-%
Percentage of total brokerage commissions paid to JFIMI 0.36% 1.36% -0-%
Percentage of total dollar amount of transactions involving
commissions that were effected through PSI -0-% -0-% -0-%
Percentage of total dollar amount of transactions involving
commissions that were effected through JFIMI 0.29% 0.62% -0-%
The Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the 1940 Act) and their
parents during their most recent fiscal year. As of October 31, 2002, the Fund
had no such holdings.
CAPITAL STOCK AND ORGANIZATION
THE FUND IS AUTHORIZED TO ISSUE 2,000,000,000 SHARES OF COMMON STOCK, $.001 PER
SHARE DIVIDED INTO FOUR CLASSES, DESIGNATED AS CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES. Currently, the Fund is offering all four classes. In accordance
with the Fund's Articles of Incorporation, the Directors may authorize the
creation of additional series and classes within such series, (the proceeds of
which would be invested in separate, independently managed series with distinct
investment objectives and policies and share purchase, redemption and net asset
value procedures) with such preferences, privileges, limitations and voting and
dividend rights as the Directors may determine. All consideration received by
the Fund for shares of any additional series, and all assets in which such
B-25
consideration is invested, would belong to that series (subject only to the
rights of creditors of that series) and would be subject to the liabilities
related thereto. Pursuant to the 1940 Act, shareholders of any additional series
of shares would normally have to approve the adoption of any advisory contract
relating to such series and of any changes in the investment policies related
thereto. The Directors have no intention of authorizing additional series at the
present time.
The Articles of Incorporation further provide that no Director, officer,
employee or agent of the Fund is liable to the Fund or to a shareholder, nor is
any Director, officer, employee or agent liable to any third persons in
connection with the affairs of the Fund, except as such liability may arise from
his or her own bad faith, willful misfeasance, gross negligence or reckless
disregard of his or her duties. It also provides that all third parties shall
look solely to the Fund property for satisfaction of claims arising in
connection with the affairs of the Fund. With the exceptions stated, the
Articles of Incorporation permit the Directors to provide for the
indemnification of Directors, officers, employees or agents of the Fund against
all liability in connection with the affairs of the Fund.
The Fund shall continue without limitation of time subject to the provisions in
the Articles of Incorporation concerning termination by action of the
shareholders or by the Directors by written notice to the shareholders.
The Directors have the power to alter the number and the terms of office of the
Directors and they may at any time lengthen their own terms or make their terms
of unlimited duration and appoint their own successors, provided that always at
least a majority of the Directors have been elected by the shareholders of the
Fund. The voting rights of shareholders are not cumulative, so that holders of
more than 50 percent of the shares voting can, if they choose, elect all
Directors being selected, while the holders of the remaining shares would be
unable to elect any Directors.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined net
asset value (NAV) per share plus a sales charge which, at the election of the
investor, may be imposed either (1) at the time of purchase (Class A shares and
Class C shares) or (2) on a deferred basis (Class B and Class C shares or Class
A shares in certain circumstances). Class Z shares of the Fund are offered to a
limited group of investors at NAV without any sales charge. See "How to Buy,
Sell and Exchange Shares of the Fund" in the Prospectus.
Each class of shares represents an interest in the same assets of the Fund and
is identical in all respects except that (1) 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; (2) 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; (3) each
class has a different exchange privilege; (4) only class B shares have a
conversion feature and (5) Class Z shares are offered exclusively for sale to a
limited group of investors.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must complete an application and telephone PMFS at (800) 225-1852 (toll-free) to
receive an account number. The following information will be requested: your
name, address, tax identification number, class election, dividend distribution
election, amount being wired and wiring bank. Instructions should then be given
by you to your bank to transfer funds by wire to State Street Bank and Trust
Company, Boston, MA, Custody and Shareholder Services Division, Attention:
Prudential Pacific Growth Fund, Inc., specifying on the wire the account number
assigned by PMFS and your name and identifying the class in which you are
investing (Class A, Class B, Class C or Class Z shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:00 p.m., New York time) on a business day, you may
purchase shares of the Fund on that day. See "Net Asset Value."
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Pacific Growth
Fund, Inc., Class A, Class B, Class C or Class Z shares and your name and
individual account number. It is not necessary to call PMFS to make subsequent
purchase orders utilizing Federal Funds. The minimum amount which may be
invested by wire is $1,000.
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather than
cash) will be limited to (1) reorganizations, (2) statutory mergers, or (3i)
other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, and (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) is approved by the Fund's investment adviser.
SPECIMEN PRICE MAKE-UP
B-26
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum initial sales charge of 5%,
Class C* shares are sold at net asset value plus a maximum sales charge of 1%
and Class B* and Class Z shares are sold at net asset value. Using the Fund's
net asset value at October 31, 2002, the maximum offering price of the Fund's
shares is as follows:
CLASS A
Net asset value and redemption price per Class A share* $ 6.59
Maximum initial sales charge (5% of offering price) .35
Maximum offering price to public $ 6.94
CLASS B
Net asset value, offering price and redemption price per Class B share* $ 6.19
CLASS C
Net asset value and redemption price per Class C share* $ 6.22
Maximum initial sales charge (1% of offering price) .06
Maximum offering price to public $ 6.28
CLASS Z
Net asset value, offering price and redemption price per Class Z share $ 6.61
* Class A, Class B and Class C shares are subject to a contingent deferred sales
charge (CDSC) on certain redemptions. Class A shares may be subject to a CDSC on
certain redemptions. See "How to Buy, Sell and Exchange Shares of the Fund--How
to Sell Your Shares--Contingent Deferred Sales Charges" in the Prospectus.
SELECTING A PURCHASE ALTERNATIVE
The following is provided to assist you in determining which share class of the
Fund best suits your individual circumstances and is based on current fees and
expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 4 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 longer than 4 years, but less than 5
years, and do not qualify for a reduced sales charge on Class A shares, you
should consider purchasing Class B or Class C shares over Class A shares. This
is because the sales charge plus the cumulative annual distribution-related fee
on Class A shares would exceed those of the Class B and Class C shares if you
redeem your investment during this time period. In addition, more of your money
would be invested initially in the case of Class C shares, because of the
relatively low initial sales charge, and all of your money would be invested
initially in the case of Class B shares, which are sold at NAV.
If you intend to hold your investment for longer than 5 years, you should
consider purchasing Class A shares over either Class B or Class C shares. This
is because the maximum sales charge plus the cumulative annual
distribution-related fee on Class A shares would be less than those of the Class
B and Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may generally 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. See
"Reduction and Waiver of Initial Sales Charge--Class A shares" below. However,
unlike Class B 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.
In addition, if you purchase $1 million or more of Class A shares, you are not
subject to an initial sales charge, but you are subject to a 1% CDSC on shares
sold within 12 months of purchase. This charge is waived for all such Class A
shareholders other than those who purchased their shares through certain
broker-dealers that are not affiliated with Prudential.
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 for more than 5 years in the
case of Class C shares for the higher cumulative annual distribution-related fee
on those shares plus, in the case of Class C shares, the 1% initial sales charge
to exceed the initial sales charge plus the 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 NAV, the
effect of the return on the investment over this period of time or redemptions
when the CDSC is applicable.
B-27
REDUCTION AND WAIVER OF INITIAL SALES CHARGE--CLASS A SHARES
BENEFIT PLANS. Certain group retirement and savings plans may purchase Class A
shares without the initial sales charge if they meet the required minimum for
amount of assets, average account balance or number of eligible employees. For
more information about these requirements, call Prudential at (800) 353-2847.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, without the
initial sales charge, through the Distributor or the Transfer Agent, by:
- officers of the Prudential mutual funds (including the Fund),
- employees of the Distributor, PSI, PI and their subsidiaries and members of
the families of such person who maintain an "employee related" account at PSI or
the Transfer Agent,
- employees of subadvisers of the Prudential mutual funds, provided that
purchases at NAV are permitted by such person's employer,
- 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,
- members of the Board of Directors of Prudential,
- real estate brokers, agents and employees of real estate brokerage companies
affiliated with The Prudential Real Estate Affiliates who maintain an account at
PSI, Prusec or with the Transfer Agent,
- registered representatives and employees of brokers who have entered into a
selected dealer agreement with the Distributor, provided that purchases at NAV
are permitted by such person's employer,
- investors who have a business relationship with a financial adviser who joined
PSI from another investment firm, provided that (1) 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 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(7) of the
Internal Revenue Code of 1986, as amended (the Internal Revenue Code) and
non-qualified plans for which the Fund is an available option (collectively,
Benefit Plans), (2) the purchase is made with proceeds of a redemption of shares
of any open-end non-money market fund sponsored by the financial adviser's
previous employer (other than a fund which imposes a distribution or service fee
of .25 of 1% or less) and (3) the financial adviser served as the client's
broker on the previous purchase,
- investors in Individual Retirement Accounts (IRAs), provided the purchase is
made with the proceeds of a tax-free rollover of assets from a Benefit Plan for
which Prudential provides administrative or recordkeeping services and further
provided that such purchase is made within 60 days of receipt of the Benefit
Plan distribution,
- orders placed by broker-dealers, investment advisers or financial planners who
have entered into an agreement with the Distributor, who place trades for their
own accounts or the accounts of their clients and who charge a management
consulting or other fee for their services (for example, mutual fund "wrap" or
asset allocation programs), and
- orders placed by clients of broker-dealers, investment advisers or financial
planners who place trades for customer accounts if the accounts are linked to
the master account of such broker-dealer, investment adviser or financial
planner and the broker-dealer, investment adviser or financial planner charges
its clients a separate fee for its services (for example, mutual fund
"supermarket programs").
Broker-dealers, investment advisers or financial planners sponsoring fee-based
programs (such as mutual fund "wrap" or asset allocation programs and mutual
fund "supermarket" programs) may offer their clients more than one class of
shares in the Fund in connection with different pricing options for their
programs. Investors should consider carefully any separate transaction and other
fees charged by these programs in connection with investing in each available
share class before selecting a share class.
For an investor to obtain any reduction or waiver of the initial sales charge,
at the time of the sale either the Transfer Agent must be notified directly by
the investor or the Distributor must be notified by the dealer facilitating the
transaction that the sale qualifies for the reduced or waived sales charge. The
reduction or waiver will be granted subject to confirmation of your entitlement.
No initial sales charge is imposed upon Class A shares acquired upon the
reinvestment of dividends and distributions.
B-28
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or eligible
group of related investors purchases Class A shares of the Fund concurrently
with Class A shares of other Prudential Mutual Funds, the purchases may be
combined to take advantage of the reduced sales charges applicable to larger
purchases. See the table of breakpoints under "How to Buy, Sell and Exchange
Shares of the Fund--Step 2: Choose a Share Class - Reducing or Waiving Class A's
Initial Sales Charge" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
- an individual;
- the individual's spouse, their children and their parents;
- the individual's and spouse's IRA;
- 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);
- a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
- a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account created
by the individual or the individual's spouse; and
- one or more employee benefit plans of a company controlled by an individual.
In addition, an eligible group of related Fund investors may include an employer
(or group of related employers) and one or more qualified retirement plans of
such employer or employers. An employer controlling, controlled by or under
common control with another employer is deemed related to that employer.
The Transfer Agent, the Distributor or your broker 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.
LETTERS OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors) who enter into a written letter of intent
providing for the investment, within a thirteen-month period, of a specified
dollar amount in the Fund or other Prudential mutual funds. Retirement and group
plans no longer qualify to purchase Class A shares at NAV by entering into a
letter of intent.
For purposes of the 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 your
Dealer will not be aggregated to determine the reduced sales charge.
A letter of intent permits an investor to establish a total investment goal to
be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Escrowed Class A shares totaling 5% of the dollar amount of the
letter of intent will be held by the Transfer Agent in the name of the investor.
The effective date of a letter of intent may be back-dated up to 90 days, in
order that any investments made during this 90-day period, valued at the
investor's cost, can be applied to the fulfillment of the letter of intent goal.
A letter of intent does not obligate the investor to purchase, nor the Fund to
sell, the indicated amount. In the event the letter of intent goal is not
satisfied within the thirteen-month period, the investor is required to pay the
difference between the sales charges otherwise applicable to the investments
made during this period and sales charges actually paid. Such payment may be
made directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain such difference. Investors electing to
purchase Class A shares of the Fund pursuant to a letter of intent should
carefully read such letter.
The Transfer Agent, Distributor or dealer 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.
CLASS B AND CLASS C SHARES
B-29
The offering price of Class B shares is the NAV next determined following
receipt of an order in proper form by the Transfer Agent, your Dealer or the
Distributor. Class C shares are sold with an initial sales charge of 1%.
Redemptions of Class B and Class C shares may be subject to a CDSC. See
"Contingent Deferred Sales Charges."
The Distributor will pay, from its own resources, sales commissions at the time
of sale of up to 4% of the purchase price of Class B shares to dealers,
financial advisers and other persons who sell Class B shares. This facilitates
the ability of the Fund to sell the Class B shares without an initial sales
charge being deducted at the time of purchase. The Distributor anticipates that
it will recoup its advancement of sales commissions from the combination of the
CDSC and the distribution fee. See "How the Fund is Managed--Distributor" in the
Prospectus. In connection with the sale of Class C shares, the Distributor will
pay at the time of the sale, from its own resources, dealers, financial advisers
and other persons which distribute Class C shares, a sales commission of up to
1% of the purchase price.
WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class C shares at
NAV, without the initial sales charge. For more information, call Prudential at
(800) 353-2847.
INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. Investors may
purchase Class C shares at NAV, without the initial sales charge, with the
proceeds from the redemption of shares of any unaffiliated registered investment
company which were not held through an account with any Prudential affiliate.
Such purchases must be made within 60 days of the redemption. Investors eligible
for this waiver include (1) investors purchasing shares through an account at
PSI, (2) investors purchasing shares through a COMMAND Account or an Investor
Account with Prusec, and (3) investors purchasing shares through other brokers.
This waiver is not available to investors who purchase shares directly from the
Transfer Agent. You must notify the Transfer Agent directly or through your
broker if you are entitled to this waiver and provide the Transfer Agent with
such supporting documents as it may deem appropriate.
OTHER. Investors who purchase Class C shares through certain broker-dealers that
are not affiliated with Prudential may purchase Class C shares without paying
the initial sales charge.
CLASS Z SHARES
Class Z shares of the Fund currently are available for purchase by the following
categories of investors:
- 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,
- participants in any fee-based program sponsored by an affiliate of the
Distributor which includes mutual funds as investment options and for which the
Fund is an available option,
- certain participants in the MEDLEY Program (group variable annuity contracts)
sponsored by Prudential for whom Class Z shares of the Prudential mutual funds
are an available investment option,
- Benefit Plans for which an affiliate of the Distributor provides
administrative or recordkeeping services and as of September 20, 1996, (1) were
Class Z shareholders of the Prudential mutual funds or (2) executed a letter of
intent to purchase Class Z shares of the Prudential Mutual Funds,
- the Prudential Securities Cash Balance Pension Plan, an employee defined
benefit plan sponsored by PSI,
- current and former Directors/Trustees of the Prudential mutual funds
(including the Fund),
- employees of Prudential and/or PSI who participate in a Prudential-sponsored
employee saving plan and,
- Prudential, with an investment of $10 million or more.
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
who distribute shares a finder's fee, from its own resources, based on a
percentage of the net asset value of shares sold by such persons.
B-30
Class Z shares of the Fund may also be purchased by certain savings, retirement
and deferred compensation plans, qualified or non-qualified under the Internal
Revenue Code, provided that (1) the plan purchases shares of the Fund pursuant
to an investment management agreement with Prudential or its affiliates, (2) the
Fund is an available investment option under the agreement and (3) the plan will
participate in the PruArray and SmartPath Programs (benefit plan recordkeeping
services) sponsored by PMFS. These plans include Benefit Plans.
RIGHTS OF ACCUMULATION
Reduced sales charges also are available through rights of accumulation, under
which an investor or an eligible group of related investors, as described above
under "Combined Purchase and Cumulative Purchase Privilege," may aggregate the
value of their existing holdings of shares of the Fund and shares of other
Prudential mutual funds (excluding money market funds, other than those acquired
pursuant to the exchange privilege) to determine the reduced sales charge.
Rights of accumulation may be applied across the classes of shares of the
Prudential mutual funds. However, the value of shares held directly with the
Transfer Agent and through your broker will not be aggregated to determine the
reduced sales charge. The value of existing holdings for purposes of determining
the reduced sales charge is calculated using the maximum offering price (NAV
plus maximum sales charge) as of the previous business day.
The Distributor, dealer or the Transfer Agent must be notified at the time of
purchase that the shareholder is entitled to a reduced sales charge. The reduced
sales charge 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 plan.
SALE OF SHARES
You can redeem your shares at any time for cash at the NAV next determined after
the redemption request is received in proper form (in accordance with procedures
established by PMFS in connection with investors' accounts) by PMFS, the
Distributor or your broker. 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 are redeeming your shares
through a broker, your broker must receive your sell order before the Fund
computes its NAV for that day (at the close of regular trading on the NYSE,
usually 4: 00 p.m. New York time) in order to receive that day's NAV. In the
event that regular trading on the NYSE closes before 4:00 p.m. New York time you
will receive the next day's NAV if your order to sell is received after the
close of trading on the NYSE. Your broker will be responsible for furnishing all
necessary documentation to the Distributor and may charge you for its services
in connection with redeeming shares of the Fund.
If you hold shares of the Fund through PSI, you must redeem your shares through
PSI. Please contact your PSI financial adviser.
In order to redeem shares, a written request for redemption signed by you
exactly as the account is registered is required. If you hold certificates, the
certificates must be received by PMFS, the Distributor or your dealer in order
for the redemption request to be processed. If redemption is requested by a
corporation, partnership, trust or fiduciary, written evidence of authority
acceptable to the Transfer Agent must be submitted before such request will be
accepted. All correspondence and documents concerning redemptions should be sent
to the Fund in care of Prudential Mutual Fund Services LLC, Attention:
Redemption Services, P.O. Box 8149, Philadelphia, PA 19101, to the Distributor
or to your dealer.
Payment for redemption of recently purchased shares will be delayed until the
Fund or PMFS has been advised that the purchase check has been honored, which
may take up to 10 calendar days from the time of receipt of the purchase check
by PMFS. Such delay may be avoided by purchasing shares by wire or by certified
or cashier's check.
EXPEDITED REDEMPTION PRIVILEGE. By electing the Expedited Redemption Privilege,
you may arrange to have redemption proceeds sent to your bank account. The
Expedited Redemption Privilege may be used to redeem shares in an amount of $200
or more, except if an account for which an expedited redemption is requested has
a net asset value of less than $200, the entire account will be redeemed.
Redemption proceeds in the amount of $1000 or more will be remitted by wire to
your bank account at a domestic commercial bank which is a member of the Federal
Reserve system. Redemption proceeds of less than $1000 will be mailed by check
to your designated bank account. Any applicable CDSC will be deducted from the
redemption proceeds. Expedited redemption requests may be made by telephone or
letter, must be received by the Fund prior to 4:00 p.m. New York Time, to
receive a redemption amount based on that day's NAV and are subject to the terms
and conditions as set forth in the Fund's Prospectus regarding redemption of
shares. In the event that regular trading on the NYSE closes before 4:00 p.m.
New York time, you will receive the following day's NAV if you order to sell is
received after the close of regular trading on the NYSE. For more information,
see "How to Buy, Sell and Exchange Shares of the Fund -- Telephone Redemptions
and Exchanges" in the Prospectus. The Expedited Redemption Privilege may be
modified or terminated at any time without notice. To receive further
information, shareholders should contact PMFS at (800) 225-1852.
B-31
SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $100,000, (2)
are to be paid to a person other than the shareholder, (3) are to be sent to an
address other than the address on PMFS' records, or (4) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request or stock power must be signature guaranteed by an "eligible guarantor
institution." An "eligible guarantor institution" includes any bank, broker,
dealer, savings association or credit union. PMFS reserves the right to request
additional information from, and make reasonable inquiries of, any eligible
guarantor institution.
Payment for shares presented for redemption will be made by check within seven
days after receipt by the PMFS, the Distributor or your broker of the
certificate and written request, except as indicated below. If you hold shares
through PSI, payment for shares presented for redemption will be credited to
your account at your dealer, unless you indicate otherwise. Such payment may be
postponed or the right of redemption suspended at times (1) when the NYSE is
closed for other than customary weekends and holidays, (2) when trading on the
NYSE is restricted, (3) when an emergency exists as a result of which disposal
by the Fund of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Fund fairly to determine the value of its net
assets, or (4) during any other period when the Commission, by order, so
permits; provided that applicable rules and regulations of the SEC shall govern
as to whether the conditions prescribed in (2), (3) or (4) exist.
REDEMPTION IN KIND. If the Directors determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Fund, in lieu of cash, in conformity with applicable rules of the
Commission. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "Sale of Shares." If your shares are
redeemed in kind, you would incur transaction costs in converting the assets
into cash. The Fund, however, has elected to be governed by Rule 18f-1 under the
1940 Act, under which the Fund is obligated to redeem shares solely in cash up
to the lesser of $250,000 or 1% of the NAV of the Fund during any 90-day period
for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the 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 an account
value of less than $500 due to a redemption. The Fund will give such
shareholders 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 back into your account any
portion or all of the proceeds of such redemption in shares of the Fund and
account at the NAV next determined after the order is received, which must be
within 90 days after the date of the 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 PMFS, either directly or through the Distributor or your dealer, 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 will generally not affect
federal tax treatment of any gain realized upon redemption. However, if the
redemption was made within a 30 day period of the repurchase and if the
redemption resulted in a loss, some or all of the loss, depending on the amount
reinvested, may not be allowed for federal income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Investors who purchase $1 million or more of Class A shares and sell these
shares within 12 months of purchase are subject to a 1% CDSC. This charge is
waived for all such Class A shareholders other than those who purchased their
shares through certain broker-dealers that are not affiliated with Prudential.
Redemptions of Class B shares will be subject to a CDSC declining from 5% to 0%
over a six-year period. Class C shares redeemed within eighteen months of
purchase (or one year for Class C shares purchased before November 2, 1998) will
be subject to a 1% CDSC. The CDSC will be deducted from the redemption proceeds
and reduce the amount received by you. The CDSC will be imposed on any
redemption by you, which will reduce the current value of your Class A, 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 12 months in the case of Class A shares (in
certain cases), six years, in the case of Class B shares, and eighteen months
(or one year for Class C shares purchased before November 2, 1998), in the case
of Class C shares. A CDSC will be applied on the lesser of the original purchase
price or the current value of the shares being redeemed. Increases in the value
of your shares or shares acquired through reinvestment of dividends or
distributions are not subject to a CDSC. The amount of any CDSC will be paid to
and retained by the Distributor. If you purchased or hold your shares through a
broker, third party administrator or other authorized entity that maintains
subaccount recordkeeping, any applicable CDSC that you will pay will be
calculated and reported to PMFS by such broker, administrator or other
authorized entity.
The amount of the CDSC, if any, will vary depending on the number of years from
the time of payment for the purchase of shares until the time of redemption of
such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month.
B-32
The CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund.
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
YEAR SINCE PURCHASE CONTINGENT DEFERRED SALES CHARGE AS A PERCENTAGE OF
PAYMENT MADE DOLLARS INVESTED OR REDEMPTION PROCEEDS
------------------- ---------------------------------------------------
First 5.0%
Second 4.0%
Third 3.0%
Fourth 2.0%
Fifth 1.0%
Sixth 1.0%
Seventh None
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments for
the purchase of Class A shares made during the preceding 12 months (in certain
cases), six years for Class B shares and 18 months for Class C shares; then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a cost
of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain or
increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE - CLASS A SHARES. The CDSC will be
waived for all investors other than those who purchased their shares through
certain broker-dealers that are not affiliated with Prudential.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
at the time of death or initial determination of disability, provided that the
shares were purchased prior to death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions are:
(1) in the case of a tax-deferred retirement plan, a lump-sum or other
distribution after retirement;
(2) in the case of an IRA (including a Roth IRA), a lump-sum or other
distribution after attaining age 59 1/2, death or disability, provided that the
shares were purchased prior to death or disability, or a periodic distribution
based on life expectancy;
(3) in the case of a Section 403 (b) custodial account, a lump sum or
other distribution after attaining age 591/2; and
(4) a tax-free return of an excess contribution or plan distributions
following the death of 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 the one following a separation from sevice (that is,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waiver on redemptions
resulting from the termination of a tax-deferred retirement plan, unless
such redemptions otherwise qualify for a waiver as described above. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC
was not previously deducted with 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 redemption
B-33
of shares purchased with amounts used to repay loans made from the account
to the participant and from which a CDSC was previously deducted.
Systematic Withdrawal Plan. The CDSC will be waived (or reduced) on certain
redemptions effected through a Systematic Withdrawal Plan. On an annual basis,
up to 12% of the total dollar amount subject to the CDSC may be redeemed without
charge. The Transfer Agent will calculate the total amount available for this
waiver annually on the anniversary date of your purchase. The CDSC will be
waived (or reduced) on redemptions until this threshold 12% is reached. The
Systematic Withdrawal Plan is not available to participants in certain
retirement plans. Please contact PMFS at (800) 225-1852 for more details.
In addition, the CDSC will be waived on redemptions of shares held by Directors
of the Fund.
You must notify the Transfer Agent either directly or through your broker, at
the time of redemption, that you are entitled to a 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. In connection with these waivers, the Transfer Agent or your broker
will require you to submit the supporting documentation set forth below.
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
------------------ ----------------------
Death A certified copy of the shareholder's death certificate or,
in the case of a trust, a certified copy of the grantor's
death certificate, plus a copy of the trust agreement
identifying the grantor.
Disability--An individual will be considered disabled A copy of the Social Security Administration award letter or
if he or she is unable to engage in any substantial a letter from a physician on the physician's letterhead
gainful activity by reason of any medically stating that the shareholder is permanently disabled. In the
determinable physical or mental impairment which can case of a trust, a copy of the trust agreement identifying
be expected to result in death or to be of the grantor will be required as well. The letter must also
long-continued and indefinite duration. indicate the date of disability.
Distribution from an IRA or 403(b) Custodial Account A copy of the distribution form from the 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 indicating the reason for the
distribution.
Excess Contributions A letter from the shareholder (for an IRA) or the plan
administrator/Director on company letterhead indicating the
amount of the excess and whether or not taxes have been
paid.
The Transfer Agent reserves the right to request such additional documents as it
may deem appropriate.
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994. The CDSC is
reduced on redemptions of Class B shares of the Fund purchased prior to August
1, 1994 if immediately after a purchase of such shares, the aggregate cost of
all Class B shares of the Fund owned by you in a single account exceeded
$500,000. For example, if you purchased $100,000 of Class B shares of the Fund
in one year and an additional $450,000 of Class B shares in the following year,
with the result that the aggregate cost of your Class B shares of the Fund
following the second purchase was $550,000, the quantity discount would be
available for the second purchase of $450,000 but not for the first purchase of
$100,000. The quantity discount will be imposed at the following rates depending
on whether the aggregate value exceeded $500,000 or $1 million:
YEAR SINCE PURCHASE CONTINGENT DEFERRED SALES CHARGE AS A PERCENTAGE OF
PAYMENT MADE DOLLARS INVESTED OR REDEMPTION PROCEEDS
------------------- ---------------------------------------------------
$500,001 TO $1 MILLION OVER $1 MILLION
First 3.0% 2.0%
Second 2.0% 1.0%
Third 1.0% 0%
Fourth and thereafter 0% 0%
You must notify the Fund's Transfer Agent either directly or through PSI or
Prusec, at the time of redemption, that you are entitled to the reduced CDSC.
The reduced CDSC will be granted subject to confirmation of your holdings.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS C SHARES
B-34
BENEFIT PLANS. The CDSC will be waived for redemptions by certain group
retirement plans for which Prudential or brokers not affiliated with Prudential
provide administrative or recordkeeping services. The CDSC also will be waived
for certain redemptions by benefit plans sponsored by Prudential and its
affiliates. For more information, call Prudential at (800) 353-2847.
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 the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares (excluding shares
acquired through the automatic reinvestment of dividends and other
distributions) eligible to convert to Class A shares (the Eligible Shares) will
be determined on each conversion date in accordance with the following formula:
(1) 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 (2) multiplied by the
total number of Class B shares purchased and then held in your account. Each
time any Eligible Shares in your account convert to Class A shares, all shares
or amounts representing Class B shares then in your account that were acquired
through the automatic reinvestment of dividends and other distributions will
convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B shares
in your account on any conversion date are the result of multiple purchases at
different net asset values per share, the number of Eligible Shares calculated
as described above will generally be either more or less than the number of
shares actually purchased approximately seven years before such conversion date.
For example, if 100 shares were initially purchased at $10 per share (for a
total of $1,000) and a second purchase of 100 shares was subsequently made at
$11 per share (for a total of $1,100), 95.24 shares would convert approximately
seven years from the initial purchase (i.e., $1,000 divided by $2,100 (47.62%),
multiplied by 200 shares equals 95.24 shares). The Manager reserves the right to
modify the formula for determining the number of Eligible Shares in the future
as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A than Class B
shares, the per share NAV 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.
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 would 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.
Class B shares acquired through the reinvestment of dividends or distributions
will be converted to Class A shares according to the procedures utilized by the
broker-dealer through which the Class B shares were purchased, to the extent the
shares are carried on the books of the broker-dealer and the broker-dealer
provides subaccounting services to the Fund. Otherwise, the procedures utilized
by PMFS, or its affiliates, will be used. The use of different procedures may
result in a timing differential in the conversion of Class B shares acquired
through the reinvestment of dividends and distributions.
The conversion feature may be subject to the continuing availability of opinions
of counsel or rulings of the Internal Revenue Service (1) 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 (2)
that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
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. Certificates are issued only for full shares and may be
redeposited in the Shareholder Investment Account at any time. There is no
charge to the investor for the issuance of a certificate. The Fund makes
available to its shareholders the following privileges and plans.
B-35
AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. For the convenience of
investors, all dividends and distributions are automatically reinvested in full
and fractional shares of the Fund at net asset value per share. 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
dividends or distributions in cash may subsequently reinvest any such dividend
or distribution at NAV by returning the check to the Transfer Agent within 30
days after the payment date. The reinvestment will be made at the NAV per share
next determined after receipt of the check by the Transfer Agent. Shares
purchased with reinvested dividends and/or distributions will not be subject to
any CDSC upon redemption.
EXCHANGE PRIVILEGE. The Fund makes available to its shareholders the privilege
of exchanging their shares of the Fund for shares of certain other Prudential
mutual funds, including one or more specified money market funds, subject in
each case to the minimum investment requirements of such funds. Shares of such
other Prudential mutual funds may also be exchanged for shares of the Fund. All
exchanges are made on the basis of the relative NAV 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.
In order to exchange shares by telephone, you must authorize telephone exchanges
on your initial application form or by written notice to the Transfer Agent and
hold shares in non-certificate form. Thereafter, you may call the Fund at
(800)225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 a.m. and 8:00 p.m., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. Neither
the Fund nor its agents will be liable for any loss, liability or cost which
results from acting upon instructions reasonably believed to be genuine under
the foregoing procedures. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order.
If you hold shares through PSI, you must exchange your shares by contacting your
PSI financial adviser.
If you hold certificates, the certificates must be returned in order for the
shares to be exchanged. See "Sale of Shares" above.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 8157, Philadelphia, PA
19101.
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 PMFS, at the address noted above.
CLASS A. Shareholders of the Fund may exchange their Class A shares for Class A
shares of Prudential Short-Term Corporate Bond Fund 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
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A shares)
B-36
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential mutual funds and shares of Special Money Market Fund, Inc., a money
market fund. No CDSC will be payable upon such exchange, but a CDSC may be
payable upon the redemption of Class B and Class C shares acquired as a result
of the exchange. The applicable sales charge will be that imposed by the fund in
which shares were initially purchased and the purchase date will be deemed to be
the date of the initial purchase, rather than the date of the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of an
eligible money market fund without imposition of any CDSC at the time of
exchange. Upon subsequent redemption from such money market fund or after
re-exchange into the Fund, such shares will be subject to the CDSC calculated
without regard to the time such shares were held in the money market fund. In
order to minimize the period of time in which shares are subject to a CDSC,
shares exchanged out of the money market fund will be exchanged on the basis of
their remaining holding periods, with the longest remaining holding periods
being exchanged first. In measuring the time period shares are held in a money
market fund and "tolled" for purposes of calculating the CDSC holding period,
exchanges are deemed to have been made on the last day of the month. Thus, if
shares are exchanged into the Fund from a money market fund during the month
(and are held in the Fund at the end of the month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class B
or Class C exchange privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of the Fund, respectively, without subjecting such shares to any CDSC. Shares of
any fund participating in the Class B or Class C exchange privilege that were
acquired through reinvestment of dividends or distributions may be exchanged for
Class B or Class C shares of other funds, respectively, without being subject to
any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other Prudential
mutual funds.
SPECIAL EXCHANGE PRIVILEGE. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Purchase,
Redemption and Pricing of Fund Shares--Reduction and Waiver of Initial Sales
Charges--Class A Shares" above) and for shareholders who qualify to purchase
Class Z shares (see "Purchase, Redemption and Pricing of Fund Shares--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 the account of a
shareholder who qualifies to purchase Class A shares at NAV will be
automatically exchanged for Class A shares 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 PSI,
Prusec or another broker that they are eligible for this special exchange
privilege. Effective June 16, 2003, the special exchange privilege that allows
eligible Class B or Class C shareholders to exchange their shares for Class A
shares will be discontinued.
Participants in any fee-based program for which the Fund is an available option
will have their Class A shares, if any, exchanged for Class Z shares when they
elect to have those assets become a part of the fee-based program. Upon leaving
the program (whether voluntarily or not), such Class Z shares (and, to the
extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value. Similarly, participants in PSI's 401(k) Plan for which the Fund's Class Z
shares are an available option and who wish to transfer their Class Z shares out
of the PSI's 401(k) Plan following separation from service (that is, voluntary
or involuntary termination of employment or retirement) will have their Class Z
shares exchanged for Class A shares at NAV.
Additional details about the exchange privilege and prospectuses for each of the
Prudential mutual funds are available from the Fund's Transfer Agent, the
Distributor or your broker. The special exchange privilege may be modified,
terminated or suspended on 60 days' notice, and any fund, including the Fund, or
the Distributor, has the right to reject any exchange application relating to
such fund's shares.
DOLLAR COST AVERAGING
B-37
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 $22,500 at a private college and around $10,600 at a public university.
Assuming these costs increase at a rate of 7% a year, the cost of one year at a
private college could reach $44,300 and over $21,000 at a public university.(1)
(1) Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges.
Average costs for private institutions include tuition, fees, room and board for
the 1998-1999 academic year.
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
PERIOD OF MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
------------------------------ --------- --------- --------- --------
25 Years $ 105 $ 158 $ 210 $ 263
20 Years 170 255 340 424
15 Years 289 433 578 722
10 Years 547 820 1,093 1,366
5 Years 1,361 2,041 2,721 3,402
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares may be worth more or less than their original cost when
redeemed.
AUTOMATIC INVESTMENT PLAN (AIP). Under AIP, an investor may arrange to have a
fixed amount automatically invested in shares of the Fund by authorizing his or
her bank account or Prudential Securities Account (including a COMMAND Account)
to be debited to invest specified dollar amounts in shares of the Fund. The
investor's bank must be a member of the Automatic Clearing House System.
Further information about this program and an application form can be obtained
from the Transfer Agent, the Distributor or your broker.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders through PSI or the Transfer Agent. Such plan provides for monthly,
quarterly, semi-annual or annual redemptions in any amount, except as provided
below, up to the value of the shares in the shareholder's account. Systematic
withdrawals of Class B or Class C shares may be subject to a CDSC. The
systematic withdrawal plan is not available to participants in certain
retirement plans. Please contact PMFS at (800) 225-1852 for more details.
In the case of shares held through the Transfer Agent, (1) a $10,000 minimum
account value applies, (2) systematic withdrawals may not be for less than $100
and (3) the shareholder must elect to have all dividends and/or distributions
automatically reinvested. See "Automatic Reinvestment of Dividends and
Distributions" above.
The Transfer Agent, the Distributor or the applicable dealer act as an agent for
the shareholder in redeeming sufficient full and fractional shares to provide
the amount of the systematic withdrawals. 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.
Systematic withdrawals should not be considered as dividends, yield or income.
If systematic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each systematic withdrawal constitutes a redemption of shares, and
any gain or loss realized must be recognized for federal income tax purposes. In
addition, systematic withdrawals made concurrently with purchases of additional
shares are inadvisable because of the sales charges applicable to (1) the
purchase of Class A shares and (2) the redemption of Class B and Class C shares.
Each shareholder should consult his or her own tax adviser with regard to the
tax consequences of the plan, particularly if used in connection with a
retirement plan.
B-38
TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans, including
a 401(k) plan, self-directed individual retirement accounts and "tax-deferred
accounts" under Section 403(b)(7) of the Internal Revenue Code are available
through the Distributor. These plans are for use by both self-employed
individuals and corporate employers. These plans permit either self-direction of
accounts by participants, or a pooled account arrangement. Information regarding
the establishment of these plans, and the administration, custodial fees and
other details are available from PSI or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult with
their own legal counsel and/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 38.6% federal income tax bracket
and shows how much more retirement income can accumulate within an IRA as
opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING(1)
CONTRIBUTIONS MADE OVER: PERSONAL SAVINGS IRA
------------------------ ---------------- ---
10 years $ 26,283 $ 31,291
15 years 44,978 58,649
20 years 68,739 98,846
25 years 98,936 157,909
30 years 137,316 244,692
(1) The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
a traditional IRA account will be subject to tax when withdrawn from the
account. Distributions from a Roth IRA which meet the conditions required under
the Internal Revenue Code will not be subject to tax upon withdrawal from the
account.
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with other
Prudential mutual funds. Under such a program, a group of portfolios will be
selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, e.g., to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event that such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Fund may waive or reduce
its minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as a part of
the program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, investors should consult their Prudential
Securities Financial Adviser or Prudential/Pruco Securities Representative
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
The Fund's net asset value per share or NAV is determined by subtracting its
liabilities from the value of its assets and dividing the remainder by the
number of outstanding shares. NAV is calculated separately for each class. The
Directors have fixed the specific time of day for the computation of net asset
value to be as of 4:00 p.m. New York time. Under the 1940 Act, the Directors are
responsible for determining in good faith the fair value of securities of the
Fund. In accordance with procedures adopted by the Directors, investments listed
on a securities exchange and Nasdaq National Market System securities (other
than options on stock and stock indexes) are valued at the last sale price of
such exchange system on the day of valuation or, if there was no sale on such
day, the mean between the last bid and asked prices on such day, or at the bid
price on such day in the absence of an asked price. 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 by the Manager in consultation with the Subadviser to
be over-the-counter, are valued on the basis of valuations provided by an
independent pricing agent or principal market maker which uses information with
respect to transactions in bonds, quotations from bond dealers, agency ratings,
market transactions in comparable
B-39
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 by
the Manager in consultation with the Subadviser to be over-the-counter, are
valued at the mean between the last reported bid and asked prices (or the last
bid price in the absence of an asked price) provided by more than one principal
market makers. Options on stock and stock indices traded on an exchange are
valued at the mean between the most recently quoted bid and asked prices on the
respective exchange and futures contracts and options thereon are valued at
their last sale prices as of the close of trading on the applicable commodities
exchange or board of trade or at the last bid price in the absence of an asked
price. Quotations of foreign securities in a foreign currency are converted to
U.S. dollar equivalents at the current rate obtained from a recognized bank or
dealer, and forward currency exchange contracts are valued at the current cost
of covering or offsetting such contracts. Should an extraordinary event, which
is likely to affect the value of the security, occur after the close of an
exchange on which a portfolio security is traded, such security will be valued
at fair value, considering factors determined in good faith by the investment
adviser under procedures established by and under the general supervision of the
Fund's Board of Directors.
Securities or other assets for which reliable market quotations are not readily
available or for which the pricing agent or principal market maker does not
provide a valuation or methodology or provides a valuation or methodology that,
in the judgment of the Manager or Subadviser (or Valuation Committee or Board of
Directors) does not represent fair value, are valued by the Valuation Committee
or Board of Directors in consultation with the Manager or Subadviser, including
its portfolio manager, traders, and its research and credit analysts, on the
basis of the following factors: cost of the security, transactions in comparable
securities, relationships among various securities and such other factors, as
may be determined by the Manager, Subadviser, Board of Directors or Valuation
Committee to materially affect the value of the security. Fair Value Securities
may include, but are not limited to, the following: certain private placements
and restricted securities that do not have an active trading market; securities
whose trading has been suspended or for which market quotes are no longer
available; debt securities that have recently gone into default and for which
there is no current market; securities whose prices are stale; securities
denominated in currencies that are restricted, untraded or for which exchange
rates are disrupted; securities affected by significant events; and securities
that the investment adviser or Manager believes were priced incorrectly. A
"significant event" (which includes, but is not limited to, an extraordinary
political or market event) is an event that the investment adviser or Manager
believes with a reasonably high degree of certainty has caused the closing
market prices of one or more of the Fund's portfolio securities to no longer
reflect their value at the time of the Fund's NAV calculation. On a day that the
Manager determines that one or more of the Fund's portfolio securities
constitute Fair Value Securities, the Manager may determine the fair value of
these securities without the supervision of the Valuation Committee if the fair
valuation of all such securities results in a change of less than $0.01 to the
Fund's NAV and the Manager presents these valuations to the Board for its
ratification. 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 Directors not to
represent fair value. Short-term securities with remaining maturities of more
than 60 days, for which market quotations are readily available, are valued at
their current market quotations as supplied by an independent pricing agent or
principal market maker.
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 NAVs 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 NAVs of Class A, Class B and Class C shares as a
result of the fact that the Class Z shares are not subject to any distribution
or service fee. It is expected, however, that the NAVs of the four classes 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, DIVIDENDS AND DISTRIBUTIONS
The Fund has elected to qualify and intends to remain qualified as a regulated
investment company under the Internal Revenue Code for each taxable year.
Accordingly, the Fund must, among other things, (1) derive at least 90% of its
gross income from dividends, interest, proceeds from loans of securities and
gains from the sale or other disposition of securities 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; and (2) diversify its holdings so that, at the end of
each quarter of the taxable year, (a) at least 50% of the value of its assets is
represented by cash and cash items, U.S. Government securities, securities of
other regulated investment companies and other securities, with such other
securities limited in respect of any one issuer to an amount not greater than 5%
of such Funds' assets, and not greater than 10% of the outstanding voting
securities of such issuer, and (b) 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 or the securities of other regulated investment companies) and (3)
distribute to its shareholders at least 90% of its net investment income and net
short-term capital gains (that is the excess of net short-term capital gains
over net long-term capital losses) each year. These requirements may limit a
Funds' ability to invest in other types of assets.
As a regulated investment company, the Fund will not be subject to federal
income tax on its net investment income and capital gains, if any, that it
distributes to its shareholders, provided (among other things) that at least 90%
of the Funds' net investment income
B-40
(including net short-term capital gains) other than long-term capital gains
earned in the taxable year is distributed. The Fund intends to distribute
annually to its shareholders all of its taxable net investment income, which
includes dividends, interest and any net short-term capital gains in excess of
net long-term capital losses. The Board of Directors of the Fund will determine
once a year whether to distribute any net long-term capital gains in excess of
any net short-term capital losses. In determining the amount of capital gains to
be distributed, any capital loss carryovers from prior years will be offset
against capital gains. A 4% nondeductible excise tax will be imposed on the Fund
to the extent such Fund does not meet certain distribution requirements by the
end of each calendar year.
Gains or losses attributable to foreign currency contracts, or to fluctuations
in exchange rates between the time the Fund accrues income, expenses or other
liabilities denominated in a foreign currency and the time the Fund actually
collects such income or pays such liabilities, are treated as ordinary income or
ordinary loss for federal income tax purposes. Similarly, gains or losses on the
disposition of debt securities held by the Fund, if any, denominated in a
foreign currency, to the extent attributable to fluctuations in exchange rates
between the acquisition and its disposition dates are also treated as ordinary
income or loss.
Gains or losses on sales or securities by the Fund will generally be treated as
long-term capital gains or losses if the securities have been held by it for
more than one year. Long-term capital gains on sales of securities by the Fund
are taxed at different rates depending on: (1) the shareholder's income tax
bracket; (2) whether the securities were held by the Fund for more than five
years and (3) the date on which the securities were acquired by the Fund. 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. If an option written by the Fund on securities lapses or is
terminated through a closing transaction, such as a purchase by the Fund of the
option from its holder, the Fund will generally realize short-term capital gain
or loss, depending on whether the premium income is greater or less than the
amount paid by the Fund in the closing transaction. If securities are sold by
the Fund pursuant to the exercise of a call option written by it, the Fund will
include the premium received in the sale proceeds of the securities delivered in
determining the amount of gain or loss on the sale. Certain of the Fund's
transactions may be subject to wash sale, straddle, constructive sale or short
sale provisions of the Internal Revenue Code which may, among other things,
require the Fund to defer losses, recognize gain or cause gain to be treated as
short-term capital gain and taxed at ordinary income rates rather than long-term
capital gain rates. In addition, debt securities acquired by the Fund may be
subject to original issue discount rules which may, among other things, cause
the Fund to accrue income in advance of the receipt of cash with respect to
interest and, market discount rules which may, among other things, cause gains
to be treated as ordinary income.
Special rules apply to most options on stock indexes, certain futures contracts
and options thereon, and foreign currency forward contracts in which the Fund
may invest. See "Description of the Fund, Its Investments and Risks--Risk
Management and Return Enhancement Strategies." These investments generally will
constitute Section 1256 contracts and will be required to be "marked to market"
for federal income tax purposes at the end of the Funds' taxable year, i.e.,
treated as having been sold at their fair market value on the last day of the
Fund's taxable year. Except with respect to foreign currency forward contracts,
sixty percent of any capital 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 generally be treated as short-term capital gain or loss.
Forward foreign currency contracts, options and futures contracts entered into
by the Fund may create "straddles" for federal income tax purposes, which may
result in the deferral of losses in positions held by the Fund to the extent of
any unrecognized gain on offsetting positions held by the Fund.
A "passive foreign investment company" (PFIC) is a foreign corporation that, in
general, meets either of the following tests: (1) at least 75% of its gross
income is passive or (2) an average of at least 50% of its assets produce, or
are held for the production of, passive income. If the Fund acquires and holds
stock in a PFIC beyond the end of the year of its acquisition, the Fund will be
subject to federal income tax on a portion of any "excess distribution" received
on the stock or of any gain from disposition of the stock (collectively, PFIC
income), plus interest thereon, even if the Fund distributes the PFIC income as
a taxable dividend to its shareholders. If the Fund elects to treat any PFIC in
which it invests as a "qualified electing fund" then 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 funds' annual ordinary
earnings and net capital gain, even if they are not distributed to such Fund;
those amounts would be subject to the distribution requirements applicable to
the Fund described above. Because the election to treat a PFIC as a qualified
electing fund cannot be made without the provision of certain information by the
PFIC, the Fund may not be able to make such an election. If the Fund does not or
cannot elect to treat such a PFIC as a "qualified electing fund," the Fund can
make a "mark-to-market" election, I.E., treat the shares of the PFIC as sold on
the last day of such Funds' taxable year, and thus avoid the special tax and
interest charge. The gains the Fund recognizes from the mark-to-market election
would be included as ordinary income in the net investment income the Fund must
distribute to shareholders, notwithstanding that the Fund would receive no cash
in respect of such gains. Any loss from the mark-to-market election may be
recognized by the Fund to the extent of its previously reported mark-to-market
gains.
Dividends of net investment income will be taxable to a U.S. shareholder as
ordinary income regardless of whether such shareholder receives such dividends
in additional shares or in cash. Dividends received from the Fund will be
eligible for the dividends-received deduction for corporate shareholders only to
the extent that the Fund's income is derived from certain dividends received
from
B-41
domestic corporations. Since the Fund is not likely to have a substantial
portion of its assets invested in stock of domestic corporations, the amount of
the Fund's dividends eligible for the corporate dividends-received deduction
will be minimal. The amount of dividends qualifying for the dividends-received
deduction will be designated as such in a written notice to shareholders mailed
not later than 60 days after the end of the Fund's taxable year. Distributions
of net long-term capital gains, if any, will be taxable as long-term capital
gains regardless of whether the shareholder receives such distribution in
additional shares in cash and regardless of how long the shareholder has held
the Fund's shares, and will not be eligible for the dividends-received deduction
for corporations. Shareholders electing to receive dividends and distributions
in the form of additional shares will have a cost basis for future federal
income tax purposes in each share so received equal to the net asset value of a
share of the Fund on the reinvestment date.
Any dividends or capital gains distributions received by a shareholder will have
the effect of reducing the net asset value of the Funds' shares by the exact
amount of the dividend or capital gains distribution. If the net asset value of
the shares should be reduced below a shareholder's cost as a result of a
dividend or capital gains distribution, such dividend or capital gains
distribution, although constituting a return of capital, will be taxable as
described above. Prior to purchasing shares of the Fund, therefore, the investor
should carefully consider the impact of dividends or capital gains distributions
which are expected to be or have been announced.
Distributions of net investment income made to a nonresident alien individual, a
nonresident alien fiduciary of a foreign estate or trust, foreign corporation or
foreign partnership (a foreign shareholder) will be subject to U.S. withholding
tax at a rate of 30% (or lower treaty rate), unless the dividends are
effectively connected with the U.S. trade or business of the shareholder and the
shareholder complies with certain filing requirements. Gains realized upon the
sale or redemption of shares of the Fund by a foreign shareholder and
distributions of net long-term capital gains to a foreign shareholder will
generally not be subject to U.S. income tax unless the gain is effectively
connected with a trade or business carried on by the shareholder within the
United States. If distributions are effectively connected with a U.S. trade or
business carried on by a foreign shareholder, distributions of net investment
income and net long-term capital gains will be generally subject to U.S. income
tax at the graduated rates applicable to U.S. citizens or domestic corporations.
The tax consequences to a foreign shareholder entitled to claim the benefits of
an applicable tax treaty may be different from those described herein. Foreign
shareholders are advised to consult their own tax advisers with respect to the
particular tax consequences resulting from their investment in the Fund.
Income received by the Fund from sources within foreign countries may be subject
to withholding and other taxes imposed by such countries. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes. It is impossible to determine the effective rate of foreign tax in
advance since the amount of the Funds' assets to be invested in various
countries is not known.
If the Fund is liable for foreign taxes, the Fund expects to meet the
requirements of the Internal Revenue Code for "passing-through" to its
shareholders foreign income taxes paid, but there can be no assurance that the
Fund will be able to do so. Under the Internal Revenue Code, if more than 50% of
the value of the Funds' total assets at the close of its taxable year consists
of stocks or securities of foreign corporations, the Fund will be eligible and
may file an election with the Internal Revenue Service to "pass-through" to the
Funds' shareholders the amount of foreign income taxes paid by the Fund.
Pursuant to this election shareholders will be required to: (1) include in gross
income (in addition to taxable dividends actually received) their pro rata share
of the foreign income taxes paid by the Fund; (2) treat their pro rata share of
foreign income taxes as paid by them; and (3) either deduct their pro rata share
of foreign income taxes in computing their taxable income or, subject to certain
limitations, use it as a foreign tax credit against U.S. income taxes. No
deduction for foreign taxes may be claimed by a shareholder who does not itemize
deductions. A shareholder that is a foreign shareholder may not be able to claim
a credit or deduction against such tax for the foreign taxes treated as having
been paid by such shareholder. Accordingly, a foreign shareholder may recognize
additional taxable income as a result of the Fund's electing to pass through the
foreign taxes to shareholders. The amount of foreign taxes for which a
shareholder may claim a credit in any year will generally be subject to various
limitations including a separate limitation for "passive income," which
includes, among other things, dividends, interest and certain foreign currency
gains.
Each shareholder will be notified within 60 days after the close of the Funds'
taxable year whether the foreign income taxes paid by the Fund will
"pass-through" for that year and, if so, such notification will designate (1)
the shareholder's portion of the foreign income taxes paid to each such country
and (2) the portion of the dividend which represents income derived from sources
within each such country.
The per share dividends on Class B and Class C shares will be lower than the per
share dividends on Class A or Class Z shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares and lower
on Class A shares in relation to Class Z shares. The per share distributions of
net capital gains, if any, will be paid in the same amount for Class A, Class B,
Class C and Class Z shares.
Distributions may be subject to additional state and local taxes. Shareholders
are advised to consult their own tax advisers with respect to the federal, state
and local tax consequences resulting from their investment in the Fund.
B-42
PERFORMANCE INFORMATION
AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares.
Average annual total return is computed according to the following formula:
P(1+T) POWER OF n = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical $1000
payment made at the beginning of the 1, 5 or 10 year periods.
Average annual total return takes into account any applicable initial or
deferred sales charges but does not take into account any federal or state
income taxes that may be payable upon redemption.
The average annual total return of the Class A shares for the one year, five
year and since inception (July 24, 1992) periods ended October 31, 2002 was
-8.34%, -9.91% and -2.54%, respectively, and for the Class B shares, was -8.83%,
-9.95% and -2.83%, respectively, for the same periods. The average annual total
return for Class C shares for the one year, five year and since inception
(August 1, 1994) periods ended October 31, 2002 was -6.07%, -9.88% and -9.54%,
respectively. The average annual total return for Class Z shares for the one
year, five year and since inception (March 1, 1996) periods ended October 31,
2002 was -3.50%, -8.89% and -10.55%, respectively.
AVERAGE ANNUAL TOTAL RETURN (AFTER TAXES ON DISTRIBUTIONS AND AFTER TAXES ON
DISTRIBUTIONS AND REDEMPTION). Average annual total return (after taxes on
distributions and after taxes on distribution and redemption) take into account
any applicable initial or contingent deferred sales charges and take into
account federal income taxes that may be payable upon receiving distributions
and following redemption. Federal income taxes are calculated using the highest
marginal income tax rates in effect on the reinvestment date.
Average annual total return (after taxes on distributions) is computed
according to the following formula:
P(1+T) POWER OF n = ATV BASE OF D
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return (after taxes on distributions, or
after taxes on distributions and redemption, as applicable).
n = number of years.
ATV BASE OF D = ending 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), after taxes on
fund distributions but not after taxes on redemption.
Average annual total return (after taxes on distributions and
redemption) is computed according to the following formula:
P(1+T) POWER OF n = ATV BASE OF DR
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return (after taxes on distributions, or
after taxes on distributions and redemption, as applicable).
N = number of years.
ATV BASE OF DR = ending 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), after taxes on
fund distributions and redemption.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total return.
Aggregate total return is determined separately for Class A, Class B, Class C
and Class Z shares.
B-43
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1000.
ERV = ending redeemable value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical $1000
payment made at the beginning of the 1, 5 or 10 year periods.
Aggregate total return does not take into account any federal or state income
taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The aggregate total return for Class A shares for the one year, five year and
since inception (July 24, 1992) periods ended October 31, 2002 was -3.51%,
-37.53% and -19.17%, respectively, and for Class B shares was -4.03%, -40.26%
and -25.52%, respectively, for the same periods. The aggregate total return for
Class C shares for the one year, five year and since inception (August 1, 1994)
periods ended October 31, 2002 was -4.16%, -39.97% and -55.84%, respectively.
The aggregate total return for Class Z shares for the one year, five year and
since inception (March 1, 1996) periods ended October 31, 2002 was -3.50%,
-37.22 and -52.45%, respectively.
From time to time, the performance of the Fund may be measured against various
indices. Set forth below is a chart which compares the performance of different
types of investments over the long-term with the rate of inflation.(1)
[CHART]
PERFORMANCE COMPARISON OF DIFFERENT TYPES OF INVESTMENTS OTHER THE LONG TERM
(12/31/1926-12/31/2001)
Common Stocks 10.7%
Long-Term Gov't. Bonds 5.3%
Inflation 3.1%
(1) Source: Ibbotson Associates' STOCKS, BONDS, BILLS AND INFLATION--2001
YEARBOOK (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). All rights reserved. Common stock returns are based on the
Standard & Poor's 500 Stock Index, a market-value 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-44
FINANCIAL STATEMENTS
The Fund's financial statements for the fiscal year ended October 31, 2002,
incorporated into this SAI by reference to the Fund's 2002 annual report to
shareholders (File No. 811-6391), have been so incorporated in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on
authority of said firm as experts in auditing and accounting. You may obtain a
copy of the Fund's annual report at no charge by request to the Fund by calling
(800) 225-1852, or by writing to the Fund at 100 Mulberry Street, Gateway Center
Three, Newark, NJ 07102.
B-45
APPENDIX I--DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
DEBT 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 that of 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 (that
is, 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.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through Baa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
its generic rating category.
SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to honor
senior financial obligations and contracts. 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-1 repayment
ability will often be evidenced by many of the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt and ample
protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured sources of
alternative liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This normally will
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liability is maintained.
MIG 1: This designation denotes best quality. There is strong protection by
established cash flows, superior liquidity support or demonstrated broad-based
access to the market for refinancing.
MIG 2: This designation denotes high quality. Margins of protection are ample
although not so large as in the proceeding group.
I-1
STANDARD & POOR'S RATINGS SERVICES
LONG-TERM ISSUE CREDIT RATINGS
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligator's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: An obligation rated AA differs from the highest-rated obligations only in
small degrees. The obligator's capacity to meet its financial commitment on the
obligation is extremely strong.
A: An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligator's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet the financial commitment on the
obligation.
PLUS (+) OR MINUS (-): The ratings from AA to BBB may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
A-1: The designation 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.
NOTES RATINGS
An S&P notes rating reflects the liquidity factors and market risks unique to
notes. Notes due in three years or less will likely receive a notes rating.
Notes maturing beyond three years will most likely receive a long-term debt
rating. The following criteria will be used in making that assessment.
- Amortization schedule--the longer the final maturity relative to other
maturities the more likely it will be treated as a note.
- Source of payment--the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
NOTE RATING SYMBOLS ARE AS FOLLOWS:
SP-1: Strong capacity to pay principal and interest. An issue determined to
posses a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2: Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
FITCH RATINGS
INTERNATIONAL LONG-TERM CREDIT RATINGS
AAA: Highest credit quality. AAA ratings denote the lowest expectation of credit
risk. They are assigned only in case of exceptionally strong capacity for timely
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of credit
risk. They indicate very strong capacity for timely payments of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
I-2
A: High credit quality. A ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
SHORT-TERM DEBT RATINGS
F1: Highest credit quality. Indicates the best capacity for timely payment of
financial commitments; may have an added "+" to denote any exceptionally strong
credit feature.
F2: Good credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
PLUS (+) OR MINUS (-): Plus and minus signs may be appended to a rating to
denote relative status within major rating categories. Such suffixes are not
added to the AAA long-term rating category or to short-term ratings other than
F-1.
I-3
APPENDIX II--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk and 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.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility which,
for a mutual fund, depicts how widely the returns varied over a certain period
of time. When a fund has a high standard deviation, its range of performance has
been very wide, implying greater volatility potential. Standard deviation is
only one of several measures of a fund's volatility.
II-1
APPENDIX III--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]
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
Source: Stocks, Bonds, Bills and Inflation 2001 Yearbook, Ibbotson Associates,
Chicago, Illinois (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. This chart is for illustrative purposes only
and is not indicative of the past, present, or future performance of any asset
class or any Prudential mutual fund.
Generally, stock returns are due to capital appreciation and the reinvestment of
distributions. Bond returns are attributable mainly to the reinvestment of
interest. Also, stock prices are usually more volatile than bond prices over the
long-term.
Small stock returns for 1926-1980 are those of stocks comprising the 5th
quintile of the NYSE. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P 500
Composite index, a market-weighted, unmanaged index of 500 stocks (currently) in
a variety of industries. It is often used as a broad measure of stock market
performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the U.S. 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.
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 1990
through 2001. 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.
III-1
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. The net effect of the deduction of the operating expenses of a
mutual fund on these historical total returns, including the compounded effect
over time, could be substantial.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
YEAR 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
TREASURY
BONDS(4) 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6% 10.0% (2.56)% 13.52% 7.23%
------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
MORTGAGE
SECURITIES(4) 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5% 7.0% 1.86% 11.16% 8.22%
------------------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE
CORPORATE BONDS(3) 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2% 8.6% (1.96)% 9.39% 10.40%
------------------------------------------------------------------------------------------------------------------------
U.S. HIGH YIELD
BONDS(4) (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8% 1.6% 2.39% (5.86)% 5.28%
------------------------------------------------------------------------------------------------------------------------
WORLD GOVERNMENT
BONDS(5) 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)% 5.3% (5.07)% (2.63)% (3.54)%
========================================================================================================================
DIFFERENCE BETWEEN
HIGHEST AND LOWEST 24.9% 30.9% 11.0% 10.3% 9.9% 5.5% 8.7% 17.1% 8.4% 7.46% 19.10% 13.94%
RETURNS PERCENT
------------------------------------------------------------------------------------------------------------------------
(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.
III-2
This chart illustrates the performance of major world stock markets for the
period from December 31, 1985 through December 31, 2001. It does not represent
the performance of any Prudential Mutual Fund.
[CHART]
AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS
(12/31/1985 - 12/31/2001) (IN U.S. DOLLARS)
Sweden 15.51%
Spain 15.26%
Hong Kong 14.96%
Netherland 14.03%
Belgium 13.78%
France 13.20%
USA 13.14%
U.K. 12.28%
Switzerland 12.21%
Europe 11.92%
Denmark 11.88%
Australia 9.54%
Germany 8.63%
Canada 8.45%
Italy 7.70%
Norway 6.82%
Austria 4.95%
Japan 3.84%
Source: Morgan Stanley Capital International (MSCI) based on data retrieved from
Lipper Analytical New Application (LANA) as of December 31, 2001. Used with
permission. Morgan Stanley country indices are unmanaged indices which include
those stocks making up the largest two-thirds of each country's total stock
market capitalization. Returns reflect the reinvestment of all distributions.
This chart is for illustrative purposes only and is not indicative of the past,
present or future performance of any specific investment. Investors cannot
invest directly in stock indices.
III-3
This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 Stock Index with and without reinvested
dividends.
[CHART]
Source: Stocks, Bonds, Bills, and Inflation 2001 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is used for illustrative
purposes only and is not intended to represent the past, present or future
performance of any Prudential mutual fund. Common stock total return is based on
the Standard & Poor's 500 Stock Index, a market-value-weighted index made up of
500 of the largest stocks in the U.S. based upon their stock market value.
Investors cannot invest directly in indices.
III-4
[CHART]
WORLD STOCK MARKET CAPITALIZATION BY REGION
WORLD TOTAL: 15.9 TRILLION
U.S. 45.4%
Europe 33.2%
Pacific Basin 18.4%
Canada 3.0%
Source: Morgan Stanley Capital International, December 31, 2001. 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.
III-5
This chart below shows the historical volatility of general interest rates as
measured by the long-term U.S. Treasury Bond.
[CHART]
LONG TERM U.S. TREASURY BOND YIELD IN PERCENT (1926-2001)
Source: Stocks, Bonds, Bills, and Inflation 2001 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 1926-2001. 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.
III-6
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) (1) Amended and Restated Articles of Incorporation, incorporated by
reference to Exhibit 1 to Post-Effective Amendment No. 5 to the Registration
Statement on Form N-1A (File No. 33-42391) filed via EDGAR on January 3,
1995.
(2) Articles Supplementary, incorporated by reference to Exhibit 1(b) to
Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A
(File No. 33-42391) filed via EDGAR on December 29, 1995.
(3) Articles Supplementary, as filed May 29, 2001. *
(b) By-Laws of the Registrant, as Revised and Restated November 18, 1999,
incorporated by reference to Exhibit (b) to Post-Effective Amendment No. 14
to the Registration Statement on Form N-1A (File No. 33-42391) filed via
EDGAR on December 22, 2000.
(c) (1) Specimen stock certificate (Class A Shares), incorporated by reference
to Exhibit 4(a) to Post-Effective Amendment No. 9 to the Registration
Statement on Form N-1A (File No. 33-42391) filed via EDGAR on December 31,
1997.
(2) Specimen stock certificate (Class B Shares), incorporated by reference
to Exhibit 4(b) to Post-Effective Amendment No. 9 to the Registration
Statement on Form N-1A (File No. 33-42391) filed via EDGAR on December 31,
1997.
(3) Specimen stock certificate (Class C Shares), incorporated by reference
to Exhibit 4(c) to Post-Effective Amendment No. 9 to the Registration
Statement on Form N-1A (File No. 33-42391) filed via EDGAR on December 31,
1997.
(4) Specimen stock certificate (Class Z Shares), incorporated by reference
to Exhibit 4(d) to Post-Effective Amendment No. 9 to the Registration
Statement on Form N-1A (File No. 33-42391) filed via EDGAR on December 31,
1997.
(5) Instruments defining rights of shareholders, incorporated by reference
to Exhibit 4(c) to Post-Effective Amendment No. 2 to the Registration
Statement on Form N-1A (File No. 33-42391) filed via EDGAR on December 30,
1993 (File No. 33-42391).
(d) (1) Management Agreement between the Registrant and Prudential Mutual Fund
Management, Inc., incorporated by reference to Exhibit 5(a) to
Post-Effective Amendment No. 9 to the Registration Statement on Form N-1A
(File No. 33-42391) filed via EDGAR on December 31, 1997.
(2) Subadvisory Agreement between Prudential Mutual Fund Management, Inc.
and The Prudential Investment Corporation, incorporated by reference to
Exhibit 5(b) to Post-Effective Amendment No. 9 to the Registration Statement
on Form N-1A (File No. 33-42391) filed via EDGAR on December 31, 1997.
(3) Amendment dated January 1, 2000 to Subadvisory Agreement between
Prudential Investments Fund Management LLC and the Prudential Investment
Corporation, incorporated by reference to Exhibit (d)(3) to Post-Effective
Amendment No. 14 to the Registration Statement on Form N-1A (File No.
33-42391) filed via EDGAR on December 22, 2000.
(4) Interim Subadvisory Agreement dated October 2, 2000 between Prudential
Investments Fund Management LLC and Jennison Associates LLC, incorporated by
reference to Exhibit (d)(4) to Post-Effective Amendment No. 16 to the
Registration Statement on Form N-1A (File No. 33-42391) filed via EDGAR on
February 26, 2001.
(5) Subadvisory Agreement between Prudential Investments Fund Management LLC
and Jardine Fleming International Management Inc., incorporated by reference
to Exhibit (d)(5) to Post-Effective Amendment No. 17 to the Registration
Statement on Form N-1A (File No. 33-42391) filed via EDGAR on December 28,
2001.
(e) (1) Distribution Agreement between the Registrant and Prudential Securities
Incorporated, incorporated by reference to Exhibit 6 to Post-Effective
Amendment No. 8 to the Registration Statement on Form N-1A (File No.
33-42391) filed via EDGAR on December 27, 1996.
(2) Distribution Agreement between the Registrant and Prudential Investment
Management Services LLC, incorporated by reference to Exhibit (e)(2) to
Post-Effective Amendment No. 10 to the Registration Statement on Form N-1A
(File No. 33-42391) filed via EDGAR on November 24, 1998.
(3) Form of Dealer Agreement, incorporated by reference to Exhibit (e)(3) to
Post-Effective Amendment No. 10 to the Registration Statement on Form N-1A
(File No. 33-42391) filed via EDGAR on November 24, 1998.
(f) Not Applicable.
(g) (1) Custodian Contract between the Registrant and State Street Bank and
Trust Company, incorporated by reference to Exhibit 8(a) to Post-Effective
Amendment No. 9 to the Registration Statement on Form N-1A (File No.
33-42391) filed via EDGAR on December 31, 1997.
(2) Form of Amendment to Custodian Contract, incorporated by reference to
Exhibit 8(b) to Post-Effective Amendment No. 6 to the Registration Statement
on Form N-1A (File No. 33-42391) filed via EDGAR on November 2, 1995.
(3) Amendment dated February 22, 1999 to Custodian Contract, incorporated by
reference to Exhibit (g)(3) to Post-Effective Amendment No. 14 to the
Registration Statement on Form N-1A (File No. 33-42391) filed via EDGAR on
December 22, 2000.
(4) Amendment dated July 17, 2001 to Custodian Contract, incorporated by
reference to Exhibit (g)(4) to Post-Effective Amendment No. 17 to the
Registration Statement on Form N-1A (File No. 33-42391) filed via EDGAR on
December 28, 2001.
C-1
(5) Amendment dated January 17, 2002 to Custodian Contract. *
(h) (1) Transfer Agency and Service Agreement between Registrant and Prudential
Mutual Fund Services, Inc, incorporated by reference to Exhibit 9 to
Post-Effective Amendment No. 9 to the Registration Statement on Form N-1A
(File No. 33-42391) filed via EDGAR on December 31, 1997.
(2) Amendment dated August 24, 1999 to Transfer Agency and Service Agreement
between the Registrant and Prudential Mutual Fund Services LLC, incorporated
by reference to Exhibit (h)(2) to Post-Effective Amendment No. 14 to the
Registration Statement on Form N-1A (File No. 33-42391) filed via EDGAR on
December 22, 2000.
(i) Opinion of Shereff, Friedman, Hoffman & Goodman, incorporated by reference
to Exhibit 10 to Post-Effective Amendment No. 9 to the Registration
Statement on Form N-1A (File No. 33-42391) filed via EDGAR on December 31,
1997.
(j) Consent of Independent Accountants.*
(k) Not Applicable.
(l) Not Applicable.
(m) (1) Amended Distribution and Service Plan for Class A shares of the
Registrant, incorporated by reference to Exhibit (m)(6) to Post-Effective
Amendment No. 10 to the Registration Statement on Form N-1A (File No.
33-42391) filed via EDGAR on November 24, 1998.
(2) Amended Distribution and Service Plan for Class B shares of the
Registrant, incorporated by reference to Exhibit (m)(7) to Post-Effective
Amendment No. 10 to the Registration Statement on Form N-1A (File No.
33-42391) filed via EDGAR on November 24, 1998.
(3) Amended Distribution and Service Plan for Class C shares of the
Registrant, incorporated by reference to Exhibit (m)(8) to Post-Effective
Amendment No. 10 to the Registration Statement on Form N-1A (File No.
33-42391) filed via EDGAR on November 24, 1998.
(n) Not Applicable.
(o) Amended and Restated Plan pursuant to Rule 18f-3 dated September 4, 2002. *
(p) (1) Code of Ethics of the Registrant dated September 4, 2002. *
(2) Code of Ethics and Personal Securities Trading Policy of Prudential
Investment Management, Inc., Prudential Investments LLC and Prudential
Investment Management Services LLC, dated September 4, 2002. *
(3) Code of Ethics of JF International Management Inc. dated November 8,
2001, incorporated by reference to Exhibit (p)(3) to Post-Effective
Amendment No. 17 to the Registration Statement on Form N-1A (File No.
33-42391) filed via EDGAR on December 28, 2001.
(q) Powers of Attorney dated May 23, 2001, incorporated by reference to Exhibit
(q) to Post-Effective Amendment No. 17 to the Registration Statement on Form
N-1A (File No. 33-42391) filed via EDGAR on December 28, 2001.
* Filed herewith.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 25. INDEMNIFICATION
As permitted by Sections 17(h) and (i) of the Investment Company Act of 1940, as
amended (the 1940 Act), and pursuant to Article VI of the Fund's Amended By-Laws
(Exhibit (b) to the Registration Statement), the Registrant shall indemnify
present and former officers, directors, employees and agents of the Registrant
against judgments, fines, settlements and expenses and may advance expenses to
such parties to the fullest extent authorized, and in the manner permitted, by
applicable federal and state law. Section 2-418 of Maryland General Corporation
Law permits indemnification of directors unless it is established that (1) the
act or omission of the director was material to the matter and (a) was committed
in bad faith or (b) was the result of active and deliberate dishonesty; or (2)
the director actually received an improper personal benefit in money, property
or services; or (3) in the case of a criminal proceeding, the director has
reasonable cause to believe that the act or omission was unlawful. As permitted
by Section 17(i) of the 1940 Act, pursuant to Section 10 of the Distribution
Agreement (Exhibit (e)(1) to the Registration Statement), Prudential Investment
Management Services LLC (PIMS) or the Registrant may be indemnified against
liabilities which it may incur, except liabilities arising from bad faith, gross
negligence, willful misfeasance or reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended (Securities Act), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission (Commission) such indemnification is against public
policy as expressed in the 1940 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in
C-2
connection with the successful defense of any action, suit or proceeding) is
asserted against the Registrant by such director, officer or controlling person
in connection with the shares being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1940 Act and
will be governed by the final adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and directors under certain circumstances.
Section 9 of the Management Agreement (Exhibit (d)(i) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit (d)(ii) to the
Registration Statement) limit the liability of Prudential Investments LLC (PI)
and Prudential Investment Management, Inc. (PIM), respectively, to liabilities
arising from willful misfeasance, bad faith or gross negligence in the
performance of their respective duties or from reckless disregard by them of
their respective obligations and duties under the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner consistent
with Release No. 11330 of the Commission under the 1940 Act so long as the
interpretation of Section 17(h) and 17(i) of such Act remains in effect and is
consistently applied.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
(a) Prudential Investments LLC (PI)
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A of
this Post-Effective Amendment to the Registration Statement and "Investment
Advisory and Other Services--Manager and Investment Adviser" in the Statement of
Additional Information (SAI) constituting Part B of this Post-Effective
Amendment to the Registration Statement.
The business and other connections of the officers of PI are listed in Schedules
A and D of Form ADV of PI as currently on file with the Commission, the text of
which is hereby incorporated by reference (File No. 801-31104).
The business and other connections of PI's directors and principal executive
officers within the last two years are set forth below. Except as otherwise
indicated, the address of each person is 100 Mulberry Street, Gateway Center
Three, Newark, NJ 07102.
NAME AND ADDRESS POSITION WITH PI PRINCIPAL OCCUPATIONS
---------------- ---------------- ---------------------
Robert F. Gunia Executive Vice President and Chief Executive Vice President and Chief Administrative Officer,
Administrative Officer PI; Vice President, Prudential; President, Prudential
Investment Management Services LLC (PIMS)
William V. Healey Executive Vice President, Chief Legal Executive Vice President, Chief Legal Officer and Secretary,
Officer and Secretary PI; Vice President and Associate General Counsel, Prudential;
Senior Vice President, Chief Legal Officer and Secretary,
PIMS
David R. Odenath, Jr. President, Chief Executive Officer and President, Chief Executive Officer and Chief Operating
Chief Operating Officer Officer, PI; Senior Vice President, The Prudential Insurance
Company of America (Prudential)
Kevin B. Osborn Executive Vice President Executive Vice President, PI
Judy A. Rice Executive Vice President Executive Vice President, PI
Philip N. Russo Executive Vice President, Chief Financial Executive Vice President, Chief Financial Officer and
Officer and Treasurer Treasurer, PI; Director of Jennison Associates LLC
Lynn M. Waldvogel Executive Vice President Executive Vice President, PI
(b) JF International Management Inc. (JFIMI)
See "How the Fund is Managed--Investment Adviser" in the Prospectus constituting
Part A of this Post-Effective Amendment to the Registration Statement and
"Investment Advisory and Other Services--Manager and Investment Adviser" in the
SAI constituting Part B of this Post-Effective Amendment to the Registration
Statement.
C-3
The business and other connections of the directors and executive officers of
JFIMI are listed on its Form ADV as currently on file with the Commission (File
No. 801-41622).
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Prudential Investment Management Services LLC (PIMS)
PIMS is distributor for Cash Accumulation Trust, COMMAND Money Fund, COMMAND
Government Fund, COMMAND Tax-Free Fund, Nicholas-Applegate Fund, Inc.,
(Nicholas-Applegate Growth Equity Fund), Prudential California Municipal Fund,
Prudential Equity Fund, Inc., Prudential Europe Growth Fund, Inc., Prudential's
Gibraltar Fund, Inc., Prudential Global Total Return Fund, Inc., Prudential
Government Income Fund, Inc., Prudential Government Securities Trust, Prudential
High Yield Fund, Inc., Prudential Index Series Fund, Prudential Institutional
Liquidity Portfolio, Inc., Prudential MoneyMart Assets, Inc., Prudential
Municipal Bond Fund, Prudential Municipal Series Fund, Prudential National
Municipals Fund, Inc., Prudential Natural Resources Fund, Inc., Prudential
Pacific Growth Fund, Inc., Prudential Real Estate Securities Fund, Prudential
Sector Funds, Inc., Prudential Short-Term Corporate Bond Fund, Inc., Prudential
Small Company Fund, Inc., Prudential Tax-Free Money Fund, Inc., Prudential
Tax-Managed Funds, Prudential Tax-Managed Small-Cap Fund, Inc., Prudential Total
Return Bond Fund, Inc., Prudential 20/20 Focus Fund, Prudential U.S. Emerging
Growth Fund, Inc., Prudential Value Fund, Prudential World Fund, Inc., Special
Money Market Fund, Inc., Strategic Partners Asset Allocation Funds, Strategic
Partners Opportunity Funds, Strategic Partners Style Specific Funds, The
Prudential Investment Portfolios, Inc., and The Target Portfolio Trust.
(b) Information concerning the directors and officers of PIMS is set forth
below.
POSITIONS AND POSITIONS AND
NAME(1) OFFICES WITH UNDERWRITER OFFICES WITH REGISTRANT
------- ------------------------ -----------------------
C. Edward Chaplin Executive Vice President and Treasurer None
751 Broad Street
Newark, NJ 07102
Margaret Deverell Senior Vice President and Chief Financial Officer None
213 Washington Street
Newark, NJ 07102
John T. Doscher Senior Vice President and Chief Compliance Officer None
Robert F. Gunia President Vice President and Director
William V. Healey Senior Vice President, Secretary and Chief Legal Officer None
Stephen Pelletier Executive Vice President None
Scott G. Sleyster Executive Vice President None
71 Hanover Road
Florham Park, NJ 07932
John R. Strangfeld, Jr. Executive Vice President None
One Seaport Plaza
New York, NY 10292
(1) The address of each person named is Gateway Center Three, 100 Mulberry
Street, Newark, NJ 07102 unless otherwise noted.
(c) Registrant has no principal underwriter who is not an affiliated person of
the Registrant.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of
State Street Bank and Trust Company, One Heritage Drive, North Quincy, MA 02171,
JF International Management, Inc., 21st Floor, Charter House, 8 Connaught Road,
Central, Hong Kong, the Registrant, 100 Mulberry Street, Gateway Center Three,
Newark, NJ 07102 and Prudential Mutual Fund Services LLC, 194 Wood Avenue South,
Iselin, New Jersey 08830. Documents required by Rules 31a-1(b)(4), (5), (6),
(7), (9), (10) and (11) and 31a-1(d) and (f) will be kept at Gateway Center
Three, Newark, NJ 07102, and the remaining accounts, books and other documents
required by such other pertinent provisions of Section 31(a) and the Rules
promulgated thereunder will be kept by State Street Bank and Trust Company and
Prudential Mutual Fund Services LLC.
C-4
ITEM 29. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund is Managed--Manager"
and "How the Fund is Managed--Distributor" in the Prospectus and the captions
"Investment Advisory and Other Services--Manager and Investment Advises" and
"Investment Advisory and Other Services--Principal Underwriter, Distributor and
Rule 12b-1 Plans" in the SAI, constituting Parts A and B, respectively, of this
Post-Effective Amendment to the Registration Statement, Registrant is not a
party to any management-related service contract.
ITEM 30. UNDERTAKINGS
None
C-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) of the Securities Act and has
duly caused this Post-Effective Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Newark, and State of New Jersey, on the 30th day of December, 2002.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
*David R. Odenath
-----------------
DAVID R. ODENATH, PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
*Delayne Dedrick Gold Director
---------------------
DELAYNE DEDRICK GOLD
*Robert F. Gunia Director and Vice President
----------------
ROBERT F. GUNIA
*Robert E. La Blanc Director
-------------------
ROBERT E. LA BLANC
*David R. Odenath Director
-----------------
DAVID R. ODENATH
*Judy A. Rice Director and Vice President
-------------
JUDY A. RICE
*Robin B. Smith Director
---------------
ROBIN B. SMITH
*Stephen Stoneburn Director
------------------
STEPHEN STONEBURN
*Nancy H. Teeters Director
-----------------
NANCY H. TEETERS
*Grace C. Torres Treasurer and Principal Financial
---------------- and Accounting Officer
GRACE C. TORRES
*Clay T. Whitehead Director
------------------
CLAY T. WHITEHEAD
By: /s/ Jonathan D. Shain
-------------------------
JONATHAN D. SHAIN
ATTORNEY-IN-FACT December 30, 2002
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
(a)(3) Articles Supplementary filed May 29, 2001. *
(g)(5) Amendment dated January 17, 2002 to Custodian Contract. *
(j) Consent of Independent Accountants. *
(o) Amended and Restated Plan pursuant to Rule 18f-3 dated September 4, 2002. *
(p)(1) Code of Ethics of the Registrant dated September 4, 2002. *
(p)(2) Code of Ethics and Personal Securities Trading Policy of Prudential Investment Management, Inc.,
Prudential Investments LLC and Prudential Investment Management
Services LLC dated September 4, 2002. *
* Filed herewith.