PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC.
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PROSPECTUS DATED MARCH 16, 1998
(REVISED AS OF JUNE 1, 1998)
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Prudential High Yield Total Return Fund, Inc. (the Fund) is an open-end,
diversified, management investment company whose investment objective is total
return through high current income and capital appreciation. The Fund seeks to
achieve its objective by investing primarily in high yield fixed income
securities, equity securities that were attached to or included in a unit with
fixed income securities at the time of purchase, convertible securities and
preferred stocks. Under normal circumstances, the Fund intends to invest at
least 65% of its total assets in such securities. There can be no assurance that
the Fund's investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies." The Fund's address is Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, and its
telephone number is (800) 225-1852.
THE FUND INVESTS IN LOWER RATED AND UNRATED BONDS, COMMONLY REFERRED TO AS "JUNK
BONDS," INCLUDING DEFAULTED AND DISTRESSED SECURITIES. THESE SECURITIES ARE
SUBJECT TO A GREATER RISK OF LOSS OF PRINCIPAL AND NONPAYMENT OF INTEREST,
INCLUDING DEFAULT RISK, THAN HIGHER RATED BONDS. PURCHASERS SHOULD CAREFULLY
ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND. SEE "HOW THE FUND
INVESTS--INVESTMENT OBJECTIVE AND POLICIES--RISK FACTORS RELATING TO INVESTING
IN DEBT SECURITIES RATED BELOW INVESTMENT GRADE (JUNK BONDS)" AND "--RISK
FACTORS RELATING TO INVESTING IN DISTRESSED SECURITIES."
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission (the
Commission) in a Statement of Additional Information, dated March 16, 1998,
which information is incorporated herein by reference (is legally considered a
part of this Prospectus) and is available without charge upon request to the
Fund at the address or telephone number noted above. The Commission maintains a
Web site (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference and other information regarding
the Fund.
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Investors are advised to read the Prospectus and retain it for future reference.
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AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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FUND HIGHLIGHTS
The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
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WHAT IS PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC.?
Prudential High Yield Total Return Fund, Inc. is a mutual fund. A mutual
fund pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
diversified, management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is total return through high current income
and capital appreciation. It seeks to achieve this objective by investing
primarily in high yield fixed income securities, equity securities that were
attached to or included in a unit with fixed income securities at the time of
purchase, convertible securities and preferred stocks. See "How the Fund
Invests--Investment Objective and Policies" at page 6.
WHAT ARE THE FUND'S RISK FACTORS AND SPECIAL CHARACTERISTICS?
The Fund invests in low quality fixed income securities commonly referred
to as "junk bonds." Investments of this type are subject to greater risk of loss
of principal and nonpayment of interest, and may be in default of principal
and/or interest payments. See "How the Fund Invests--Investment Objective and
Policies--Risk Factors Relating to Investing in Debt Securities Rated Below
Investment Grade (Junk Bonds)" at page 11. The Fund may invest in securities
issued by foreign companies and foreign governments, including securities
denominated in U.S. dollars and foreign currencies, which involve risks not
typically associated with U.S. investments. See "How the Fund Invests--Risk
Factors and Special Considerations Relating to Investing in Foreign Securities"
at page 12. The Fund may invest in debt or equity securities of financially or
operationally troubled issuers (distressed securities). These securities may be
subject to greater credit or market risk or price volatility than other
securities in which the Fund may invest. See "How the Fund Invests--Investment
Objective and Policies--Risk Factors Relating to Investing in Distressed
Securities" at page 13. The Fund may also engage in various hedging and return
enhancement strategies involving derivatives, including the purchase and sale of
put and call options on securities, stock indices and foreign currencies, the
purchase and sale of foreign currency exchange contracts and transactions
involving futures contracts and related options. See "How the Fund
Invests--Risks of Hedging and Return Enhancement Strategies" at page 14. The
Fund may engage in short selling, which entails additional risks. See "How the
Fund Invests--Other Investments and Investment Policies--Short Sales" at pages
16. As with an investment in any mutual fund, an investment in this Fund can
decrease in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
manager of the Fund and is compensated for its services at an annual rate of .65
of 1% of the Fund's average daily net assets. As of February 28, 1998, PIFM
served as manager or administrator to 64 investment companies, including 42
mutual funds, with aggregate assets of approximately $63 billion. The Prudential
Investment Corporation, which does business under the
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name of Prudential Investments (PI, the investment adviser or the Subadviser)
furnishes investment advisory services in connection with the management of the
Fund under a Subadvisory Agreement with PIFM. See "How the Fund is
Managed--Manager" at page 17.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Investment Management Services LLC (the Distributor) acts as the
Distributor of the Fund's Class A, Class B, Class C and Class Z shares. The
Distributor is paid a distribution and service fee with respect to Class A
shares which is currently being charged at the annual rate of .15 of 1% of the
average daily net assets of the Class A shares and is paid a distribution and
service fee with respect to Class B and Class C shares which is currently being
charged at an annual rate of .75 of 1% of the average daily net assets of each
of the Class B and Class C shares. The Distributor incurs the expenses of
distributing the Class Z shares under a distribution agreement with the Fund,
none of which is reimbursed by or paid for by the Fund. See "How the Fund is
Managed--Distributor" at page 18.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares and
is $5,000 for Class C Shares. The minimum subsequent investment is $100 for
Class A, Class B and Class C shares. Class Z shares are not subject to any
minimum investment requirements. There is no minimum initial requirement for
certain retirement and employee savings plans or custodial accounts for the
benefit of minors. For purchases made through the Automatic Savings Accumulation
Plan, the minimum initial and subsequent investment is $50. See "Shareholder
Guide--How to Buy Shares of the Fund" at page 24 and "Shareholder
Guide--Shareholder Services" at page 34.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through the Distributor or brokers or
dealers that have entered into agreements to act as participating or introducing
brokers for the Distributor (Dealers) or directly from the Fund through its
transfer agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer
Agent). In each case, sales are made at the net asset value per share (NAV) next
determined after receipt of your purchase order by the Transfer Agent, a Dealer,
or the Distributor, plus a sales charge which may be imposed either (i) at the
time of purchase (Class A shares) or (ii) on a deferred basis (Class B or Class
C shares). Class Z shares are offered to a limited group of investors at NAV
without any sales charge. Dealers may charge their customers a separate fee for
handling purchase transactions. See "How the Fund Values its Shares" at page 20
and "Shareholder Guide--How to Buy Shares of the Fund" at page 24.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four classes of shares:
* Class A Shares: Sold with an initial sales charge of up to 4% of the offering
price.
* Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from 5%
to zero of the lower of the amount invested or the redemption
proceeds) which will be imposed on certain redemptions made
within six years of purchase. Although Class B shares are
subject to higher ongoing distribution-related expenses than
Class A shares, Class B shares will automatically convert to
Class A shares (which are subject to lower ongoing
distribution-related expenses) approximately seven years
after purchase.
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3
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* Class C Shares: Sold without an initial sales charge but, for one year after
purchase, are subject to a CDSC of 1% on redemptions. Like
Class B shares, Class C shares are subject to higher ongoing
distribution-related expenses than Class A shares but do not
convert to another class.
* Class Z Shares: Sold without either an initial sales charge or CDSC to a
limited group of investors. Class Z shares are not subject to
any ongoing service or distribution-related expenses. See
"Shareholder Guide--Alternative Purchase Plan" at page 25.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
your Dealer, the Distributor or the Transfer Agent receives your sell order. The
proceeds of redemptions of Class B and Class C shares may be subject to a CDSC.
Dealers may charge their customers a separate fee for handling sale
transactions. See "Shareholder Guide--How to Sell Your Shares" at page 29.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to declare daily and pay monthly dividends of net
investment income and make distributions of any net capital gains, if any, at
least annually. Dividends and distributions will be automatically reinvested in
additional shares of the Fund at NAV without a sales charge unless you request
that they be paid to you in cash. See "Taxes, Dividends and Distributions" at
page 21.
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FUND EXPENSES
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) ................. 4% None None None
Maximum Sales Load Imposed on Reinvested
Dividends ........................................... None None None None
Maximum Deferred Sales Load (as a percentage
of original purchase price or redemption
proceeds, whichever is lower) ....................... None 5% during the first 1% on None
year, decreasing by 1% redemp-
annually to 1% in the tions made
fifth and sixth years within one
and 0% in the year of
seventh year* purchase
Redemption Fees ...................................... None None None None
Exchange Fees ........................................ None None None None
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES**
(as a percentage of average net assets)
Management Fees (After Waiver) ....................... .35% .35% .35% .35%
12b-1 Fees (After Reduction)++ ....................... .15% .75% .75% None
Other Expenses ....................................... .40% .40% .40% .40%
--- --- --- ---
Total Fund Operating Expenses (After Waiver
and After Reduction) ................................ .90% 1.50% 1.50% .75%
=== ==== ==== ===
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS
------ -------
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
<S> <C> <C>
Class A ............................................................ $49 $68
Class B ............................................................ $65 $77
Class C ............................................................ $25 $47
Class Z ............................................................ $ 8 $24
<CAPTION>
You would pay the following expenses on the same investment, assuming no
redemption:
<S> <C> <C>
Class A ............................................................ $49 $68
Class B ............................................................ $15 $47
Class C ............................................................ $15 $47
Class Z ............................................................ $ 8 $24
</TABLE>
The example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
The purpose of this table is to assist an investor in understanding the various
types of costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "How the Fund is Managed." The example is based on, and "Other
Expenses" include, estimated operating expenses of the Fund for the fiscal
period ending March 31, 1999, such as Directors' and professional fees,
registration fees, reports to shareholders and transfer agency and custodian
(domestic and foreign) fees (but excluding foreign withholding taxes).
- ----------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
** Based on estimated expenses for the fiscal period ending March 31, 1999
taking into account the management fee waiver. The Manager has agreed to
waive .30 of 1% of the Management Fees for the fiscal period ending March
31, 1999. Without such waiver the Management Fees would be .65% for Class
A, Class B, Class C and Class Z shares and Total Fund Operating Expenses
would be 1.20% of the average net assets of the Fund's Class A shares,
1.80% of the average net assets of the Fund's Class B and Class C shares
and 1.05% of the average net assets of the Fund's Class Z shares. See "How
the Fund is Managed--Manager--Fee Waivers and Subsidy."
+ Dealers may independently charge additional fees for shareholder
transactions or advisory services. Pursuant to rules of the National
Association of Securities Dealers, Inc., the aggregate initial sales
charges, deferred sales charges and asset-based sales charges (Rule 12b-1
fees) on shares of the Fund may not exceed 6.25% of total gross sales,
subject to certain exclusions. This 6.25% limitation is imposed on each
class of the Fund rather than on a per shareholder basis. Therefore,
long-term shareholders of the Fund may pay more in total sales charges than
the economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Fund is Managed--Distributor."
++ Although the Class A, Class B and Class C Distribution and Service Plans
provide that the Fund may pay up to an annual rate of .30 of 1% of the
average daily net assets of the Class A shares and up to 1% of the average
daily net assets of the Class B and Class C shares, the Distributor has
agreed to limit its distribution fees with respect to Class A shares of the
Fund so as not to exceed .15 of 1% of the average daily net assets of the
Class A shares, and to limit its distribution fees to no more than .75 of
1% of the average daily net assets of each of the Class B and Class C
shares, for the fiscal period ending March 31, 1999. Total Fund Operating
Expenses without such limitations or fee waivers would be 1.35% for Class A
shares and 2.05% for Class B and Class C shares. See "How the Fund is
Managed--Distributor."
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5
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HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is total return through high current income
and capital appreciation. The Fund will seek to achieve its objective by
investing primarily in high yield fixed income securities, equity securities
that were attached to or included in a unit with fixed income securities at the
time of purchase, convertible securities and preferred stocks. Under normal
circumstances, the Fund intends to invest 65% of its total assets in such
securities. The balance of the Fund's assets (or remaining 35%) may be invested
in any other securities believed by the Subadviser to be consistent with the
Fund's investment objective, including, higher rated fixed income securities,
equity securities that were not attached to or included in a unit with fixed
income securities at the time of purchase, loan participations and assignments,
trade claims, futures contracts and options thereon, other derivatives and
certain other investments described in the Prospectus and Statement of
Additional Information. There can be no assurance that the Fund's investment
objective will be achieved. See "Investment Objective and Policies" and
"Portfolio Characteristics" in the Statement of Additional Information.
THE FUND IS A VEHICLE FOR DIVERSIFICATION OF YOUR OVERALL PORTFOLIO. IT IS
NOT INTENDED TO CONSTITUTE A BALANCED INVESTMENT PROGRAM. AS WITH AN INVESTMENT
IN ANY MUTUAL FUND, AN INVESTMENT IN THIS FUND CAN DECREASE IN VALUE AND YOU CAN
LOSE MONEY.
The higher yields sought by the Fund are generally obtainable from
securities rated in the lower categories by recognized rating services. The Fund
expects to seek high current income by investing in high yield fixed income
securities. High yield fixed income securities are fixed income securities rated
lower than Baa by Moody's Investors Service, Inc. (Moody's), or lower than BBB
by Standard & Poor's Ratings Group (Standard & Poor's) or comparably rated by
any other Nationally Recognized Statistical Rating Organization (NRSRO), or
unrated securities determined by the Subadviser to be of comparable quality.
Corporate bonds rated below Baa by Moody's and BBB by Standard & Poor's are
considered speculative. The Fund may invest in bonds rated below Caa by Moody's
or CCC by Standard & Poor's, including bonds in the lowest ratings categories (C
for Moody's and D for Standard and Poor's) and unrated bonds of comparable
quality. Such securities are highly speculative and may be in default of
principal and/or interest payments. A description of corporate bond ratings is
contained in Appendix A to this Prospectus.
Lower rated and comparable unrated securities tend to offer higher yields
than higher rated securities with the same maturities because the historical
financial condition of the issuers of such securities may not have been as
strong as that of other issuers. Since lower rated securities generally involve
greater risk of loss of income and principal than higher rated securities,
investors should consider carefully the relative risks associated with
investments in securities which carry lower ratings and in comparable unrated
securities.
The investment adviser will perform its own investment analysis and will
not rely principally on the ratings assigned by the rating services, although
such ratings will be considered by the investment adviser. The investment
adviser will consider, among other things, the financial history and condition,
the prospects and the management of an issuer in selecting securities for the
Fund's portfolio.
The Fund's portfolio may include securities of financially troubled or
bankrupt companies (financially troubled issuers) and securities of companies,
that in the view of the Subadviser are currently undervalued, out of favor or
price depressed relative to their long term potential for growth and income
(operationally troubled issuers) (collectively distressed securities).
Investment in distressed securities involves certain risks. See "Risk Factors
Relating to Investing in Distressed Securities" below.
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Equity securities include foreign and domestic common stocks and rights and
warrants. Equity securities that were attached to or included in a unit with
fixed income securities include equity securities that are issued with fixed
income securities. Such equity securities may be detachable from the fixed
income securities with which they were issued. To the extent the Fund invests in
equity securities, there may be a diminution in the Fund's overall yield.
Convertible securities are typically corporate bonds or preferred stocks
that may be converted at a stated price within a specified period of time into a
specified number of shares of common stock of the same or a different issuer.
Convertible securities are generally senior to common stocks in a corporation's
capital structure, but are usually subordinated to similar nonconvertible
securities. While providing a fixed income stream (generally higher in yield
than the income derivable from a common stock but lower than that afforded by a
similar nonconvertible security), a convertible security also affords an
investor the opportunity, through its conversion feature, to participate in the
capital appreciation attendant upon a market price advance in the convertible
security's underlying common stock.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed income security) or
its "conversion value" (i.e., its value upon conversion into its underlying
common stock). As a fixed income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security is
also influenced by the market value of the security's underlying common stock.
The price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer.
High yield fixed income securities may also provide the potential for
capital appreciation, in addition to providing the potential for high current
income. Equity securities that were attached to or included in a unit with fixed
income securities at the time of purchase, convertible securities and preferred
stock may also provide the potential for capital appreciation, and in certain
instances, the potential for high current income. The Fund will seek capital
appreciation by investing in securities which may be expected by the Subadviser
to appreciate in value as a result of declines in long term interest rates or
favorable developments affecting the business or prospects of the issuer which
may improve the issuer's financial condition and credit rating, or a combination
of both.
As stated above, the Fund will seek to achieve its objective by investing
primarily in high yield fixed income securities, equity securities that were
attached to or included in a unit with fixed income securities at the time of
purchase, convertible securities and preferred stock. When prevailing economic
conditions cause a narrowing of the spreads between the yields derived from
lower rated or comparable unrated securities and those derived from higher rated
issues, the Fund may invest in higher rated fixed income securities which
provide similar yields but have less risk. Generally, the Fund's average
weighted maturity will range from 3 to 12 years.
WHEN MARKET CONDITIONS DICTATE A MORE DEFENSIVE INVESTMENT STRATEGY, THE
FUND MAY INVEST TEMPORARILY WITHOUT LIMIT IN SHORT TERM OBLIGATIONS OF, OR
SECURITIES GUARANTEED BY, THE UNITED STATES GOVERNMENT, ITS AGENCIES OR
INSTRUMENTALITIES OR IN HIGH QUALITY OBLIGATIONS OF BANKS AND CORPORATIONS. THE
YIELD ON THESE SECURITIES WILL TEND TO BE LOWER THAN THE YIELD ON OTHER
SECURITIES TO BE PURCHASED BY THE FUND.
ZERO COUPON, PAY-IN-KIND AND DEFERRED PAYMENT SECURITIES
THE FUND MAY INVEST IN ZERO COUPON, PAY-IN-KIND OR DEFERRED PAYMENT
SECURITIES. Zero coupon securities are securities that are sold at a discount to
par value and on which interest payments are not made during the life of the
security. Upon maturity, the holder is entitled to receive the par value of the
security. While interest payments are not made on such securities, holders of
such securities are deemed to have received annually "phantom income." The Fund
accrues income with respect to these securities for federal income tax and
accounting purposes prior to the receipt of
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<PAGE>
cash payments. Pay-in-kind securities are securities that have interest payable
by delivery of additional securities. Upon maturity, the holder is entitled to
receive the aggregate par value of the securities. Deferred payment securities
are securities that remain a zero coupon security until a predetermined date, at
which time the stated coupon rate becomes effective and interest becomes payable
at regular intervals. Zero coupon, pay-in-kind and deferred payment securities
may be subject to greater fluctuation in value and lesser liquidity in the event
of adverse market conditions than comparably rated securities paying cash
interest at regular interest payment periods. See "Portfolio
Characteristics--Zero Coupon, Pay-in-Kind or Deferred Payment Securities" in the
Statement of Additional Information.
FOREIGN SECURITIES
The Fund may invest up to 35% of its total assets in equity and fixed
income securities of foreign issuers denominated in U.S. dollars and up to 5% of
its total assets in foreign currency denominated securities issued by foreign
and domestic issuers. American and global depositary receipts are not included
in this 35% limitation. American Depositary Receipts (ADRs), European Depositary
Receipts (EDRs), Global Depositary Receipts (GDRs) and other types of depositary
receipts evidence ownership of underlying securities issued by a foreign
corporation that have been deposited with a depositary or custodian bank,
typically a U.S. bank or trust company. Depositary receipts may be issued in
connection with an offering of securities by the issuer of the underlying
securities or issued by a depositary bank as a vehicle to promote investment and
trading in the underlying securities. While depositary receipts may not
necessarily be denominated in the same currency as the underlying securities,
the risks associated with foreign securities also generally apply to depositary
receipts. See "Risk Factors and Special Considerations Relating to Investing in
Foreign Securities" below.
FOREIGN GOVERNMENT SECURITIES. Foreign government securities include debt
securities issued or guaranteed, as to payment of principal and interest, by
governments, quasi-governmental entities, governmental agencies, supranational
entities and other governmental entities (collectively, Government Entities)
denominated in U.S. dollars or foreign currencies. A "supranational entity" is
an entity constituted by the national governments of several countries to
promote economic development. Examples of such supranational entities include,
among others, the World Bank (International Bank for Reconstruction and
Development), the European Investment Bank and the Asian Development Bank. Debt
securities of "quasi-governmental entities" are issued by entities owned by a
national, state, or equivalent government or are obligations of a political unit
that are not backed by national government's "full faith and credit" and general
taxing powers. Examples of quasi-governmental entities include, among others,
the Province of Ontario and the City of Stockholm. Foreign government securities
also include mortgage-backed securities issued by Government Entities.
LOAN PARTICIPATIONS AND ASSIGNMENTS
The Fund may invest in bank debt which includes interests in loans to
companies or their affiliates undertaken to finance a capital restructuring or
in connection with recapitalizations, acquisitions, leveraged buyouts,
refinancings or other financially leveraged transactions and may include loans
which are designed to provide temporary or "bridge" financing to a borrower
pending the sale of identified assets, the arrangement of longer term loans or
the issuance and sale of debt obligations. These loans, which may bear fixed or
floating rates, have generally been arranged through private negotiations
between a corporate borrower and one or more financial institutions (Lenders),
including banks. The Fund's investment may be in the form of participations in
loans (Participations) or of assignments of all or a portion of loans from third
parties (Assignments).
Participations differ both from the public and private debt securities
typically held by the Fund and from Assignments. In Participations, the Fund has
a contractual relationship only with the Lender, not with the borrower. As a
result, the Fund has the right to receive payments of principal, interest and
any fees to which it is entitled only from the Lender
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<PAGE>
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In connection with purchasing Participations, the Fund
generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement relating to the loan, nor any rights of set-off
against the borrower, and the Fund may not benefit directly from any collateral
supporting the loan in which it has purchased the Participation. Thus, the Fund
assumes the credit risk of both the borrower and the Lender that is selling the
Participation. In the event of the insolvency of the Lender, the Fund may be
treated as a general creditor of the Lender and may not benefit from any set-off
between the Lender and the borrower. In Assignments, by contrast, the Fund
acquires direct rights against the borrower, except that under certain
circumstances such rights may be more limited than those held by the assigning
Lender. See "Portfolio Characteristics--Bank Debt" in the Statement of
Additional Information.
The Fund may have difficulty disposing of Assignments and Participations.
Because the market for such instruments is not highly liquid, the Fund
anticipates that such instruments could be sold only to a limited number of
institutional investors. The lack of a highly liquid secondary market may have
an adverse impact on the value of such instruments and will have an adverse
impact on the Fund's ability to dispose of particular Assignments or
Participations in response to a specific economic event, such as deterioration
in the creditworthiness of the borrower.
TRADE CLAIMS
The Fund may invest in trade claims, which are non-securitized rights of
payment arising from obligations other than borrowed funds. Trade claims
typically arise when, in the ordinary course of business, vendors and suppliers
extend credit to a company by offering payment terms. Generally, when a company
files for bankruptcy protection, payments on trade claims cease and the claims
are subject to compromise along with the other debts of the company. Trade
claims typically are bought and sold at a discount reflecting the degree of
uncertainty with respect to the timing and extent of recovery. In addition to
the risks otherwise associated with low quality obligations, trade claims have
other risks, including (i) the possibility that the amount of the claim may be
disputed by the obligor, (ii) the debtor may have a variety of defenses to
assert against the claim under the bankruptcy code, (iii) volatile pricing due
to a less liquid market, including a small number of brokers for trade claims
and a small universe of potential buyers, (iv) the risk that the Fund may be
obligated to purchase a trade claim larger than initially anticipated, and (v)
the risk of failure of sellers of trade claims to indemnify the Fund against
loss due to the bankruptcy or insolvency of such sellers. The negotiation and
enforcement of rights in connection with trade claims may result in higher legal
expenses to the Fund, which may reduce return on such investments. It is not
unusual for trade claims to be priced at a discount to publicly traded
securities that have an equal or lower priority claim. Additionally, trade
claims may be treated as non-securities investments. As a result, any gains may
be considered "non-qualifying" under the Internal Revenue Code of 1986, as
amended (Internal Revenue Code). See "Taxes, Dividends and Distributions" in the
Statement of Additional Information.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE FUND MAY ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING USING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN, BUT NOT FOR SPECULATION. THESE STRATEGIES CURRENTLY INCLUDE
FUTURES CONTRACTS AND OPTIONS THEREON (INCLUDING INTEREST RATE FUTURES CONTRACTS
AND OPTIONS THEREON), OPTIONS ON SECURITIES, FINANCIAL INDICES AND CURRENCIES,
AND FORWARD CURRENCY EXCHANGE CONTRACTS. THE FUND, AND THUS ITS INVESTORS, MAY
LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE STRATEGIES. The Fund's ability
to use these strategies may be limited by market conditions, regulatory limits
and tax considerations and there can be no assurance that any of these
strategies will succeed. See "Portfolio Characteristics" in the Statement of
Additional Information. New financial products and risk management techniques
continue to be developed and the Fund may use these new investments and
techniques to the extent consistent with its investment objective and policies.
FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY PURCHASE AND SELL FINANCIAL FUTURES CONTRACTS AND OPTIONS
THEREON WHICH ARE TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE TO REDUCE
CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO ENHANCE RETURN
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IN ACCORDANCE WITH REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION
(CFTC). THESE FUTURES CONTRACTS AND RELATED OPTIONS WILL BE ON DEBT SECURITIES,
INCLUDING U.S. GOVERNMENT SECURITIES, FINANCIAL INDICES AND FOREIGN CURRENCIES.
THE FUND, AND THUS ITS INVESTORS, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF
THESE STRATEGIES. A futures contract is an agreement to purchase or sell an
agreed amount of securities or currencies at a set price for delivery in the
future. A stock index futures contract is an agreement to deliver an amount of
cash equal to a specific dollar amount times the difference between the value of
a specific stock index on an agreed future date and the contract price. The Fund
may purchase and sell futures contracts as a hedge against changes resulting
from market conditions in the value of securities which are held in the Fund's
portfolio or which the Fund intends to acquire.
The Fund may not purchase or sell futures contracts and related options to
attempt to enhance return, if immediately thereafter the sum of the amount of
initial margin deposits on the Fund's existing futures and options on futures
and premiums paid for such related options would exceed 5% of the liquidation
value of the Fund's total assets. The Fund may purchase and sell futures
contracts and related options, without limitation, for bona fide hedging
purposes in accordance with regulations of the CFTC (i.e., to reduce certain
risks of its investments). The value of all futures contracts sold will not
exceed the total market value of the Fund's portfolio.
Futures contracts and related options are generally subject to segregation
and coverage requirements of the CFTC or the Commission. If the Fund does not
hold the security underlying the futures contract, the Fund will be required to
segregate on an ongoing basis cash or other liquid assets in an amount at least
equal to the Fund's obligations with respect to such futures contracts.
THE FUND'S SUCCESSFUL USE OF FUTURES CONTRACTS AND RELATED OPTIONS DEPENDS
UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET AND
IS SUBJECT TO VARIOUS ADDITIONAL RISKS. The correlation between movements in the
price of a futures contract and the movements in the index or price of the
currencies being hedged is imperfect and there is a risk that the value of the
indices or currencies being hedged may increase or decrease at a greater rate
than the related futures contracts, resulting in losses to the Fund. Certain
futures exchanges or boards of trade have established daily limits on the amount
that the price of futures contracts or related options may vary, either up or
down, from the previous day's settlement price. These daily limits may restrict
the Fund's ability to purchase or sell certain futures contracts or related
options on any particular day.
OTHER OPTIONS TRANSACTIONS
THE FUND MAY PURCHASE AND WRITE (I.E., SELL) PUT AND CALL OPTIONS ON
SECURITIES, FINANCIAL INDICES AND CURRENCIES THAT ARE TRADED ON U.S. OR FOREIGN
SECURITIES EXCHANGES OR IN THE OVER-THE-COUNTER (OTC) MARKET TO HEDGE THE FUND'S
PORTFOLIO OR TO ATTEMPT TO ENHANCE RETURN. These options will be on equity and
debt securities, including U.S. Government securities, financial indices,
including stock indices (e.g., S&P 500), and foreign currencies. The Fund may
write covered put and call options to attempt to generate additional income
through the receipt of premiums, purchase put options in an effort to protect
the value of securities (or currencies) that it owns against a decline in market
value and purchase call options in an effort to protect against an increase in
the price of securities (or currencies) it intends to purchase. The Fund may
also purchase put and call options to offset previously written put and call
options of the same series. See "Portfolio Characteristics--Options on
Securities" in the Statement of Additional Information.
A CALL OPTION GIVES THE PURCHASER, IN EXCHANGE FOR A PREMIUM PAID, THE
RIGHT FOR A SPECIFIED PERIOD OF TIME TO PURCHASE THE SECURITIES OR CURRENCY
SUBJECT TO THE OPTION AT A SPECIFIED PRICE (THE EXERCISE PRICE OR STRIKE PRICE).
The writer of a call option, in return for the premium, has the obligation, upon
exercise of the option, to deliver, depending upon the terms of the option
contract, the underlying securities or a specified amount of cash to the
purchaser upon receipt of the exercise price. When the Fund writes a call
option, the Fund gives up the potential for gain on the underlying securities or
currency in excess of the exercise price of the option during the period that
the option is open. There is no limitation on the amount of call options the
Fund may write.
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A PUT OPTION GIVES THE PURCHASER, IN RETURN FOR A PREMIUM, THE RIGHT, FOR A
SPECIFIED PERIOD OF TIME, TO SELL THE SECURITIES OR CURRENCY SUBJECT TO THE
OPTION TO THE WRITER OF THE PUT AT THE SPECIFIED EXERCISE PRICE. The writer of
the put option, in return for the premium, has the obligation, upon exercise of
the option, to acquire the securities or currency underlying the option at the
exercise price. The Fund might, therefore, be obligated to purchase the
underlying securities or currency for more than their current market price.
THE FUND WILL WRITE ONLY "COVERED" OPTIONS. A written option is covered if,
as long as the Fund is obligated under the option, it (i) owns an offsetting
position in the underlying security or currency or (ii) segregates cash or other
liquid assets in an amount equal to or greater than its obligation under the
option. Under the first circumstance, the Fund's losses are limited because it
owns the underlying security; under the second circumstance, in the case of a
written call option, the Fund's losses are potentially unlimited. See "Portfolio
Characteristics--Options on Securities" in the Statement of Additional
Information.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
THE FUND MAY ENTER INTO FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO
PROTECT THE VALUE OF ITS ASSETS AGAINST FUTURE CHANGES IN THE LEVEL OF CURRENCY
EXCHANGE RATES. The Fund may enter into such contracts on a spot, i.e., cash,
basis at the rate then prevailing in the currency exchange market or on a
forward basis, by entering into a forward contract to purchase or sell currency.
A forward contract on foreign currency is an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days agreed
upon by the parties from the date of the contract at a price set on the date of
the contract.
THE FUND'S DEALINGS IN FORWARD CONTRACTS WILL BE LIMITED TO HEDGING
INVOLVING EITHER SPECIFIC TRANSACTIONS OR PORTFOLIO POSITIONS. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency or in a different currency (cross hedge). Although there
are no limits on the number of forward contracts which the Fund may enter into,
the Fund may not position hedge (including cross hedges) with respect to a
particular currency for an amount greater than the aggregate market value
(determined at the time of making any sale of foreign currency) of the
securities being hedged. See "Portfolio Characteristics--Risks Related to
Forward Foreign Currency Exchange Contracts" in the Statement of Additional
Information.
RISK FACTORS RELATING TO INVESTING IN DEBT SECURITIES RATED BELOW INVESTMENT
GRADE (JUNK BONDS)
Fixed income securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and general
market liquidity (market risk). Lower rated or unrated (i.e., high yield or high
risk) securities (commonly referred to as "junk bonds") are more likely to react
to developments affecting market and credit risk than are more highly rated
securities, which react primarily to movements in the general level of interest
rates. The investment adviser considers both credit risk and market risk in
making investment decisions for the Fund. Investors should carefully consider
the relative risks of investing in high yield securities and understand that
such securities are not generally meant for short term investing.
Under adverse economic conditions, there is a risk that highly leveraged
issuers may be unable to service their debt obligations or to repay their
obligations upon maturity. During an economic downturn or recession, securities
of highly leveraged issuers are more likely to default than securities of higher
rated issuers. In addition, the secondary market for high yield securities,
which is concentrated in relatively few market makers, may not be as liquid as
the secondary
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market for more highly rated securities. Under adverse market or economic
conditions, the secondary market for high yield securities could contract
further, independent of any specific adverse changes in the condition of a
particular issuer. As a result, the investment adviser could find it more
difficult to sell these securities or may be able to sell the securities only at
prices lower than if such securities were widely traded. Prices realized upon
the sale of such lower rated or unrated securities, under these circumstances,
may be less than the prices used in calculating the Fund's NAV. Under the
circumstances where the Fund owns the majority of an issue, market and credit
risks may be greater.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the Fund's portfolio and increasing
the exposure of the Fund to the risks of high yield securities.
The Fund may invest in securities having the lowest ratings assigned by
nationally recognized statistical ratings organizations or no rating but judged
by the Subadviser to be of comparable quality. Debt rated BB, B, CCC, CC and C
by Standard & Poor's, and debt rated Ba, B, Caa, Ca and C by Moody's is regarded
by the rating agency, on balance, as predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation. BB/Ba indicates the lowest degree of speculation and
D/C the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. Similarly, debt
rated Ba or BB and below is regarded by the relevant rating agency as
speculative. Debt rated C by Standard & Poor's is the lowest rated debt that is
not in default as to principal or interest and such issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing. Such securities are also generally considered to be subject
to greater risk than securities with higher ratings with regard to a
deterioration of general economic conditions. Debt rated D by Standard & Poor's
is in payment default. Moody's does not have a D rating. See "Description of
Security Ratings" in the Appendix.
Ratings of fixed income securities represent the rating agencies' opinions
regarding their credit quality and are not a guarantee of quality. Rating
agencies attempt to evaluate the safety of principal and interest payments and
do not evaluate the risks of fluctuations in market value. Also, rating agencies
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer's current financial condition may be better or worse
than a rating indicates.
RISK FACTORS AND SPECIAL CONSIDERATIONS RELATING TO INVESTING IN FOREIGN
SECURITIES
FOREIGN SECURITIES INVOLVE CERTAIN RISKS, WHICH SHOULD BE CONSIDERED
CAREFULLY BY AN INVESTOR IN THE FUND. THESE RISKS INCLUDE POLITICAL OR ECONOMIC
INSTABILITY IN THE COUNTRY OF THE ISSUER, THE DIFFICULTY OF PREDICTING
INTERNATIONAL TRADE PATTERNS, THE POSSIBILITY OF IMPOSITION OF EXCHANGE CONTROLS
AND THE RISK OF CURRENCY FLUCTUATIONS. Such securities may be subject to greater
fluctuations in price than securities issued by U.S. corporations or issued or
guaranteed by the U.S. Government, its instrumentalities or agencies. In
addition, there may be less publicly available information about a foreign
company or government than about a domestic company or the U.S. Government.
Foreign companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. There is generally less government regulation of securities
exchanges, brokers and listed companies abroad than in the United States and
there is a possibility of expropriation, confiscatory taxation or diplomatic
developments which could affect investment. In many instances, foreign debt
securities may provide higher yields than securities of domestic issuers which
have similar maturities and quality. These investments, however, may be less
liquid than the securities of U.S. corporations. In the event of default of any
such foreign debt obligations, it may be more difficult for the Fund to obtain
or enforce a judgment against the issuers of such securities.
INVESTING IN THE SECURITIES MARKETS OF DEVELOPING COUNTRIES INVOLVES
EXPOSURE TO ECONOMIES THAT ARE GENERALLY LESS DIVERSE AND MATURE AND TO
POLITICAL SYSTEMS WHICH CAN BE EXPECTED TO HAVE LESS STABILITY THAN THOSE OF
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DEVELOPED COUNTRIES. HISTORICAL EXPERIENCE INDICATES THAT THE MARKETS OF
DEVELOPING COUNTRIES HAVE BEEN MORE VOLATILE THAN THE MARKETS OF DEVELOPED
COUNTRIES. THE RISKS ASSOCIATED WITH INVESTMENTS IN FOREIGN SECURITIES MAY BE
GREATER WITH RESPECT TO INVESTMENTS IN DEVELOPING COUNTRIES AND ARE CERTAINLY
GREATER WITH RESPECT TO INVESTMENTS IN THE SECURITIES OF FINANCIALLY AND
OPERATIONALLY TROUBLED ISSUERS.
ADDITIONAL COSTS COULD BE INCURRED IN CONNECTION WITH THE FUND'S
INTERNATIONAL INVESTMENT ACTIVITIES. Foreign brokerage commissions are generally
higher than United States brokerage commissions. Increased custodian costs as
well as administrative difficulties (such as the applicability of foreign laws
to foreign custodians in various circumstances) may be associated with the
maintenance of assets in foreign jurisdictions.
If the security is denominated in a foreign currency, it will be affected
by changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversions between currencies. A
change in the value of any such currency against the U.S. dollar will result in
a corresponding change in the U.S. dollar value of the Fund's securities
denominated in that currency. Such changes also will affect the Fund's income
and distributions to shareholders. In addition, although the Fund will receive
income in such currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the exchange rate for any such
currency declines after the Fund's income has been accrued and translated into
U.S. dollars, the Fund could be required to liquidate portfolio securities to
make such distributions, particularly in instances in which the amount of income
the Fund is required to distribute is not immediately reduced by the decline in
such currency. Similarly, if an exchange rate declines between the time the Fund
incurs expenses in U.S. dollars and the time such expenses are paid, the amount
of such currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in any such
currency of such expenses at the time they were incurred.
The Fund may, but need not, enter into forward foreign currency exchange
contracts, options on foreign currencies and futures contracts on foreign
currencies and related options, for hedging purposes, including: locking in the
U.S. dollar price of the purchase or sale of securities denominated in a foreign
currency; locking in the U.S. dollar equivalent of dividends to be paid on such
securities which are held by the Fund; and protecting the U.S. dollar value of
such securities which are held by the Fund.
RISK FACTORS RELATING TO INVESTING IN DISTRESSED SECURITIES
Distressed securities involve a high degree of credit and market risk and
may be subject to greater price volatility than other securities in which the
Fund invests.
Although the Fund will invest in select companies which in the view of the
Subadviser have the potential over the long term for capital growth, there can
be no assurance that such financially or operationally troubled companies can be
successfully transformed into profitable operating companies. There is a
possibility that the Fund may incur substantial or total losses on its
investments. During an economic downturn or recession, securities of financially
troubled issuers are more likely to go into default than securities of other
issuers. In addition, it may be difficult to obtain information about
financially and operationally troubled issuers.
Securities of financially troubled issuers are less liquid and more
volatile than securities of companies not experiencing financial difficulties.
The market prices of such securities are subject to erratic and abrupt market
movements and the spread between bid and asked prices may be greater than
normally expected. In addition, it is anticipated that many of such portfolio
investments may not be widely traded and that the Fund's position in such
securities may be substantial relative to the market for such securities. As a
result, the Fund may experience delays and incur losses and other costs in
connection with the sale of its portfolio securities.
Distressed securities which the Fund may purchase may also include
securities of companies involved in bankruptcy proceedings, reorganizations and
financial restructurings. To the extent the Fund invests in such securities, it
may have
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<PAGE>
a more active participation in the affairs of issuers than is generally assumed
by an investor. This may subject the Fund to litigation risks or prevent the
Fund from disposing of securities. In a bankruptcy or other proceeding, the Fund
as a creditor may be unable to enforce its rights in any collateral or may have
its security interest in any collateral challenged, disallowed or subordinated
to the claims of the creditors. See "Portfolio Characteristics--Securities of
Financially and Operationally Troubled Issuers--Bankruptcy and Other
Proceedings--Litigation Risks" in the Statement of Additional Information.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS AND IN CURRENCY EXCHANGE
TRANSACTIONS INVOLVES INVESTMENT RISKS AND TRANSACTION COSTS TO WHICH THE FUND
WOULD NOT BE SUBJECT ABSENT THE USE OF THESE STRATEGIES. THE FUND, AND THUS ITS
INVESTORS, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE STRATEGIES. If
the Subadviser's predictions of movements in the direction of the securities,
foreign currency and interest rate markets are inaccurate, the adverse
consequences to the Fund may leave the Fund in a worse position than if such
strategies were not used. Risks inherent in the use of options, foreign currency
and futures contracts and options on futures contracts include (1) dependence on
the Subadviser's ability to predict correctly movements in the direction of
interest rates, securities prices and currency markets; (2) imperfect
correlation between the price of options and futures contracts and options
thereon and movements in the prices of the securities or currencies being
hedged; (3) the fact that skills needed to use these strategies are different
from those needed to select portfolio securities; (4) the possible absence of a
liquid secondary market for any particular instrument at any time; and (5) the
possible inability of the Fund to purchase or sell a portfolio security at a
time that otherwise would be favorable for it to do so, or the possible need for
the Fund to sell a portfolio security at a disadvantageous time, due to the need
for the Fund to maintain "cover" or to segregate securities in connection with
hedging transactions.
The Fund will generally purchase options and futures on an exchange only if
there appears to be a liquid secondary market for such options or futures; the
Fund will generally purchase OTC options only if management believes that the
other party to options will continue to make a market for such options. However,
there can be no assurance that a liquid secondary market will continue to exist
or that the other party will continue to make a market. Thus, it may not be
possible to close an options or futures transaction. The inability to close
options and futures positions also could have an adverse impact on the Fund's
ability to effectively hedge its portfolio. There is also the risk of loss by
the Fund of margin deposits or collateral in the event of bankruptcy of a broker
with whom the Fund has an open position in an option, a futures contract or
related option.
OTHER INVESTMENTS AND INVESTMENT POLICIES
REPURCHASE AGREEMENTS
The Fund will enter into repurchase agreements whereby the seller of the
security agrees to repurchase that security from the Fund at a mutually agreed
upon time and price. The repurchase date is usually within a day or two of the
original purchase, although it may extend over a number of months. The resale
price is in excess of the purchase price, reflecting an agreed upon rate of
return effective for the period of time the Fund's money is invested in the
repurchase agreement. The Fund's repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. In the
event of a default or bankruptcy by a seller, the Fund will promptly seek to
liquidate the collateral. To the extent that the proceeds from any sale of such
collateral upon a default in the obligation to repurchase are less than the
resale price, the Fund will suffer a loss. The Fund participates in a joint
repurchase account with other investment companies managed by PIFM pursuant to
an order of the Commission. See "Portfolio Characteristics--Repurchase
Agreements" in the Statement of Additional Information.
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SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or other liquid assets or secures an
irrevocable letter of credit in favor of the Fund in an amount equal to at least
100%, determined daily, of the market value of the securities loaned which is
maintained in a segregated account pursuant to applicable regulations. During
the time portfolio securities are on loan, the borrower will pay the Fund an
amount equivalent to any dividend or interest paid on such securities and the
Fund may invest the cash collateral and earn additional income, or it may
receive an agreed upon amount of interest income from the borrower. As with any
extensions of credit, there are risks of delay in recovery and in some cases
loss of rights in the collateral should the borrower of the securities fail
financially. The Fund will not lend more than 30% of the value of its total
assets. See "Portfolio Characteristics--Lending of Securities" in the Statement
of Additional Information. The Fund may pay reasonable administration and
custodial fees in connection with a loan.
BORROWING
The Fund may borrow an amount equal to no more than 331 @3% of the value of
its total assets (calculated at the time of the borrowing) from banks for
temporary, extraordinary or emergency purposes or for the clearance of
transactions. The Fund may pledge up to 331 @3% of its total assets to secure
these borrowings. If the Fund's asset coverage for borrowings falls below 300%,
the Fund will take prompt action to reduce its borrowings. If the 300% asset
coverage should decline as a result of market fluctuations or other reasons, the
Fund may be required to sell portfolio securities to reduce the debt and restore
the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time. The Fund will not
purchase portfolio securities when borrowings exceed 5% of the value of its
total assets. See "Portfolio Characteristics--Borrowing" in the Statement of
Additional Information.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities markets
either within or outside of the United States. Restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933, as amended
(the Securities Act), privately placed commercial paper and municipal lease
obligations that have a readily available market are not considered illiquid for
purposes of this limitation. The investment adviser will monitor the liquidity
of such restricted securities under the supervision of the Board of Directors.
Investing in Rule 144A securities could have the effect of increasing the level
of Fund illiquidity to the extent that qualified institutional buyers become,
for a limited time, uninterested in purchasing these securities. Repurchase
agreements subject to demand are deemed to have a maturity equal to the
applicable notice period.
Securities of financially and operationally troubled issuers are less
liquid and more volatile than securities of companies not experiencing financial
difficulties. Many of the Fund's portfolio investments may not be widely traded.
Accordingly, the Fund may have to sell portfolio securities at disadvantageous
times and at disadvantageous prices in order to maintain no more than 15% of its
net assets in illiquid securities. This could have an adverse impact on the
Fund's performance. See "Portfolio Characteristics--Illiquid Securities" in the
Statement of Additional Information.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future in order to secure what is considered to be an advantageous
price or yield to the Fund at the time of entering into the transaction. While
the Fund will only purchase securities on a when-issued or delayed delivery
basis with the
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<PAGE>
intention of acquiring the securities, the Fund may sell the securities before
the settlement date, if it is deemed advisable. At the time the Fund makes the
commitment to purchase securities on a when-issued or delayed delivery basis,
the Fund will record the transaction and thereafter reflect the value, each day,
of such security in determining the NAV of the Fund. At the time of delivery of
the securities, the value may be more or less than the purchase price. The Fund
will segregate cash or other liquid assets having a value equal to or greater
than the Fund's purchase commitments. Subject to this requirement, the Fund may
purchase securities on such basis without limit. See "Portfolio
Characteristics--When-Issued and Delayed Delivery Securities" in the Statement
of Additional Information.
SHORT SALES
The Fund may sell a security it does not own in anticipation of a decline
in the market value of that security (short sales). To complete the transaction,
the Fund will borrow the security to make delivery to the buyer. The Fund is
then obligated to replace the security borrowed by purchasing it at the market
price at the time of replacement. The price at such time may be more or less
than the price at which the security was sold by the Fund. Until the security is
replaced, the Fund is required to pay to the lender any dividends or interest
which accrue during the period of the loan. To borrow the security, the Fund may
be required to pay a premium which would increase the cost of the security sold.
The proceeds of the short sale will be retained by the broker to the extent
necessary to meet margin requirements until the short position is closed out.
Until the Fund replaces the borrowed security, it will (a) segregate cash or
other liquid assets at such a level that the amount deposited in the account
plus the amount deposited with the broker as collateral will equal the current
value of the security sold short and will not be less than the market value of
the security at the time it was sold short, or (b) otherwise cover its short
position through a short sale "against-the-box," which is a short sale in which
the Fund owns an equal amount of the securities sold short or securities
convertible into or exchangeable for, without payment of any further
consideration, securities of the same issue as, and equal in amount to, the
securities sold short. The value of securities of any one issuer in which the
Fund is short may not exceed the lesser of 2% of the value of the Fund's net
assets or 2% of the securities of any class of any issuer.
The Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. The Fund will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss will be increased, by the amount of any
premium, dividends or interest paid in connection with the short sale.
PORTFOLIO TURNOVER
As a result of the Fund's investment policies, its portfolio turnover rate
may exceed 100%, although the rate is not expected to exceed 150%. High
portfolio turnover (over 100%) may involve correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by the
Fund. See "Portfolio Transactions and Brokerage" in the Statement of Additional
Information. In addition, high portfolio turnover may result in increased short
term capital gains which, when distributed to shareholders, are treated as
ordinary income. See "Taxes, Dividends and Distributions."
INVESTMENT RESTRICTIONS
The Fund's investment objective is not a fundamental policy, which means
that it may be changed by the Fund's Board of Directors without the approval of
the Fund's shareholders. The Fund will notify its shareholders in the event of
any change in its investment objective.
The Fund is subject to certain investment restrictions which constitute
fundamental policies. Fundamental policies cannot be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities as defined in the Investment Company Act of 1940, as amended
(Investment Company Act). Investment policies that are not fundamental may be
modified by the Board of Directors. See "Investment Restrictions" in the
Statement of Additional Information.
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HOW THE FUND IS MANAGED
THE FUND HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, DECIDES UPON MATTERS
OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
The Fund is responsible for the payment of certain fees and expenses
including, among others, the following: (i) management and distribution fees;
(ii) the fees of unaffiliated Directors; (iii) the fees of the Fund's Custodian
and Transfer and Dividend Disbursing Agent; (iv) the fees of the Fund's legal
counsel and independent accountants; (v) brokerage commissions incurred in
connection with portfolio transactions; (vi) all taxes and charges of
governmental agencies; (vii) the reimbursement of organization expenses; and
(viii) expenses related to shareholder communications, including all expenses of
shareholders' and Board of Directors' meetings and of preparing, printing and
mailing reports, proxy statements and prospectuses to shareholders.
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .65 OF 1%
OF THE FUND'S AVERAGE DAILY NET ASSETS. PIFM is organized in New York as a
limited liability company. See "Fee Waivers and Subsidy" below and "Manager" in
the Statement of Additional Information.
As of February 28, 1998, PIFM served as the manager to 42 open-end
investment companies, constituting all of the Prudential Mutual Funds, and as
manager or administrator to 22 closed-end investment companies with aggregate
assets of approximately $63 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. See
"Manager" in the Statement of Additional Information.
UNDER THE SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), WHICH DOES BUSINESS UNDER THE NAME OF PRUDENTIAL INVESTMENTS
(PI, THE SUBADVISER OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY
SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM
FOR ITS REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. PIFM
continues to have responsibility pursuant to the Management Agreement for all
investment advisory services and supervises the Subadviser's performance of such
services.
The co-portfolio managers of the Fund are George Edwards, Managing
Director, and Paul G. Price, CFA, Vice President of Prudential Investments.
Messrs. Edwards and Price share responsibility for the day-to-day management of
the Fund's portfolio. In addition, Messrs. Edwards and Price serve as
co-managers of the Prudential Distressed Securities Fund, Inc. Mr. Edwards has
been employed by PI as a portfolio manager since 1985 and has been a portfolio
manager of the Fund since its inception. Mr. Edwards serves as a high yield
portfolio manager of institutional accounts at PI. Mr. Price has been employed
by The Prudential Insurance Company of America (Prudential) since 1988 and has
served as co-portfolio manager of the Fund since its inception.
Messrs. Edwards and Price are part of Prudential's high yield bond team of
11 seasoned investment professionals with more than 100 years of combined
investment experience. The team manages over $5.5 billion in high yield assets.
The portfolio managers use bottom-up analysis to consider a universe of
approximately 1,800 bond issues, analyzing such factors as liquidity, financial
strength and risk/return profile, to construct the Fund's portfolio.
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PIFM and PIC are wholly-owned subsidiaries of The Prudential Insurance
Company of America (Prudential), a major diversified insurance and financial
services company.
FEE WAIVERS AND SUBSIDY
PIFM has agreed to waive .30 of 1% of its management fee for the fiscal
period ended March 31, 1999. The Fund is not required to reimburse PIFM for such
management fee waiver. Thereafter, PIFM may from time to time waive all or a
portion of its management fee and subsidize all or a portion of the operating
expenses of the Fund. Fee waivers and expense subsidies will increase the Fund's
total return. See "Fund Expenses" above and "Performance Information" in the
Statement of Additional Information.
DISTRIBUTOR
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC (THE DISTRIBUTOR), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS A LIMITED
LIABILITY COMPANY ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES
AS THE DISTRIBUTOR OF THE CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF THE
FUND. IT IS A WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL. Prudential Securities
Incorporated, One Seaport Plaza, New York, New York 10292, previously served as
the exclusive distributor of Fund shares and will serve as a co-distributor of
the Fund for shares sold through its financial advisors until approximately July
1, 1998. Thereafter, Prudential Investment Management Services LLC will serve as
the exclusive distributor of Fund shares. Prudential Securities Incorporated is
an indirect, wholly-owned subsidiary of Prudential.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS
B PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING THE
FUND'S CLASS A, CLASS B AND CLASS C SHARES. The Distributor also incurs the
expenses of distributing the Fund's Class Z shares under the Distribution
Agreement, none of which is reimbursed by or paid for by the Fund. These
expenses include commissions and account servicing fees paid to, or on account
of, Dealers or financial institutions (other than national banks) which have
entered into agreements with the Distributor, advertising expenses, the cost of
printing and mailing prospectuses to potential investors and indirect and
overhead costs of the Distributor associated with the sale of the Fund's shares,
including lease, utility, communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis Dealers 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.
UNDER THE CLASS A PLAN, THE FUND MAY PAY THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The
Class A Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of .25% of 1%) may not exceed .30 of 1% of the
average daily net assets of the Class A shares. It is expected that, in the case
of Class A shares, proceeds from the distribution fee will be used primarily to
pay account servicing fees to financial advisers. The Distributor has agreed to
limit its distribution-related fees payable under the Class A Plan to.15 of 1%
of the average daily net assets of the Class A shares for the fiscal year ending
March 31, 1999.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND MAY PAY THE DISTRIBUTOR FOR
ITS DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS B AND CLASS C SHARES AT
AN ANNUAL RATE OF 1% OF THE AVERAGE DAILY NET ASSETS OF EACH OF THE CLASS B AND
CLASS C SHARES. The Class B and Class C Plans provide for the payment to the
Distributor of (i) an asset-based sales charge of .75 of 1% of the average daily
net assets of the Class B and Class C shares, respectively, and (ii) a service
fee of
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<PAGE>
.25 of 1% of the average daily net assets of each of the Class B and Class C
shares. The service fee is used to pay for personal service and/or the
maintenance of shareholder accounts. The Distributor also receives contingent
deferred sales charges from certain redeeming shareholders. The Distributor has
agreed to limit its distribution-related fees payable under each of the Class B
and Class C Plans to .75 of 1% of the average daily net assets of the Class B
and Class C shares for the fiscal year ending March 31, 1999. See "Shareholder
Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
The Fund records all payments made under the Plans as expenses in the
calculation of net investment income. See "Distributor" in the Statement of
Additional Information.
Distribution expenses attributable to the sale of Class A, Class B and
Class C shares of the Fund will be allocated to each such class based upon the
ratio of sales of each such class to the sales of Class A, Class B and Class C
shares of the Fund, other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Fund, including a
majority of the Directors who are not "interested persons" of the Fund (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to the
Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each Plan
may be terminated at any time by vote of a majority of the Rule 12b-1 Directors
or of a majority of the outstanding shares of the applicable class of the Fund.
The Fund will not be obligated to pay distribution and service fees incurred
under any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to Dealers and other persons which
distribute shares of the Fund (including Class Z shares). Such payments may be
calculated by reference to the NAV of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
FEE WAIVERS
The Distributor has agreed to limit its distribution fee for the Class A,
Class B and Class C shares as described above under "Distributor." Fee waivers
will increase the Fund's total return. See "Fund Expenses" above and
"Performance Information" in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS
Affiliates of the Distributor may act as brokers or futures commission
merchants for the Fund provided that the commissions, fees or other remuneration
they receive are fair and reasonable. See "Portfolio Transactions and Brokerage"
in the Statement of Additional Information.
From time to time, affiliates of the Distributor render investment banking
services which may relate to or involve issuers of securities held by the Fund
or sought to be purchased or sold by the Fund. Accordingly, such affiliates and
their clients may have interests in actual or potential conflict with the
interests of the Fund. Under such circumstances, the Manager will act in the
best interests of the Fund without regard to the interests of affiliates of the
Distributor or their clients.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Its mailing address is P.O. Box
1713, Boston, Massachusetts 02105.
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Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), Raritan
Plaza One, Edison, New Jersey 08837, serves as Transfer Agent and Dividend
Disbursing Agent and in those capacities maintains certain books and records for
the Fund. PMFS is a wholly-owned subsidiary of PIFM. Its mailing address is P.O.
Box 15035, New Brunswick, New Jersey 08906-5005.
YEAR 2000
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of their outside service
providers. Many computer software systems in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. Such event could have a negative impact on handling securities
trades, payments of interest and dividends, pricing and account services.
Although, at this time, there can be no assurance that there will be no adverse
impact on the Fund, the Manager, the Distributor, the Transfer Agent and the
Custodian have advised the Fund that they have been actively working on
necessary changes to their computer systems to prepare for the year 2000 and
expect that their systems, and those of their outside service providers, will be
adapted in time for that event.
HOW THE FUND VALUES ITS SHARES
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING
ITS LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. For
valuation purposes, quotations of foreign securities in a foreign currency are
converted to U.S. dollar equivalents. THE BOARD OF DIRECTORS HAS FIXED THE
SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE FUND'S NAV TO BE AS OF 4:15
P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. For valuation purposes, quotations
of foreign securities in a foreign currency are converted to U.S. dollar
equivalents. See "Net Asset Value" in the Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Fund or days on which changes in the
value of the Fund's portfolio securities do not materially affect the NAV. See
"Net Asset Value" in the Statement of Additional Information.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. The
NAV of Class A shares will generally be lower than the NAV of Class Z shares
because Class Z shares are not subject to any distribution and/or service fees.
It is expected, however, that the NAV of the four classes will tend to converge
immediately after the recording of dividends, if any, which will differ by
approximately the amount of distribution and/or service fee expense accrual
differential among the classes, unless the Fund has net operating losses.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS TOTAL RETURN (INCLUDING
AVERAGE ANNUAL TOTAL RETURN AND AGGREGATE TOTAL RETURN) AND YIELD IN
ADVERTISEMENTS OR SALES LITERATURE. TOTAL RETURN AND YIELD ARE CALCULATED
SEPARATELY FOR
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CLASS A, CLASS B, CLASS C AND CLASS Z SHARES. These figures are based on
historical earnings and are not intended to indicate future performance. The
total return shows how much an investment in the Fund would have increased
(decreased) over a specified period of time (i.e., one, five or ten years or
since inception of the Fund) assuming that all distributions and dividends by
the Fund were reinvested on the reinvestment dates during the period and less
all recurring fees. The aggregate total return reflects actual performance over
a stated period of time. Average annual total return is a hypothetical rate of
return that, if achieved annually, would have produced the same aggregate total
return if performance had been constant over the entire period. Average annual
total return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither average annual
total return nor aggregate total return takes into account any federal or state
income taxes which may be payable upon redemption. The yield refers to the
income generated by an investment in the Fund over a one-month or 30-day period.
This income is then annualized; that is, the amount of income generated by the
investment during that 30-day period is assumed to be generated each 30-day
period for twelve periods and is shown as a percentage of the investment. The
income earned on the investment is also assumed to be reinvested at the end of
the sixth 30-day period. The Fund also may include comparative performance
information in advertising or marketing the Fund's shares. Such performance
information may include data from Lipper Analytical Services, Inc., Morningstar
Publications, Inc., and other industry publications, business periodicals and
market indices. See "Performance Information" in the Statement of Additional
Information. Further performance information will be contained in the Fund's
annual and semi-annual reports to shareholders, which will be available without
charge. See "Shareholder Guide--Shareholder Services--Reportsto Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE FUND INTENDS TO QUALIFY AND ELECT TO BE TREATED AS A REGULATED
INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. AS LONG AS IT SO QUALIFIES,
THE FUND WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT
INCOME AND NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS.
TAXATION OF SHAREHOLDERS
All dividends out of net investment income, together with distributions of
net short-term gains (i.e., the excess of net short-term capital gains over net
long-term capital losses) distributed to shareholders, will be taxable as
ordinary income to the shareholder whether or not reinvested. Any net capital
gains (i.e., the excess of net capital gains from the sale of assets held for
more than 12 months over net short-term capital losses) distributed to
shareholders will be taxable as capital gains to the shareholder, whether or not
reinvested and regardless of the length of time a shareholder has owned his or
her shares. The maximum long-term capital gains rate for individual shareholders
for securities held between 12 and 18 months is currently 28% and for securities
held more than 18 months is 20%. The maximum tax rate for ordinary income is
39.6%. The maximum long-term capital gains rate for corporate shareholders
currently is 35%.
Dividends received by corporate shareholders are eligible for a
dividends-received deduction of 70% to the extent the Fund's income is derived
from qualified dividends received by the Fund from domestic corporations.
Dividends attributable to interest income, capital and currency gain, gain or
loss from Section 1256 contracts, dividend income from foreign corporations and
income from some other sources will not be eligible for the corporate dividends
received deduction. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information. Corporate shareholders should consult their tax advisers
regarding other requirements applicable to the dividends received deduction.
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<PAGE>
Any dividends paid shortly after a purchase by an investor may have the
effect of reducing the per share NAV of the investor's shares by the per share
amount of the dividends. Furthermore, such dividends, although in effect a
return of capital, are subject to federal income taxes. Therefore, prior to
purchasing shares of the Fund, the investor should carefully consider the impact
of dividends, including capital gains distributions, which are expected to be or
have been announced.
Any gain or loss realized upon a sale or redemption of shares by a
shareholder who is not a dealer in securities will generally be treated as
capital gain or loss. In the case of an individual, any such capital gain will
be treated as a short-term capital gain, taxable at ordinary income rates if the
shares were held for not more than 12 months, and as a long-term capital gain
taxable at the maximum rate of 28% if such shares were held for more than 12 but
not more than 18 months, and at the maximum rate of 20% if such shares were held
for more than 18 months. In the case of a corporation, any such capital gain
will be treated as a long-term capital gain, taxable at the same rates as
ordinary income, if such shares were held for more than 12 months. Any such loss
will be treated as a long-term capital loss if the shares were held for more
than 12 months. Moreover, any such loss with respect to shares that are held for
six months or less will be treated as a long-term capital loss to the extent of
any capital gain distributions received by the shareholder.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include the sales charges incurred with respect to its initial shareholdings for
purposes of calculating gain or loss realized upon a sale or exchange of those
shares of the Fund. Instead, such charges may be treated as incurred on its
reacquisition of Fund shares.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Fund is required to withhold and remit
to the U.S. Treasury 31% of dividends, capital gain income and redemption
proceeds on the accounts of certain shareholders who fail to furnish their tax
identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of certain
foreign shareholders) with the required certifications regarding the
shareholder's status under the federal income tax law. Withholding at this rate
is also required from dividends and capital gains distributions (but not
redemption proceeds) payable to shareholders who are otherwise subject to backup
withholding. Dividends of net investment income and net short-term capital gains
payable to a foreign shareholder will generally be subject to U.S. withholding
tax at the rate of 30% (or lower treaty rate).
Shareholders are urged to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Taxes, Dividends and
Distributions" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS BASED ON ACTUAL
NET INVESTMENT INCOME DETERMINED IN ACCORDANCE WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES; HOWEVER, A PORTION OF SUCH DIVIDEND MAY ALSO INCLUDE
PROJECTED NET INVESTMENT INCOME. THE FUND EXPECTS TO MAKE DISTRIBUTIONS AT LEAST
ANNUALLY OF NET CAPITAL GAINS, IF ANY. Dividends paid by the Fund with respect
to each class of shares, to the extent any dividends are paid, will be
calculated in the same manner, at the same time, on the same day and will be in
the same amount except that Class A, Class B and Class C shares will bear their
own distribution charges, generally resulting in lower dividends for Class B and
Class C shares in relation to Class A shares and lower dividends for Class A
shares in relation to Class Z shares. Distribution of net capital gains, if any,
will be paid in the same amount per share for each class of shares. See "How the
Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES, BASED
ON THE NAV OF EACH CLASS ON THE PAYMENT DATE AND RECORD DATE, RESPECTIVELY, OR
SUCH OTHER DATE AS THE BOARD OF DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER
ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO
RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election should be
submitted to Prudential Mutual Fund Services LLC, Attn: Account
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Maintenance Unit, P.O. Box 15035, New Brunswick, New Jersey 08906-5015.The Fund
will notify each shareholder after the close of the Fund's taxable year both of
the dollar amount and the taxable status of that year's dividends and
distributions on a per share basis.
IF YOU BUY SHARES IMMEDIATELY BEFORE THE RECORD DATE (THE DATE THAT
DETERMINES WHO RECEIVES THE DIVIDEND), YOU WILL RECEIVE A PORTION OF THE MONEY
YOU INVESTED AS A TAXABLE DIVIDEND. THEREFORE, YOU SHOULD CONSIDER THE TIMING OF
DIVIDENDS WHEN BUYING SHARES OF THE FUND.
To the extent that, in a given year, distributions to shareholders exceed
the Fund's current and accumulated earnings profits, shareholders will receive a
return of capital in respect of such year and, in an annual statement, will be
notified of the amount of any return of capital for such year.
Any distributions of net capital gains paid shortly after a purchase by an
investor will have the effect of reducing the per share net asset value of the
investor's shares by the per share amount of the distributions. Such
distributions, although in effect a return of invested principal, are subject to
federal income taxes. Accordingly, prior to purchasing shares of the Fund, an
investor should carefully consider the impact of capital gains distributions
which are expected to be or have been announced.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON FEBRUARY 18, 1997. THE FUND IS
AUTHORIZED TO ISSUE 2.5 BILLION SHARES OF COMMON STOCK, $.0001 PAR VALUE PER
SHARE, DIVIDED INTO FOUR CLASSES, DESIGNATED CLASS A, CLASS B, CLASS C AND CLASS
Z COMMON STOCK. OF THE AUTHORIZED SHARES OF COMMON STOCK, ONE BILLION SHARES
HAVE BEEN DESIGNATED CLASS A COMMON STOCK, 500 MILLION SHARES HAVE BEEN
DESIGNATED CLASS B COMMON STOCK, 500 MILLION SHARES HAVE BEEN DESIGNATED CLASS C
COMMON STOCK AND 500 MILLION SHARES HAVE BEEN DESIGNATED CLASS Z COMMON STOCK.
Each class of common stock represents an interest in the same assets of the Fund
and is identical in all respects except that (i) each class is subject to
different sales charges and distribution and/or service fees (except for Class Z
shares, which are not subject to any sales charge or distribution and/or service
fee), which may affect performance, (ii) each class has exclusive voting rights
on any matter submitted to shareholders that relates solely to its arrangement
and has separate voting rights on any matter submitted to shareholders in which
the interests of one class differ from the interests of any other class, (iii)
each class has a different exchange privilege, (iv) only Class B shares have a
conversion feature, and (v) Class Z shares are offered exclusively for sale to a
limited group of investors. See "How the Fund is Managed--Distributor."
Currently, the Fund is offering Class A, Class B, Class C and Class Z shares of
common stock. In accordance with the Fund's Articles of Incorporation, the Board
of Directors may authorize the creation of additional series of common stock and
classes within such series, with such preferences, privileges, limitations and
voting and dividend rights as the Board may determine.
The Board of Directors may increase or decrease the number of authorized
shares. Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
common stock is equal as to earnings, assets and voting privileges, except as
noted above, and each class (with the exception of Class Z shares, which are not
subject to any distribution and/or service fees) bears the expenses related to
the distribution of its shares. Except for the conversion feature applicable to
the Class B shares, there are no conversion, preemptive or other subscription
rights. In the event of liquidation, each share of common stock of the Fund is
entitled to its portion of all of the Fund's assets after all debts and expenses
of the Fund have been paid. Since Class B and Class C shares generally bear
higher distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders and to Class Z
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<PAGE>
shareholders, whose shares are not subject to any distribution and/or service
fees. The Fund's shares do not have cumulative voting rights for the election of
Directors.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF DIRECTORS IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OR MORE
OF THE FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE
OR MORE DIRECTORS OR TO TRANSACT ANY OTHER BUSINESS.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which
has been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Fund with the Commission
under the Securities Act. Copies of the Registration Statement may be obtained
at a reasonable charge from the Commission or may be examined, without charge,
at the office of the Commission in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH THE DISTRIBUTOR, DEALERS, OR
DIRECTLY FROM THE FUND THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15035, NEW BRUNSWICK, NEW JERSEY 08906-5020. The purchase price is the NAV
next determined following receipt of an order in proper form by the Distributor,
your Dealer or the Transfer Agent, plus a sales charge which, at your option,
may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). Class Z shares are offered to a
limited group of investors at NAV without any sales charge. Dealers may charge
their customers a separate fee for handling purchase transactions. Payment made
by cash, wire, check or through your brokerage account. See "Alternative
Purchase Plan" below. See also "How the Fund Values its Shares."
In order to receive that day's NAV, your order must be received before the
Fund's NAV is computed (currently 4:15 P.M., New York time). If you purchase
shares through your Dealer, the Dealer must receive your order before the Fund's
NAV is computed that day and must transmit the order to the Distributor that
same day for you to receive that day's NAV.
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares, except that the minimum initial investment for Class
C shares may be waived from time to time. There is no minimum initial investment
requirement for Class Z shares. The minimum subsequent investment is $100 for
all classes, except for Class Z shares, for which there is no such minimum. All
minimum investment requirements are waived for certain retirement and employee
savings plans or custodial accounts for the benefit of minors. For purchases
made through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment is $50. See "Shareholder Services" below.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
If a stock certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares in street name with their Dealer will not receive stock
certificates.
Your Dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the placement of the
order.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your Dealer. Any such charge is retained by the Dealer and is not
remitted to the Fund.
24
<PAGE>
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire,
you must first telephone PMFS to receive an account number at (800) 225-1852
(toll-free). The following information will be requested: your name, address,
tax identification number, class election, dividend distribution election,
amount being wired and wiring bank. Instructions should then be given by you to
your bank to transfer funds by wire to State Street Bank and Trust Company
(State Street), Boston, Massachusetts, Custody and Shareholder Services
Division, Attention: Prudential High Yield Total Return Fund, Inc., specifying
on the wire the account number assigned by PMFS and your name and identifying
the class in which you are eligible to invest (Class A, Class B, Class C or
Class Z shares).
If you arrange for receipt by State Street of federal funds prior to the
calculation of NAV (4:15 P.M., New York time) on a business day, you may
purchase shares of the Fund as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential High Yield Total
Return Fund, Inc., Class A, Class B, Class C or Class Z shares and your name and
individual account number. It is not necessary to call PMFS to make subsequent
purchase orders utilizing federal funds. The minimum amount which may be
invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS
Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------ ------------------------ -----------------
<S> <C> <C>
CLASS A Maximum initial sales charge of .30 of 1% (currently Initial sales charge waived or reduced
4% of the public offering price being charged at a rate for certain purchases
of .15 of 1%)
CLASS B Maximum CDSC of 5% of the 1% (currently being Shares convert to Class A shares
lesser of the amount invested or charged at a rate approximately seven years after
the redemption proceeds; of .75 of 1%) purchase
declines to zero after six years
CLASS C Maximum CDSC of 1% of the 1% (currently Shares do not convert to another class
lesser of the amount invested or being charged at a rate
the redemption proceeds on of .75 of 1%)
redemptions made within one
year of purchase
CLASS Z None None Sold to a limited group of investors
</TABLE>
The four classes represent an interest in the same portfolio of investments
of the Fund and have the same rights, except that (i) each class (with the
exception of Class Z shares, which are not subject to any distribution or
service fees), bears the separate expenses of its Rule 12b-1 distribution and
service plan, (ii) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangements and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interest of any other class, (iii) each
class has a different exchange privilege, (iv) only Class B shares have a
conversion feature, and (v) Class Z shares are offered exclusively for sale to a
limited group of investors. See "How to Exchange Your Shares" below. The income
25
<PAGE>
attributable to each class and the dividends payable on the shares of each class
will be reduced by the amount of the distribution-related fee (if any) of each
class. Class B and Class C shares bear the expenses of a higher distribution fee
which will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A and Class Z shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B, Class C and Class Z
shares and will generally receive more compensation initially for selling Class
A and Class B shares than for selling Class C or Class Z shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares automatically
convert to Class A shares approximately seven years after purchase (see
"Conversion Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on the fees and
expenses to be charged to the Fund:
If you intend to hold your investment in the Fund for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to an initial sales charge of 5% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6-year period, you should
consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 7 years or more and do not
qualify for a reduced sales charge on Class A shares, since Class B shares
convert to Class A shares approximately 7 years after purchase and because all
of your money would be invested initially in the case of Class B shares, you
should consider purchasing Class A or Class B shares over Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and Class C shares for the
higher cumulative annual distribution-related fee on those shares to exceed the
initial sales charge plus cumulative annual distribution-related fees on Class A
shares. This does not take into account the time value of money, which further
reduces the impact of the higher Class B or Class C distribution-related fee on
the investment, fluctuations in NAV, the effect of the return on the investment
over this period of time or redemptions during which the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT
OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES
UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See "Reduction and
Waiver of Initial Sales Charges" and "Class Z Shares" below.
26
<PAGE>
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested) as
shown in the following table:
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
-------------- --------------- -----------------
Less than $50,000 4.00% 4.17% 3.75%
$50,000 to $99,999 3.50 3.63 3.25
$100,000 to $249,999 2.75 2.83 2.50
$250,000 to $499,999 2.00 2.04 1.90
$500,000 to $999,999 1.50 1.52 1.40
$1,000,000 and above None None None
The Distributor may reallow the entire sales charge to Dealers. Dealers may
be deemed to be underwriters, as that term is defined in the Securities Act. The
Distributor reserves the right, without prior notice to any Dealer, to suspend
or eliminate Dealer concessions or commissions.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay Dealers, financial advisers and other persons which distribute shares a
finders' fee from its own resources based on a percentage of the NAV of shares
sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of
an initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 or 403(b)(7) of the Internal
Revenue Code (collectively, Benefit Plans), provided that the Benefit Plan has
existing assets of at least $1 million invested in shares of Prudential Mutual
Funds (excluding money market funds other than those acquired pursuant to the
exchange privilege) or 250 eligible employees or participants. In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent and for
which the Transfer Agent does individual account recordkeeping (Direct Account
Benefit Plans), Class A shares may be purchased at NAV by participants who are
repaying loans made from such plans to the participant.
Special Rules Applicable to Retirement Plans. After a Benefit Plan
qualifies to purchase Class A shares at NAV, all subsequent purchases will be
made at NAV.
Other Waivers. In addition, Class A shares may be purchased at NAV, through
the Transfer Agent, by the following persons: (a) officers of the Prudential
Mutual Funds (including the Fund), (b) employees of the Distributor and PIFM and
their subsidiaries and members of the families of such persons who maintain an
"employee related" account at the Transfer Agent, (c) employees of subadvisers
of the Prudential Mutual Funds, provided that purchases at NAV are permitted by
such person's employer, (d) Prudential, employees and special agents of
Prudential and its subsidiaries and all persons who have retired directly from
active service with Prudential or one of its subsidiaries, (e) registered
representatives and employees of Dealers, provided that purchases at NAV are
permitted by such person's employer, (f) investors in Individual Retirement
Accounts, provided
27
<PAGE>
the purchase is made with the proceeds of a tax-free rollover of assets from a
Benefit Plan for which Prudential Investments serves as the record keeper or
administrator, (g) investors previously eligible to purchase Class A shares at
NAV because of their participation in programs sponsored by an affiliate of the
Distributor for certain retirement plan or deferred compensation plan
participants, (h) 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 (e.g., mutual
fund "wrap" or asset allocation programs), and (i) orders placed by clients of
such broker-dealers, investment advisers or financial planners who place trades
for their own accounts if the accounts are linked to the master account of such
broker-dealer, investment adviser or financial planner on the books and records
of the broker-dealer, investment adviser or financial planner (e.g., mutual
fund "supermarket" programs).
For an investor to obtain any reduction or waiver of the initial sales
charges, 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 charges are imposed upon Class A shares
purchased upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales
Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent, a Dealer, or the Distributor.
Although there is no sales charge imposed at the time of purchase, redemptions
of Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below. The Distributor will pay, from
its own resources, sales commissions of up to 4% of the purchase price of Class
B shares to Dealers, financial advisers and other persons who sell Class B
shares at the time of sale from its own resources. This facilitates the ability
of the Fund to sell the Class B shares without an initial sales charge being
deducted at the time of purchase. The Distributor anticipates that it will
recoup its advancement of sales commissions from the combination of the CDSC and
the distribution fee. See "How the Fund is Managed--Distributor." In connection
with the sale of Class C shares, the Distributor will pay, from its own
resources, Dealers, financial advisers and the other persons which distribute
Class C shares a sales commission of up to 1% of the purchase price at the time
of the sale.
CLASS Z SHARES
Class Z shares of the Fund currently are available for purchase by: (i)
pension, profit sharing or other employee benefit plans qualified under Section
401 of the Internal Revenue Code, deferred compensation and annuity plans under
Sections 457 and 403(b)(7) of the Internal Revenue Code, and non-qualified plans
for which the Fund is an available option (collectively, Benefit Plans),
provided such Benefit Plans (in combination with other plans sponsored by the
same employer or group of related employers) have at least $50 million in
defined contribution assets; (ii) participants in any fee-based program or trust
program sponsored by any affiliate of the Distributor which includes mutual
funds as investment options and for which the Fund is an available option; (iii)
certain participants in the MEDLEY Program (group variable annuity contracts)
sponsored by an affiliate of the Distributor for whom Class Z shares of the
Prudential Mutual Funds are an available option, (iv) Benefit Plans for which an
affiliate of the Distributor serves as recordkeeper and as of September 20,
1996, (a) were Class Z shareholders of the Prudential Mutual Funds or (b)
executed a letter of intent to purchase Class Z shares of the Prudential Mutual
Funds; (v) current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund); and (vi) employees of an affiliate of the Distributor who
participate in an employer-sponsored employee savings plan. After a Benefit Plan
qualifies to purchase Class Z shares, all subsequent purchases will be for Class
Z shares.
28
<PAGE>
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay Dealers, financial advisers and other persons
which distribute shares a finders' fee, from its own resources, based on a
percentage of the NAV of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM SHARES OF THE FUND AT ANY TIME FOR CASH AT THE NAV PER SHARE
NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT, THE DISTRIBUTOR OR YOUR DEALER. See "How the Fund Values its
Shares." In certain cases, however, redemption proceeds will be reduced by the
amount of any applicable contingent deferred sales charge, as described below.
See "Contingent Deferred Sales Charges" below. If you are redeeming your shares
through a Dealer, your Dealer must receive your sell order before the Fund
computes its NAV for that day (i.e., 4:15 P.M., New York time) in order to
receive that day's NAV. Your Dealer 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 IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR
REDEMPTION SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF
YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE
OF THE CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT, 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 its Transfer Agent, Prudential
Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box 15035, New
Brunswick, New Jersey 08906-5010, the Distributor or to your Dealer.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR DEALER
OF THE CERTIFICATE AND/OR WRITTEN REQUEST EXCEPT AS INDICATED BELOW. Such
payment may be postponed or the right of redemption suspended at times (a) when
the New York Stock Exchange is closed for other than customary weekends and
holidays, (b) when trading on such Exchange is restricted, (c) when an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (d) during any other period
when the Commission, by order, so permits; provided that applicable rules and
regulations of the Commission shall govern as to whether the conditions
prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR THE TRANSFER AGENT 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 THE FUND OR THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY
PURCHASING SHARES BY WIRE OR BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the Commission. Securities will be readily marketable and will be valued in the
same manner as a regular redemption. See "How the Fund Values its Shares." If
your shares are redeemed in kind, you would incur transaction costs in
converting the assets into cash. The Fund has, however, elected to be governed
by Rule 18f-1
29
<PAGE>
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the NAV of the Fund
during the 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has an NAV of less than $500 due to a redemption. The Fund will give any such
shareholder 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any such
involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of redemption. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. If less than a full repurchase is made,
the credit will be on a pro rata basis. You must notify the Fund's Transfer
Agent, either directly or through your Dealer or the Distributor, at the time
the repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege may affect the federal
income tax treatment of any gain realized upon redemption.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred
sales charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within one year of purchase will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid to
you. The CDSC will be imposed on any redemption by you which reduces the current
value of your Class B or Class C shares to an amount which is lower than the
amount of all payments by you for shares during the preceding six years, in the
case of Class B shares, and one year, in the case of Class C shares. A CDSC will
be applied on the lesser of the original purchase price or the current value of
the shares being redeemed. Increases in the value of your shares or shares
purchased through reinvestment of dividends or distributions are not subject to
CDSC. The amount of any CDSC will be paid to and retained by the Distributor.
See "How the Fund is Managed--Distributor" and "Waiver of Contingent Deferred
Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of your shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month. The CDSC will be calculated from the first day of the month after
the initial purchase, excluding the time shares were held in a money market
fund. See "How to Exchange Your Shares" below.
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------ -------------------------
First ......................... 5.0%
Second ........................ 4.0%
Third ......................... 3.0%
Fourth ........................ 2.0%
Fifth ......................... 1.0%
Sixth ......................... 1.0%
Seventh ....................... None
30
<PAGE>
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results generally in the lowest
possible rate. It will be assumed that the redemption is made first of amounts
representing shares acquired pursuant to the reinvestment of dividends and
distributions; then of amounts representing the increase in NAV above the total
amount of payments for the purchase of Fund shares made during the preceding six
years; then of amounts representing the cost of shares held beyond the
applicable CDSC period; and finally, of amounts representing the cost of shares
held for the longest period of time within the applicable CDSC period.
For example, assume you purchased 800 Class B shares at $12.50 per share
for a cost of $10,000. Subsequently, you acquired 5 additional Class B shares
through dividend reinvestment. During the second year after the purchase, you
decided to redeem $5,000 of your investment. Assuming at the time of the
redemption the NAV had appreciated to $15 per share, the value of your Class B
shares would be $12,075 (805 shares at $15 per share). The CDSC would not be
applied to the value of the reinvested dividend shares and the amount which
represents appreciation ($2,075). Therefore, $2,925 of the $5,000 redemption
proceeds ($5,000 minus $2,075) would be charged at a rate of 4% (the applicable
rate in the second year after purchase) for a total CDSC of $117.
For federal income tax purposes, the amount of the CDSC will reduce the
gain or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), or a trust, at the time of death or initial
determination or disability, provided that the shares were purchased prior to
death or disability.
The CDSC will also be waived in the case of a total or partial redemption
in connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 591 @2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service, i.e.,
following voluntary or involuntary termination of employment or following
retirement. Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan unless such
redemptions otherwise qualify as a waiver as described above. Shares purchased
with amounts used to repay a loan from such plans on which a CDSC was not
previously deducted will thereafter be subject to a CDSC without regard to the
time such amounts were previously invested. In the case of a 401(k) plan, the
CDSC will also be waived upon the redemption of shares purchased with amounts
used to repay loans made from the account to the participant and from which a
CDSC was previously deducted. In addition, the CDSC will be waived on
redemptions of shares held by a Director of the Fund.
Systematic Withdrawal Plan. The CDSC will be waived (or reduced) on certain
redemptions from 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 or for exchanged shares
purchased prior to March 1, 1997, or March 1 of the current year. The CDSC will
be waived (or reduced) on redemptions until this threshold 12% is reached.
In addition, the CDSC will be waived on redemptions of shares held by a
Director of the Fund.
You must notify the Transfer Agent either directly or through your Dealer,
at the time of redemption, that you are entitled to waiver of the CDSC and
provide the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement. See "Purchase and Redemption of
31
<PAGE>
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative NAV 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 eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares then in your account. Each time any Eligible Shares in
your account convert to Class A shares, all shares or amounts representing Class
B shares then in your account that were acquired through the automatic
reinvestment of dividends and other distributions will convert to Class A
shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different NAVs 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 800 shares were initially purchased at $12.50 per share (for a
total of $10,000) and a second purchase of 100 shares was subsequently made at
$15 per share (for a total of $1,500), 95.24 shares would convert approximately
seven years from the initial purchase (i.e., $10,000 divided by $11,500 or
86.96% multiplied by 900 shares or 782.64 shares). The Manager reserves the
right to modify the formula for determining the number of Eligible Shares in the
future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share 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. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year will not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase of
such shares.
The conversion feature is subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (ii) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares will continue to be subject, possibly indefinitely, to their higher
annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET
FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF SUCH
32
<PAGE>
FUNDS. CLASS A, CLASS B, CLASS C AND CLASS Z SHARES MAY BE EXCHANGED FOR CLASS
A, CLASS B, CLASS C AND CLASS Z SHARES, RESPECTIVELY, OF ANOTHER FUND ON THE
BASIS OF THE RELATIVE NAV. No sales charge will be imposed at the time of
exchange. Any applicable CDSC payable upon the redemption of shares exchanged
will be that imposed by the fund in which shares are initially purchased and
will be calculated from the first day of the month after the initial purchase,
excluding the time shares were held in a money market fund. Class B and Class C
shares may not be exchanged into money market funds other than Prudential
Special Money Market Fund, Inc. For purposes of calculating the holding period
applicable to the Class B conversion feature, the time period during which Class
B shares were held in a money market fund will be excluded. See "Conversion
Feature--Class B Shares" above. An exchange will be treated as a redemption and
purchase for tax purposes. See "Shareholder Investment Account--Exchange
Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15035, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE
OF SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares on a quarterly basis, unless the shareholder elects
otherwise. Similarly, shareholders who qualify to purchase Class Z share 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 NAV 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 their Dealer that they are
eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at NAV.
33
<PAGE>
The exchange privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, the Fund reserves the right to refuse purchase order and exchanges
by any person, group or commonly controlled accounts, if, in the Manager's sole
judgment, such person, group or accounts were following a market timing strategy
or were otherwise engaging in excessive trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you
can take advantage of the following additional services and privileges:
o AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested.
o AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Fund's shares in amounts as little as $50 via an
automatic debit to a bank account. For additional information about this
service, you may contact the Transfer Agent directly.
o TAX-DEFERRED RETIREMENT PLANS. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from the Transfer Agent. If you
are considering adopting such a plan, you should consult with your own legal or
tax adviser with respect to the establishment and maintenance of such a plan.
o SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders, which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" above. See also "Shareholder
Investment Account--Systematic Withdrawal Plan" in the Statement of Additional
Information.
o REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 (toll-free) or by writing to the Fund at
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In
addition, monthly unaudited financial data are available upon request from the
Fund.
o SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (732)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
34
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE, INC.
BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
SHORT-TERM DEBT RATINGS
Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
A-1
<PAGE>
PRIME 3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short- term debt obligations.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime
rating categories.
SHORT-TERM MUNICIPAL RATINGS
Moody's ratings for tax-exempt notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term and long-term credit risk.
MIG 1: Loans bearing the designation MIG 1 are of the best quality,
enjoying strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
MIG 2: Loans bearing the designation MIG 2 are of high quality, with
margins of protection ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality, with
all security elements accounted for but lacking strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4: Loans bearing the designation MIG 4 are of adequate quality.
Protection commonly regarded and required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
STANDARD & POOR'S RATINGS GROUP
BOND RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A: Debt rated A has strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC AND C: Debt rated BB, B, CCC, CC and C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
A-2
<PAGE>
B: Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC typically is applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C: The rating C typically is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC-debt rating. The C rating maybe used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
C1: The rating C1 is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
COMMERCIAL PAPER
Standard & Poor's commercial paper ratings are current assessments of the
likelihood of timely payment of debt considered short-term in the relevant
market.
A-1: The A-1 designation indicates that the degree of safety regarding
timely payment is very strong.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
A-3
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
================================================================================
TABLE OF CONTENTS
PAGE
----
FUND HIGHLIGHTS ......................................................... 2
What are the Fund's Risk Factors and Special Characteristics? ........... 2
FUND EXPENSES ........................................................... 5
HOW THE FUND INVESTS .................................................... 6
Investment Objective and Policies .................................... 6
Hedging and Return Enhancement Strategies ............................ 9
Risk Factors Relating to Investing in Debt Securities
Rated Below Investment Grade (Junk Bonds) ............................ 11
Risk Factors and Special Considerations Relating to
Investing in Foreign Securities ...................................... 12
Risk Factors Relating to Investing in Distressed Securities .......... 13
Risks of Hedging and Return Enhancement Strategies ................... 14
Other Investments and Investment Policies ............................ 14
Investment Restrictions .............................................. 16
HOW THE FUND IS MANAGED ................................................. 17
Manager .............................................................. 17
Fee Waivers and Subsidy .............................................. 18
Distributor .......................................................... 18
Fee Waivers .......................................................... 19
Portfolio Transactions ............................................... 19
Custodian and Transfer and Dividend Disbursing Agent ................. 19
Year 2000 ............................................................ 20
HOW THE FUND VALUES ITS SHARES .......................................... 20
HOW THE FUND CALCULATES PERFORMANCE ..................................... 20
TAXES, DIVIDENDS AND DISTRIBUTIONS ...................................... 21
GENERAL INFORMATION ..................................................... 23
Description of Common Stock .......................................... 23
Additional Information ............................................... 24
SHAREHOLDER GUIDE ....................................................... 24
How to Buy Shares of the Fund ........................................... 24
Alternative Purchase Plan ............................................ 25
How to Sell Your Shares .............................................. 29
Conversion Feature--Class B Shares ................................... 32
How to Exchange Your Shares .......................................... 32
Shareholder Services ................................................. 34
DESCRIPTION OF SECURITY RATINGS ......................................... A-1
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MF181P
- --------------------------------------------------------------------------------
Class A: 74437D109
CUSIP No.: Class B: 74437D208
Class C: 74437D307
Class Z: 74437D406
- --------------------------------------------------------------------------------
PRUDENTIAL HIGH YIELD
TOTAL RETURN FUND, INC.
P R O S P E C T U S
[ARTWORK]
MARCH 16, 1998
(REVISED JUNE 1, 1998)
PRUDENTIAL LOGO
