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PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102-4077
November 10, 1999
Dear Shareholder:
I am writing to ask you to vote on an important proposal to merge
Prudential Distressed Securities Fund, Inc. into Prudential High Yield Total
Return Fund, Inc. A shareholder meeting is scheduled for November 24, 1999.
This package contains information about the proposal and includes materials you
will need to vote by mail. The Board of Directors of Prudential Distressed
Securities Fund, Inc. has reviewed the proposed merger and has recommended that
it be presented to shareholders for their consideration. Although the Directors
have determined that a merger is in the shareholders' best interest, the final
decision is up to you.
If approved, the merger would give you the opportunity to participate in a
larger fund with similar investment policies. The combined fund would also have
lower gross expenses. To help you understand the proposal, we are including a
"Q and A" that answers common questions about merger transactions. The
accompanying proxy statement includes a detailed description of the proposed
merger. Please read the enclosed materials carefully and cast your vote.
Remember, your vote is extremely important, no matter how large or small your
holdings. By voting now, you can help avoid additional costs that are incurred
with follow-up letters and calls.
To vote, you may use any of the following methods:
. By Mail. You can vote your shares by completing and signing the
enclosed proxy card, and mailing it in the enclosed postage paid
envelope. If you need any assistance, or have any questions regarding
the proposal or how to vote your shares, please call Prudential at
(800) 225-1852.
. By Internet. You may also vote via the internet. To do so, have your
proxy card available and go to the web site: www.proxyvote.com. Enter
your 12-digit control number from your proxy card and follow the
instructions found on the web site.
. By Telephone. Finally, you may vote by telephone by calling
1-800-690-6903 toll free. Enter your 12-digit control number from your
proxy card and follow the instructions given.
If you have any questions before you vote, please call us at 1-800-225-1852.
We're glad to help you understand the proposal and assist you in voting. Thank
you for your participation.
Very truly yours,
John R. Strangfeld, Jr.
President
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IMPORTANT INFORMATION TO HELP YOU UNDERSTAND AND VOTE ON THE
PROPOSAL
Please read the enclosed proxy statement for a complete description of the
merger proposal. As a quick reference, the following provides a brief overview
of the proposal.
WHAT PROPOSAL AM I BEING ASKED TO VOTE ON?
You are being asked to approve a merger of Prudential Distressed Securities
Fund, Inc. into Prudential High Yield Total Return Fund, Inc.
WHAT IS THE REASON FOR THIS MERGER?
The proposed merger is intended to combine two similarly managed funds,
resulting in overall lower gross expenses (the merger also should result in
lower net expenses for Class B and Class C shares). The merger is also
desirable because of the inability of Prudential Distressed Securities Fund to
attract investors and build an investment portfolio that can effectively pursue
the fund's objective. With assets that have now declined to about $3 million,
Prudential Distressed Securities Fund's portfolio must be managed defensively
and its assets cannot be aggressively invested to achieve capital appreciation.
Prudential High Yield Total Return Fund, which is a much larger fund, has built
an investment portfolio that can more fully implement its objective of total
return through high current income and capital appreciation.
DO THE FUNDS BEING MERGED HAVE SIMILAR INVESTMENT POLICIES?
Yes. Both funds invest in securities that are deemed speculative and
riskier than blue chip or higher rated securities. Prudential Distressed
Securities Fund invests primarily in debt and equity securities of financially
troubled companies and in equity securities of operationally troubled companies,
while Prudential High Yield Total Return Fund invests primarily in high yield
fixed income (or debt) securities. Although the types of securities in which
each fund may invest can be somewhat different, in practice, each Fund
emphasizes investment in debt securities. Furthermore, the overall process of
identifying highly speculative securities to achieve capital appreciation and/or
high current income, as well as the risks associated with such securities, is
similar. In addition, both funds make similar use of derivative and hedging
strategies.
WHO ARE THE FUND MANAGERS FOR THESE FUNDS?
Prudential Investments' Fixed Income Group currently manage both funds and
is expected to manage the combined fund. Senior Managing Directors James J.
Sullivan and Jack W. Gaston head the Group, which is organized into teams
specializing in different market sectors.
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HOW DO THE EXPENSE STRUCTURES OF THE FUNDS COMPARE?
Distressed Securities Fund
Annual Fund Operating Expenses (deducted from Fund assets)
CLASS A CLASS B CLASS C
Management fees .75% .75% .75%
+ Distribution and service (12b-1) fees .30% 1.00% 1.00%
+ Other expenses 2.94% 2.94% 2.94%
= Total annual Fund operating expenses 3.99% 4.69% 4.69%
- - Fee Waiver or Reimbursement 2.74% 2.69% 2.69%
= Total net expenses 1.25% 2.00% 2.00%
High Yield Total Return Fund
Annual Fund Operating Expenses (deducted from Fund assets)
CLASS A CLASS B CLASS C
Management fees .65% .65% .65%
+ Distribution and service (12b-1) fees .30% 1.00% 1.00%
+ Other expenses .54% .54% .54%
= Total annual Fund operating expenses 1.49% 2.19% 2.19%
- - Fee Waiver or Reimbursement .20% .40% .40%
= Total net expenses 1.29% 1.79% 1.79%
IS THE MERGER A TAXABLE EVENT FOR FEDERAL INCOME TAX PURPOSES?
Typically, the exchange of shares pursuant to a merger does not
result in a gain or loss for federal income tax purposes. For more
information, see the proxy statement.
WHAT WILL BE THE SIZE OF PRUDENTIAL HIGH YIELD TOTAL RETURN FUND
AFTER THE MERGER?
If the proposal is approved, the combined fund is anticipated to
have approximately $140 million in assets.
HOW WILL YOU DETERMINE THE NUMBER OF SHARES OF PRUDENTIAL
HIGH YIELD TOTAL RETURN FUND THAT YOU WILL RECEIVE?
As of the close of business of the New York Stock Exchange at the
Effective Time of the merger, shareholders will receive the number of
full and fractional Class A, Class B or Class C shares of Prudential High
Yield Total Return Fund that is equal in value to the net asset value of
their Class A, Class B or Class C shares of Prudential Distressed
Securities Fund on that date. The merger is anticipated to occur on
November 26, 1999.
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WHAT IF THERE ARE NOT ENOUGH VOTES TO REACH QUORUM BY THE
SCHEDULED SHAREHOLDER MEETING DATE?
If we do not receive sufficient votes to hold the meeting, we or
Shareholder Communications, a proxy solicitation firm, may contact you by mail
or telephone to encourage you to vote. Shareholders should review the proxy
materials and cast their vote to avoid additional mailings or telephone calls.
If there are not sufficient votes to approve the proposal by the time of the
Shareholder Meeting (November 24, 1999), the meeting may be adjourned to permit
further solicitation of proxy votes.
HAS THE FUND'S BOARD OF DIRECTORS APPROVED THE PROPOSAL?
Yes. The Board of Directors has approved the proposal and recommends that
you vote to approve it.
HOW MANY VOTES AM I ENTITLED TO CAST?
As a shareholder, you are entitled to one vote for each share you own of
Prudential Distressed Securities Fund on the record date. The record date is
August 27, 1999.
HOW DO I VOTE MY SHARES?
You can vote your shares by completing and signing the enclosed proxy card,
and mailing it in the enclosed postage paid envelope. If you need any
assistance, or have any questions regarding the proposal or how to vote your
shares, please call Prudential at (800) 225-1852.
You may also vote via the internet. To do so, have your proxy card
available and go to the web site: www.proxyvote.com. Enter your 12-digit
control number from your proxy card and follow the instructions found on the web
site.
Finally, you can vote by telephone by calling 1-800-690-6903 toll free.
Enter your 12-digit control number from your proxy card and follow the
instructions given.
HOW DO I SIGN THE PROXY CARD?
INDIVIDUAL ACCOUNTS: Shareholders should sign exactly as their names appear
on the account registration shown on the card.
JOINT ACCOUNTS: Both owners must sign and the signatures should conform
exactly to the names shown on the account registration.
ALL OTHER ACCOUNTS: The person signing must indicate his or her capacity.
For example, a trustee for a trust should include their title when they
sign, such as "Jane Doe, Trustee"; or an authorized officer of a company
should indicate their position with the company, such as "John Smith,
President."
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PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
100 Mulberry Street
Gateway Center Three, 9/th/ Floor
Newark, New Jersey 07102-4077
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To our Shareholders:
Notice is hereby given that a Special Meeting of Shareholders (the Meeting)
of Prudential Distressed Securities Fund, Inc. will be held at 100 Mulberry
Street, Gateway Center Three, 14/th/ Floor, Newark, New Jersey 07102, on
November 24, 1999, at 11:00 a.m. Eastern time, for the following purposes:
1. To approve an Agreement and Plan of Merger under which Prudential
Distressed Securities Fund, Inc. (Distressed Securities Fund) will merge with
and into Prudential High Yield Total Return Fund, Inc. (High Yield Total Return
Fund) whereupon the separate existence of Distressed Securities Fund will cease
and High Yield Total Return Fund will be the surviving corporation, and each
whole and fractional share of each class of Distressed Securities Fund shall be
converted into and become whole and fractional shares of equal net asset value
of the same class of High Yield Total Return Fund.
2. To transact such other business as may properly come before the Meeting
or any adjournments of the Meeting.
The Board of Directors has fixed the close of business on August 27, 1999
as the record date for the determination of the shareholders of Distressed
Securities Fund entitled to notice of, and to vote at, this Meeting and any
adjournments.
Marguerite E. H. Morrison
Secretary
Dated: November 10, 1999
________________________________________________________________________________
A PROXY CARD FOR YOUR FUND IS ENCLOSED ALONG WITH THE PROXY STATEMENT. PLEASE
VOTE YOUR SHARES TODAY BY SIGNING AND RETURNING THE ENCLOSED PROXY CARD IN THE
POSTAGE PREPAID ENVELOPE PROVIDED. YOU ALSO MAY VOTE BY TELEPHONE OR VIA THE
INTERNET AS DESCRIBED IN THE ENCLOSED MATERIALS. THE BOARD OF YOUR FUND
RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSAL.
________________________________________________________________________________
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YOUR VOTE IS IMPORTANT -
PLEASE RETURN YOUR PROXY CARD PROMPTLY.
SHAREHOLDERS ARE INVITED TO ATTEND THE MEETING IN PERSON. ANY SHAREHOLDER WHO
DOES NOT EXPECT TO ATTEND THE MEETING IS URGED TO COMPLETE THE ENCLOSED PROXY
CARD, DATE AND SIGN IT, AND RETURN IT IN THE ENVELOPE PROVIDED, WHICH NEEDS NO
POSTAGE IF MAILED IN THE UNITED STATES. IN ORDER TO AVOID UNNECESSARY EXPENSE,
WE ASK YOUR COOPERATION IN MAILING YOUR PROXY CARD PROMPTLY, NO MATTER HOW LARGE
OR SMALL YOUR HOLDINGS MAY BE.
INSTRUCTIONS FOR EXECUTING YOUR PROXY CARD
The following general rules for executing proxy cards may be of assistance to
you and may help avoid the time and expense involved in validating your vote if
you fail to execute your proxy card properly.
1. INDIVIDUAL ACCOUNTS: Your name should be signed exactly as it appears on the
account registration shown on the proxy card.
2. JOINT ACCOUNTS: Both owners must sign and the signatures should conform
exactly to the names shown on the account registration.
3. ALL OTHER ACCOUNTS should show the capacity of the individual signing. This
can be shown either in the form of the account registration itself or by the
individual executing the proxy card. For example:
REGISTRATION VALID SIGNATURE
--------------------------------------------------------
A. 1. XYZ Corporation John Smith, President
2. XYZ Corporation John Smith, President
c/o John Smith, President
B. 1. ABC Company Profit Sharing Plan Jane Doe, Trustee
2. Jones Family Trust Charles Jones, Trustee
3. Sarah Clark, Trustee Sarah Clark, Trustee
u/t/d 7/1/85
C. 1. Thomas Wilson, Custodian Thomas Wilson, Custodian
f/b/o Jessica Wilson UTMA
New Jersey
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PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC.
PROSPECTUS
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
PROXY STATEMENT
Gateway Center Three
100 Mulberry Street, 9/th/ Floor
Newark New Jersey 07102-4077
(800) 225-1852
______________________________
NOVEMBER 10, 1999
______________________________
This Proxy Statement and Prospectus (Proxy Statement) is being furnished to
shareholders of Prudential Distressed Securities Fund, Inc. (Distressed
Securities Fund) in connection with the solicitation of proxies by the
Distressed Securities Fund's Board of Directors for use at the Special Meeting
of Shareholders of Distressed Securities Fund and at any adjournments of the
meeting (the Meeting). The Meeting will be held on Wednesday, November 24, 1999,
at 11:00 a.m. Eastern Time at 100 Mulberry Street, Gateway Center Three, 14th
Floor, Newark, New Jersey 07102.
The purpose of the Meeting is to vote on an Agreement and Plan of Merger
(the Agreement) under which Distressed Securities Fund will merge (the Merger)
with and into Prudential High Yield Total Return Fund, Inc. (High Yield Total
Return Fund). If the Merger is approved, the separate existence of Distressed
Securities Fund will cease and High Yield Total Return Fund will be the
surviving corporation, and each whole and fractional share of each class of
Distressed Securities Fund shall be converted into and become whole and
fractional shares of equal net asset value of the same class of High Yield Total
Return Fund on November 26, 1999, or such later date as the parties may agree
(the Effective Time).
High Yield Total Return Fund is a diversified taxable bond fund registered
as an open-end management investment company and organized as a Maryland
corporation. High Yield Total Return Fund's investment objective is to seek
total return through high current income and capital appreciation. High Yield
Total Return Fund seeks to achieve its investment objective by investing
primarily in high yield fixed income securities. The Fund also invests in
preferred stocks, equity-related securities and convertible securities.
Distressed Securities Fund is a diversified stock and bond fund registered
as an open-end management investment company and organized as a Maryland
corporation. Distressed Securities Fund's investment objective is to seek
capital appreciation. Distressed Securities Fund seeks to achieve its investment
objective by investing primarily in debt and equity securities of financially
troubled companies and in the equity securities of operationally troubled
companies.
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If Distressed Securities Fund's shareholders approve the Merger, the
shareholders of Distressed Securities Fund will become shareholders of High
Yield Total Return Fund.
This Proxy Statement should be retained for your future reference. It sets
forth concisely the information about the Merger and High Yield Total Return
Fund that a shareholder should know before voting on the proposed Merger. A
Statement of Additional Information dated November 10, 1999, which relates to
this Proxy Statement, has been filed with the Securities and Exchange Commission
(the Commission) and is incorporated into this Proxy Statement by reference.
This Proxy Statement is accompanied by the Prospectus, dated June 1, 1999, as
supplemented to date, which offers shares of High Yield Total Return Fund. The
Statement of Additional Information for High Yield Total Return Fund, dated June
1, 1999, as supplemented to date, is available upon request. Enclosed with the
Proxy Statement is the Annual Report of High Yield Total Return Fund dated March
31, 1999. The Prospectus and Statement of Additional Information and supplements
thereto for High Yield Total Return Fund have been filed with the Commission and
are incorporated into this Proxy Statement by reference. A Prospectus and
Statement of Additional Information for Distressed Securities Fund, both dated
February 5, 1999, as supplemented to date, have been filed with the Commission
and are incorporated into this Proxy Statement by reference. Copies of the
documents referred to above may be obtained without charge by contacting
Prudential Mutual Fund Services LLC at Post Office Box 15005, New Brunswick, New
Jersey 08906-5005, or by calling (800) 225-1852.
The Securities and Exchange Commission has not approved or disapproved High
Yield Total Return Fund's shares, nor has the Commission determined that this
proxy statement and prospectus is complete or accurate. It is a criminal offense
to state otherwise.
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SPECIAL MEETING OF SHAREHOLDERS OF
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
TO BE HELD ON NOVEMBER 24, 1999 AT:
100 MULBERRY STREET
GATEWAY CENTER THREE, 14TH FLOOR
NEWARK, NEW JERSEY 07102-4077
_____________________________
PROXY STATEMENT AND PROSPECTUS
_____________________________
VOTING INFORMATION
This Proxy Statement and Prospectus (Proxy Statement) is furnished in
connection with a solicitation of proxies made by, and on behalf of, the Board
of Directors of Prudential Distressed Securities Fund, Inc. (Distressed
Securities Fund) to be used at the Special Meeting of Shareholders of Distressed
Securities Fund and at any adjournments of the Special Meeting (the Meeting), to
be held on Wednesday, November 24, 1999 at 11:00 a.m. at 100 Mulberry Street,
Gateway Center Three, 14/th/ Floor, Newark, New Jersey 07102, the principal
executive office of The Prudential Investment Corporation (PIC). PIC serves as
the investment adviser to Prudential High Yield Total Return Fund, Inc. (High
Yield Total Return Fund) and Distressed Securities Fund (collectively, the
Funds).
The purpose of the Meeting is described in the accompanying Notice. The
solicitation is made primarily by the mailing of this Proxy Statement and the
accompanying proxy card on or about November 10, 1999. Supplementary
solicitations may be made by mail, telephone, telegraph, facsimile, electronic
means or by personal interview by representatives of Distressed Securities Fund.
In addition, Shareholder Communications Corporation, a proxy solicitation firm,
may be retained to solicit shareholders on behalf of Distressed Securities Fund.
The costs of retaining Shareholder Communications Corporation will be borne by
Distressed Securities Fund's and High Yield Total Return Fund's Manager,
Prudential Investments Fund Management LLC (PIFM). The expenses in connection
with preparing this Proxy Statement and its enclosures and of all solicitations
will be borne by PIFM. PIFM will also reimburse brokerage firms and others for
their reasonable expenses in forwarding solicitation material to the beneficial
owners of shares of Distressed Securities Fund.
Even if you sign and return the enclosed proxy card, you may revoke your
proxy at any time prior to its use by written notification received by
Distressed Securities Fund, by submitting a later-dated proxy card, or by
attending the Meeting and voting in person.
All proxy cards solicited by the Board of Directors that are properly
completed and received by the Secretary of Distressed Securities Fund prior to
the Meeting, and that are not revoked, will be voted at the Meeting. Shares
represented by proxies will be voted in accordance with the instructions you
provide. If no instruction is made on a proxy card, it will be voted FOR
Proposal No. 1. Only proxies that are actually voted will be counted toward
establishing a quorum, which is the minimum number of shares necessary to
transact business at the Meeting.
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If a proxy that is properly signed and returned is accompanied by
instructions to withhold authority to vote (an abstention) or represents a
broker "non-vote" (that is, a proxy from a broker or nominee indicating that
they have not received instructions from the beneficial owner or other person
entitled to vote shares on this matter for which the broker or nominee does not
have discretionary power), the shares represented thereby will be considered
present for purposes of determining the existence of a quorum for the
transaction of business, but will have the effect of a vote against Proposal No.
1.
Distressed Securities Fund also may arrange to have votes recorded by
telephone. The expenses associated with telephone voting will be borne by PIFM.
If Distressed Securities Fund takes votes by telephone, it will use procedures
designed to authenticate shareholders' identities, to allow shareholders to
authorize the voting of their shares in accordance with their instructions, and
to confirm that their instructions have been properly recorded. Proxies given by
telephone may be revoked at any time before they are voted in the same manner
that proxies voted by mail may be revoked.
If a quorum is not present at the Meeting, or if a quorum is present at the
Meeting but sufficient votes to approve Proposal No. 1 are not received, or if
other matters arise requiring shareholder attention, the persons named as proxy
agents may propose one or more adjournments of the Meeting to permit the further
solicitation of proxies. An adjournment will require the affirmative vote of a
majority of shares present at the Meeting or represented by proxy. When voting
on a proposed adjournment, the persons named as proxy agents will vote FOR the
proposed adjournment all shares that they are entitled to vote with respect to
Proposal No. 1, unless directed to vote AGAINST the Proposal, in which case such
shares will be voted against the proposed adjournment. A shareholder vote may
be taken on the Merger described in this Proxy Statement or on any other
business properly presented at the Meeting prior to adjournment if sufficient
votes have been received.
Shareholders of record at the close of business on August 27, 1999 will be
entitled to vote at the Meeting. Each such shareholder will be entitled to one
vote for each share held on that date. On August 27, 1999, there were
54,773.953 Class A shares, 176,397.625 Class B shares and 41,713.375 Class C
shares issued and outstanding for Distressed Securities Fund. The following
shareholders held 5% or more of each class of shares of Distressed Securities
Fund on August 27, 1999: Prudential Securities C/F Mr. Luken W. Potts IRA DTD
04/02/98, Merion Sta., PA owned 5,191 Class A shares (approximately 9.48% of
outstanding Class A shares); Carter Prickerel Properties L.L.C., Kalamazoo, MI,
owned 2,450 Class C shares (approximately 5.87% of outstanding Class C shares);
NELAG Partners, Rancho Mirage, CA, owned 4,342 Class C shares (approximately
10.41% of outstanding Class C shares); Bette Baldwin, Los Angeles, CA, owned
2,450 Class C shares (approximately 5.87% of outstanding Class C shares); Dr.
Steven J. Bier MD TTEE, Retiement Trust, Bronx, NY, owned 6,993 Class C shares
(approximately 16.76% of outstanding Class C shares); Herbert P. Schenkel,
Macungie, PA, owned 2,450 Class C shares (approximately 5.87% of outstanding
Class C shares); and Susan T. Aberbach, New York, NY, owned 4,901 Class C shares
(approximately 11.75% of outstanding Class C shares).
As of August 27, 1999, the Directors and officers of both Distressed
Securities Fund and High Yield Total Return Fund owned, in the aggregate, less
than 1% of each class of each Fund's total outstanding shares. Prudential
Securities Incorporated intends to vote any shares of Distressed Securities Fund
for which it has direct voting authority FOR the Proposal.
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Vote Required
APPROVAL OF THE MERGER REQUIRES THE AFFIRMATIVE VOTE OF TWO-THIRDS OF THE
OUTSTANDING SHARES OF COMMON STOCK OF DISTRESSED SECURITIES FUND.
SYNOPSIS
The following is a summary of information contained elsewhere in this Proxy
Statement, in the Agreement and Plan of Merger (the Agreement, the form of which
is attached as Attachment A), and in the Prospectuses of Distressed Securities
Fund and High Yield Total Return Fund, which are incorporated into this Proxy
Statement by this reference. Shareholders should read the Proxy Statement and
the Prospectus of High Yield Total Return Fund for more complete information.
The Merger would merge Distressed Securities Fund into High Yield Total
Return Fund, a larger mutual fund also managed by PIFM, for which PIC acts as
investment adviser. If the Merger is approved, Distressed Securities Fund will
cease to exist and current shareholders of Distressed Securities Fund will
become shareholders of High Yield Total Return Fund instead.
Investment Objectives and Policies
Distressed Securities Fund and High Yield Total Return Fund have
substantially similar investment objectives and policies. Distressed Securities
Fund seeks capital appreciation by investing primarily in the debt and equity
securities of financially troubled companies and the equity securities of
operationally troubled companies. High Yield Total Return Fund seeks total
return through high current income and capital appreciation by investing
primarily in high yield fixed income securities. High Yield Total Return Fund
also invests in preferred stocks, equity-related securities and convertible
securities. Some of the securities in which High Yield Total Return Fund invests
may be issued by financially or operationally troubled companies.
The Funds' investment objectives differ in that Distressed Securities Fund
does not look to provide investors with current income while High Yield Total
Return Fund invests in securities that can provide capital appreciation and high
current income. Under its investment policies, Distressed Securities Fund
invests principally in equity and debt securities. In contrast, High Yield Total
Return Fund invests primarily debt securities.
Distressed Securities Fund and High Yield Total Return Fund have the same
Manager (PIFM), the same investment adviser (PIC) and the same portfolio
managers (Prudential Investments' Fixed Income Group). The address of PIFM is
Gateway Center Three, 100 Mulberry Street, 9/th/ Floor, Newark, New Jersey
07102-4077. PIFM and its predecessors have served as manager or administrator to
investment companies since 1987. As of August 31, 1999, PIFM served as manager
to all 46 of the Prudential Mutual Funds, and as manager or administrator to 22
closed-end investment companies, with aggregate assets of approximately $71.8
billion.
The benchmark index for both Distressed Securities Fund and High Yield
Total Return Fund is the Lehman Brothers High Yield Bond Index (the Index), a
market value weighted benchmark of corporate securities with one or more years
to maturity that are not publicly issued, rated below investment grade and have
$50 million or more outstanding. PIC manages each Fund to have overall interest
rate risk similar to that of the Index.
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High Yield Total Return Fund pays dividends out of any net investment
income, if any, every month. Distressed Securities Fund pays dividends, if any,
at least annually. Net realized capital gains for both Funds, if any, are also
distributed annually.
Expense Structures
Distressed Securities Fund and High Yield Total Return Fund each pay a
monthly management fee to PIFM. PIFM, in turn, reimburses the investment
adviser, PIC, for its reasonable costs and expenses in providing advisory
services to each Fund. Distressed Securities Fund has agreed to pay a management
fee to PIFM at an annual rate of 0.75% of average net assets. High Yield Total
Return Fund has agreed to pay a management fee to PIFM at an annual rate of
0.65% of average net assets.
The management fee paid by both Funds covers PIFM's oversight of the Funds'
respective investment portfolios. PIFM also administers each Fund's corporate
affairs and, in connection therewith, furnishes the Funds with office
facilities, together with those ordinary clerical and bookkeeping services that
are not furnished by the Funds' custodian or transfer and dividend disbursing
agent. Officers and employees of PIFM serve as officers and Directors of the
Funds without compensation.
Both Funds' expense structures are similar but the rates paid are
different. PIFM has contractually agreed to waive a portion of its management
fee payable by each Fund and/or reimburse certain annual Fund operating
expenses. As a result, the management fee payable by High Yield Total Return
Fund is at an annual rate of .50% of average net assets and the annual net
operating expenses for Distressed Securities Fund are limited to 1.25%, 2.00%
and 2.00% for Class A, Class B and Class C shares, respectively. For the fiscal
period ended March 31, 1999, PIFM agreed to waive a larger portion of its
management fee so that High Yield Total Return Fund paid PIFM .35% of average
net assets (on an annualized basis). In addition, Prudential Investment
Management Services LLC (PIMS), the Funds' Distributor, has contractually agreed
to waive a portion of the distribution and service (12b-1) fee payable by Class
A shares of each Fund (.05% of a fee of .30%) and a portion of the 12b-1 fees
payable by Class B and Class C shares of High Yield Total Return Fund (.25% of a
fee of 1.00%).
If the Merger is approved, Class B and Class C shareholders of Distressed
Securities Fund should realize a reduction in both the net annual operating
expenses and gross annual operating expenses (that is, without any waivers or
reimbursements) paid on their investment. Class A shareholders should realize a
reduction in the gross annual operating expenses paid on their investment, but a
slight increase in the net annual operating expenses. Shareholders should
understand that the contractual waivers and/or reimbursements by PIFM and PIMS
are enforceable for one-year periods and may be terminated with respect to any
subsequent fiscal year on not less than 30 days' notice prior to the end of a
current fiscal year. The contractual waivers and reimbursement for High Yield
Total Return Fund extend through March 31, 2000. The contractual waivers
enjoyed by Distressed Securities Fund extend through November 30, 1999. There
is no assurance that PIFM will continue this reimbursement beyond that date.
Overall, the proposed Merger would provide Distressed Securities Fund
shareholders with the following benefits:
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. the opportunity to participate in a larger fund;
. investment in a fund with an investment objective and policies similar
to Distressed Securities Fund's investment objective and policies; and
. net annual operating expenses for Class B and Class C shares that are
lower than those of Distressed Securities Fund Class B and Class C
shares and similar (although slightly higher) for Class A shares,
including any expense limitations, and gross annual operating expenses
for each class that are estimated to be substantially lower than those
of Distressed Securities Fund.
The Board of Directors believes that the Merger will benefit Distressed
Securities Fund shareholders and recommends that shareholders vote in favor of
the Merger.
The Proposed Merger
Shareholders of Distressed Securities Fund will be asked at the Meeting to
vote upon and approve the Agreement, under which Distressed Securities Fund will
merge with and into High Yield Total Return Fund whereupon the separate
existence of Distressed Securities Fund will cease and High Yield Total Return
Fund will be the surviving corporation, and after the filing of Articles of
Merger each whole and fractional share of each class of Distressed Securities
Fund shall be converted into and become whole and fractional shares of equal net
asset value of the same class of High Yield Total Return Fund, on or about
Friday, November 26, 1999 (the Effective Time). Approval of the Merger will be
determined solely by approval of the shareholders of Distressed Securities Fund.
No vote by shareholders of High Yield Total Return Fund is required.
The Funds have received an opinion of counsel at the Effective Time that
the Merger will not result in any gain or loss for federal income tax purposes
to either Distressed Securities Fund, High Yield Total Return Fund, or the
shareholders of each Fund.
Fund Operating Expenses
Each Fund pays a management fee to PIFM for managing its investments and
business affairs which is calculated and paid to PIFM every month. Distressed
Securities Fund has agreed to pay PIFM a management fee at an annual rate of
0.75% of its average net assets and High Yield Total Return Fund has agreed to
pay PIFM a management fee at an annual rate of 0.65% of its average net assets.
In addition to the management fee, each Fund incurs other expenses for
services such as maintaining shareholder records and furnishing shareholder
statements and financial reports. For the period ended March 31, 1999, High
Yield Total Return Fund's and Distressed Securities Fund's annualized total
operating expense ratios for Class A shares were 1.06% and 1.25% (after waivers
and reimbursements), respectively, and for Class B and Class C shares each were
1.64% and 2.00%, respectively. Had the management fee waiver that is currently
in effect been in place during this period, High Yield Total Return Fund's
annualized total operating expenses for Class A, Class B and Class C shares
would have been 1.29%, 1.79% and 1.79%, respectively. If shareholders approve
the Merger, High Yield Total Return Fund's expense structure will apply.
7
<PAGE>
Assuming continuation of High Yield Total Return Fund's current expenses, this
expense structure would increase the total operating expenses currently incurred
by Class A shareholders of Distressed Securities Fund from 1.25% to 1.29% of
average net assets and decrease the total operating expenses from 2.00% to 1.79%
for Class B and Class C shareholders. If the proposed Merger is not approved,
Distressed Securities Fund will continue with its current fee structure, except
that there is no assurance that the fee waiver or reimbursement of PIFM or PIMS
will continue past November 30, 1999. For more information about the Funds'
current fees, refer to their Prospectuses. See the Pro Forma Capitalization and
Ratios below for estimates of expenses if the Merger is approved.
Comparative Fee Tables
The following table shows the fees and expenses of Class A, Class B and
Class C shares of Distressed Securities Fund and High Yield Total Return Fund,
adjusted to reflect current fees, and pro forma fees for the combined fund after
giving effect to the Merger, including the effect of PIFM's and PIMS' expense
waivers and/or reimbursements previously described.
Fund operating expenses are paid out of each Fund's assets. Expenses are
factored into each Fund's share price or dividends and are not charged directly
to shareholder accounts. The following figures are based on historical expenses,
adjusted to reflect current fees, of Distressed Securities Fund for the six-
month period ended May 31, 1999 (as annualized) and of High Yield Total Return
Fund for the period ended March 31, 1999 (as annualized) and are calculated as a
percentage of average net assets of each Fund. The pro forma combined figures
are based on December 31, 1998 amounts.
<TABLE>
<CAPTION>
Class A Shares Distressed Securities High Yield Pro Forma
Fund Total Return Combined Fund
Fund
Class A shares Class A shares Class A shares
<S> <C> <C> <C>
Management fees .75% .65% .65%
+ Distribution and service (12b-1) fees .30% .30% .30%
+ Other expenses 2.94% .54% .51%
= Total annual operating expenses 3.99% 1.49% 1.46%
- - Fee waiver or expense reimbursement 2.74% .20% .20%
= Net annual operating expenses 1.25% 1.29% 1.26%
</TABLE>
<TABLE>
<CAPTION>
Class B and Class C Shares Distressed Securities High Yield Pro Forma
Fund Total Return Combined Fund
Fund
Class B and Class B and Class B and
Class C shares Class C shares Class C shares
<S> <C> <C> <C>
Management fees .75% .65% .65%
+ Distribution and service (12b-1) fees 1.00% 1.00% 1.00%
+ Other expenses 2.94% .54% .51%
= Total annual operating expenses 4.69% 2.19% 2.16%
- - Fee waiver or expense reimbursement 2.69% .40% .40%
= Net annual operating expenses 2.00% 1.79% 1.76%
</TABLE>
8
<PAGE>
Examples of the Effect of Fund Expenses
The following table illustrates the expenses on a hypothetical $10,000
investment in each Fund under the current and pro forma (combined fund) expenses
calculated at the rates stated above for the first year, and thereafter using
gross expenses with no fee waivers or expense reimbursements, assuming a 5%
annual return, and assuming that you sell your shares at the end of each period.
<TABLE>
<CAPTION>
Class A Shares
Distressed Securities High Yield Pro Forma
Fund Total Return Fund Combined Fund
Class A shares Class A shares Class A shares
<S> <C> <C> <C>
1 Year $ 621 $ 526 $ 523
3 Years $1,415 $ 833 $ 824
5 Years $2,226 $1,162 $1,147
10 Years $4,325 $2,092 $2,060
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
Distressed Securities High Yield Pro Forma
Fund Total Return Fund Combined Fund
Class B shares Class B shares Class B shares
<S> <C> <C> <C>
1 Year $ 703 $ 682 $ 679
3 Years $1,472 $ 947 $ 938
5 Years $2,247 $1,238 $1,223
10 Years $4,404 $2,231 $2,200
</TABLE>
<TABLE>
<CAPTION>
Class B Shares (Assuming No Redemption)
Distressed Securities High Yield Pro Forma
Fund Total Return Fund Combined Fund
Class B shares Class B shares Class B shares
<S> <C> <C> <C>
1 Year $ 203 $ 182 $ 179
3 Years $1,172 $ 647 $ 638
5 Years $2,147 $1,138 $1,123
10 Years $4,404 $2,231 $2,200
</TABLE>
<TABLE>
<CAPTION>
Class C Shares
Distressed Securities High Yield Pro Forma
Fund Total Return Fund Combined Fund
Class C shares Class C shares Class C shares
<S> <C> <C> <C>
1 Year $ 401 $ 380 $ 377
3 Years $1,260 $ 740 $ 731
5 Years $2,226 $1,227 $1,212
10 Years $4,666 $2,568 $2,537
</TABLE>
9
<PAGE>
Class C Shares (Assuming No Redemption)
<TABLE>
<CAPTION>
Distressed Securities High Yield Pro Forma
Fund Total Return Fund Combined Fund
Class C shares Class C shares Class C shares
<S> <C> <C> <C>
1 Year $ 301 $ 280 $ 277
3 Years $1,260 $ 740 $ 731
5 Years $2,226 $1,227 $1,212
10 Years $4,666 $2,568 $2,537
</TABLE>
These examples assume that all dividends and other distributions are
reinvested and that the percentage amounts listed under Annual Fund Operating
Expenses remain the same in the years shown. These examples illustrate the
effect of expenses, but are not meant to suggest actual or expected expenses,
which may vary. The assumed return of 5% is not a prediction of, and does not
represent, actual or expected performance of any Fund.
Pro Forma Capitalization and Ratios
The following table shows the capitalization of Distressed Securities Fund
and High Yield Total Return Fund as of December 31, 1998 and the pro forma
combined capitalization as if the Merger had occurred on that date.
<TABLE>
<CAPTION>
Distressed Securities High Yield Pro Forma
Fund Total Return Combined Fund
Fund
<S> <C> <C> <C>
Net Assets (000s)
Class A................. $2,517 $35,994 $38,511
Class B................. 3,106 96,873 99,979
Class C................. 831 18,711 19,542
Class Z................. N/A 2,581 2,581
Net Asset Value Per Share
Class A................. $11.47 $ 8.90 $ 8.90
Class B................. 11.47 8.90 8.90
Class C................. 11.47 8.90 8.90
Class Z................. N/A 8.90 8.90
Shares Outstanding (000s)
Class A................. 219 4,046 4,329
Class B................. 271 10,889 11,238
Class C................. 72 2,103 2,196
Class Z................. N/A 290 290
</TABLE>
The following table shows the ratio of expenses to average net assets and
the ratio of net investment income to average net assets (based upon average
weighted shares outstanding during the relevant period) of Distressed Securities
Fund for the six months ended May 31, 1999 (as
10
<PAGE>
annualized) and of High Yield Total Return Fund for the fiscal period ended
March 31, 1999. The ratios also are shown on a pro forma combined basis as of
March 31, 1999.
<TABLE>
<CAPTION>
Distressed Securities High Yield Pro Forma
Fund Total Return Combined Fund
Fund
<S> <C> <C> <C>
Ratio of expenses to average net assets
Class A............................................ 1.25% 1.06% 1.26%
Class B............................................ 2.00% 1.64% 1.76%
Class C............................................ 2.00% 1.64% 1.76%
Ratio of net investment income to average net assets
Class A............................................ 11.53% 9.52% 9.55%
Class B............................................ 10.78% 8.97% 9.00%
Class C............................................ 10.78% 8.96% 8.99%
</TABLE>
Forms of Organization
Distressed Securities Fund is a diversified, open-end management investment
company organized as a Maryland corporation on November 30, 1995. High Yield
Total Return Fund is also a diversified, open-end management investment company
organized as a Maryland corporation, and was formed on February 18, 1997.
Distressed Securities Fund is authorized to issue 2 billion shares of common
stock, 500 million of which are designated Class A shares, 500 million of which
are designated Class B shares, 500 million of which are designated Class C
shares and 500 million of which are designated Class Z shares (although Class Z
shares have never been offered). High Yield Total Return Fund is authorized to
issue 2.5 billion shares of common stock, 1 billion of which are designated
Class A shares, 500 million of which are designated Class B shares, 500 million
of which are designated Class C shares and 500 million of which are designated
Class Z shares.
Because the Funds are both organized as Maryland corporations under
substantially similar Articles of Incorporation, and because each Fund has
adopted substantially similar Bylaws, the rights of security holders of each
Fund under state law and the governing documents would be expected to remain
unchanged after the Merger.
Performance Comparisons of the Funds
The following table compares each Fund's average annual total returns for
the periods set forth below. Please note that High Yield Total Return Fund began
its operations on May 5, 1998. Distressed Securities Fund began its operations
on March 26, 1996. Average annual total returns include the deduction of sales
charges, are based on past results and are not an indication of future
performance.
11
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS (CLASS A SHARES)
(PERIODS ENDED JUNE 30, 1999)
<TABLE>
<CAPTION>
Six Months One Year Since
Inception**
<S> <C> <C> <C>
Distressed Securities Fund 7.47%* -16.50%* 4.39%*
High Yield Total Return Fund 3.96%* - 1.84%* -1.46%*
</TABLE>
*If the Fund's Manager and Distributor had not waived a portion of their fees
and/or reimbursed certain operating expenses during the periods shown, total
returns would have been lower.
**From commencement of operations on March 26, 1996 for Distressed Securities
Fund and on May 5, 1998 for High Yield Total Return Fund.
AVERAGE ANNUAL TOTAL RETURNS (CLASS B SHARES)
(PERIODS ENDED JUNE 30, 1999)
<TABLE>
<CAPTION>
Six Months One Year Since
Inception**
<S> <C> <C> <C>
Distressed Securities Fund 7.20%* -17.10%* 3.63%*
High Yield Total Return Fund 3.71%* - 2.38%* -1.99%*
</TABLE>
*If the Fund's Manager and Distributor had not waived a portion of their fees
and/or reimbursed certain operating expenses during the periods shown, total
returns would have been lower.
** From commencement of operations on March 26, 1996 for Distressed Securities
Fund and on May 5, 1998 for High Yield Total Return Fund.
AVERAGE ANNUAL TOTAL RETURNS (CLASS C SHARES)
(PERIODS ENDED JUNE 30, 1999)
<TABLE>
<CAPTION>
Six Months One Year Since
Inception**
<S> <C> <C> <C>
Distressed Securities Fund 7.20%* -17.10%* 3.63%*
High Yield Total Return Fund 3.71%* - 2.38%* -1.99%*
</TABLE>
*If the Fund's Manager and Distributor had not waived a portion of their fees
and/or reimbursed certain operating expenses during the periods shown, total
returns would have been lower.
** From commencement of operations on March 26, 1996 for Distressed Securities
Fund and on May 5, 1998 for High Yield Total Return Fund.
INVESTMENT OBJECTIVES AND POLICIES
If the Merger is approved, the shareholders of Distressed Securities Fund
will become shareholders of High Yield Total Return Fund. The following
information compares the objectives and policies of the Funds.
12
<PAGE>
Investment Objectives
Distressed Securities Fund and High Yield Total Return Fund have similar
investment objectives. Distressed Securities Fund seeks capital appreciation by
investing primarily in the debt and equity securities of financially troubled
companies and the equity securities of operationally troubled companies. High
Yield Total Return Fund seeks total return through high current income and
capital appreciation by investing primarily in high yield fixed income
securities. High Yield Total Return Fund also invests in preferred stocks,
equity-related securities and convertible securities. The Funds have the same
Manager, investment adviser and portfolio managers. The portfolio managers for
both Funds are members of Prudential Investments' Fixed Income Group. The Fixed
Income Group manages more than $135 billion for retail investors, institutional
investors, and policyholders of The prudential Insurance Company of America.
Senior Managing Directors James J. Sullivan and Jack W. Gaston head the Group,
which is organized into teams specializing in different market sectors.
Both Distressed Securities Fund and High Yield Total Return Fund use the
Lehman Brothers High Yield Bond Index to compare performance of the Fund to a
broad-based index. The Lehman Brothers High Yield Bond Index is a weighted index
of corporate securities with one or more years to maturity that are publicly
issued, rated below investment grade (that is, below the four highest rating
categories as determined by a nationally recognized statistical rating
organization), and with $50 million or more in debt obligations outstanding.
Distressed Securities Fund may also use the Standard & Poor's 500 Stock Index as
a secondary comparative index. The Standard & Poor's 500 Stock Index is an
unmanaged index of 500 stocks of large U.S. companies that provides a broad look
at how U.S. stock prices have performed.
The investment objective of each Fund is a fundamental policy. This means
that the objective cannot be changed without the approval of shareholders of the
Fund. There can be no assurance that either Distressed Securities Fund or High
Yield Total Return Fund will achieve its objective. With the exception of
fundamental policies, investment policies (other than specified investment
restrictions) of the Funds can be changed without shareholder approval.
Principal Investment Strategies
While Distressed Securities Fund normally invests at least 65% of total
assets in debt and equity securities, High Yield Total Return Fund normally
invests at least 65% of its total assets in high yield debt securities rated Ba
or lower by Moody's Investors Service (Moody's), or BB or lower by Standard &
Poor's Ratings Group (Standard & Poor's). High Yield Total Return Fund also
invests in preferred stocks, equity-related securities such as common stocks,
rights and warrants, and convertible securities. In general, this means that
High Yield Total Return Fund will emphasize debt securities while Distressed
Securities Fund may emphasize investment in debt or equity securities. In
practice, the portfolio managers of Distressed Securities Fund emphasize
investment in debt securities.
In determining which securities to buy and sell, the investment adviser for
both Funds considers, among other things, the financial history and condition,
earnings trends, analysts' recommendations, and the prospects and management of
an issuer. The investment adviser generally will employ fundamental analysis in
making purchase and sale determinations. Fundamental analysis involves review of
financial statements and other data to attempt to predict
13
<PAGE>
an issuer's prospects and to attempt to decide whether the price of a security
is undervalued or overvalued.
The debt securities that each Fund purchases that are rated below Baa by
Moody's or below BBB by Standard & Poor's are considered "lower-rated," "high
yield" or "junk" bonds. These securities are highly speculative, less liquid and
may include securities that are in default on principal or interest payments.
Each Fund may also invest in securities that are not rated, but which the
investment adviser deems to be comparable in quality to the rated securities in
which it may invest.
Distressed Securities Fund may invest up to 30% of its total assets in
securities of foreign issuers and High Yield Total Return Fund may invest up to
35% of its total assets in foreign securities denominated in U.S. dollars and up
to 5% in foreign securities that are foreign currency denominated.
Both Funds also may invest in other securities that are generally
speculative, including trade claims and loan participations and assignments.
Trade claims are rights of payment due from obligations of a bankrupt or
troubled company. They are typically bought and sold at a discount based on the
expected timing and extent of recovery. Loan participations and assignments are
high-yield, nonconvertible corporate debt of varying maturities. In a loan
participation, the Fund has the right to receive payments of principal, interest
and fees that are due from the lender, conditioned upon the lender's receipt of
payment from the borrower. Assignments provide the Fund with direct rights
against the borrower of the loan, but the Fund's rights may be more limited than
the lender's rights against the borrower.
COMPARISON OF OTHER POLICIES OF THE FUNDS
Diversification
Distressed Securities Fund and High Yield Total Return Fund are both
diversified funds. This means that, with respect to 75% of each Fund's total
assets, the Fund may not invest more than 5% of its total assets in the
securities of a single issuer, and the Fund may not hold more than 10% of the
outstanding voting securities of a single issuer. These limitations do not apply
to U.S. Government securities.
Borrowing
Each Fund may borrow money from banks. Each Fund may borrow money for
temporary or emergency purposes and for the clearance of transactions. In
addition, Distressed Securities Fund may borrow money for investment purposes,
which is the practice known as leveraging. Leveraging is a speculative
investment technique and exaggerates the effect of any increase or decrease in
the market value of the Fund's portfolio. Neither Fund may borrow money in an
amount exceeding 33 1/3% of its total assets.
14
<PAGE>
Lending
Each Fund may lend assets to brokers, dealers and financial institutions.
Each Fund may lend up to 30% of its total assets, but this limitation does not
apply to purchases of debt securities or to repurchase agreements.
Illiquid Securities
Each Fund may invest in illiquid securities, including those without a
readily available market and repurchase agreements with maturities longer than
seven days. Each Fund may hold up to 15% of its net assets in illiquid
securities.
Temporary Defensive Investments
Although PIC normally invests each Fund's assets according to the Fund's
investment strategy, there are times when each Fund may temporarily invest up to
100% of its assets in money market instruments in response to adverse market,
economic or political conditions.
For more information about the risks and restrictions associated with these
policies, see each Fund's Prospectus, and for a more detailed discussion of the
Funds' investments, see their Statements of Additional Information, all of which
are incorporated into this Proxy Statement by reference.
COMPARISON OF PRINCIPAL RISK FACTORS
Each Fund is subject to the risks normally associated with funds that
invest in lower rated debt obligations and the securities of troubled companies.
As described more fully above, each Fund has substantially similar investment
objectives, policies and permissible investments.
Because each Fund normally invests in lower-rated debt obligations, the
Funds have substantially similar levels of risk. As of September 30, 1999,
Distressed Securities Fund and High Yield Total Return Fund invested 38.48% and
91.43% of their total assets in lower-rated debt obligations (rated below
"investment grade" or, if not rated, of equivalent quality), respectively.
Investments in debt obligations present credit, market and interest rate risk.
Lower-rated, higher yielding debt securities also known as "junk bonds" have a
higher risk of default and tend to be less liquid. Both Funds also may be
subject to litigation risk or be unable to dispose of an investment because of
the issuer's involvement in bankruptcy proceedings, reorganizations and
financial restructurings.
Both Funds may also use investment strategies such as derivatives that
involve risk. The Funds use these risk management techniques to try to preserve
assets or enhance return. Derivatives may not fully offset the underlying
positions and this could result in losses to the Fund that would not otherwise
have occurred. In addition, Distressed Securities Fund, but not High Yield Total
Return Fund, may use investment leverage. Leverage risk is the risk associated
with investments or trading strategies that relatively small market movements
may result in large changes in the value of an investment.
15
<PAGE>
An investment in Distressed Securities Fund presents an additional risk
associated with investment in the equity securities of troubled companies. These
risks include larger potential losses and/or share volatility. To the extent
that High Yield Total Return Fund invests in the equity securities of troubled
companies, as it may do, it is also subject to these risks.
Like any mutual fund, an investment in either Distressed Securities Fund or
High Yield Total Return Fund could lose value. For a more complete discussion of
the risks associated with either Fund, please refer to the "Risk/Return Summary"
or the section entitled "Investment Risks" in each Fund's Prospectus.
OPERATIONS OF HIGH YIELD TOTAL RETURN FUND
FOLLOWING THE MERGER
Neither PIFM nor PIC expect High Yield Total Return Fund to revise its
investment policies as a result of the Merger. In addition, because George
Edwards and Paul Price serve as co-portfolio managers of both Distressed
Securities Fund and High Yield Total Return Fund, neither PIFM nor PIC
anticipates any significant changes to the High Yield Total Return Fund's
management or general investment approach. The agents that provide High Yield
Total Return Fund with services, such as its Custodian and Transfer Agent, which
also provide these services to Distressed Securities Fund, are not expected to
change. There will be a change in certain Directors because some of the
Directors of High Yield Total Return Fund are different than the Directors of
Distressed Securities Fund. The officers of the Funds, with the exception of
their Secretary, are the same.
Substantially all of the current investments of Distressed Securities Fund
are permissible investments for High Yield Total Return Fund. Nevertheless, PIC
may sell securities held by Distressed Securities Fund or High Yield Total
Return Fund between shareholder approval and the Effective Time of the Merger as
may be necessary or desirable in the ongoing management of each Fund and the
adjustment of each Fund's portfolio in anticipation of the Merger. Transaction
costs associated with such adjustments will be borne by the Fund that incurred
them. Transaction costs associated with such adjustments that occur after the
Effective Time will be borne by High Yield Total Return Fund.
PURCHASES, REDEMPTIONS AND EXCHANGES
Purchasing Shares
The price to buy one share of a class of each Fund is that class's net
asset value, or NAV, plus, in the case of Class A and Class C shares, a front-
end sales charge. Each Fund offers Class A, Class B and Class C shares. High
Yield Total Return Fund charges a lower front-end sales charge on Class A shares
(4% of the Class A shares' offering price) than is charged by Distressed
Securities Fund (5% of the Class A shares' offering price). The sales charges
imposed by Class B and Class C shares of High Yield Total Return Fund are
identical to those charged by Distressed Securities Fund. In the case of Class B
shares, only a contingent deferred sales charge (CDSC) is charged, while Class C
shares are sold with a 1% front-end load and a 1% CDSC. High Yield Total Return
Fund also offers Class Z shares, which are sold without either a front-end load
or a CDSC and are available only to a limited group of investors. You will
receive the same class of shares in High Yield Total Return Fund as you own in
Distressed Securities Fund, except that you may exchange your shares for Class Z
shares if you qualify. Therefore, you will not be subject to
16
<PAGE>
any additional sales charges and, if you qualify for Class Z shares, you may
benefit from the elimination of otherwise applicable CDSCs and distribution and
service (12b-1) fees.
The Class A shares you will receive in the Merger are not subject to a
front-end sales charge. The Class B or Class C shares you will receive in the
Merger are subject to the identical CDSC as is applicable to your Distressed
Securities Fund investment. In other words, the CDSC will be calculated from the
first day of the month after your purchase of shares of Distressed Securities
Fund, exclusive of any time during which you may have been invested in a money
market fund.
Shares in both Funds are purchased at the next NAV calculated after your
investment is received and accepted. Each Fund's NAVs are normally calculated
each business day at 4:15 p.m., New York Time. Refer to each Fund's Prospectus
for more information regarding how to buy shares.
Redeeming Shares
The redemption policies for each Fund are identical. Your shares will be
sold at the next NAV, less any applicable contingent deferred sales charge
imposed on Class B and Class C shares, calculated after your order is received
and accepted. Refer to each Fund's Prospectus for more information regarding how
to sell shares.
Minimum Investment Requirements
For Distressed Securities Fund, the minimum initial investment amount is
$10,000 and the minimum additional investment amount is $100. For High Yield
Total Return Fund, the minimum initial investment amount is $1,000 and the
minimum additional investment amount is $100. If shareholders of Distressed
Securities Fund approve the Merger, they would be shareholders of a Fund with
lower minimum investment requirements than Distressed Securities Fund.
Purchases and Redemptions of Distressed Securities Fund
On May 27, 1999, Distressed Securities Fund closed to new accounts pending
a reorganization of Distressed Securities Fund into High Yield Total Return
Fund. The Boards of Directors subsequently determined that the Merger was
preferable to a reorganization. Shareholders of Distressed Securities Fund may
redeem shares through the Effective Time of the Merger. If the Merger is
approved, the purchase and redemption policies of the combined fund will be the
same as the current policies of High Yield Total Return Fund.
Exchanges of Fund Shares
The exchange privilege currently offered by each Fund is the same and is
not expected to change after the Merger. Shareholders of the Funds may exchange
their shares for shares of the same class of any other Prudential Mutual Fund.
If you hold Class B or Class C shares and wish to exchange into a money market
fund, you must exchange into Prudential Special Money Market Fund, Inc. During
the time you are invested in Prudential Special Money Market Fund, Inc., the
period of time during which your contingent deferred sales charge is calculated
is frozen. Refer to each Fund's Prospectus for restrictions governing exchanges.
17
<PAGE>
Dividends and Other Distributions
Each Fund distributes substantially all of its net investment income and
capital gains to shareholders each year. Distressed Securities Fund declares
dividends, if any, annually. High Yield Total Return Fund pays any dividends
from net investment income every month. Net capital gains for both Funds, if
any, are also distributed annually. At or before the Effective Time, Distressed
Securities Fund may declare additional dividends or other distributions in order
to distribute substantially all of its investment company taxable income and net
realized capital gains.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
It is anticipated that each Fund will receive an opinion of outside
counsel, Swidler Berlin Shereff Friedman LLP, that the Merger will constitute a
reorganization within the meaning of Section 368(a)(1)(A) of the Internal
Revenue Code of 1986, as amended (the Code). Accordingly, no gain or loss will
be recognized by the Funds. Additionally, no gain or loss will be recognized by
shareholders of Distressed Securities Fund as a result of the Merger. Please see
the section entitled "The Proposed Transaction - Federal Income Tax
Considerations" for more information.
During the period between shareholder approval and the Effective Time, PIC
may sell certain securities to make portfolio adjustments to Distressed
Securities Fund and High Yield Total Return Fund in connection with the Merger.
Selling these securities may result in realization of capital gains, which, when
distributed, would be taxable to Distressed Securities Fund.
THE PROPOSED TRANSACTION
Agreement and Plan of Merger
The Agreement describes the terms and conditions under which the proposed
transaction may be completed. Significant provisions of the Agreement are
summarized below; however, this summary is qualified in its entirety by
reference to the Agreement, the form of which is attached at Attachment A to
this Proxy Statement.
The Agreement contemplates that Distressed Securities Fund will merge with
and into High Yield Total Return Fund at the Effective Time, whereupon the
separate existence of Distressed Securities Fund will cease and High Yield Total
Return Fund will be the surviving corporation, and each whole and fractional
Class A, Class B and Class C share of Distressed Securities Fund will be
converted into and become whole and fractional Class A, Class B and Class C
shares, respectively, of equal net asset value of High Yield Total Return Fund.
If requested, High Yield Total Return Fund will issue certificates representing
its shares only upon surrender of certificates for shares of Distressed
Securities Fund.
Immediately after the Merger, each former Distressed Securities Fund
shareholder will own shares of High Yield Total Return Fund equal to the
aggregate net asset value of that shareholder's shares of Distressed Securities
Fund immediately prior to the Merger. The net asset value per share of High
Yield Total Return Fund will not be affected by the transaction. Thus, the
Merger will not result in a dilution of any shareholder interest.
All assets, rights, privileges, powers and franchises of Distressed
Securities Fund and all debts due on whatever account to it, shall be taken and
deemed to be transferred to and vested in
18
<PAGE>
High Yield Total Return Fund without further act or deed, and all such assets,
rights, privileges, powers and franchises, and all and every other interest of
Distressed Securities Fund, shall be thereafter effectively the property of High
Yield Total Return Fund as they were of Distressed Securities Fund. High Yield
Total Return Fund generally will be responsible for all of the liabilities and
obligations of Distressed Securities Fund. The value of Distressed Securities
Fund's assets and liabilities will be determined at the Effective Time, using
the valuation procedures set forth in Distressed Securities Fund's Prospectus
and Statement of Additional Information. The net asset value of a share of High
Yield Total Return Fund will be determined as of the same time using the
valuation procedures set forth in its Prospectus and Statement of Additional
Information.
Any transfer taxes payable upon issuance of shares of High Yield Total
Return Fund in a name other than that of the registered holder of the shares on
the books of Distressed Securities Fund as of that time will be payable by the
person to whom such shares are to be issued as a condition of such transfer.
The completion of the Merger is subject to a number of conditions set forth
in the Agreement, some of which may be waived by either Fund. In addition, the
Agreement may be amended in any mutually agreeable manner, except that no
amendment that may have a materially adverse effect on the shareholders'
interests may be made subsequent to the Meeting.
Reasons for the Merger
The Boards of Directors (the Boards) of the Funds have determined that the
Merger is in the best interests of the shareholders of both Funds and that the
Merger will not result in a dilution of the interests of shareholders of either
Fund.
In considering the Merger, the Boards considered a number of factors,
including the following:
. the compatibility of the Funds' investment objectives, policies and
restrictions;
. the relative past and current growth in assets and investment
performance of the Funds and future prospects for High Yield Total
Return Fund;
. the relative expense ratios of the Funds;
. the tax consequences of the Merger;
. the relative size of the Funds and decrease in the number of
shareholders of Distressed Securities Fund;
. the benefits to the shareholders of the Funds; and
. the fact that the costs of the Merger will be borne by PIFM, not
the Shareholders.
19
<PAGE>
PIFM and PIC recommended the Merger to the Board of each Fund at meetings
of the Boards held on August 27, 1999. In recommending the Merger, PIFM and PIC
advised the Boards that the Funds have similar investment objectives, policies
and investment portfolios. PIFM and PIC informed the Boards that the Funds
differed primarily with respect to the Distressed Securities Fund's ability to
invest in equity securities in addition to debt obligations, the Funds' expense
structures and the Funds' initial and subsequent investment minimums. In
addition, currently only the High Yield Total Return Fund offers Class Z shares
and the front-end sales charge on High Yield Total Return Fund Class A shares is
lower than that imposed on Distressed Securities Fund Class A shares.
The Boards considered that if the Merger is approved, Class B and Class C
shareholders of Distressed Securities Fund should realize a reduction in both
the net annual operating expenses and gross annual operating expenses (that is,
without any waivers or reimbursements) paid on their investment. Class A
shareholders should realize a reduction in the gross annual operating expenses
paid on their investment, but a slight increase in the net annual operating
expenses. Although the Manager and Distributor of Distressed Securities Fund
have contractually agreed to their respective waivers and reimbursements for the
fiscal year ending November 30, 1999, there can be no assurance that the waivers
and reimbursements will continue thereafter or, if continued, that the amount of
such waivers and reimbursements would not be reduced.
Description of the Securities to be Issued
High Yield Total Return Fund was incorporated in Maryland on February 18,
1997. It is registered with the Securities and Exchange Commission (the
Commission) as an open-end management investment company. High Yield Total
Return Fund is authorized to issue 2.5 billion of shares of common stock, $.0001
par value per share, divided into four classes of shares, designated as Class A,
Class B, Class C and Class Z common stock. Each class of common stock
represents an interest in the same assets of High Yield Total Return Fund and is
identical in all respects except that:
. each class is subject to different sales charges and distribution
and/or service (12b-1) fees, except for Class Z shares, which are not
subject to any sales charges or distribution and/or service fees;
. 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;
each class has a different exchange privilege;
. only Class B shares have a conversion feature whereby Class B shares
held for at least 6 years will automatically convert to Class A
shares, on a quarterly basis, approximately seven years after
purchase; and
. Class Z shares are offered exclusively for sale to a limited group of
investors.
20
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Shares of High Yield Total Return Fund, when issued, are fully paid,
nonassessable, fully transferable and redeemable at the option of the
shareholder. Except for the conversion feature applicable to Class B shares,
there are no conversion, preemptive or other subscription rights. The voting
and dividend rights, the right of redemption and the privilege of exchange are
described in the High Yield Total Return Fund's Prospectus.
High Yield Total Return Fund does not intend to hold annual meetings of
shareholders. There will normally be no meetings of shareholders for the
purpose of electing Directors unless less than a majority of the Directors
holding office have been elected by shareholders, at which time the Directors
then in office will call a shareholder meeting for the election of Directors.
Shareholders of record of at least two-thirds of the outstanding shares of an
investment company may remove a Director by votes cast in person or by proxy at
a meeting called for that purpose. The Directors are required to call a meeting
of shareholders for the purpose of voting upon the question of removal of any
Director, or to transact any other business, when requested in writing to do so
by the shareholders of record holding at least 10% of the High Yield Total
Return Fund's outstanding shares.
Federal Income Tax Considerations
The Merger is intended to qualify for federal income tax purposes as a
reorganization under the Code. With respect to the Merger, it is anticipated
that the Funds will receive an opinion from Swidler Berlin Shereff Friedman LLP,
counsel to High Yield Total Return Fund, based upon representations made by both
Distressed Securities Fund and High Yield Total Return Fund, substantially to
the effect that:
(1) The Merger will constitute a reorganization within the meaning of
Section 368(a)(1)(A) of the Code;
(2) Distressed Securities Fund and High Yield Total Return Fund will each
be a "party to a reorganization" within the meaning of Section 368(b)
of the Code;
(3) Pursuant to Sections 361(a) and 357(a) of the Code, no gain or loss
will be recognized by Distressed Securities Fund upon the transfer of
its assets to High Yield Total Return Fund solely in exchange for
shares of High Yield Total Return Fund and the assumption by High
Yield Total Return Fund of Distressed Securities Fund's liabilities,
if any, as a result of the Merger or upon the distribution (whether
actual or constructive) of the shares of High Yield Total Return Fund
in connection with the Merger;
(4) Pursuant to Section 1032(a) of the Code, no gain or loss will be
recognized by High Yield Total Return Fund upon its acquisition of
Distressed Securities Fund's assets in exchange for shares of High
Yield Total Return Fund;
(5) Pursuant to Section 362(b) of the Code, the basis of the assets of
Distressed Securities Fund acquired by High Yield Total Return Fund
will be the same as the basis of such assets when held by Distressed
Securities Fund immediately prior to the Merger;
21
<PAGE>
(6) Pursuant to Section 1223(2) of the Code, the holding period of the
assets of Distressed Securities Fund acquired by High Yield Total
Return Fund will include the period during which such assets were held
by Distressed Securities Fund;
(7) Pursuant to Section 354(a)(1) of the Code, no gain or loss will be
recognized by a shareholder of Distressed Securities Fund upon the
exchange of his, her or its shares solely for shares of High Yield
Total Return Fund, including fractional shares, in connection with the
Merger;
(8) Pursuant to Section 358(a)(1) of the Code, the basis of the shares of
High Yield Total Return Fund received by Distressed Securities Fund
shareholders will be the same as the basis of Distressed Securities
Fund shares surrendered in exchange therefor; and
(9) Pursuant to Section 1223(1) of the Code, the holding period for shares
of High Yield Total Return Fund received by each shareholder of
Distressed Securities Fund in exchange for his or her shares of
Distressed Securities Fund will include the period during which such
shareholder held shares of Distressed Securities Fund (provided
Distressed Securities Fund shares were held as capital assets, as
defined in Section 1221 of the Code, on the date of the exchange).
It should be noted that an opinion of counsel is not binding on the
Internal Revenue Service (IRS) or any court. If the IRS were to successfully
assert that the Merger does not qualify as a reorganization under the Code, then
the Merger would be treated as a taxable sale of Distressed Securities Fund's
assets to High Yield Total Return Fund followed by the taxable liquidation of
Distressed Securities Fund, and shareholders of Distressed Securities Fund would
recognize gain or loss as a result of such transaction.
Shareholders of Distressed Securities Fund should consult their tax
advisers regarding the effect, if any, of the Merger in light of their
individual circumstances. Because the foregoing discussion relates only to the
federal income tax consequences of the Merger, shareholders also should consult
their tax advisers as to state and local tax consequences, if any, of the
Merger.
Conclusion
The Agreement was approved by the Boards of Directors of Distressed
Securities Fund and High Yield Total Return Fund at meetings held on August 27,
1999. The Boards of Directors of both Funds determined that the Merger is in
the best interests of shareholders of each Fund and that the interests of
existing shareholders of Distressed Securities Fund and High Yield Total Return
Fund would not be diluted as a result of the Merger. If the Merger is not
completed, Distressed Securities Fund will continue to engage in business as a
registered investment company and the Board of Directors of Distressed
Securities Fund will consider other proposals for the Fund, including proposals
for the reorganization or liquidation of the Fund.
22
<PAGE>
ADDITIONAL INFORMATION ABOUT HIGH YIELD TOTAL RETURN FUND
High Yield Total Return Fund's Prospectus dated June 1, 1999, as
supplemented to date, is enclosed with this Proxy Statement and is incorporated
into this Proxy Statement by reference. The Prospectus contains additional
information about High Yield Total Return Fund, including its investment
objective and policies, Manager, investment adviser, advisory fees and
expenses, organization and procedures for purchasing and redeeming shares. The
Prospectus also contains High Yield Total Return Fund's financial highlights for
the fiscal period ended March 31, 1999. The audited financial statements of
High Yield Total Return Fund are included in the Fund's Annual Report, which is
also enclosed with this Proxy Statement.
MISCELLANEOUS
Legal Matters
Certain legal matters in connection with the issuance of High Yield Total
Return Fund shares have been passed upon by Swidler Berlin Shereff Friedman LLP,
counsel to High Yield Total Return Fund.
Independent Accountants
The audited financial statements of Distressed Securities Fund and High
Yield Total Return Fund for the fiscal periods ended November 30, 1998 and March
31, 1999, respectively, included in the Statements of Additional Information,
have been examined by PricewaterhouseCoopers LLP, independent accountants, whose
reports thereon are included in the respective Statements of Additional
Information and in the Annual Reports to Shareholders for the fiscal years or
periods ended November 30, 1998 and March 31, 1999, respectively. The financial
statements audited by PricewaterhouseCoopers LLP have been incorporated by
reference in reliance on their reports given on their authority as experts in
auditing and accounting.
Available Information
Distressed Securities Fund and High Yield Total Return Fund are each
subject to the informational requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940 (the 1940 Act), and in accordance with
these laws, they each file reports, proxy material and other information with
the Commission. Such reports, proxy material and other information can be
inspected and copied at the Public Reference Room maintained by the Commission
at 450 Fifth Street, N.W., Washington D.C. 20549 and 7 World Trade Center, New
York, NY 10048. Copies of such material can also be obtained from the Public
Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, Washington D.C. 20549, at prescribed rates,
or at the Commission's website (http://www.sec.gov).
Notice To Banks, Broker-Dealers And Voting Trustees And Their Nominees
Please advise Distressed Securities Fund, in care of Prudential Investment
Management Services LLC, Gateway Center Three, 100 Mulberry Street, 14/th/
Floor, Newark, New Jersey 17102-4077, whether other persons are beneficial
owners of shares for which proxies are being solicited and, if so, the number of
copies of the Proxy Statement you wish to receive in order to supply copies to
the beneficial owners of the shares.
23
<PAGE>
SHAREHOLDER PROPOSALS
Any shareholder of Distressed Securities Fund who wishes to submit a
proposal to be considered by the Fund's shareholders at the next meeting of
shareholders should send the proposal to Distressed Securities Fund, c/o
Marguerite E. H. Morrison, Secretary, at Gateway Center Three, 100 Mulberry
Street, 9/th/ Floor, Newark, New Jersey 07102-4077, so as to be received
within a reasonable time before the Board of Directors of Distressed Securities
Fund makes the solicitation relating to such meeting. Shareholder proposals that
are submitted in a timely manner will not necessarily be included in the
Distressed Securities Fund's proxy materials. Including shareholder proposals in
proxy materials is subject to limitations under federal securities laws.
The Distressed Securities Fund's By-Laws provide that the Fund will not be
required to hold annual meetings of shareholders if the election of Directors is
not required under the 1940 Act. It is the present intention of the Board of
Directors not to hold annual meetings of shareholders unless required to do so
by the 1940 Act.
OTHER BUSINESS
Management of Distressed Securities Fund knows of no business to be
presented at the Meeting other than the Proposal described in this Proxy
Statement. However, if any other matter requiring a shareholder vote should
arise, the proxies will vote according to their best judgment in the interest
of Distressed Securities Fund.
By order of the Board of Directors,
MARGUERITE E. H. MORRISON
Secretary
November 10, 1999
---------------------------------------------------------------
It is important that you execute and return your proxy promptly.
---------------------------------------------------------------
24
<PAGE>
ATTACHMENT A
AGREEMENT AND PLAN OF MERGER
MERGING
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
(A MARYLAND CORPORATION)
INTO
PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC.
(A MARYLAND CORPORATION)
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated this 25th day of
August, 1999, by and between Prudential Distressed Securities Fund, Inc., a
Maryland corporation (hereinafter called "Distressed Securities Fund" or the
"Dissolving Corporation"), and Prudential High Yield Total Return Fund, Inc., a
Maryland corporation (hereinafter called "High Yield Total Return Fund" or the
"Surviving Corporation"), said corporations sometimes collectively called the
"Corporations."
WHEREAS, the High Yield Total Return Fund is a corporation duly organized
and validly existing under the laws of the State of Maryland, has authorized
capital stock consisting of 2.5 billion shares of common stock, each of the par
value of $.0001 per share, of which 1 billion shares have been designated Class
A shares, 500 million of which are designated Class B shares, 500 million of
which are designated as Class C shares and 500 million of which are designated
as Class Z shares, and owns no interest in land in the State of Maryland; and
WHEREAS, the Distressed Securities Fund is a corporation duly organized and
validly existing under the laws of the State of Maryland, has authorized capital
stock consisting of 2 billion shares of common stock, each of the par value of
$.001 per share, of which 500 million shares have been designated Class A
shares, 500 million of which are designated Class B shares, 500 million of which
are designated as Class C shares and 500 million of which are designated as
Class Z shares (although Class Z shares are not currently offered, issued or
outstanding), and owns no interest in land in the State of Maryland; and
WHEREAS, Distressed Securities Fund has suspended the sale of its shares as
of May 27, 1999 in contemplation of its reorganization with or merger into High
Yield Total Return Fund; and
WHEREAS, as of August 27, 1999, there were 54,773.953 Class A shares,
176,397.625 Class B shares and 41,713.375 Class C shares of Distressed
Securities Fund issued and outstanding, and as of the Effective Time of the
Merger (as hereinafter defined) there may be a lesser number of shares issued
and outstanding of each class of shares of
<PAGE>
Distressed Securities Fund depending on the number of shares redeemed during
such period, since Distressed Securities Fund is registered as an open-end
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, each of the shares of each class of Distressed Securities Fund
issued and outstanding on the record date for the Special Meeting of
Shareholders of Distressed Securities Fund to be held on or about November 26,
1999 (the "Special Meeting"), are entitled to vote on the Merger; and
WHEREAS, the principal office of Distressed Securities Fund in the State of
Maryland is c/o The Corporation Trust Incorporated, 32 South Street, Baltimore,
Maryland 21202 and its principal place of business is Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077; and
WHEREAS, the principal office of High Yield Total Return Fund in the State
of Maryland is c/o The Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202 and its principal place of business is Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077; and
WHEREAS, the Merger is intended to qualify as a reorganization under
Section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the "Code"),
and the Agreement is intended to qualify as a plan of reorganization within the
meaning of Treasury Regulation Section 1.368-2(g), and the Corporations and
their respective Boards of Directors deem it advisable and to the advantage of
the Corporations and their respective stockholders that Distressed Securities
Fund be merged with and into High Yield Total Return Fund, with High Yield Total
Return Fund being the Surviving Corporation, under and pursuant to the laws of
the State of Maryland on the terms and conditions herein contained (the
"Merger").
NOW, THEREFORE, in consideration of the premises and mutual agreements,
covenants and provisions herein contained, the parties hereto agree to the terms
and conditions of the foregoing Merger and the method of carrying the same into
effect as follows:
ARTICLE I
1.1 Distressed Securities Fund and High Yield Total Return Fund agree that
at the Effective Time of the Merger, as defined in Section 1.2 below, Distressed
Securities Fund shall be merged with and into High Yield Total Return Fund, and
High Yield Total Return Fund shall be the Surviving Corporation and shall be
governed by the laws of the State of Maryland.
1.2 Subject to the satisfaction of each of the conditions to the
obligations of the respective Corporations hereunder (or the waiver thereof by
the party entitled to the benefit thereof), the Corporations shall execute, file
and record as provided under the laws
2
<PAGE>
of Maryland Articles of Merger substantially in the form set forth as "Exhibit
A," with such changes thereto as shall be approved by the respective
Corporations in accordance with Maryland law. The Merger shall become effective
on or after the filing of such Articles of Merger at the time and on the date
set forth herein. The date and time when the Merger shall become effective are
referred to herein as the "Effective Time."
1.3 The Articles of Incorporation of High Yield Total Return Fund in
effect immediately prior to the Effective Time shall be the Articles of
Incorporation of the Surviving Corporation, until amended in the manner provided
in such Articles of Incorporation or in the Bylaws of the Surviving Corporation
and in the Maryland General Corporation Law.
1.4 The Bylaws of High Yield Total Return Fund in effect immediately prior
to the Effective Time shall be the Bylaws of the Surviving Corporation, until
amended in the manner provided in such Bylaws and in the Maryland General
Corporation Law.
1.5 The following persons shall constitute the Board of Directors of the
Surviving Corporation upon the Effective Time and shall hold office until their
respective successors are elected and qualified: Eugene C. Dorsey, Delayne D.
Gold, Robert F. Gunia, Thomas T. Mooney, Thomas H. O'Brien, David R. Odenath,
Jr., Richard A. Redeker, John R. Strangfeld, Nancy H. Teeters, and Louis A.
Weil, III.
1.6 The persons who were elected as the officers of High Yield Total
Return Fund to serve as such as of the Effective Time shall be the officers of
the Surviving Corporation.
ARTICLE II
2.1 The manner and basis of converting the issued and outstanding shares
of each class of shares of Distressed Securities Fund into the Class A, Class B
and Class C shares of High Yield Total Return Fund shall be as hereinafter set
forth in this Article II.
2.2 Each whole and fractional share of the Class A shares of Distressed
Securities Fund issued and outstanding immediately prior to the Effective Time
shall, as of the Effective Time and without further act, be converted into, and
become whole and fractional shares of equal value of, Class A shares of High
Yield Total Return Fund. Each such share of Class A shares of High Yield Total
Return Fund issued pursuant to this paragraph shall be fully paid and non-
assessable.
2.3 Each whole and fractional share of the Class B shares of Distressed
Securities Fund issued and outstanding immediately prior to the Effective Time
shall, as of the Effective Time and without further act, be converted into, and
become whole and fractional shares of equal value of, Class B shares of High
Yield Total Return Fund. Each such share of Class B shares of High Yield Total
Return Fund issued pursuant to this paragraph shall be fully paid and non-
assessable.
3
<PAGE>
2.4 Each whole and fractional share of the Class C shares of Distressed
Securities Fund issued and outstanding immediately prior to the Effective Time
shall, as of the Effective Time and without further act, be converted into, and
become whole and fractional shares of equal value of, Class C shares of High
Yield Total Return Fund. Each such share of Class C shares of High Yield Total
Return Fund issued pursuant to this paragraph shall be fully paid and non-
assessable.
2.5 High Yield Total Return Fund shall not issue certificates representing
its shares in connection with the Merger. With respect to any Distressed
Securities Fund shareholder holding Distressed Securities Fund certificates for
shares as of the Effective Time, until High Yield Total Return Fund is notified
by Distressed Securities Fund's transfer agent that such shareholder has
surrendered his or her outstanding certificates for shares or, in the event of
lost, stolen or destroyed certificates for shares, posted adequate bond or
submitted a lost certificate form, as the case may be, High Yield Total Return
Fund will not permit such shareholder to (1) receive dividends or other
distributions on High Yield Total Return Fund shares in cash (although such
dividends and distributions shall be credited to the account of such shareholder
established on High Yield Total Return Fund's books, as provided in the next
sentence), (2) exchange High Yield Total Return Fund shares credited to such
shareholder's account for shares of other Prudential Mutual Funds, or (3) pledge
or redeem such shares. In the event that a shareholder is not permitted to
receive dividends or other distributions on High Yield Total Return Fund shares
in cash as provided in the preceding sentence, High Yield Total Return Fund
shall pay such dividends or other distributions in additional High Yield Total
Return Fund shares, notwithstanding any election such shareholder shall have
made previously with respect to the payment of dividends or other distributions
on shares of Distressed Securities Fund. Prior to the Effective Time,
Distressed Securities Fund will request its shareholders to surrender their
outstanding Distressed Securities Fund stock certificates, post adequate bond or
submit a lost certificate form, as the case may be.
2.6 Any transfer taxes payable upon issuance pursuant to the foregoing
provisions of this Article II of any class of shares of High Yield Total Return
Fund in a name other than that of the registered holder of the shares of
Distressed Securities Fund entitled to receive the same shall be paid by the
person to whom such shares are to be issued.
2.7 Ownership of High Yield Total Return Fund shares will be shown on the
books of the High Yield Total Return Fund's transfer agent. Shares of High
Yield Total Return Fund will be issued in the manner described in High Yield
Total Return Fund's then current prospectus and statement of additional
information.
2.8 All computations of net asset value shall be made in accordance with
the valuation procedures set forth in each Corporation's respective prospectus
and statement of additional information.
4
<PAGE>
2.9 Distressed Securities Fund shall cause State Street Bank and Trust
Company ("State Street"), as custodian for Distressed Securities Fund, to
deliver to High Yield Total Return Fund at the Effective Time a certificate of
an authorized officer of State Street stating that (1) Distressed Securities
Fund's portfolio securities, cash and any other assets have been transferred in
proper form to High Yield Total Return Fund as of the Effective Time and (2)
all necessary taxes, if any, have been paid, or provision for payment has been
made, in conjunction with the transfer of portfolio securities.
2.10 Distressed Securities Fund shall deliver to High Yield Total Return
Fund on or prior to the Effective Time the names and addresses of each of the
shareholders of Distressed Securities Fund and the number of outstanding shares
owned by each such shareholder, all as of immediately prior to the Effective
Time, certified by the Secretary of Distressed Securities Fund.
ARTICLE III
3.1 At the Effective Time, the separate existence of Distressed
Securities Fund shall cease, except to the extent, if any, continued by statute,
and all the assets, rights, privileges, powers and franchises of Distressed
Securities Fund and all debts due on whatever account to it, shall be taken and
deemed to be transferred to and vested in the Surviving Corporation without
further act or deed, and all such assets, rights, privileges, powers and
franchises, and all and every other interest of Distressed Securities Fund,
shall be thereafter effectively the property of the Surviving Corporation as
they were of Distressed Securities Fund; and the title to and interest in any
real estate vested by deed, lease or otherwise, unto either of the Corporations,
shall not revert or be in any way impaired. The Surviving Corporation shall be
responsible for all of the liabilities and obligations of Distressed Securities
Fund, but the liabilities of the Corporations or of their stockholders,
directors, or officers shall not be affected by the Merger, nor shall the rights
of the creditors thereof or any person dealing with such Corporation or any
liens upon the property of such Corporations, be impaired by the Merger, and any
such claim existing or action or proceeding pending by or against either
Corporation may be prosecuted to judgment as if the Merger had not taken place,
or the Surviving Corporation may be proceeded against or substituted in place of
Distressed Securities Fund. Except as otherwise specifically set forth in this
Agreement, the identity, existence, purposes, powers, franchises, rights,
immunities and liabilities of High Yield Total Return Fund shall continue
unaffected and unimpaired by the Merger.
3.2 All corporate accounts, plans, policies, resolutions, approvals, and
authorizations of stockholders, the Board of Directors, Committees of the Board
of Directors, and agents of Distressed Securities Fund that are in effect
immediately prior to the Effective Time shall be taken for all purposes as the
acts, plans, policies, resolutions, approvals and authorizations of the
Surviving Corporation and shall be as effective and binding thereon as the same
were with respect to Distressed Securities Fund.
5
<PAGE>
3.3 In case at any time after the Effective Time the Surviving Corporation
shall determine that any further conveyance, assignment or other documents or
any further action is necessary or desirable to vest in or confirm to the
Surviving Corporation full title to all cash and securities and other
properties, assets, rights, privileges and franchises of the Corporations, the
officers and directors of the Corporations, at the expense of the Surviving
Corporation, shall execute and deliver all such instruments and take all such
action as the Surviving Corporation may determine to be necessary or desirable
in order to vest in and confirm to the Surviving Corporation title to and
possession of all such cash and securities and other properties, assets, rights,
privileges and franchises and otherwise to carry out the purpose of this
Agreement.
ARTICLE IV
4.1 Distressed Securities Fund represents and warrants as follows:
(a) Distressed Securities Fund is a corporation duly organized and
validly existing under the laws of the State of Maryland;
(b) Distressed Securities Fund is an open-end, management investment
company duly registered under the 1940 Act, and such registration is in full
force and effect;
(c) Distressed Securities Fund is not, and the execution, delivery
and performance of this Agreement will not result, in violation of any provision
of the Articles of Incorporation or By-Laws of Distressed Securities Fund or of
any material agreement, indenture, instrument, contract, lease or other
undertaking to which Distressed Securities Fund is a party or by which
Distressed Securities Fund is bound;
(d) All material contracts or other commitments to which Distressed
Securities Fund, or the properties or assets of Distressed Securities Fund, is
subject, or by which Distressed Securities Fund is bound except this Agreement
will be terminated on or prior to the Effective Time without Distressed
Securities Fund or High Yield Total Return Fund incurring any liability or
penalty with respect thereto;
(e) No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently pending
or to its knowledge threatened against Distressed Securities Fund or any of its
properties or assets. Distressed Securities Fund knows of no facts that might
form the basis for the institution of such proceedings, and is not a party to or
subject to the provisions of any order, decree or judgment of any court or
governmental body that materially and adversely affects its business or its
ability to consummate the transactions herein contemplated;
(f) The Portfolio of Investments, Statement of Assets and
Liabilities, Statement of Operations, Statement of Cash Flows, Statement of
Changes in Net Assets, and Financial Highlights of Distressed Securities Fund at
November 30, 1998 and for the
6
<PAGE>
year then ended and the Notes thereto (copies of which have been furnished to
High Yield Total Return Fund) have been audited by PricewaterhouseCoopers LLP,
independent accountants, in accordance with generally accepted auditing
standards. Such financial statements have been prepared in accordance with
generally accepted accounting principles and present fairly, in all material
respects, the financial condition, results of operations, changes in net assets
and financial highlights of Distressed Securities Fund as of and for the period
ended on such date, and there are no material known liabilities of Distressed
Securities Fund (contingent or otherwise) not disclosed therein;
(g) Since November 30, 1998, there has not been any material adverse
change in Distressed Securities Fund's financial condition, assets, liabilities
or business other than changes occurring in the ordinary course of business, or
any incurrence by Distressed Securities Fund of indebtedness maturing more than
one year from the date such indebtedness was incurred, except as otherwise
disclosed to and accepted by High Yield Total Return Fund. For the purposes of
this paragraph 4.1(e), a decline in net assets or change in the number of shares
outstanding shall not constitute a material adverse change;
(h) At the date hereof and at the Effective Time, all federal and
other tax returns and reports of Distressed Securities Fund required by law to
have been filed on or before such dates shall have been timely filed, and all
federal and other taxes shown as due on said returns and reports shall have been
paid insofar as due, or provision shall have been made for the payment thereof,
and, to the best of Distressed Securities Fund's knowledge, all federal or other
taxes required to be shown on any such return or report have been shown on such
return or report, no such return is currently under audit and no assessment has
been asserted with respect to such returns;
(i) For each past taxable year since it commenced operations,
Distressed Securities Fund has met the requirements of Subchapter M of the Code
for qualification and treatment as a regulated investment company and has
elected to be treated as such and Distressed Securities Fund intends to meet
those requirements for the current taxable year; and, for each past calendar
year since it commenced operations, Distressed Securities Fund has made such
distributions as are necessary to avoid the imposition of federal excise tax or
has paid or provided for the payment of any excise tax imposed;
(j) All issued and outstanding shares of Distressed Securities Fund
are, and at the Effective Time will be, duly and validly authorized, issued and
outstanding, fully paid and non-assessable. All issued and outstanding shares of
Distressed Securities Fund will, at the Effective Time, be held in the name of
the persons and in the amounts set forth in the list of shareholders submitted
to High Yield Total Return Fund. Distressed Securities Fund does not have
outstanding any options, warrants or other rights to subscribe for or purchase
any shares, nor is there outstanding any security convertible into any of its
shares, except for Class B shares of Distressed Securities Fund which have the
conversion feature described in Distressed Securities Fund's prospectus;
7
<PAGE>
(k) At the date hereof and immediately prior to the Effective Time,
Distressed Securities Fund will have good and marketable title to the assets to
be transferred to High Yield Total Return Fund, and full right, power and
authority to sell, assign, transfer and deliver such assets hereunder free of
any liens, claims, charges or other encumbrances, and, at the Effective Time,
High Yield Total Return Fund will acquire good and marketable title thereto;
(l) The execution, delivery and performance of this Agreement has
been duly authorized by the Board of Directors of Distressed Securities Fund and
by all necessary action, other than shareholder approval, on the part of
Distressed Securities Fund, and this Agreement constitutes a valid and binding
obligation, subject to shareholder approval, of Distressed Securities Fund;
(m) The information furnished and to be furnished by Distressed
Securities Fund for use in applications for orders, registration statements,
proxy materials and other documents that may be necessary in connection with the
transactions contemplated hereby is and shall be accurate and complete in all
material respects and is in compliance and shall comply in all material respects
with applicable federal securities and other laws and regulations; and
(n) On the effective date of the Registration Statement filed on Form
N-14 with respect to the Merger ("Registration Statement"), at the time of the
meeting of the shareholders of Distressed Securities Fund and at the Effective
Time, the Proxy Statement of Distressed Securities Fund, the Prospectus of High
Yield Total Return Fund, and the Statement of Additional Information of High
Yield Total Return Fund to be included in or incorporated by reference into the
Registration Statement (collectively, "Proxy Statement") (1) will comply in all
material respects with the provisions and regulations of the Securities Act of
1933, as amended ("1933 Act"), the Securities Exchange Act of 1934, as amended
("1934 Act") and the 1940 Act, and the rules and regulations under such Acts and
(2) will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein in light of the circumstances under
which they were made or necessary to make the statement therein not misleading;
provided, however, that the representations and warranties in this paragraph
4.1(l) shall not apply to statements in or omissions from the Proxy Statement
and Registration Statement made in reliance upon and in conformity with
information furnished by High Yield Total Return Fund for use therein.
4.2 High Yield Total Return Fund represents and warrants as follows:
(a) High Yield Total Return Fund is a corporation duly organized and
validly existing under the laws of the State of Maryland;
8
<PAGE>
(b) High Yield Total Return Fund is an open-end, management investment
company duly registered under the 1940 Act, and such registration is in full
force and effect;
(c) High Yield Total Return Fund is not, and the execution, delivery
and performance of this Agreement will not result, in violation of any provision
of the Articles of Incorporation or By-Laws of High Yield Total Return Fund or
of any material agreement, indenture, instrument, contract, lease or other
undertaking to which High Yield Total Return Fund is a party or by which High
Yield Total Return Fund is bound;
(d) No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently pending
or threatened against High Yield Total Return Fund or any of its properties or
assets. High Yield Total Return Fund knows of no facts that might form the basis
for the institution of such proceedings, and High Yield Total Return Fund is not
a party to or subject to the provisions of any order, decree or judgment of any
court or governmental body that materially and adversely affects its business or
its ability to consummate the transactions herein contemplated;
(e) The Portfolio of Investments, Statement of Assets and Liabilities,
Statement of Operations, Statement of Changes in Net Assets, and Financial
Highlights of High Yield Total Return Fund at March 31, 1999, and for the fiscal
period then ended and the Notes thereto (copies of which have been furnished to
Distressed Securities Fund) have been audited by PricewaterhouseCoopers LLP,
independent accountants, in accordance with generally accepted auditing
standards. Such financial statements are prepared in accordance with generally
accepted accounting principles and present fairly, in all material respects, the
financial condition, results of operations, changes in net assets and financial
highlights of High Yield Total Return Fund as of and for the period ended on
such date, and there are no material known liabilities of High Yield Total
Return Fund (contingent or otherwise) not disclosed therein;
(f) Since March 31, 1999, there has not been any material adverse
change in High Yield Total Return Fund's financial condition, assets,
liabilities or business other than changes occurring in the ordinary course of
business, or any incurrence by High Yield Total Return Fund of indebtedness
maturing more than one year from the date such indebtedness was incurred, except
as otherwise disclosed to and accepted by Distressed Securities Fund. For the
purposes of this paragraph, a decline in net asset value per share or a decrease
in the number of shares outstanding shall not constitute a material adverse
change;
(g) At the date hereof and at the Effective Time, all federal and
other tax returns and reports of High Yield Total Return Fund required by law to
have been filed on or before such dates shall have been filed, and all federal
and other taxes shown as due on said returns and reports shall have been paid
insofar as due, or provision shall have been made for the payment thereof, and,
to the best of High Yield Total Return Fund's knowledge, all federal or other
taxes required to be shown on any such return or report
9
<PAGE>
are shown on such return or report, no such return is currently under audit and
no assessment has been asserted with respect to such returns;
(h) For each past taxable year since it commenced operations, High
Yield Total Return Fund has met the requirements of Subchapter M of the Code for
qualification and treatment as a regulated investment company and has elected to
be treated as such and High Yield Total Return Fund intends to meet those
requirements for the current taxable year; and, for each past calendar year
since it commenced operations, High Yield Total Return Fund has made such
distributions as are necessary to avoid the imposition of federal excise tax or
has paid or provided for the payment of any excise tax imposed;
(i) All issued and outstanding shares of High Yield Total Return Fund
are, and at the Effective Time will be, duly and validly authorized, issued and
outstanding, fully paid and non-assessable. Except as contemplated by this
Agreement, High Yield Total Return Fund does not have outstanding any options,
warrants or other rights to subscribe for or purchase any of its shares nor is
there outstanding any security convertible into any of its shares, except for
the Class B shares which have a conversion feature described in High Yield Total
Return Fund's Prospectus dated June 1, 1999;
(j) The execution, delivery and performance of this Agreement has been
duly authorized by the Board of Directors of High Yield Total Return Fund and by
all necessary corporate action on the part of High Yield Total Return Fund, and
this Agreement constitutes a valid and binding obligation of High Yield Total
Return Fund;
(k) The information furnished and to be furnished by High Yield Total
Return Fund for use in applications for orders, registration statements, proxy
materials and other documents which may be necessary in connection with the
transactions contemplated hereby is and shall be accurate and complete in all
material respects and is and shall comply in all material respects with
applicable federal securities and other laws and regulations; and
(l) On the effective date of the Registration Statement, at the time
of the meeting of the shareholders of Distressed Securities Fund and at the
Effective Time, the Proxy Statement and the Registration Statement (1) will
comply in all material respects with the provisions of the 1933 Act, the 1934
Act and the 1940 Act and the rules and regulations under such Acts, (2) will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading and (3) with respect to the Registration Statement, at the time it
becomes effective, it will not contain an untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein in the
light of the circumstances under which they were made, not misleading; provided,
however, that the representations and warranties in this paragraph 4.2(l) shall
not apply to statements in or omissions from the Proxy Statement and the
Registration Statement made in reliance upon
10
<PAGE>
and in conformity with information furnished by Distressed Securities Fund for
use therein.
ARTICLE V
5.1 The obligations of each of the Corporations to effectuate the Merger
hereunder shall be subject to satisfaction of the following conditions:
(a) The representations and warranties of each Corporation contained
herein shall be true as of and at the Effective Time with the same effect as
though made as of and at such date, and each Corporation shall have performed
all obligations required by this Agreement to be performed by it prior to the
Effective Time; and each Corporation shall have delivered to the other a
certificate dated as of the Effective Time signed by its President or Vice
President to the foregoing effect.
(b) Each Corporation shall have delivered to the other a certified
copy of the resolutions of its Board of Directors approving this Agreement,
which resolutions shall be adopted by at least a majority vote of its Directors,
including a majority of its Directors who are not "interested persons" of such
Corporation as that term is defined in the 1940 Act.
(c) The Securities and Exchange Commission ("SEC") shall not have
issued an unfavorable advisory report under Section 25(b) of the 1940 Act nor
instituted any proceeding seeking to enjoin consummation of the Merger under
Section 25(c) of the 1940 Act.
(d) No legal, administrative or other proceedings shall have been
instituted or threatened between the date of this Agreement and the Effective
Time seeking to restrain or otherwise prohibit the Merger.
(e) The holders of at least two-thirds of the outstanding shares of
Distressed Securities Fund shall have voted in favor of the adoption of this
Agreement and the Merger contemplated hereby at the Special Meeting.
(f) Each Corporation shall have received an opinion of Swidler Berlin
Shereff Friedman LLP, or ruling from the Internal Revenue Service, substantially
to the effect that:
(1) The Merger will constitute a reorganization within the meaning of
Section 368(a)(1)(A) of the Code;
(2) Distressed Securities Fund and High Yield Total Return Fund will
each be a "party to a reorganization" within the meaning of Section 368(b) of
the Code;
11
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(3) Pursuant to Sections 361(a) and 357(a) of the Code, no gain or
loss will be recognized by Distressed Securities Fund upon the transfer of its
assets to High Yield Total Return Fund solely in exchange for shares of High
Yield Total Return Fund and the assumption of Distressed Securities Fund's
liabilities, if any, as a result of the Merger or upon the distribution (whether
actual or constructive) of the shares of High Yield Total Return Fund in
connection with the Merger;
(4) Pursuant to Section 1032(a) of the Code, no gain or loss will be
recognized by High Yield Total Return Fund upon its acquisition of Distressed
Securities Fund's assets in exchange for shares of High Yield Total Return Fund;
(5) Pursuant to Section 362(b) of the Code, the basis of the assets of
Distressed Securities Fund acquired by High Yield Total Return Fund will be the
same as the basis of such assets when held by Distressed Securities Fund
immediately prior to the Merger;
(6) Pursuant to Section 1223(2) of the Code, the holding period of the
assets of Distressed Securities Fund acquired by High Yield Total Return Fund
will include the period during which such assets were held by Distressed
Securities Fund;
(7) Pursuant to Section 354(a)(1) of the Code, no gain or loss will be
recognized by a shareholder of Distressed Securities Fund upon the exchange of
his, her or its shares solely for shares of High Yield Total Return Fund,
including fractional shares, in connection with the Merger;
(8) Pursuant to Section 358(a)(1) of the Code, the basis of the shares
of High Yield Total Return Fund received by Distressed Securities Fund
shareholders will be the same as the basis of Distressed Securities Fund shares
surrendered in exchange therefor; and
(9) Pursuant to Section 1223(1) of the Code, the holding period for
shares of High Yield Total Return Fund received by each shareholder of
Distressed Securities Fund in exchange for his or her shares of Distressed
Securities Fund will include the period during which such shareholder held
shares of Distressed Securities Fund (provided Distressed Securities Fund shares
were held as capital assets, as defined in Section 1221 of the Code, on the date
of the exchange).
(g) Each Corporation shall have received an opinion (or opinions) of
counsel in form and substance satisfactory to it to the effect that:
(1) it is a corporation duly organized and validly existing under the
laws of the State of Maryland with power under its Articles of Incorporation to
own all of its properties and assets and, to the knowledge of such counsel, to
carry on its business as presently conducted;
12
<PAGE>
(2) this Agreement has been duly authorized, executed and delivered by
the Corporation and, assuming due authorization, execution and delivery of the
Agreement by the other Corporation, is a valid and binding obligation of the
Corporation enforceable in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights and to general
equity principles;
(3) in the case of High Yield Total Return Fund, the shares of High
Yield Total Return Fund to be distributed to the shareholders of Distressed
Securities Fund under this Agreement, assuming their due authorization,
execution and delivery as contemplated by this Agreement, will be validly issued
and outstanding and fully paid and non-assessable, and no shareholder of High
Yield Total Return Fund has any preemptive right to subscribe therefor or
purchase such shares;
(4) the execution and delivery of this Agreement did not, and the
consummation of the transactions contemplated hereby will not, (i) conflict with
the Corporation's Articles of Incorporation or By-Laws or (ii) result in a
default or a breach of (a) the Corporation's Management Agreement, (b) the
Corporation's Custodian Contract, (c) the Corporation's Distribution Agreement
and (d) the Corporation's Transfer Agency and Service Agreement; provided,
however, that such counsel may state that they express no opinion as to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
and to general equity principles;
(5) to the knowledge of such counsel, no consent, approval,
authorization, filing or order of any court or governmental authority is
required for the consummation of the transactions contemplated herein, except
such as have been obtained under the 1933 Act, the 1934 Act and the 1940 Act and
such as may be required under state Blue Sky or securities laws;
(6) the Corporation is registered with the SEC as an investment
company, and, to the knowledge of such counsel, no order has been issued or
proceeding instituted to suspend such registration; and
(7) such counsel knows of no litigation or government proceeding
instituted or threatened against the Corporation that could be required to be
disclosed in its registration statement on Form N-1A and is not so disclosed.
Such opinion may rely on an opinion of Maryland counsel to the extent it
addresses Maryland law.
(h) Distressed Securities Fund shall have delivered to High Yield Total
Return Fund at the Effective Time a statement of the assets and liabilities,
which shall be prepared in accordance with generally accepted accounting
principles consistently applied, together with a list of the portfolio
securities of Distressed Securities Fund showing the adjusted
13
<PAGE>
tax basis of such securities by lot, as of the Effective Time, certified by the
Treasurer of Distressed Securities Fund.
(i) Immediately prior to the Effective Time, Distressed Securities Fund
shall have declared and paid to its shareholders of record one or more dividends
and/or other distributions so that it will have distributed substantially all
(and in any event not less than ninety-eight percent) of such Fund's investment
company taxable income (computed without regard to any deduction for dividends
paid), net tax-exempt interest income, if any, and realized net capital gain, if
any, for all completed taxable years from the inception of such Fund, and for
the period from and after the most recently completed taxable year through the
Effective Time.
(j) Any proposed change to High Yield Total Return Fund's operations that
may be approved by the Board of Directors of High Yield Total Return Fund
subsequent to the date of this Agreement but in connection with and as a
condition to implementing the transactions contemplated by this Agreement, for
which the approval of High Yield Total Return Fund shareholders is required
pursuant to the 1940 Act or otherwise, shall have been approved by the requisite
vote of the holders of the outstanding shares of High Yield Total Return Fund in
accordance with the 1940 Act and the provisions of Maryland law, and certified
copies of the resolution evidencing such approval shall have been delivered to
Distressed Securities Fund.
(k) All consents of other parties and all consents, orders and permits of
federal, state and local regulatory authorities (including those of the SEC and
of state Blue Sky or securities authorities, including "no-action" positions of
such authorities) deemed necessary by High Yield Total Return Fund or Distressed
Securities Fund to permit consummation, in all material respects, of the
transactions contemplated hereby shall have been obtained, except where failure
to obtain any such consent, order or permit would not involve a risk of a
material adverse effect on the assets or properties of High Yield Total Return
Fund or Distressed Securities Fund, provided, that either party hereto may for
itself waive any part of this condition.
(l) The Registration Statement shall have become effective under the 1933
Act, and no stop order suspending the effectiveness thereof shall have been
issued, and to the best knowledge of the parties hereto, no investigation or
proceeding under the 1933 Act for that purpose shall have been instituted or be
pending, threatened or contemplated.
ARTICLE VI
6.1 Each Corporation hereby represents and warrants that this Agreement
has been submitted to its Board of Directors for approval and was approved on
August 25, 1999.
14
<PAGE>
6.2 Distressed Securities Fund agrees that this Agreement shall be
submitted to its shareholders for approval at the Special Meeting. Distressed
Securities Fund agrees to prepare the proxy statement in connection with the
Special Meeting in compliance with the 1934 Act, the 1940 Act and the rules and
regulations under each Act.
6.3 All expenses incurred by either of the Corporations in connection with
this Agreement shall be paid by Prudential Investments Fund Management LLC,
which serves as the Manager of each Corporation.
6.4 Each Corporation covenants to operate its respective business in the
ordinary course between the date hereof and the Effective Time, it being
understood that the ordinary course of business will include declaring and
paying customary dividends and other distributions and such changes in
operations as are contemplated by the normal operations of the Corporations,
except as may otherwise be provided herein.
6.5 Subject to the provisions of this Agreement, each Corporation will
take, or cause to be taken, all action, and will do, or cause to be done, all
things reasonably necessary, proper or advisable to consummate and make
effective the transactions contemplated by this Agreement.
ARTICLE VII
7.1 Anything contained in this Agreement to the contrary notwithstanding,
this Agreement may be terminated and the Merger abandoned at any time (whether
before or after approval hereof by the shareholders of Distressed Securities
Fund) prior to the Effective Time:
(a) by mutual consent of the Corporations;
(b) by either of the Corporations if any condition set forth in
Article V hereof has not been fulfilled or waived by it; or
(c) by either of the Corporations if the Merger shall not have become
effective on or before November 30, 1999, unless they should otherwise mutually
agree. In the event of any such termination, there shall be no liability for
damages on the part of either Corporation or any Director or officer of either
Corporation.
7.2 An election by a Corporation to terminate this Agreement and abandon
the Merger shall be exercised by its Board of Directors.
7.3 At any time prior to the Effective Time, any of the terms or
conditions of this Agreement may be waived by the Corporation entitled to the
benefit thereof by action taken by its Board of Directors or its President, if,
in the judgment of the Board of Directors or President by taking such action,
such waiver will not have a material adverse
15
<PAGE>
effect on the benefits intended under this Agreement to the stockholders of the
Corporation on behalf of which such action is taken.
7.4 This Agreement may be amended, modified or supplemented only in
writing by the parties; provided, however, that following the Special Meeting,
no such amendment may have the effect of changing the provisions for determining
the number of shares of High Yield Total Return Fund to be distributed to
Distressed Securities Fund's shareholders under this Agreement to the detriment
of such shareholders without their further approval.
ARTICLE VIII
8.1 The respective representations and warranties of the Corporations
contained in Article IV hereof shall expire with, and be terminated by, the
Merger contemplated by this Agreement, and the Corporations shall not be under
any liability with respect to any such representations or warranties after the
Effective Time.
ARTICLE IX
9.1 This Agreement embodies the entire agreement between the parties with
respect to the subject matter hereof, and there are no agreements,
understandings, restrictions or warranties among the parties other than those
set forth herein or herein provided for.
9.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original but all of such counterparts together
shall constitute but one instrument.
9.3 This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, without regard to the conflicts of laws
provisions thereof.
9.4 This Agreement shall bind and inure to the benefit of the parties and
their respective successors and assigns, and no assignment or transfer hereof or
of any rights or obligations hereunder shall be made by either party without the
written consent of the other party. Nothing herein expressed or implied is
intended or shall be construed to confer upon or give any person, firm or
corporation other than the parties and their respective successors and assigns
any rights or remedies under or by reason of this Agreement.
16
<PAGE>
IN WITNESS WHEREOF, each of the Corporations has caused this Agreement and
Plan of Merger to be executed on its behalf of its President or Vice President
and attested to by its Secretary all as of the day and year first written above.
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
Attest:
By: /s/ John R. Strangfeld By: /s/ Marguerite E. H. Morrison
---------------------- -----------------------------
John R. Strangfeld, President Marguerite E. H. Morrison, Secretary
PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC.
Attest:
By: /s/ John R. Strangfeld By: /s/ Deborah A. Docs
---------------------- -------------------
John R. Strangfeld, President Deborah A. Docs, Secretary
17
<PAGE>
EXHIBIT A
ARTICLES OF MERGER
BETWEEN
PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC.
(a Maryland corporation)
AND
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
(a Maryland corporation)
Prudential High Yield Total Return Fund, Inc., a corporation duly organized
and existing under the laws of the State of Maryland ("High Yield Total Return
Fund"), and Prudential Distressed Securities Fund, Inc., a corporation duly
organized and existing under the laws of the State of Maryland ("Distressed
Securities Fund"), do hereby certify that:
FIRST: High Yield Total Return Fund and Distressed Securities Fund agree
to merge pursuant to the Agreement and Plan of Merger attached hereto as Exhibit
A, which Agreement and Plan of Merger has been approved by the respective Boards
of Directors of Distressed Securities Fund and High Yield Total Return Fund for
the Merger of Distressed Securities Fund with and into High Yield Total Return
Fund.
SECOND: The name and place of incorporation of each party to these
Articles are Prudential High Yield Total Return Fund, Inc., a Maryland
corporation, and Prudential Distressed Securities Fund, Inc., a Maryland
corporation. The date of incorporation of Distressed Securities Fund in the
State of Maryland is November 30, 1995. High Yield Total Return Fund shall
survive the Merger and shall continue under the name "Prudential High Yield
Total Return Fund, Inc.," as a corporation of the State of Maryland.
THIRD: High Yield Total Return Fund and Distressed Securities Fund each
have their principal office in the State of New Jersey in Essex County. Neither
High Yield Total Return Fund nor Distressed Securities Fund owns an interest in
land in the State of Maryland.
FOURTH: The terms and conditions of the transaction set forth in these
Articles were advised, authorized, and approved by each party to the Articles in
the manner and by
<PAGE>
vote required by its charter and the laws of the State of Maryland. The manner
of approval was as follows:
(a) The respective Boards of Directors of High Yield Total Return
Fund and Distressed Securities Fund at meetings each held on August 25, 1999,
adopted resolutions approving the Agreement and Plan of Merger, subject to the
approval of shareholders of Distressed Securities Fund, which resolutions
declared that the proposed Merger was advisable on substantially the terms and
conditions set forth or referred to in the resolutions and directed that the
proposed Merger be submitted for consideration at a special meeting of the
shareholders of Distressed Securities Fund.
(b) Notice which stated that a purpose of the meeting was to act on
the proposed Merger was given by Distressed Securities Fund to its shareholders
as required by law.
(c) The proposed Merger was approved by the shareholders of
Distressed Securities Fund at a special meeting of shareholders held on
November__, 1999, by the affirmative vote of at least two-thirds of the
outstanding shares of Distressed Securities Fund.
FIFTH: No amendment to the charter of High Yield Total Return Fund is to
be effected as part of the Merger.
SIXTH: The total number of shares of stock of all classes which High
Yield Total Return Fund has authority to issue is 2.5 billion shares of common
stock, par value of $.0001 per share, of which 1 billion shares have been
designated Class A shares, 500 million of which are designated Class B shares,
500 million of which are designated as Class C shares and 500 million of which
are designated as Class Z shares. The aggregate par value of all shares of all
classes of High Yield Total Return Fund is $250,000. The total number of shares
of all classes which Distressed Securities Fund has authority to issue is 2
billion shares of common stock, par value of $.001 per share, of which 500
million shares have been designated Class A shares, 500 million of which are
designated Class B shares, 500 million of which are designated as Class C shares
and 500 million of which are designated as Class Z shares (although Class Z
shares are not currently offered, issued or outstanding). The aggregate par
value of all classes of Distressed Securities Fund is $2,000,000.
SEVENTH: The Merger does not increase the authorized stock of High Yield
Total Return Fund.
EIGHTH: The manner and basis of converting or exchanging issued stock of
the merging corporations into different stock of a corporation, or other
consideration, and the treatment of any issued stock of the merging corporations
not to be converted or exchanged are as follows:
2
<PAGE>
(a) Each whole and fractional share of the Class A shares of
Distressed Securities Fund issued and outstanding immediately prior to the
Effective Time shall, as of the Effective Time and without further act, be
converted into, and become whole and fractional shares of equal value of, Class
A shares of High Yield Total Return Fund. Each such share of Class A shares of
High Yield Total Return Fund issued pursuant to this paragraph shall be fully
paid and non-assessable.
(b) Each whole and fractional share of the Class B shares of
Distressed Securities Fund issued and outstanding immediately prior to the
Effective Time shall, as of the Effective Time and without further act, be
converted into, and become whole and fractional shares of equal value of, Class
B shares of High Yield Total Return Fund. Each such share of Class B shares of
High Yield Total Return Fund issued pursuant to this paragraph shall be fully
paid and non-assessable.
(c) Each whole and fractional share of the Class C shares of
Distressed Securities Fund issued and outstanding immediately prior to the
Effective Time shall, as of the Effective Time and without further act, be
converted into, and become whole and fractional shares of equal value of, Class
C shares of High Yield Total Return Fund. Each such share of Class C shares of
High Yield Total Return Fund issued pursuant to this paragraph shall be fully
paid and non-assessable.
NINTH: The Merger shall become effective for both High Yield Total Return
Fund and Distressed Securities Fund at 8:00 a.m., Eastern Time on November __,
1999 (the "Effective Time").
[The Remainder Of This Page Is Intentionally Blank]
3
<PAGE>
IN WITNESS WHEREOF, Prudential High Yield Total Return Fund, Inc., a
Maryland corporation, and Prudential Distressed Securities Fund, Inc., a
Maryland corporation, have caused these presents to be signed in their
respective names and on their respective behalves by their respective President
or Vice President and witnessed by their respective Secretary on
__________________, 1999.
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
Attest:
By: ___________________________ By: ___________________________
John R. Strangfeld, President Marguerite E. H. Morrison, Secretary
PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC.
Attest:
By: ___________________________ By: ___________________________
John R. Strangfeld, President Deborah A. Docs, Secretary
4
<PAGE>
THE UNDERSIGNED, ____________________ of Prudential High Yield Total Return
Fund, Inc., a Maryland corporation, who executed on behalf of the Corporation
the foregoing Articles of Merger of which this certificate is made a part,
hereby acknowledges in the name and on behalf of said Corporation the foregoing
Articles of Merger to be the corporate act of said Corporation and hereby
certifies that to the best of his knowledge, information and belief the matters
and facts set forth therein with respect to the authorization and approval
thereof are true in all material respects under the penalties of perjury.
_________________________
By: _____________________
Title:___________________
THE UNDERSIGNED, ____________________ of Prudential Distressed Securities
Fund, Inc., a Maryland corporation, who executed on behalf of the Corporation
the foregoing Articles of Merger of which this certificate is made a part,
hereby acknowledges in the name and on behalf of said Corporation the foregoing
Articles of Merger to be the corporate act of said Corporation and hereby
certifies that to the best of his knowledge, information and belief the matters
and facts set forth therein with respect to the authorization and approval
thereof are true in all material respects under the penalties of perjury.
_________________________
By: _____________________
Title:___________________
5
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TABLE OF CONTENTS TO THE PROXY STATEMENT AND PROSPECTUS
<TABLE>
<S> <C>
3 Voting Information 16 Purchases, Redemptions and
5 Vote Required Exchanges
16 Purchasing Shares
5 Synopsis 17 Redeeming Shares
5 Investment Objectives and Policies 17 Minimum Investment Requirements
6 Expense Structures 17 Purchases and Redemptions of
7 The Proposed Merger Distressed Securities Fund
7 Fund Operating Expenses 17 Exchanges of Fund Shares
8 Comparative Fee Tables 18 Dividends and Other Distributions
9 Examples of the Effect of
Fund Expenses 18 Federal Income Tax
10 Pro Forma Capitalization Consequences of the Merger
and Ratios
11 Forms of Organization 18 The Proposed Transaction
11 Performance Comparisons of the 18 Agreement and Plan of Merger
Funds 19 Reasons for the Merger
20 Description of the Securities to be
12 Investment Objectives and Issued
Policies 21 Federal Income Tax Considerations
13 Investment Objectives 22 Conclusion
13 Principal Investment Strategies
23 Additional Information about
14 Comparison of Other Policies of High Yield Total Return Fund
the Funds
14 Diversification 23 Miscellaneous
14 Borrowing 23 Legal Matters
15 Lending 23 Independent Accountants
15 Illiquid Securities 23 Available Information
15 Temporary Defensive Investments 23 Notice to Banks, Broker-Dealers
and Voting Trustees and Their
15 Comparison of Principal Risk Nominees
Factors
24 Shareholder Proposals
16 Operations of High Yield Total
Return Fund Following the 24 Other Business
Merger
Attachment A: Agreement and
Plan of Merger between Prudential
Distressed Securities Fund, Inc.
and Prudential High Yield Total
Return Fund, Inc.
</TABLE>
<PAGE>
PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(800) 225-1852
STATEMENT OF ADDITIONAL INFORMATION
dated November 10, 1999
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(800) 225-1852
This Statement of Additional Information specifically relates to the
proposed merger (Merger) between Prudential Distressed Securities Fund, Inc.
(Distressed Securities Fund) and Prudential High Yield Total Return Fund, Inc.
(High Yield Total Return Fund) under which Distressed Securities Fund will merge
with and into High Yield Total Return Fund whereupon the separate existence of
Distressed Securities Fund will cease and High Yield Total Return Fund will be
the surviving corporation, and each whole and fractional share of Distressed
Securities Fund shall be converted into, and become whole and fractional shares
of equal net asset value of, High Yield Total Return Fund to occur on November
26, 1999, or such later date as the parties may agree. This Statement of
Additional Information consists of this cover page and the following described
documents, each of which is attached hereto and incorporated herein by
reference:
1. Statement of Additional Information of High Yield Total Return Fund
dated June 1, 1999, as supplemented to date.
2. Annual Report of Distressed Securities Fund for the fiscal year ended
November 30, 1998.
3. Semi-Annual Report of Distressed Securities Fund for the six month
period ended May 31, 1999. The Semi-Annual Report (which is unaudited)
reflects all adjustments which, in the opinion of management, are
necessary to a fair statement of the results for the six month period
ended May 31, 1999.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Prospectus and Proxy Statement dated November
5, 1999, relating to the above-referenced matter. A copy of the Prospectus and
Proxy Statement may be obtained from High Yield Total Return Fund without charge
by writing or calling High Yield Total Return Fund at the address or phone
number listed above.
<PAGE>
PRUDENTIAL HIGH YIELD TOTAL RETURN FUND, INC.
Statement of Additional Information
dated June 1, 1999
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. 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 "Description of the Fund, Its
Investments and Risks."
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark,
New Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus dated June 1, 1999, a copy of
which may be obtained from the Fund upon request.
TABLE OF CONTENTS
PAGE
----
Fund History ........................................................... B-2
Description of the Fund, Its Investments and Risks ..................... B-2
Investment Restrictions ................................................ B-20
Management of the Fund ................................................. B-22
Control Persons and Principal Holders of Securities .................... B-25
Investment Advisory and Other Services ................................. B-25
Brokerage Allocation and Other Practices ............................... B-29
Capital Shares, Other Securities and Organization ...................... B-30
Purchase, Redemption and Pricing of Fund Shares ........................ B-31
Shareholder Investment Account ......................................... B-41
Net Asset Value ........................................................ B-45
Taxes, Dividends and Distributions ..................................... B-46
Performance Information ................................................ B-48
Financial Statements ................................................... B-50
Report of Independent Accountants ...................................... B-67
Appendix I--Historical Performance Data ................................ I-1
Appendix II--General Investment Information ............................ II-1
Appendix III--Information Relating to Prudential ....................... III-1
================================================================================
MF181B
<PAGE>
FUND HISTORY
The Fund was incorporated in Maryland on February 18, 1997.
DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS
(A) CLASSIFICATION. The Fund is a diversified, open-end management
investment company.
(B) AND (C) INVESTMENT STRATEGIES, POLICIES AND RISKS. 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. Under normal circumstances, the Fund
intends to invest 65% of its total assets in such securities. The Fund may also
invest in any other securities believed by the investment adviser to be
consistent with the Fund's investment objective, including preferred stocks,
equity-related securities, which may be attached to or included in a unit with
fixed-income securities at the time of purchase, convertible securities, loan
participations and assignments, trade claims, higher rated fixed-income
securities, 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 "How the Fund Invests--Investment Objective and Policies" in
the Prospectus.
Since investors generally perceive that there are greater risks associated
with high-yield, or lower rated, fixed-income securities of the type in which
the Fund may invest, the yields and prices of such securities may tend to
fluctuate more than those for higher rated securities. In the lower quality
segments of the fixed-income securities market, changes in perceptions of
issuers' creditworthiness tend to occur more frequently and in a more pronounced
manner than do changes in higher quality segments of the fixed-income securities
market resulting in greater yield and price volatility. Investment in these
securities is a long-term investment strategy and, accordingly, investors in the
Fund should have the financial ability and willingness to remain invested for
the long term.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In addition,
the prices of fixed income securities fluctuate in response to the general level
of interest rates. Fluctuations in the prices of portfolio securities subsequent
to their acquisition will not affect cash income from such securities but will
be reflected in the Fund's net asset value (NAV).
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 risks 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. Lower rated fixed-income securities are securities rated below Baa
by Moody's Investors Service (Moody's) or BBB by Standard & Poor's Rating Group
(Standard & Poor's), or comparably rated by any other Nationally Recognized
Statistical Rating Organization (NRSRO). Changes in economic or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments in bonds rated below Baa or BBB than is the case with
higher grade bonds. Corporate bonds rated below Baa by Moody's and BBB by
Standard & Poor's are considered speculative. Such high-yield securities are
commonly known as junk bonds. Lower-rated and comparable non-rated 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 the other issuers. In addition
to the risk of default, there are the related costs of recovery on defaulted
issues.
The investment adviser will attempt to reduce these risks through
diversification of the portfolio and by analysis of each issuer and its ability
to make timely payments of income and principal, as well as broad economic
trends in corporate developments. The investment adviser will not rely
principally on the ratings assigned by the rating services, although such
ratings will be considered by the investment adviser. A description of corporate
bond ratings is contained in Appendix A to the Prospectus. 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. Therefore, the investment adviser will also 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. Since some issuers
do not seek ratings for their securities, non-rated securities will also be
considered for investment by the Fund only when the investment adviser believes
that the financial condition of the issuers of such securities and/or the
protection afforded by the terms of the securities themselves limit the risk to
the Fund to a degree comparable to that of rated securities that are consistent
with the Fund's objective and policies.
B-2
<PAGE>
RISK RELATING TO INVESTING IN HIGH YIELD DEBT SECURITIES
Fixed-income securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and general
market liquidity (market risk). Lower rated or similar unrated (that is, high
yield) securities 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. The achievement of its investment objective may be more dependent on
the investment adviser's own credit analysis than is the case for higher quality
bonds. 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 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
circumstances where the Fund owns the majority of an issue, market and credit
risks may be greater.
In addition to the risk of default, there are the related costs of recovery
on defaulted issues. The investment adviser will attempt to reduce these risks
through diversification of the portfolio and by analysis of each issuer and its
ability to make timely payments of income and principal, as well as broad
economic trends in corporate developments.
Since investors generally perceive that there are greater risks associated
with the lower rated securities of the type in which the Fund may invest, the
yields and prices of such securities may tend to fluctuate more than those for
higher rated securities. In the lower quality segments of the fixed-income
securities market, changes in perceptions of issuers' creditworthiness tend to
occur more frequently and in a more pronounced manner than do changes in higher
quality segments of the fixed-income securities fluctuate in response to the
general level of interest rates. Fluctuations in the prices of portfolio
securities subsequent to their acquisition will not affect cash income from such
securities but will be reflected in the Fund's net asset value.
Certain of the high-yield fixed-income securities in which the Fund may
invest may be purchased at a market discount. The Fund does not intend to hold
such securities until maturity unless current yields on these securities remain
attractive. Capital losses may be recognized when securities purchased at a
premium are held to maturity or are called or redeemed at a price lower than
their purchase price. Capital gains or losses may also be recognized for federal
income tax purposes on the retirement of such securities or may be recognized
upon the sale of securities.
ZERO COUPON, PAY-IN-KIND OR 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 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 comparable rated securities paying cash interest at regular
intervals.
There are certain risks related to investing in zero coupon, pay-in-kind
and deferred payment securities. These securities generally are more sensitive
to movements in interest rates and are less liquid than comparably rated
securities paying cash interest at regular intervals. Consequently, such
securities may be subject to greater fluctuation in value. During a period of
severe market conditions, the market for such securities may become even less
liquid. In addition, as these securities do not pay cash
B-3
<PAGE>
interest, the Fund's investment exposure to these securities and their risks,
including credit risk, will increase during the time these securities are held
in the Fund's portfolio. Further, to maintain its qualification for pass-through
treatment under the federal tax laws, the Fund is required to distribute income
to its shareholders and, consequently, may have to dispose of its portfolio
securities under disadvantageous circumstances to generate the cash, or may have
to leverage itself by borrowing the cash to satisfy these distributions, as they
relate to the distribution of "phantom income" and the value of the paid-in-kind
interest. The required distributions will result in an increase in the Fund's
exposure to such securities.
SECURITIES OF FOREIGN ISSUERS
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.
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.
BRADY BONDS. The Fund is permitted to invest in debt obligations commonly
known as "Brady Bonds" which are created through the exchange of existing
commercial bank loans to foreign entities for new obligations in connection with
debt restructurings under a plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady (the Brady Plan). Brady Bonds have been issued in
connection with the restructuring of the bank loans, for example, of the
governments of Mexico, Venezuela and Argentina.
Brady Bonds have been issued only recently, and, accordingly, do not have a
long payment history. They may be collateralized or uncollateralized and issued
in various currencies (although most are dollar-denominated) and they are
actively traded in the over-the-counter secondary market.
Dollar-denominated, collateralized Brady Bonds, which may be fixed rate par
bonds or floating rate discount bonds, are generally collateralized in full as
to principal due at maturity by U.S. Treasury zero coupon obligations which have
the same maturity as the Brady Bonds. Interest payments on these Brady Bonds
generally are collateralized by cash or securities in an amount that, in the
case of fixed rate bonds, is equal to at least one year of rolling interest
payments based on the applicable interest rate at that time and is adjusted at
regular intervals thereafter. Certain Brady Bonds are entitled to "value
recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. Brady Bonds
are often viewed as having three or four valuation components: (1) the
collateralized repayment of principal at final maturity; (2) the collateralized
interest payments; (3) the uncollateralized interest payments; and (4) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk"). In the event of a default with respect
to collateralized Brady Bonds as a result of which the payment obligations of
the issuer are accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral agent to the scheduled maturity of the defaulted
Brady Bonds, which will continue to be outstanding, at which time the face
amount of the collateral will equal the principal payments which would have then
been due on the Brady Bonds in the normal course. In addition, in light of the
residual risk of Brady Bonds and, among other factors, the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be viewed as
speculative.
B-4
<PAGE>
RISK FACTORS 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
development 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 equity and fixed-income markets of developing countries
involves exposure to economies that are generally less diverse and mature and to
political systems which can be expected to have less stability than those of
developed countries. Historical experience indicates that the markets of
developing countries have been more volatile than the markets of developed
countries. The risks associated with investments in foreign securities may be
greater with respect to investments in developing countries 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 foreign currency forward 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 AND SPECIAL CONSIDERATIONS OF INVESTING IN EURO-DENOMINATED
SECURITIES
Effective January 1, 1999, the 11 member states of the European Union
introduced the "euro" as a common currency. During a three year transitional
period, the euro will coexist with each member state's currency. Beginning
January 1, 2002, the euro is expected to become the sole currency of the member
states. During the transition period, the Fund will treat the euro as a separate
currency from that of any member state.
The conversion may impact the trading in securities of issuers located in,
or denominated in the currencies of, the member states, as well as foreign
exchanges, payments, the settlement process, custody of assets and accounting.
In addition, the transition of member states' currency into the euro will
eliminate the currency risk among the member states and will likely affect the
investment process and considerations of the Fund's investment adviser. To the
extent the Fund holds non-U.S. dollar-denominated securities, including those
denominated in the euro, the Fund will still be subject to currency risk due to
fluctuations in those currencies as compared to the U.S. dollar.
The introduction of the euro is expected to affect derivative and other
financial contracts in which the Fund may invest insofar as price sources based
upon current currencies of the member states will be replaced, and market
conventions, such as day-count
B-5
<PAGE>
fractions or settlement dates, applicable to underlying instruments may be
changed to conform to the conventions applicable to the euro currency.
The overall impact of the transition of member states' currencies to the
euro cannot be determined with certainty at this time. In addition to the
effects described above, it is likely that more general short and long-term
ramifications can be expected, such as changes in the economic environment and
change in the behavior of investors, all of which will impact the Fund's
investments.
The Fund's Manager is taking steps: (a) that it believes will reasonably
address euro-related changes to enable the Fund to process transactions
accurately and completely with minimal disruption to business activities, and
(b) to obtain reasonable assurances that appropriate steps are being taken by
each of the Fund's other service providers.
BANK DEBT
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 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.
Investments in Participations and Assignments otherwise bear risks common
to other debt securities, including the risk of nonpayment of principal and
interest by the borrower, the risk that any loan collateral may become impaired
and that the Fund may obtain less than the full value for loan interests sold
because they are illiquid.
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. In addition to the creditworthiness of
the borrower, the Fund's ability to receive payment of principal and interest is
also dependent on the creditworthiness of any institution (that is, the Lender)
interposed between the Fund and the borrower.
SECURITIES OF FINANCIALLY AND OPERATIONALLY TROUBLED ISSUERS
The Fund may invest in debt or equity securities of financially troubled or
bankrupt companies (financially troubled issuers) and in debt or equity
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). Equity securities include common stocks, preferred stock
and rights and warrants.
The investment adviser maintains a credit unit which the Fund's portfolio
managers may consult in managing the Fund's portfolio and in researching
financially troubled and operationally troubled issuers. The Fund's portfolio
managers review on an ongoing basis financially troubled and operationally
troubled issuers, including prospective purchases and portfolio holdings of the
Fund. They have broad access to research and financial reports, data retrieval
services and industry analysts.
The securities of financially and operationally troubled issuers may
require active monitoring and at times may require the Fund's investment adviser
to participate in bankruptcy or reorganization proceedings on behalf of the
Fund. To the extent the
B-6
<PAGE>
investment adviser becomes involved in such proceedings, the Fund may have a
more active participation in the affairs of the issuer than is generally assumed
by an investor and such participation may subject the Fund to the litigation
risks described below. However, the Fund does not invest in the securities of
financially or operationally troubled issuers for the purpose of exercising
day-to-day management of any issuer's affairs.
RISKS OF FINANCIALLY AND OPERATIONALLY TROUBLED ISSUERS
Investment in the securities of financially and operationally troubled
issuers involves a high degree of credit and market risk. See "Risk Factors
Relating to Investing in High Yield Debt Securities" above. Although the Fund
will invest in select companies which in the view of its investment adviser 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.
Investment in the securities of financially and operationally troubled
issuers is a long-term investment strategy and, accordingly, investors in the
Fund should have the financial ability and willingness to remain invested for
the long term. 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 the
Fund's 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.
The Fund may invest in the securities of companies involved in bankruptcy
proceedings, reorganizations and financial restructurings and may have a more
active participation in the affairs of the issuer 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 other creditors. While the Fund will attempt to avoid taking the
types of actions that would lead to equitable subordination or creditor
liability, there can be no assurance that such claims will not be asserted or
that the Fund will be able to successfully defend against them. Because (unlike
the Fund) other investors may purchase the securities of these companies for the
purpose of exercising control or management, the Fund may be at a disadvantage
to the extent that the Fund's interests differ from the interests of these other
investors.
BANKRUPTCY AND OTHER PROCEEDINGS--LITIGATION RISKS
When a company seeks relief under the Federal Bankruptcy Code (or has a
petition filed against it), an automatic stay prevents all entities, including
creditors, from foreclosing or taking other actions to enforce claims, perfect
liens or reach collateral securing such claims. Creditors who have claims
against the company prior to the date of the bankruptcy filing must petition the
court to permit them to take any action to protect or enforce their claims or
their rights in any collateral. Such creditors may be prohibited from doing so
if the court concludes that the value of the property in which the creditor has
an interest will be "adequately protected" during the proceedings. If the
bankruptcy court's assessment of adequate protection is inaccurate, a creditor's
collateral may be wasted without the creditor being afforded the opportunity to
preserve it. Thus, even if the Fund holds a secured claim, it may be prevented
from collecting the liquidation value of the collateral securing its debt,
unless relief from the automatic stay is granted by the court.
Security interests held by creditors are closely scrutinized and frequently
challenged in bankruptcy proceedings and may be invalidated for a variety of
reasons. For example, security interests may be set aside because, as a
technical matter, they have not been perfected properly under the Uniform
Commercial Code or other applicable law. If a security interest is invalidated,
the secured creditor loses the value of the collateral and because loss of the
secured status causes the claim to be treated as an unsecured claim, the holder
of such claim will almost certainly experience a significant loss of its
investment. While the Fund intends to scrutinize any security interests that
secure the debt it purchases, there can be no assurance that the security
interests will not be challenged vigorously and found defective in some respect,
or that the Fund will be able to prevail against the challenge.
Moreover, debt may be disallowed or subordinated to the claims of other
creditors if the creditor is found guilty of certain inequitable conduct
resulting in harm to other parties with respect to the affairs of a company
filing for protection from creditors under the Federal Bankruptcy Code.
Creditors' claims may be treated as equity if they are deemed to be
contributions to capital, or if a creditor attempts to control the outcome of
the business affairs of a company prior to its filing under the Bankruptcy Code.
If a
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creditor is found to have interfered with the company's affairs to the detriment
of other creditors or shareholders, the creditor may be held liable for damages
to injured parties. While the Fund will attempt to avoid taking the types of
action that would lead to equitable subordination or creditor liability, there
can be no assurance that such claims will not be asserted or that the Fund will
be able successfully to defend against them.
While the challenges to liens and debt described above normally occur in a
bankruptcy proceeding, the conditions or conduct that would lead to an attack in
a bankruptcy proceeding could in certain circumstances result in actions brought
by other creditors of the debtor, shareholders of the debtor or even the debtor
itself in other state or federal proceedings. As is the case in a bankruptcy
proceeding, there can be no assurance that such claims will not be asserted or
that the Fund will be able successfully to defend against them. To the extent
that the Fund assumes an active role in any legal proceeding involving the
debtor, the Fund may be prevented from disposing of securities issued by the
debtor due to the Fund's possession of material, non-public information
concerning the debtor.
CONVERTIBLE SECURITIES, WARRANTS AND RIGHTS
A convertible security is typically a bond, debenture, corporate note or
preferred stock or other similar security that may be converted at a stated
price within a specified period of time into a specified number of shares of
common stock or other equity securities of the same or a different issuer. A
warrant or right entitles the holder to purchase equity securities at a specific
price for a specific period of time. 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.
Convertible securities also include preferred stocks which technically are
equity securities.
In general, the market value of a convertible security is at least the
higher of its "investment value" (that is, its value as a fixed-income security)
or its "conversion value" (that is, 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.
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 (1) the possibility that the amount of the claim may be
disputed by the obligor, (2) the debtor may have a variety of defenses to assert
against the claim under the bankruptcy code, (3) volatile pricing due to a less
liquid market, including a small number of brokers for trade claims and a small
universe of potential buyers, (4) the risk that the Fund may be obligated to
purchase a trade claim larger than initially anticipated and (5) the risk of
failure of the sellers of the trade claims to indemnify the Fund against loss
due to 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" for purposes of the requirement under the Internal Revenue Code
that 90% of the income of a regulated investment company has come from certain
qualifying sources. See "Taxes, Dividends and Distributions" below.
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
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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. New financial products and
risk management techniques continue to be developed and the Fund may use these
new investments and techniques to the extent consistent with its investment
objective and policies.
OPTIONS TRANSACTIONS
The Fund may purchase and write (that is, 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 seek to enhance
return or to protect against adverse price fluctuations in securities in the
Fund's portfolio. These options will be on equity and debt securities, including
U.S. Government securities, financial indices, including stock indices (for
example, the 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.
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.
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, as the writer of a put option, might, therefore, be
obligated to purchase the underlying securities or currency for more than their
current market price.
The Fund may wish to protect certain portfolio securities against a decline
in market value at a time when put options on those particular securities are
not available for purchase. The Fund may therefore purchase a put option on
other carefully selected securities, the values of which the investment adviser
expects will have a high degree of positive correlation to the values of such
portfolio securities. If the investment adviser's judgment is correct, changes
in the value of the put options should generally offset changes in the value of
the portfolio securities being hedged. If the investment adviser's judgment is
not correct, the value of the securities underlying the put option may decrease
less than the value of the Fund's investments and therefore the put option may
not provide complete protection against a decline in the value of the Fund's
investments below the level sought to be protected by the put option.
The Fund may similarly wish to hedge against appreciation in the value of
securities that it intends to acquire at a time when call options on such
securities are not available. The Fund may, therefore, purchase call options on
other carefully selected securities the values of which the investment adviser
expects will have a high degree of positive correlation to the values of the
securities that the Fund intends to acquire. In such circumstances the Fund will
be subject to risks analogous to those summarized above in the event that the
correlation between the value of call options so purchased and the value of the
securities intended to be acquired by the Fund is not as close as anticipated
and the value of the securities underlying the call options increases less than
the value of the securities to be acquired by the Fund.
The Fund may write options on securities in connection with buy-and-write
transactions; that is, the Fund may purchase a security and concurrently write a
call option against that security. If the call option is exercised, the Fund's
maximum gain will be the premium it received for writing the option, adjusted
upwards or downwards by the difference between the Fund's purchase price of the
security and the exercise price of the option. If the option is not exercised
and the price of the underlying security declines, the amount of the decline
will be offset in part, or entirely, by the premium received.
The exercise price of a call option may be below ("in-the-money"), equal to
("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the option is written. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will remain flat or decline moderately
during the option period. Buy-and-write transactions using at-the-money call
options may be used when it is expected that the price of the underlying
security will remain fixed or advance moderately during the option period. A
buy-and-write transaction using an
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out-of-the-money call option may be used when it is expected that the premium
received from writing the call option plus the appreciation in the market price
of the underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call option
is exercised in such a transaction, the Fund's maximum gain will be the premium
received by it for writing the option, adjusted upwards or downwards by the
difference between the Fund's purchase price of the security and the exercise
price of the option. If the option is not exercised and the price of the
underlying security declines, the amount of the decline will be offset in part,
or entirely, by the premium received.
Prior to being notified of the exercise of the option, the writer of an
exchange-traded option that wishes to terminate its obligation may effect a
"closing purchase transaction" by buying an option of the same series as the
option previously written. (Options of the same series are options with respect
to the same underlying security, having the same expiration date and the same
strike price.) The effect of the purchase is that the writer's position will be
canceled by the exchange's affiliated clearing organization. Likewise, an
investor who is the holder of an exchange-traded option may liquidate a position
by effecting a "closing sale transaction" by selling an option of the same
series as the option previously purchased. There is no guarantee that either a
closing purchase or a closing sale transaction can be effected.
Exchange-traded options are issued by a clearing organization affiliated
with the exchange on which the option is listed which, in effect, gives its
guarantee to every exchange-traded option transaction. In contrast, OTC options
are contracts between the Fund and its contra-party with no clearing
organization guarantee. Thus, when the Fund purchases an OTC option, it relies
on the dealer from which it has purchased the OTC option to make or take
delivery of the securities underlying the option. Failure by the dealer to do so
would result in the loss of the premium paid by the Fund as well as the loss of
the expected benefit of the transaction.
When the Fund writes an OTC option, it generally will be able to close out
the OTC option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote the OTC option.
While the Fund will enter into OTC options only with dealers which agree to, and
which are expected to be capable of, entering into closing transactions with the
Fund, there can be no assurance that the Fund will be able to liquidate an OTC
option at a favorable price at any time prior to expiration. Until the Fund is
able to effect a closing purchase transaction in a covered OTC call option the
Fund has written, it will not be able to liquidate securities used as cover
until the option expires or is exercised or different cover is substituted. In
the event of insolvency of the contra-party, the Fund may be unable to liquidate
an OTC option. See "Illiquid Securities" below.
OTC options purchased by the Fund will be treated as illiquid securities
subject to any applicable limitation on such securities. Similarly, the assets
used to "cover" OTC options written by the Fund will be treated as illiquid
unless the OTC options are sold to qualified dealers who Agree that the Fund may
repurchase any OTC options it writes for a maximum price to be calculated by a
formula set forth in the option Agreement. The "cover" for an OTC option written
subject to this procedure would be considered illiquid only to the extent that
the maximum repurchase price under the formula exceeds the intrinsic value of
the option. See "Illiquid Securities" below.
The Fund may write only "covered" options. This means that so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option or an option to purchase the same underlying
securities, having an exercise price equal to or less than the exercise price of
the "covered" option, or will establish and maintain for the term of the option
a segregated account consisting of cash or other liquid assets having a value
equal to or greater than the exercise price of the option. In the case of a
straddle written by the Fund, the amount maintained in the segregated account
will equal the amount, if any, by which the put is "in-the-money."
OPTIONS ON SECURITIES INDICES. The Fund also may purchase and write call
and put options on securities indices in an attempt to hedge against market
conditions affecting the value of securities that the Fund owns or intends to
purchase. Through the writing or purchase of index options, the Fund can achieve
many of the same objectives as through the use of options on individual
securities. Options on securities indices are similar to options on a security
except that, rather than the right to take or make delivery of a security at a
specified price, an option on a securities index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the securities index upon which the option is based is greater than, in the case
of a call, or less than, in the case of a put, the exercise price of the option.
This amount of cash is equal to such difference between the closing price of the
index and the exercise price of the option. The writer of the option is
obligated, in return for the premium received, to make delivery of this amount.
Unlike security options, all settlements are in cash and gain or loss depends
upon price movements in the market generally (or in a particular industry or
segment of the market), rather than upon price movements in individual
securities. Price movements in securities that the Fund owns or intends to
purchase will probably not correlate perfectly with movements in the level of an
index and, therefore, the Fund bears the risk that a loss on an index option
would not be completely offset by movements in the price of such securities.
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When the Fund writes an option on a securities index, it will be required
to deposit and mark-to-market, eligible securities equal in value to 100% of the
exercise price in the case of a put, or the contract value in the case of a
call. In addition, where the Fund writes a call option on a securities index at
a time when the contract value exceeds the exercise price, the Fund will
segregate and mark-to-market, until the option expires or is closed out, cash or
cash equivalents equal in value to such excess.
Options on a securities index involve risks similar to those risks relating
to transactions in financial futures contracts described below. Also, an option
purchased by the Fund may expire worthless, in which case the Fund would lose
the premium paid therefor.
FUTURES CONTRACTS AND RELATED OPTIONS
The Fund may enter into futures contracts for the purchase or sale of debt
securities and financial indices (collectively, interest rate futures contracts)
and currencies in accordance with the Fund's investment objective. A "purchase"
of a futures contract (or a "long" futures position) means the assumption of a
contractual obligation to acquire a specified quantity of the securities
underlying the contract at a specified price at a specified future date. A
"sale" of a futures contract (or a "short" futures position) means the
assumption of a contractual obligation to deliver a specified quantity of the
securities underlying the contract at a specified price at a specified future
date. At the time a futures contract is purchased or sold, the Fund is required
to deposit cash or securities with a futures commission merchant or in a
segregated account representing between approximately 1-1/2 to 5% of the
contract amount, called "initial margin." Thereafter, the futures contract will
be valued daily and the payment in cash of "maintenance" or "variation margin"
may be required, resulting in the Fund paying or receiving cash that reflects
any decline or increase in the contract's value, a process known as
"marking-to-market."
Some futures contracts by their terms may call for the actual delivery or
acquisition of the underlying assets and other futures contracts must be "cash
settled." In most cases the contractual obligation is extinguished before the
expiration of the contract by buying (to offset an earlier sale) or selling (to
offset an earlier purchase) an identical futures contract calling for delivery
or acquisition in the same month. The purchase (or sale) of an offsetting
futures contract is referred to as a "closing transaction."
Although futures prices themselves have the potential to be extremely
volatile, in the case of any strategy involving interest rate futures contracts
and options thereon when the investment adviser's expectations are not met,
assuming proper adherence to the segregation requirement, the volatility of the
Fund as a whole should be no greater than if the same strategy had been pursued
in the cash market.
Exchanges on which futures and related options trade may impose limits on
the positions that the Fund may take in certain circumstances. In addition, the
hours of trading of financial futures contracts and options thereon may not
conform to the hours during which the Fund may trade the underlying securities.
To the extent the futures markets close before the securities markets,
significant price and rate movements can take place in the securities markets
that cannot be reflected in the futures markets.
Pursuant to the requirements of the Commodity Exchange Act, as amended (the
Commodity Exchange Act), all futures contracts and options thereon must be
traded on an exchange. Since a clearing corporation effectively acts as the
counterparty on every futures contract and option thereon, the counter party
risk depends on the strength of the clearing or settlement corporation
associated with the exchange. Additionally, although the exchanges provide a
means of closing out a position previously established, there can be no
assurance that a liquid market will exist for a particular contract at a
particular time. In the case of options on futures, if such a market does not
exist, the Fund, as the holder of an option on futures contracts, would have to
exercise the option and comply with the margin requirements for the underlying
futures contract to utilize any profit, and if the Fund were the writer of the
option, its obligation would not terminate until the option expired or the Fund
was assigned an exercise notice.
LIMITATIONS ON THE PURCHASE AND SALE OF FUTURES CONTRACTS AND RELATED OPTIONS
CFTC LIMITS. In accordance with Commodity Futures Trading Commission (CFTC)
regulations, the Fund is not permitted to purchase or sell futures contracts or
options thereon for return enhancement or risk management purposes if
immediately thereafter the sum of the amounts of initial margin deposits on the
Fund's existing futures and premiums paid for options on futures exceed 5% of
the liquidation value of such Fund's total assets (the "5% CFTC limit"). This
restriction does not apply to the purchase and sale of futures contracts and
options thereon for bona fide hedging purposes.
SEGREGATION REQUIREMENTS. To the extent the Fund enters into futures
contracts, it is required by the Securities and Exchange Commission (the
Commission) to maintain a segregated asset account sufficient to cover the
Fund's obligations with respect to such futures contracts, which will consist of
cash or other liquid assets, in an amount equal to the difference between the
fluctuating market value of such futures contracts and the aggregate value of
the initial margin deposited by the Fund with respect to such futures contracts.
Offsetting the contract by another identical contract eliminates the segregation
requirement.
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With respect to options on futures, there are no segregation requirements
for options that are purchased and owned by the Fund. However, written options,
since they involve potential obligations of the Fund, may require segregation of
Fund assets if the options are not "covered" as described below under "Options
on Futures Contracts." If the Fund writes a call option that is not "covered,"
it must segregate and maintain for the term of the option cash or liquid
securities equal to the fluctuating value of the optioned futures. If the Fund
writes a put option that is not "covered," the segregated amount would have to
be at all times equal in value to the exercise price of the put (less any
initial margin deposited by the Fund) with respect to such option.
USES OF INTEREST RATE FUTURES CONTRACTS
Futures contracts will be used for bona fide hedging, risk management and
return enhancement purposes.
POSITION HEDGING. The Fund might sell interest rate futures contracts to
protect the Fund against a rise in interest rates which would be expected to
decrease the value of debt securities which the Fund holds. This would be
considered a bona fide hedge and, therefore, is not subject to the 5% CFTC
limit. For example, if interest rates are expected to increase, the Fund might
sell futures contracts on debt securities, the values of which historically have
correlated closely or are expected to correlate closely to the values of the
Fund's portfolio securities. Such a sale would have an effect similar to selling
an equivalent value of the Fund's portfolio securities. If interest rates
increase, the value of the Fund's portfolio securities will decline, but the
value of the futures contracts to the Fund will increase at approximately an
equivalent rate thereby keeping the NAV of the Fund from declining as much as it
otherwise would have. The Fund could accomplish similar results by selling debt
securities with longer maturities and investing in debt securities with shorter
maturities when interest rates are expected to increase. However, since the
futures market may be more liquid than the cash market, the use of futures
contracts as a hedging technique would allow the Fund to maintain a defensive
position without having to sell portfolio securities. If in fact interest rates
decline rather than rise, the value of the futures contract will fall but the
value of the bonds should rise and should offset all or part of the loss. If
futures contracts are used to hedge 100% of the bond position and correlate
precisely with the bond position, there should be no loss or gain with a rise
(or fall) in interest rates. However, if only 50% of the bond position is hedged
with futures, then the value of the remaining 50% of the bond position would be
subject to change because of interest rate fluctuations. Whether the bond
positions and futures contracts correlate precisely is a significant risk
factor.
ANTICIPATORY POSITION HEDGING. Similarly, when it is expected that interest
rates may decline and the Fund intends to acquire debt securities, the Fund
might purchase interest rate futures contracts. The purchase of futures
contracts for this purpose would constitute an anticipatory hedge against
increases in the price of debt securities (caused by declining interest rates)
which the Fund subsequently acquires and would normally qualify as a bona fide
hedge not subject to the 5% CFTC limit. Since fluctuations in the value of
appropriately selected futures contracts should approximate that of the debt
securities that would be purchased, the Fund could take advantage of the
anticipated rise in the cost of the debt securities without actually buying
them. Subsequently, the Fund could make the intended purchases of the debt
securities in the cash market and concurrently liquidate the futures positions.
RISK MANAGEMENT AND RETURN ENHANCEMENT. The Fund might sell interest rate
futures contracts covering bonds. This has the same effect as selling bonds in
the portfolio and holding cash and reduces the duration of the portfolio.
(Duration measures the price sensitivity of the portfolio to interest rates. The
longer the duration, the greater the impact of interest rate changes on the
portfolio's price.) This should lessen the risks associated with a rise in
interest rates. In some circumstances, this may serve as a hedge against a loss
of principal, but is usually referred to as an aspect of risk management.
The Fund might buy interest rate futures contracts covering bonds with a
longer maturity than its portfolio average. This would tend to increase the
duration and should increase the gain in the overall portfolio if interest rates
fall. This is often referred to as risk management rather than hedging but, if
it works as intended, has the effect of increasing principal value. If it does
not work as intended because interest rates rise instead of fall, the loss will
be greater than would otherwise have been the case. Futures contracts used for
these purposes are not considered bona fide hedges and, therefore, are subject
to the 5% CFTC limit.
OPTIONS ON FUTURES CONTRACTS
The Fund may enter into options on futures contracts for certain bona fide
hedging, risk management and return enhancement purposes. This includes the
ability to purchase put and call options and write (that is, sell) "covered" put
and call options on futures contracts that are traded on commodity and futures
exchanges.
If the Fund purchases an option on a futures contract, it has the right but
not the obligation, in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call or a short position if
the option is a put) at a specified exercise price at any time during the option
exercise period.
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Unlike purchasing an option, which is similar to purchasing insurance to
protect against a possible rise or fall of security prices or currency values,
the writer or seller of an option undertakes an obligation upon exercise of the
option to either buy or sell the underlying futures contract at the exercise
price. A writer of a call option has the obligation upon exercise to assume a
short futures position and a writer of a put option has the obligation to assume
a long futures position. Upon exercise of the option, the assumption of
offsetting futures positions by the writer and holder of the option will be
accompanied by delivery of the accumulated cash balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract at exercise exceeds (in the case of a call) or is less than (in
the case of a put) the exercise price of the option on the futures contract. If
there is no balance in the writer's margin account, the option is "out of the
money" and will not be exercised. The Fund, as the writer, has income in the
amount it was paid for the option. If there is a margin balance, the Fund will
have a loss in the amount of the balance less the premium it was paid for
writing the option.
When the Fund writes a put or call option on futures contracts, the option
must either be "covered" or, to the extent not "covered," will be subject to
segregation requirements. The Fund will be considered "covered" with respect to
a call option it writes on a futures contract if the Fund owns the securities or
currency which is deliverable under the futures contract or an option to
purchase that futures contract having a strike price equal to or less than the
strike price of the "covered" option. A Fund will be considered "covered" with
respect to a put option it writes on a futures contract if it owns an option to
sell that futures contract having a strike price equal to or greater than the
strike price of the "covered" option.
To the extent the Fund is not "covered" as described above with respect to
written options, it will segregate and maintain for the term of the option cash
or other liquid assets as described above under "Limitations on the Purchase and
Sale of Futures Contracts and Related Options--Segregation Requirements."
USES OF OPTIONS ON FUTURES CONTRACTS
Options on futures contracts would be used for bona fide hedging, risk
management and return enhancement purposes.
POSITION HEDGING. The Fund may purchase put options on interest rate or
currency futures contracts to hedge its portfolio against the risk of a decline
in the value of the debt securities it owns as a result of rising interest
rates.
ANTICIPATORY HEDGING. The Fund may also purchase call options on futures
contracts as a hedge against an increase in the value of securities the Fund
might intend to acquire as a result of declining interest rates.
Writing a put option on a futures contract may serve as a partial
anticipatory hedge against an increase in the value of debt securities the Fund
might intend to acquire. If the futures price at expiration of the option is
above the exercise price, the Fund retains the full amount of the option premium
which provides a partial hedge against any increase that may have occurred in
the price of the debt securities the Fund intended to acquire. If the market
price of the underlying futures contract is below the exercise price when the
option is exercised, the Fund would incur a loss, which may be wholly or
partially offset by the decrease in the value of the securities the Fund might
intend to acquire.
Whether options on futures contracts are subject to or exempt from the 5%
CFTC limit depends on whether the purposes of the options constitutes a bona
fide hedge.
RISK MANAGEMENT AND RETURN ENHANCEMENT. Writing a put option that does not
relate to securities the Fund intends to acquire would be a return enhancement
strategy which would result in a loss if interest rates rise.
Similarly, writing a covered call option on a futures contract is also a
return enhancement strategy. If the market price of the underlying futures
contract at expiration of a written call is below the exercise price, the Fund
would retain the full amount of the option premium increasing the income of the
Fund. If the futures price when the option is exercised is above the exercise
price, however, the Fund would sell the underlying securities which were the
"cover" for the contract and incur a gain or loss depending on the cost basis
for the underlying asset.
Writing a covered call option as in any return enhancement strategy can
also be considered a partial hedge against a decrease in the value of a Fund's
portfolio securities. The amount of the premium received acts as a partial hedge
against any decline that may have occurred in the Fund's debt securities.
There can be no assurance that the Fund's use of futures contracts and
related options will be successful and the Fund may incur losses in connection
with its purchase and sale of future contracts and related options.
FOREIGN CURRENCY FORWARD CONTRACTS
The Fund may enter into foreign currency forward 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, that is, cash, basis at
the rate then prevailing in the
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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. See "Risks Related to
Foreign Currency Forward Contracts" below.
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.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
Participation in the options or futures markets 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 the
unsuccessful use of these strategies. If the investment adviser's predictions of
movements in the direction of the securities 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 and futures contracts and options on futures contracts include (1)
dependence on the investment adviser's ability to predict correctly movements in
the direction of interest rates and securities prices; (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 may sell a futures contract to protect against the decline in the
value of securities held by the Fund. However, it is possible that the futures
market may advance and the value of securities held in the Fund's portfolio may
decline. If this were to occur, the Fund would lose money on the futures
contracts and also experience a decline in value of its portfolio securities.
However, while this could occur for a very brief period or to a very small
degree, over time the market prices of the securities of a diversified portfolio
will tend to move in the same direction as the prices of futures contracts.
If the Fund purchase a futures contract to hedge against the increase in
value of securities it intends to buy, and the value of such securities
decreases, then the Fund may determine not to invest in the securities as
planned and will realize a loss on the futures contract that is not offset by a
reduction in the price of the securities.
There is a risk that the prices of securities subject to futures contracts
(and thereby the futures contract prices) may correlate imperfectly with the
behavior of the cash prices of the Fund's portfolio securities. Another such
risk is that prices of futures contracts may not move in tandem with the changes
in prevailing interest rates against which the Fund seeks a hedge. A correlation
may also be distorted by the fact that the futures market is dominated by
short-term traders seeking to profit from the difference between a contract or
security price objective and their cost of borrowed funds. Such distortions are
generally minor and would diminish as the contract approached maturity.
There may exist an imperfect correlation between the price movements of
futures contracts purchased by the Fund and the movements in the prices of the
securities (or currencies) which are the subject of the hedge. If participants
in the futures market elect to close out their contracts through offsetting
transactions rather than meet margin deposit requirements, distortions in the
normal relationships between the debt securities (or currencies) and futures
market could result. Price distortions could also result if investors in futures
contracts elect to make or take delivery or underlying securities (or
currencies) rather than engage in closing transactions due to the resultant
reduction in the liquidity of the futures market. In addition, due to the fact
that, from the point of view of speculators, the deposit requirements in the
futures markets are less onerous than margin requirements in the cash market,
increased participation by speculators in the futures markets could cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and because of the imperfect correlation between movements in the
prices of securities (or currencies) and movements in the prices of futures
contracts, a correct forecast of interest rate trends by the investment adviser
may still not result in a successful transaction.
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The risk of imperfect correlation increases as the composition of the
Fund's securities portfolio diverges from the securities that are the subject of
the futures contract, for example, those included in the municipal index.
Because the change in the price of the futures contract may be more or less than
the change in prices of the underlying securities, even a correct forecast of
interest rate changes may not result in a successful hedging transaction.
Pursuant to the requirements of the Commodity Exchange Act, all futures
contracts and options thereon must be traded on an exchange. The Fund intends to
purchase and sell futures contracts only on exchanges where there appears to be
a market in such futures sufficiently active to accommodate the volume of its
trading activity. The Fund's ability to establish and close out positions in
futures contracts and options on futures contracts would be impacted by the
liquidity of these exchanges. Although the Fund generally would purchase or sell
only those futures contracts and options thereon for which there appeared to be
a liquid market, there is no assurance that a liquid market on an exchange will
exist for any particular futures contract or option at any particular time. In
the event no liquid market exists for a particular futures contract or option
thereon in which the Fund maintains a position, it would not be possible to
effect a closing transaction in that contract or to do so at a satisfactory
price and the Fund would have to either make or take delivery under the futures
contract or, in the case of a written call option, wait to sell the underlying
securities until the option expired or was exercised, or, in the case of a
purchased option, exercise the option and comply with the margin requirements
for the underlying futures contract to realize any profit. In the case of a
futures contract or an option on a futures contract which the Fund had written
and which the Fund was unable to close, the Fund would be required to maintain
margin deposits on the futures contract or option and to make variation margin
payments until the contract is closed. In the event futures contracts have been
sold to hedge portfolio securities, such securities will not be sold until the
offsetting futures contracts can be executed. Similarly, in the event futures
have been bought to hedge anticipated securities purchases, such purchases will
not be executed until the offsetting futures contracts can be sold.
Exchanges on which futures and related options trade may impose limits on
the positions that the Fund may take in certain circumstances. In addition, the
hours of trading of financial futures contracts and options thereon may not
conform to the hours during which the Fund may trade the underlying securities.
To the extent the futures markets close before the securities markets,
significant price and rate movements can take place in the securities markets
that cannot be reflected in the futures markets.
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act are exempt from the definition of
commodity pool operator, subject to compliance with certain conditions. The Fund
may enter into futures or related options contracts for return enhancement
purposes if the aggregate initial margin and option premiums do not exceed 5% of
the liquidation value of the Fund's total assets, after taking into account
unrealized profits and unrealized losses on any such contracts, provided,
however, that in the case of an option that is in-the-money, the in-the-money
amount may be excluded in computing such 5%. The above restriction does not
apply to the purchase and sale of futures and related options contracts for BONA
FIDE hedging purchases within the meaning of the regulations of the CFTC.
In order to determine that the Fund is entering into transactions in
futures contracts for hedging purposes as such term is defined by the CFTC,
either: (1) a substantial majority (that is, approximately 75%) of all
anticipatory hedge transactions (transactions in which the Fund does not own at
the tie of the transaction, but expects to acquire, the securities underlying
the relevant futures contract) involving the purchase of futures contracts will
be completed by the purchase of securities which are the subject of the hedge,
or (2) the underlying value of all long positions in futures contracts will not
exceed the total value of (a) all short-term debt obligations held by the Fund;
(b) cash held by the Fund; (c) cash proceeds due to the Fund on investments
within thirty days; (d) the margin deposited on the contracts; and (e) any
unrealized appreciation in the value of the contracts.
If the Fund maintains a short position in a futures contract, it will cover
this position by holding, in a segregated account, cash or liquid assets equal
in value (when added to any Initial or variation margin on deposit) to the
market value of the securities underlying the futures contract. Such a position
may also be covered by owning the securities underlying the futures contract, or
by holding a call option permitting the Fund to purchase the same contract at a
price no higher than the price at which the short position was established.
In addition, if the Fund holds a long position in a futures contract, it
will hold cash or liquid assets equal to the purchase price of the contract
(less the amount of initial or variation margin on deposit) in a segregated
account. Alternatively, the Fund could cover its long position by purchasing a
put option on the same futures contract with an exercise price as high or higher
than the price of the contract held by the Fund.
Exchanges limit the amount by which the price of a futures contract may
move on any day. If the price moves equal the daily limit on successive days,
then it may prove impossible to liquidate a futures position until the daily
limit moves have ceased. In the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin on open
futures portions. In such situations, if the Fund has insufficient cash, it may
be disadvantageous to do so. In addition, the
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fund may be required to take or make delivery of the instruments underlying
futures contracts it holds at a time when it is disadvantageous to do so. The
ability to close out options and futures positions could also have an adverse
impact on the Fund's ability to hedge effectively its portfolio.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in futures or options thereon, the fund could experience delays
and/or losses in liquidating open positions purchased or sold through the broker
and/or incur a loss of all or part of its margin deposits with the broker.
Transactions are entered into by the Fund only with brokers or financial
institutions deemed creditworthy by the investment adviser.
RISK OF TRANSACTIONS IN OPTIONS ON FINANCIAL FUTURES. Compared to the
purchase or sale of futures contracts, the purchase and sale of call or put
options on futures contracts involves less potential risk to the Fund because
the maximum amount at risk is the premium paid for the options (plus transaction
costs). However, there may be circumstances when the purchase of a call or put
option on a futures contract would result in a loss to the Fund notwithstanding
that the purchase or sale of a futures contract would not result in a loss, as
in the instance where there is no movement in the prices of the future contracts
or underlying securities.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. As described above, although
the Fund generally will purchase only those options for which there appears to
be an active secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option, or at any particular
time, and for some options, no secondary market on an exchange may exist. In
such event, it might not be possible to effect closing transactions in
particular options, with the result that the Fund would have to exercise its
options in order to realize any profit and would incur transaction costs upon
the sale of underlying securities pursuant to the exercise of put options.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (4) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (5) the facilities of an exchange or
the Options clearing Corporation may not at all times be adequate to handle
current trading volume; or (6) one or more exchange could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in that class or series of options) would
cease to exist, although outstanding options on that exchange that had been
issued by the Options Clearing Corporation as a result of traders on that
exchange could continue to be exercisable in accordance with their terms.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Options clearing Corporation inadequate, and thereby result in the
institution by an exchange of special procedures which may interfere with the
timely execution of customers' orders.
RISKS OF OPTIONS ON FOREIGN CURRENCIES. Options on foreign currencies
involve the currencies of two nations and therefore, developments in either or
both countries affect the values of options on foreign currencies. Risks include
those described above under "Risk Factors Relating to Investing in Foreign
Securities" and "Risk Factors and Special Considerations of Investing in
Euro-Denominated Securities," including government actions affecting currency
valuation and the movements of currencies from one country to another. The
quantity of currency underlying option contracts represent odd lots in a market
dominated by transactions between banks; this can mean extra transaction costs
upon exercise. Option markets may be closed while round-the-clock interbank
currency markets are open, and this can create price and rate discrepancies.
RISKS RELATED TO FOREIGN CURRENCY FORWARD CONTRACTS. The Fund may enter
into forward foreign currency exchange contracts in several circumstances. When
the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, or when the Fund anticipates the receipt in a
foreign currency of dividends or interest payments on a security which it holds,
the Fund may desire to "lock-in" the U.S. dollar price of the security or the
U.S. dollar equivalent of such dividend or interest payment, as the case may be.
By entering into a forward contract for a fixed amount of dollars, for the
purchase or sale of the amount of foreign currency involved in the underlying
transactions, the Fund may be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar and
the foreign currency during the period between the date on which the security is
purchased or sold, or on which the dividend or interest payment is declared, and
the date on which such payments are made or received.
Additionally, when the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract for a fixed amount of
dollars, to sell the amount of
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foreign currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency. The precise matching of the
forward contract amounts and the value of the securities involved will not
generally be possible since the future value of securities in foreign currencies
will change as a consequence of market movements in the value of those
securities between the date on which the forward contract is entered into and
the date it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. If the Fund enters into a position hedging
transaction, the transaction will be covered by the position being hedged or the
Fund will place cash or other liquid assets in a segregated account of the Fund
(less the value of the "covering" positions, if any) in an amount equal to the
value of the Fund's total assets committed to the consummation of the given
forward contract. The assets placed in the segregated account will be
marked-to-market daily, and if the value of the securities placed in the
segregated account declines, additional cash or securities will be placed in the
account on a daily basis so that the value of the account will, at all times,
equal the amount of the Fund's net commitment with respect to the forward
contract.
The Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the forward contract.
Accordingly, if a decision is made to sell the security and make delivery of the
foreign currency and if the market value of the security is less than the amount
of foreign currency that the Fund is obligated to deliver, then it would be
necessary for the Fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase).
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. Should forward contract prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent that the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward contract prices increase,
the Fund will suffer a loss to the extent that the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. Of course, the Fund is
not required to enter into such transactions with regard to its foreign
currency-denominated securities. It also should be recognized that this method
of protecting the value of the Fund's portfolio securities against a decline in
the value of a currency does not eliminate fluctuations in the underlying prices
of the securities which are unrelated to exchange rates. Additionally, although
such contracts tend to minimize the risk of loss due to a decline in the value
of the hedged currency, at the same time they tend to limit any potential gain
which might result should the value of such currency increase.
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors should
be aware of the costs of currency conversion. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference (the spread) between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements whereby the seller of the
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date is usually within a day or two
of the original purchase, although it may extend over a number of months. The
Fund's repurchase agreements will be collateralized by U.S. Government
obligations. The Fund will enter into repurchase transactions only with parties
meeting creditworthiness standards approved by the Fund's Board of Directors.
The Fund's investment adviser will monitor the creditworthiness of such parties,
under the general supervision of the Board of Directors. In the event of a
default or bankruptcy by a seller, the Fund will promptly seek to liquidate the
collateral. To the extent that the proceeds from any sale of such collateral
upon a default in the obligation to repurchase are less than the repurchase
price, the Fund will suffer a loss.
The Fund participates in a joint repurchase agreement account with other
investment companies managed by Prudential Investments Fund Management LLC (PIFM
or the Manager) pursuant to an order of the Commission. On a daily basis, any
uninvested cash balances of the Fund may be aggregated with those of such
investment companies and invested in one or more
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repurchase agreements. Each fund participates in the income earned or accrued in
the joint account based on the percentage of its investment.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and financial institutions, provided
that outstanding loans do not exceed in the aggregate 30% of the value of the
Fund's total assets and provided that such loans are callable at any time by the
Fund and are at all times secured by cash or equivalent collateral that is equal
to at least the market value, determined daily, of the loaned securities. The
advantage of such loans is that the Fund continues to receive payments in lieu
of the interest and dividends of the loaned securities, while at the same time
earning interest either directly from the borrower or on the collateral which
will be invested in short-term obligations.
A loan may be terminated by the borrower on one business days' notice or by
the Fund at any time. If the borrower fails to maintain the requisite amount of
collateral, the loan automatically terminates, and the Fund could use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases loss of rights in the
collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will only be made to firms deemed by the
investment adviser to be creditworthy. On termination of the loan, the borrower
is required to return the securities to the Fund, and any gain or loss in the
market price during the loan would inure to the Fund.
Since voting or consent rights which accompany loaned securities pass to
the borrower, the Fund will follow the policy of calling the loan, in whole or
in part as may be appropriate, to permit the exercise of such rights if the
matters involved would have a material effect on the Fund's investment in the
securities which are the subject of the loan. The Fund will pay reasonable
finders', administrative and custodial fees in connection with a loan of its
securities or may share the interest earned on collateral with the borrower.
BORROWING
The Fund may borrow an amount equal to no more than 33-1/3% 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 33-1/3% of its total assets to secure
these borrowings. If the Fund's asset coverage for borrowings falls below 300%,
the Fund will take prompt action to reduce its borrowings. If the 300% asset
coverage should decline as a result of market fluctuations or other reasons, the
Fund may be required to sell portfolio securities to reduce the debt and restore
the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time. Such liquidations could
cause the Fund to realize gains on securities held for less than three months.
The Fund will not purchase securities when borrowings exceed 5% of the value of
the Fund's total assets.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in repurchase agreements
which have a maturity of longer than seven days or in other illiquid securities,
including certain securities that are illiquid by virtue of the absence of a
readily available market (either within or outside of the United States) or
legal or contractual restrictions on resale. Historically, illiquid securities
have included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (the Securities Act), securities which are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Securities which have not been registered under the Securities Act are
referred to as private placements or restricted securities and are purchased
directly from the issuer or in the secondary market. Mutual funds do not
typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the marketability
of portfolio securities and a mutual fund might be unable to dispose of
restricted or other illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within seven days. A
mutual fund might also have to register such restricted securities in order to
dispose of them resulting in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are
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contractual or legal restrictions on resale to the general public or to certain
institutions may not be indicative of the liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc. (NASD).
Restricted securities, including securities eligible for resale pursuant to
Rule 144A under the Securities Act and commercial paper for which there is a
readily available market, will be treated as liquid only when deemed liquid
under procedures established by the Board of Directors. The investment adviser
will monitor the liquidity of such restricted securities subject to the
supervision of the Board of Directors. In reaching liquidity decisions, the
investment adviser will consider, INTER ALIA, the following factors: (1) the
frequency of trades and quotes for the security; (2) the number of dealers
wishing to purchase or sell the security and the number of other potential
purchasers; (3) dealer undertakings to make a market in the security; and (4)
the nature of the security and the nature of the marketplace trades (for
example, the time needed to dispose of the security, the method of soliciting
offers and the mechanics of the transfer). In addition, in order for commercial
paper that is issued in reliance on Section 4(2) of the Securities Act to be
considered liquid, (i) it must be rated in one of the two highest rating
categories by at least two nationally recognized statistical rating
organizations (NRSRO), or if only one NRSRO rates the securities, by that NRSRO,
or, if unrated, be of comparable quality in the view of the investment adviser;
and (ii) it must not be "traded flat" (that is, without accrued interest) or in
default as to principal or interest. Repurchase agreements subject to demand are
deemed to have a maturity equal to the notice period.
The staff of the Commission has taken the position that purchased
over-the-counter (OTC) options and the assets used as "cover" for written OTC
options are illiquid securities unless the Fund participating in the option and
the counterparty have provided for the Fund, at the Fund's election, to unwind
the OTC option. The exercise of such an option would ordinarily involve the
payment by the Fund of an amount designed to reflect the counterparty's economic
loss from an early termination, but does allow the Fund to treat the securities
used as "cover" as liquid. See "How the Fund Invests--Additional
Strategies--Illiquid Securities" in the Prospectus.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
From time to time, in the ordinary course of business, the Fund may
purchase or sell securities on a when-issued or delayed delivery basis, that is,
delivery and payment can take place a month or more after the date of the
transaction. The purchase price and the interest rate payable on the securities
are fixed on the transaction date. The securities so purchased are subject to
market fluctuation, and no interest accrues to the Fund until delivery and
payment take place. At the time the Fund makes the commitment to purchase
securities on a when-issued or delayed delivery basis, it will record the
transaction and thereafter reflect the value of such securities in determining
its NAV each day. The Fund will make commitments for such when-issued
transactions only with the intention of actually acquiring the securities. The
Fund will segregate cash or other liquid assets, marked-to-market daily, having
a value equal to or greater than such commitments. If the Fund chooses to
dispose of the right to acquire a when-issued security prior to its acquisition,
it could, as with the disposition of any other portfolio security, incur a gain
or loss due to market fluctuations.
SHORT SALES
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,"
B-19
<PAGE>
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. For
federal income tax purposes, a short sale against the box of an appreciated
position will be treated as a sale of the appreciated position, thus generating
gain, by the Fund.
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest in securities of other investment companies, except to
the extent permitted by applicable law. Generally, the Fund does not intend to
invest in such securities. If the Fund does invest in securities of other
investment companies, shareholders of the Fund may be subject to duplicate
management and advisory fees.
SEGREGATED ACCOUNTS
When the Fund is required to segregate assets in connection with certain
hedging transactions, it will maintain cash or liquid assets in a segregated
account. "Liquid assets" mean cash, U.S. Government securities, equity
securities, debt obligations or other liquid, unencumbered assets
marked-to-market daily, including foreign securities, high-yield fixed income
securities and distressed securities.
(D) TEMPORARY DEFENSIVE STRATEGIES AND SHORT-TERM INVESTMENTS
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. The yield on these securities will tend
to be lower than the yield on other securities to be purchased by the Fund.
(E) PORTFOLIO TURNOVER
Although the Fund does not intend to engage in substantial short-term
trading, it may sell portfolio securities without regard to the length of time
that they have been held in order to take advantage of new investment
opportunities or yield differentials, or because the Fund desires to preserve
gains or limit losses due to changing economic conditions or the financial
condition of the issuer. The Fund's portfolio turnover rate is not expected to
exceed 150%. The portfolio turnover rate is generally the percentage computed by
dividing the lesser of portfolio purchases or sales (excluding all securities,
including options, whose maturities or expiration date at acquisition were one
year or less) by the monthly average value of the portfolio. High portfolio
turnover (over 100%) involves correspondingly greater brokerage commissions and
other transaction costs, which are borne directly by the Fund. In addition, high
portfolio turnover may also mean that a proportionately greater amount of
distributions to shareholders will be taxed as ordinary income rather than
long-term capital gains compared to investment companies with lower portfolio
turnover. For the fiscal period ended March 31, 1999, the Fund's portfolio
turnover rate was 97%. See "Brokerage Allocation and Other Practices" and
"Taxes, Dividends and Distributions" below.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. A "majority of the Fund's
outstanding voting securities," when used in this Statement of Additional
Information, means the lesser of (i) 67% of the voting shares represented at a
meeting at which more than 50% of the outstanding voting shares are present in
person or represented by proxy or (ii) more than 50% of the outstanding voting
shares.
The Fund may not:
1. Purchase any security (other than obligations of, or guaranteed by,
the U.S. Government, its agencies or instrumentalities) if as a result: (i)
with respect to 75% of the Fund's total assets, more than 5% of the Fund's
total assets
B-20
<PAGE>
(determined at the time of investment) would then be invested in securities
of a single issuer, or (ii) more than 10% of the voting securities of any
issuer.
2. Invest 25% or more of the market or other fair value of its total
assets in the securities of issuers, all of which conduct their principal
business activities in the same industry. For purposes of this restriction,
gas, electric, water and telephone utilities will each be treated as being
a separate industry. This restriction does not apply to obligations issued
or guaranteed by the United States Government or its agencies or
instrumentalities.
3. Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of transactions);
provided that the deposit or payment by the Fund of initial or maintenance
margin in connection with futures or options is not considered the purchase
of a security on margin.
4. Issue senior securities, borrow money or pledge its assets, except
that the Fund may borrow from banks up to 33-1/3% of the value of its
total assets (calculated when the loan is made) for temporary,
extraordinary or emergency purposes, for the clearance of transactions. The
Fund may pledge up to 33-1/3% of the value of its total assets to secure
such borrowings. For purposes of this restriction, the purchase or sale of
securities on a when-issued or delayed delivery basis, forward foreign
currency exchange contracts and collateral arrangements relating thereto,
and collateral arrangements with respect to interest rate swap
transactions, reverse repurchase agreements, dollar roll transactions,
options, futures contracts and options thereon, short sales, and
obligations of the Fund to Directors pursuant to deferred compensation
arrangements are not deemed to be a pledge of assets or the issuance of a
senior security, only so long as they are covered or collateralized in
accordance with Securities and Exchange Commission guidelines.
5. Act as underwriter of securities, except to the extent that, in
connection with the disposition of portfolio securities, it may be deemed
to be an underwriter under certain federal securities laws.
6. Buy or sell real estate or interests in real estate, except that
the Fund may purchase and sell securities which are secured by real estate,
securities of companies which invest or deal in real estate and securities
of real estate investment trusts.
7. Buy or sell commodities or commodity contracts, except that the
Fund may purchase and sell financial futures contracts and options thereon,
and forward foreign currency exchange contracts.
8. Make loans, except through the purchase of debt obligations, bank
debt (including loan participations and assignments), trade claims,
repurchase agreements and loans of securities.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or NAVs will not be considered a
violation of such policy. However, in the event that the Fund's asset coverage
for borrowings falls below 300%, the Fund will take prompt action to reduce its
borrowings, as required by applicable law.
B-21
<PAGE>
MANAGEMENT OF THE FUND
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH FUND DURING PAST 5 YEARS
- ------------------------ ---------- ----------------------
<S> <C> <C>
Edward D. Beach (74) Director President and Director of BMC Fund, Inc., a closed-end investment
company; previously, Vice Chairman of Broyhill Furniture
Industries, Inc.; Certified Public Accountant; Secretary and
Treasurer of Broyhill Family Foundation, Inc.; Member of the
Board of Trustees of Mars Hill College; Director of The High
Yield Income Fund, Inc.
Eugene C. Dorsey (72) Director Retired President, Chief Executive Officer and Trustee of the
Gannett Foundation (now Freedom Forum); former Publisher of four
Gannett newspapers and Vice President of Gannett Company; past
Chairman of Independent Sector (national coalition of
philanthropic organizations); former Chairman of the American
Council for the Arts; Director of the Advisory Board of Chase
Manhattan Bank of Rochester, The High Yield Income Fund, Inc.
and First Financial Fund, Inc.
Delayne Dedrick Gold (60) Director Marketing and Management Consultant; Director of The High Yield
Income Fund, Inc.
*Robert F. Gunia (52) Director Vice President of The Prudential Insurance Company of America
(Prudential) (since September 1997); Executive Vice President
and Treasurer (since December 1996) of Prudential Investments
Fund Management LLC (PIFM); Senior Vice President (since March
1987) of Prudential Securities Incorporated (Prudential
Securities); formerly Chief Administrative Officer (July
1990-September 1996); Director (January 1989-September 1996);
Executive Vice President, Treasurer and Chief Financial Officer
(June 1987-September 1996) of Prudential Mutual Fund Management,
Inc.; Vice President and Director of The Asia Pacific Fund, Inc.
(since May 1989); Director of the High Yield Income Fund, Inc.
Thomas T. Mooney (57) Director President of the Greater Rochester Metro Chamber of Commerce;
formerly Rochester City Manager; Trustee of Center for
Governmental Research, Inc.; Director of Blue Cross of
Rochester; The Business Council of New York State; Executive
Service Corps of Rochester; Monroe County Water Authority;
Rochester Jobs, Inc.; Monroe County Industrial Development
Corporation; Northeast Midwest Institute; The High Yield Income
Fund, Inc.; Director and Treasurer of First Financial Fund, Inc.
and The High Yield Plus Fund, Inc.
Thomas H. O'Brien (74) Director President of O'Brien Associates (Financial and Management
Consultants) (since April 1984); formerly President of Jamaica
Water Securities Corp. (holding company) (February 1989-August
1990); Chairman of the Board and Chief Executive Officer
(September 1987-February 1989) of Jamaica Water Supply Company
and Director (September 1987-April 1990); Director and President
Winthrop Regional Health Systems, Inc. and United Presbyterian
Homes; Director of Ridgewood Savings Bank and The High Yield
Income Fund, Inc.; Trustee of Hofstra University.
</TABLE>
B-22
<PAGE>
<TABLE>
<CAPTION>
POSITION PRINCIPAL OCCUPATIONS
NAME AND ADDRESS** (AGE) WITH FUND DURING PAST 5 YEARS
- ------------------------ ---------- ----------------------
<S> <C> <C>
Richard A. Redeker (55) Director Formerly President, Chief Executive Officer and Director (October
1993-September 1996), Prudential Mutual Fund Management, Inc.,
Executive Vice President, of Director and Member of the
Operating Committee (October 1993-September 1996), Prudential
Securities, Director (October 1993-September 1996) of Prudential
Securities Group, Inc. (PSG), Executive Vice President, The
Prudential Investment Corporation (January 1994-September 1996),
Director (January 1994-September 1996) of Prudential Mutual Fund
Distributors, Inc. and Prudential Mutual Fund Services, Inc. and
Senior Executive Vice President and Director of Kemper Financial
Services, Inc. (September 1978-September 1993); Director of The
High Yield Income Fund, Inc.
*John R. Strangfeld, Jr. (45) Director and Chief Executive Officer, Chairman, President and Director of The
President Prudential Investment Corporation (since January 1990); Executive
Vice President of the Prudential Global Asset Management Group of
Prudential (since February 1998); Chairman of Pricoa Capital Group
(since August 1989); Chief Executive Officer of Private Asset
Management Group of Prudential (November 1994-December 1998).
Nancy H. Teeters (68) Director Economist; formerly Vice President and Chief Economist of
International Business Machines Corporation (March 1986-June
1990); Director of Inland Steel Industries (since July 1991) and
The High Yield Income Fund, Inc.
Louis A. Weil, III (57) Director Publisher and Chief Executive Officer (since January 1996) and
Director (since September 1991) of Central Newspapers, Inc.;
Chairman of the Board (since January 1996), Publisher and Chief
Executive Officer (August 1991-December 1995) of Phoenix
Newspapers, Inc.; formerly, Publisher of Time Magazine (May
1989- March 1991), President, Publisher and Chief Executive
Officer of The Detroit News (February 1986-August 1989), and
member of the Advisory Board, Chase Manhattan Bank-Westchester;
Director of the High Yield Income Fund, Inc.
Grace C. Torres (39) Treasurer and First Vice President (since December 1995) of PIFM; First Vice
Principal President (since March 1994) of Prudential Securities; formerly
Financial First Vice President (March 1994-September 1996) of Prudential
Accounting Mutual Fund Management, Inc. and Vice President (July 1989-March
Officer 1994) of Bankers Trust Corporation.
Deborah A. Docs (41) Secretary Vice President (since December 1996) of PIFM; Vice President and
Associate General Counsel (June 1991-September 1996) of PMF;
Vice President and Associate General Counsel of Prudential
Securities (since December 1996).
Stephen M. Ungerman (45) Assistant Tax Director (since March 1996) of Prudential Investments and the
Treasurer Private Asset Group of Prudential; formerly First Vice President
(February 1993-September 1996) of Prudential Mutual Fund
Management, Inc. and Senior Tax Manager (1981-January 1993) at
Price Waterhouse LLP.
</TABLE>
- ---------------
* "Interested" Director, as defined in the Investment Company Act, by reason
of his affiliation with Prudential, Prudential Securities or PIFM.
** Unless otherwise indicated, the address of the Directors and Officers is
c/o Prudential Investments Fund Management, LLC, Gateway Center Three,
Newark, New Jersey 07102-4077.
B-23
<PAGE>
Directors and officers of the Fund are also trustees, directors and
officers of some or all of the other investment companies distributed by
Prudential Investment Management Services LLC.
The officers conduct and supervise the daily business operations of the
Fund, while the directors, in addition to their functions set forth under
"Investment Advisory and Other Services--Manager and Investment Adviser" and
"--Principal Underwriter, Distributor and Rule 12b-1 Plans," review such actions
and decide on general policy.
Pursuant to the Management Agreement with the Fund, the Manager pays all
compensation of officers and employees of the Fund as well as the fees and
expenses of all Directors of the Fund who are affiliated persons of the Manager.
The Fund pays each of its Directors who is not an affiliated person of PIFM
or The Prudential Investment Corporation (PIC), the Subadviser or the investment
adviser) annual compensation of $2,000, in addition to certain out-of-pocket
expenses. The amount of annual compensation paid to each Director may change as
a result of the introduction of additional funds upon which the Director will be
asked to serve.
Directors may receive their Directors' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of Directors' fees in installments which accrue interest at a
rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury bills
at the beginning of each calendar quarter or, pursuant to an Commission
exemptive order, at the daily rate of return of the Fund (the Fund rate).
Payment of the interest so accrued is also deferred and accruals become payable
at the option of the Director. The Fund's obligation to make payments of
deferred Directors' fees, together with interest thereon, is a general
obligation of the Fund.
The Directors have adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 72, except that retirement is being phased in for Directors who were age 68
or older as of December 31, 1993. Under this phase-in provision, Messrs. Beach,
Dorsey and O'Brien are scheduled to retire on December 31, 1999.
The following table sets forth the aggregate compensation estimated to be
paid by the Fund for the fiscal period ending March 31, 1999 to the Directors
who are not affiliated with the Manager and the aggregate compensation paid to
such Directors for service on the boards of all other funds managed by PIFM
(Fund Complex) for the calendar year ended December 31, 1998.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
ESTIMATED RETIREMENT ESTIMATED FROM FUND
AGGREGATE BENEFITS ACCRUED ANNUAL AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID
NAME AND POSITION FROM FUND EXPENSES RETIREMENT TO DIRECTORS
----------------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Edward D. Beach, Director .................................. $2,000 None N/A $135,000(38/63)*
Eugene C. Dorsey, Director** ............................... $2,000 None N/A $ 70,000(16/43)*
Delayne Dedrick Gold, Director ............................. $2,000 None N/A $135,000(38/63)*
Robert F. Gunia, Director+ ................................. None None N/A --
Mendel A. Melzer, Former Director+ ......................... None None N/A --
Thomas T. Mooney, Director** ............................... $2,000 None N/A $115,000(31/64)*
Thomas H. O'Brien, Director ................................ $2,000 None N/A $ 45,000(11/29)*
Richard A. Redeker, Director ............................... $ 500 None N/A --
Brian M. Storms, Former Director+ .......................... None None N/A --
John R. Strangfeld, Jr., Director and President+ ........... None None N/A --
Nancy H. Teeters, Director ................................. $2,000 None N/A $ 90,000(23/42)*
Louis A. Weil, III, Director ............................... $2,000 None N/A $ 90,000(26/50)*
- ----------------
</TABLE>
* Indicates number of funds/portfolios in Fund Complex (including the Fund)
to which aggregate compensation relates.
** Total compensation from all of the funds in the Fund complex for the
calendar year ended December 31, 1998, includes amounts deferred at the
election of Directors under the fund's deferred compensation plans.
Including accrued interest, total compensation amounted to $87,401 and
$143,909 for Dorsey and Mooney, respectively.
+ Robert F. Gunia, Mendel A. Melzer, Brian M. Storms and John R. Strangfeld,
Jr., who are each current or former interested Directors, do not receive
compensation from the Fund or any fund in the Prudential Mutual Fund
family.
B-24
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Directors of the Fund are eligible to purchase Class Z shares of the Fund,
which are sold without either an initial sales charge or contingent deferred
sales charge to a limited group of investors.
As of May 7, 1999, the directors and officers of the Fund, as a group,
owned less than 1% of each Class of the outstanding common stock of the Fund.
As of May 7, 1999, the beneficial owners, directly or indirectly, of more
than 5% of the outstanding shares of any class of beneficial interest were:
Amsouth Bank, Trustee, T/F Morrison's Restaurants Inc., Pension Plan, Attn:
Tracey Crain, P.O. Box 11426, Birmingham, AL 35202, who held 205,985 Class A
shares of the Fund (5.0%); Margaret Weiner, Robert Weiner, CO-TTEES, Margaret
Weiner REV TR UA DTD 04/03/95, 3320 Bridle Path Lane, Weston, FL 33331, who held
19,028 Class Z shares of the Fund (8.2%); and Mark Jeffrey Weiner, 3320 Bridle
Path Lane, Weston, FL 33331, who held 17,920 Class Z shares of the Fund (7.7%).
As of May 7, 1999, Prudential Securities was the record holder for other
beneficial owners of 3,899,310 Class A shares (or 95% of the outstanding Class A
shares), 10,380,112 Class B shares (or a 5% of the outstanding Class B shares)
1,869,813 Class C shares (or 92% of the outstanding Class C shares) and 227,976
Class Z shares (or 98% of the outstanding Class Z shares) of the Fund. In the
event of any meetings of shareholders, Prudential Securities will forward, or
cause the forwarding of, proxy materials to the beneficial owners for which it
is the record holder.
INVESTMENT ADVISORY AND OTHER SERVICES
(A) MANAGER AND INVESTMENT ADVISER
The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. PIFM serves as manager to all of the other investment companies
that, together with the Fund, comprise the Prudential Mutual Funds. See "How the
Fund is Managed" in the Prospectus. As of March 31, 1999, PIFM managed and/or
administered open-end and closed-end management investment companies with assets
of approximately $71.6 billion. According to the Investment Company Institute,
as of November 30, 1998, the Prudential Mutual Funds were the 18th largest
family of mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). Prudential Mutual Fund Services LLC (PMFS or
the Transfer Agent), a wholly-owned subsidiary of Prudential, serves as the
transfer agent for the Prudential Mutual Funds and, in addition, provides
customer service, recordkeeping and management and administration services to
qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PIFM, subject to the supervision of the Fund's Board of Directors
and in conformity with the stated policies of the Fund, manages both the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention, disposition and loan of securities and other
assets. In connection therewith, PIFM is obligated to keep certain books and
records of the Fund. PIFM also administers the Fund's corporate affairs and, in
connection therewith, furnishes the Fund with office facilities, together with
those ordinary clerical and bookkeeping services which are not being furnished
by State Street Bank and Trust Company, the Fund's custodian (the Custodian),
and PMFS, the Fund's transfer and dividend disbursing agent. The management
services of PIFM for the Fund are not exclusive under the terms of the
Management Agreement and PIFM is free to, and does, render management services
to others.
For its services, PIFM receives, pursuant to the Management Agreement, a
fee at an annual rate of .65 of 1% of the Fund's average daily net assets. The
fee is computed daily and payable monthly. The Management Agreement also
provides that, in the event the expenses of the Fund (including the fees of
PIFM, but excluding interest, taxes, brokerage commissions, distribution fees
and litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due to PIFM will be
reduced by the amount of such excess. No jurisdiction currently limits the
Fund's expenses.
In connection with its management of the corporate affairs of the Fund,
PIFM bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel
except the fees and expenses of Directors who are not affiliated persons of
PIFM or the Fund's Subadviser;
B-25
<PAGE>
(b) all expenses incurred by PIFM or by the Fund in connection with
managing the ordinary course of the Fund's business, other than those
assumed by the Fund as described below; and
(c) the costs and expenses payable to The Prudential Investment
Corporation, which does business under the name of Prudential Investments
(PI, the Subadviser or the investment adviser) pursuant to the Subadvisory
Agreement between PIFM and the Subadviser (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for
the payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Directors who are not affiliated persons of the Manager
or the Fund's Subadviser, (c) the fees and certain expenses of the Custodian and
Transfer and Dividend Disbursing Agent, including the cost of providing records
to the Manager in connection with its obligation of maintaining required records
of the Fund and of pricing the Fund's shares, (d) the charges and expenses of
legal counsel and independent accountants for the Fund, (e) brokerage
commissions and any issue or transfer taxes chargeable to the Fund in connection
with its securities transactions, (f) all taxes and corporate fees payable by
the Fund to governmental agencies, (g) the fees of any trade associations of
which the Fund may be a member, (h) the cost of stock certificates representing
shares of the Fund, (i) the cost of fidelity and liability insurance, (j)
certain organization expenses of the Fund and the fees and expenses involved in
registering and maintaining registration of the Fund and of its shares with the
Commission, including the preparation and printing of the Fund's registration
statements and prospectuses for such purposes, (k) allocable communications
expenses with respect to investor services and all expenses of shareholders' and
Directors' meetings and of preparing, printing and mailing reports, proxy
statements and prospectuses to shareholders in the amount necessary for
distribution to the shareholders, (l) litigation and indemnification expenses
and other extraordinary expenses not incurred in the ordinary course of the
Fund's business and (m) distribution fees.
The Management Agreement provides that PIFM will not be liable for any
error of judgment or for any loss suffered by the Fund in connection with the
matters to which the Management Agreement relates, except a loss resulting from
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
The Management Agreement provides that it will terminate automatically if
assigned, and that it may be terminated without penalty by either party upon not
more than 60 days' nor less than 30 days' written notice. The Management
Agreement will continue in effect for a period of more than two years from the
date of execution only so long as such continuance is specifically approved at
least annually in conformity with the Investment Company Act.
For the fiscal period ended March 31, 1999, the Fund paid PIFM a management
fee of $864,173.
PIFM has entered into the Subadvisory Agreement with the Subadviser, a
wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that
the Subadviser will furnish investment advisory services in connection with the
management of the Fund. In connection therewith, the Subadviser is obligated to
keep certain books and records of the Fund. PIFM continues to have
responsibility for all investment advisory services pursuant to the Management
Agreement and supervises the Subadviser's performance of such services. The
Subadviser is reimbursed by PIFM for the reasonable costs and expenses incurred
by the Subadviser in furnishing those services. Investment advisory services are
provided to the Fund by a business group at the Subadviser, known as Prudential
Investments.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PIFM or the Subadviser upon not more than 60 days', nor
less than 30 days', written notice. The Subadvisory Agreement provides that it
will continue in effect for a period of more than two years from its execution
only so long as such continuance is specifically approved at least annually in
accordance with the requirements of the Investment Company Act.
(B) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12B-1 PLANS
Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077 acts as
the distributor of the shares of the Fund. Prior to June 1, 1998, Prudential
Securities Incorporated (Prudential Securities), was the Fund's distributor.
PIMS and Prudential Securities are subsidiaries of Prudential.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and 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 a
Distribution Agreement, none of which is reimbursed or paid for by the Fund. See
"How the Fund is Managed--Distributor" in the Prospectus.
The expenses incurred under the Plans include commissions and account
servicing fees paid to or on account of brokers or financial institutions that
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing
B-26
<PAGE>
prospectuses to potential investors and indirect and overhead costs of the
Distributor associated with the sale of Fund shares including lease, utility,
communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
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 brokers
with respect to the promotion of the sale of the Fund's shares and the
maintenance of related shareholder accounts.
CLASS A PLAN. Under the Class A Plan, the Fund may pay the Distributor for
its distribution-related activities with respect to Class A shares at an annual
rate of up to .30 of 1% of the average daily net assets of the Class A shares.
The Class A Plan provides that (1) 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 (2) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1%.
For the fiscal period ended March 31, 1999, the Distributor and Prudential
Securities collectively received payments of $56,529 under the Class A Plan.
This amount was primarily expended on commission credits to Prudential
Securities and Prusec for payment of account servicing fees to financial
advisers and other persons who sell Class A shares. The Distributor and
Prudential Securities collectively received approximately $1,089,800 in initial
sales charges with respect to sales of Class A shares.
Class B and Class C Plans. Under the Class B and Class C Plans, the Fund
pays the Distributor for its distribution-related activities with respect to
Class B and Class C shares at an annual rate of up to 1% of the average daily
net assets of each of the Class B and Class C shares. The Class B Plan provides
that (1) up to .25 of 1% of the average daily net assets of the Class B shares
may be paid as a service fee and (2) up to .75 of 1% (not including the service
fee) of the average daily net assets of the Class B shares (asset-based sales
charge) may be paid for distribution-related expenses with respect to the Class
B shares. The Class C Plan provides that (1) up to .25 of 1% of the average
daily net assets of the Class C shares may be paid as a service fee for
providing personal service and/or maintaining shareholder accounts and (2) up to
.75 of 1% of the average daily net assets of the Class C shares may be paid for
distribution-related expenses with respect to Class C shares. The service fee
(.25 of 1% of average daily net assets) 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.
CLASS B PLAN. For the fiscal period ended March 31, 1999 the Distributor
and Prudential Securities collectively received $623,305 from the Fund under the
Class B Plan. It is estimated that the Distributor and Prudential Securities
incurred aggregate distribution expenses of approximately $4,765,000 on behalf
of the Fund during such period. It is estimated that of this amount
approximately 0% ($0) was spent on printing and mailing of prospectuses to other
than current shareholders; 0.5% ($23,000) on compensation to Pruco Securities
Corporation, an affiliated broker-dealer (Prusec), for commissions to its
representatives and other expenses, including an allocation on account of
overhead and other branch office distribution-related expenses, incurred by it
for distribution of Fund shares; and $4,742,000 (99.5%) on the aggregate of (i)
payments of commissions to account executives ($1,803,000 or 37.8%) and (ii) an
allocation of overhead and other branch office distribution-related expenses
($2,939,000 or 61.7%). The term "overhead and other branch office
distribution-related expenses" represents (a) the expenses of operating
Prudential Securities' and Pruco branch offices in connection with the sale of
Fund shares, including lease costs, the salaries and employee benefits of
operations and sales support personnel, utility costs, communications costs and
the costs of stationery and supplies, (b) the costs of client sales seminars,
(c) expenses of mutual fund sales coordinators to promote the sale of Fund
shares and (d) other incidental expenses relating to branch promotion of Fund
sales.
The Distributor (and Prudential Securities as its predecessor) also
receives the proceeds of contingent deferred sales charges paid by holders of
Class B shares upon certain redemptions of Class B shares. See "How to Buy, Sell
and Exchange Shares of the Fund--How to Sell Your Shares--Contingent Deferred
Sales Charges (CDSC)" in the Prospectus. For the fiscal period ended March 31,
1999, the Distributor and Prudential Securities collectively received
approximately $283,900 in contingent deferred sales charges attributable to
Class B shares.
CLASS C PLAN. For the fiscal year ended March 31, 1999, the Distributor and
Prudential Securities collectively received $122,290 from the Fund under the
Class C Plan. It is estimated that the Distributor and Prudential Securities
collectively incurred aggregate distribution expenses of approximately $202,400
on behalf of the Fund during such period. It is estimated that of this
B-27
<PAGE>
amount approximately 0% ($0) was spent on printing and mailing of prospectuses
to other than current shareholders; 0.1% ($100) on compensation to Pruco
Securities Corporation, an affiliated broker-dealer (Prusec), for commissions to
its representatives and other expenses, including an allocation on account of
overhead and other branch office distribution-related expenses, incurred by it
for distribution of Fund shares; and $202,300 (99.9%) on the aggregate of (i)
payments of commissions to account executives ($74,400 or 36.7%) and (ii) an
allocation of overhead and other branch office distribution-related expenses
($127,900 or 63.2%). The term "overhead and other branch office
distribution-related expenses" represents (a) the expenses of operating
Prudential Securities' and Pruco Securities Corporation's (Prusec's) branch
offices in connection with the sale of Fund shares, including lease costs, the
salaries and employee benefits of operations and sales support personnel,
utility costs, communications costs and the costs of stationery and supplies,
(b) the costs of client sales seminars, (c) expenses of mutual fund sales
coordinators to promote the sale of Fund shares and (d) other incidental
expenses relating to branch promotion of Fund sales.
The Distributor (and Prudential Securities as its predecessor) also
receives an initial sales charge and the proceeds of contingent deferred sales
charges paid by investors upon certain redemptions of Class C shares. See "How
to Buy, Sell and Exchange Shares of the Fund--How to Sell Your
Shares--Contingent Deferred Sales Charge (CDSC)" in the Prospectus. For the
period ended March 31, 1999, the Distributor and Prudential Securities
collectively received approximately $27,100 in contingent deferred sales charges
attributable to Class C shares. For the fiscal period ended March 31, 1999, the
Distributor received approximately $27,200 in initial sales charges with respect
to Class C shares.
Distribution expenses attributable to the sale of Class A, Class B and
Class C shares of the Fund are allocated to each such class based upon the ratio
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.
The Class A, Class B and Class C Plans continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority vote of the Directors who
are not interested persons of the Fund and who have no direct or indirect
financial interest in the Class A, Class B or Class C Plan or on any agreement
related to the Plans (Rule 12b-1 Directors) cast in person at a meeting called
for the purpose of voting on such continuance. A Plan may be terminated at any
time, without penalty, by the vote of a majority of the Rule 12b-1 Directors or
by the vote of the holders of a majority of the outstanding shares of the
applicable class on not more than 30 days' written notice to any other party to
the Plan. The Plans may not be amended to increase materially the amounts to be
spent for the services described therein without approval by the shareholders of
the applicable class (by both Class A and Class B shareholders, voting
separately, in the case of material amendments to the Class A Plan), and all
material amendments are required to be approved by the Board of Directors in the
manner described above. Each Plan will automatically terminate in the event of
its assignment. The Fund will not be contractually obligated to pay expenses
incurred under any Plan if it is terminated or not continued.
Pursuant to each Plan, the Board of Directors will review at least
quarterly a written report of the distribution expenses incurred on behalf of
each class of shares of the Fund by the Distributor. The report will include an
itemization of the distribution expenses and the purposes of such expenditures.
In addition, as long as the Plans remain in effect, the selection and nomination
of the Rule 12b-1 Directors shall be committed to the Rule 12b-1 Directors.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify
the Distributor to the extent permitted by applicable law against certain
liabilities under federal securities law.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons which distribute shares of the Fund (including
Class Z shares). Such payments may be calculated by reference to the net asset
value of shares sold by such persons or otherwise.
FEE WAIVERS/SUBSIDIES
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. In addition,
the Distributor may from time to time waive all or a portion of its distribution
related fees of the Fund. For the fiscal year ending March 31, 2000, PIFM has
contractually agreed to waive .15 of 1% of its management fee and the
Distributor has contractually agreed to limit its distribution related fees
payable under the Class A, Class B and Class C Plans to .25 of 1%, .75 of 1% and
.75 of 1% of Class A, Class B and Class C shares, respectively.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the National
Association of Securities Dealers, Inc. (NASD), the Distributor is required to
limit aggregate initial sales charges, deferred sales charges and asset-based
sales charges to 6.25% of
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<PAGE>
total gross sales of each class of shares. In the case of Class B shares,
interest charges equal to the prime rate plus one percent per annum may be added
to the 6.25% limitation. Sales from the reinvestment of dividends and
distributions are not required to be included in the calculation of the 6.25%
limitation. The annual asset-based sales charge with respect to Class B and
Class C shares of the Fund may not exceed .75 of 1%. The 6.25% limitation
applies to the Fund rather than on a per shareholder basis. If aggregate sales
charges were to exceed 6.25% of total gross sales of any class, all sales
charges on shares of that class would be suspended.
(C) OTHER SERVICE PROVIDERS
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. Subcustodians provide custodial
services for the Fund's foreign assets held outside the United States.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the transfer and dividend disbursing agent of the Fund.
PMFS is a wholly-owned subsidiary of PIFM. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions and
related functions. For these services, PMFS receives an annual fee of $13.00 per
shareholder account, a new account set-up fee of $2.00 for each manually
established shareholder account and a monthly inactive zero balance account fee
of $.20 per shareholder account. PMFS is also reimbursed for its out-of-pocket
expenses, including but not limited to postage stationary, printing, allocable
communication expenses and other costs.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Fund's independent accountants and in that capacity audits
the Fund's annual financial statements.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Manager is responsible for decisions to buy and sell securities,
futures and options on securities and futures for the Fund, the selection of
brokers, dealers and futures commission merchants to effect the transactions and
the negotiation of brokerage commissions, if any. The term "Manager" as used in
this section includes the Subadviser. In placing orders for portfolio securities
of the Fund, the Manager is required to give primary consideration to obtaining
the most favorable price and efficient execution. This means that the Manager
will seek to execute each transaction at a price and commission, if any, which
will provide the most favorable total cost or proceeds reasonably obtainable in
the circumstances. While the Manager generally seeks reasonably competitive
spreads or commissions, the Fund will not necessarily be paying the lowest
spread or commission available. Within the framework of this policy, the Manager
will consider the research and investment services provided by brokers, dealers
or futures commission merchants who effect or are parties to portfolio
transactions of the Fund, the Manager or the Manager's other clients. Such
research and investment services are those which brokerage houses customarily
provide to institutional investors and include statistical and economic data and
research reports on particular companies and industries. Such services are used
by the Manager in connection with all of its investment activities, and some of
such services obtained in connection with the execution of transactions for the
Fund may be used in managing other investment accounts. Conversely, brokers,
dealers or futures commission merchants furnishing such services may be selected
for the execution of transactions of such other accounts, whose aggregate assets
are far larger than the Fund's, and the services furnished by such brokers,
dealers or futures commission merchants may be used by the Manager in providing
investment management for the Fund. Commission rates are established pursuant to
negotiations with the broker, dealer or futures commission merchant based on the
quality and quantity of execution services provided by the broker in the light
of generally prevailing rates. The Manager's policy is to pay higher commissions
to brokers, other than Prudential Securities, for particular transactions than
might be charged if a different broker had been selected, on occasions when, in
the Manager's opinion, this policy furthers the objective of obtaining best
price and execution. In addition, the Manager is authorized to pay higher
commissions on brokerage transactions for the Fund to brokers other than
Prudential Securities (or any affiliate) in order to secure research and
investment services described above, subject to the primary consideration of
obtaining the most favorable price and efficient execution in the circumstances
and subject to review by the Fund's Board of Directors from time to time as to
the extent and continuation of this practice. The allocation or orders among
brokers and the commission rates paid are reviewed periodically by the Fund's
Board of Directors.
Broker-dealers may receive negotiated brokerage commissions on Fund
portfolio transactions, including options and the purchase and sale of
underlying securities upon the exercise of options. On foreign securities
exchanges, commissions may be
B-29
<PAGE>
fixed. Orders may be directed to any broker or futures commission merchant
including, to the extent and in the manner permitted by applicable law,
Prudential Securities and its affiliates.
Equity securities traded in the over-the-counter market and bonds,
including convertible bonds, are generally traded on a "net" basis with dealers
acting as principal for their own accounts without a stated commission, although
the price of the security usually includes a profit to the dealer. In
underwritten offerings, securities are purchased at a fixed price which includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount. On occasion, certain money market
instruments and U.S. Government agency securities may be purchased directly from
the issuer, in which case no commissions or discounts are paid. The Fund will
not deal with Prudential Securities or any affiliate in any transaction in which
Prudential Securities or any affiliate acts as principal, except in accordance
with rules of the Commission. Thus, it will not deal with Prudential Securities
acting as market maker, and it will not execute a negotiated trade with
Prudential Securities if execution involves Prudential Securities' acting as
principal with respect to any part of the Fund's order.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities, or an affiliate, during the existence
of the syndicate, is a principal underwriter (as defined in the Investment
Company Act), except in accordance with rules of the Commission. This
limitation, in the opinion of the Manager, will not significantly affect the
Fund's ability to pursue its present investment objective. However, in the
future in other circumstances, the Fund may be at a disadvantage because of this
limitation in comparison to other funds with similar objectives but not subject
to such limitations.
Subject to the above considerations, Prudential Securities (or any
affiliate) may act as a securities broker or futures commission merchant for the
Fund. In order for Prudential Securities (or any affiliate) to effect any
portfolio transactions for the Fund, the commissions, fees or other remuneration
received by Prudential Securities (or any affiliate) must be reasonable and fair
compared to the commissions, fees or other remuneration paid to other firms in
connection with comparable transactions involving similar securities or futures
being purchased or sold on an exchange or board of trade during a comparable
period of time. This standard would allow Prudential Securities (or any
affiliate) to receive no more than the remuneration which would be expected to
be received by an unaffiliated firm in a commensurate arm's-length transaction.
Furthermore, the Board of Directors of the Fund, including a majority of the
Directors who are not "interested" persons, has adopted procedures which are
reasonably designed to provide that any commissions, fees or other remuneration
paid to Prudential Securities (or any affiliate) are consistent with the
foregoing standard. In accordance with Section 11(a) of the Securities Exchange
Act of 1934, as amended, Prudential Securities may not retain compensation for
effecting transactions on a national securities exchange for the Fund unless the
Fund has expressly authorized the retention of such compensation. Prudential
Securities must furnish to the Fund at least annually a statement setting forth
the total amount of all compensation retained by Prudential Securities from
transactions effected for the Fund during the applicable period. Brokerage and
futures transactions with Prudential Securities are also subject to such
fiduciary standards as may be imposed by applicable law.
For the fiscal period ended March 31, 1999, the Fund paid brokerage
commissions of $2,000 to Prudential Securities, approximately 7.6% of the
aggregate brokerage commissions paid by the Fund, for effecting approximately
5.2% of the aggregate dollar amount of transactions in which the Fund paid
brokerage commissions.
The Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company Act)
and their parents at March 31, 1999. As of March 31, 1999, the Fund did not hold
any securities of its regular brokers and dealers.
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
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 (1) each
class is subject to different sales charges and distribution and/or service fees
(except for Class Z shares, which are not subject to any sales charge or
distribution and/or service fee), which may affect performance, (2) each class
has exclusive voting rights on any matter submitted to shareholders that relates
solely to its arrangement and has separate voting rights on any matter submitted
to shareholders in which the interests of one class differ from the interests of
any other class, (3) each class has a different exchange privilege, (4) only
Class B shares have a conversion feature, and (5) Class Z shares are offered
exclusively for sale to a limited group of investors. 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.
B-30
<PAGE>
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. 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 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.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
NAV per share plus a sales charge which, at the election of the investor, may be
imposed either (1) at the time of purchase (Class A or Class C shares) or (2) on
a deferred basis (Class B or Class C shares). Class Z shares of the Fund are
offered to a limited group of investors at NAV without any sales charges. See
"How to Buy, Sell and Exchange Shares of the Fund--How to Buy Shares" in the
Prospectus.
Each class of shares represents an interest in the same assets of the Fund
and has the same rights, except that (1) each class is subject to different
sales charges and distribution and/or service fees (except for Class Z shares
which are not subject to any sales charge or distribution and/or service fees),
which may affect performance, (2) each class has exclusive voting rights on any
matter submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, (3) each
class has a different exchange privilege, (4) only Class B shares have a
conversion feature and (5) Class Z shares are offered exclusively for sale to a
limited group of investors. See "Investment Advisory and Other
Services--Principal Underwriter, Distributor and Rule 12b-1 Plans." and
"Shareholder Investment Account--Exchange Privilege."
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire,
you must complete an application and telephone PMFS at (800) 225-1852
(toll-free) to receive an account number. The following information will be
requested: your name, address, tax identification number, class election,
dividend distribution election, amount being wired and wiring bank, Instructions
should then be given by you to your bank to transfer funds by wire to State
Street Bank and Trust Company (State Street), Boston, Massachusetts, Custody and
Shareholder Services Division. Attention: Prudential High Yield 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.
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.
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (1) reorganizations, (2) statutory mergers, or (3)
other acquisitions of portfolio securities that (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, and (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) are approved by the Fund's investment adviser.
B-31
<PAGE>
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 4% and Class
C* shares are sold with a 1% sales charge, and Class B* and Class Z shares of
the Fund are sold at NAV. Using the Fund's NAV at March 31, 1999, the maximum
offering prices of the Fund's shares are as follows:
<TABLE>
<CAPTION>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share ................... $8.91
Maximum sales charge (4% of offering price) .............................. .37
-----
Offering price to public ................................................. $9.28
=====
CLASS B
Net asset value, offering price and redemption price per Class B share* .. $8.91
=====
CLASS C
Net asset value and redemption price per Class C share* .................. $8.91
=====
Sales charge (1% of offering price) ...................................... $ .09
-----
Offering Price to Public ................................................. $9.00
=====
CLASS Z
Net asset value, offering price and redemption price per Class Z share ... $8.91
=====
----------
</TABLE>
* Class B and Class C shares are subject to a contingent deferred sales
charge on certain redemptions. See "How to Buy, Sell and Exchange
Shares of the Fund--How to Sell Your Shares" in the Prospectus.
SELECTING A PURCHASE ALTERNATIVE
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 4 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 4% 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 more than 4 years, but less than
5 years, and do not qualify for a reduced sales charge on Class A shares, the
sales charges and cumulative annual distribution-related fees would be
approximately the same for Class A, Class B and Class C shares. However, you
should consider purchasing Class B shares over Class A shares or Class C shares
because all of your money would be invested initially in the case of Class B
shares.
If you intend to hold your investment for longer than 5 years, you should
consider purchasing Class A shares over either Class B or Class C shares. This
is because the maximum sales charge plus the cumulative annual
distribution-related fee on Class A shares would be less than those of the Class
B or 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 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 for more than 5 years in the
case of Class C shares for the higher cumulative annual distribution-related fee
on those shares plus, in the case of Class C shares, the 1% initial sales charge
to exceed the initial sales charge plus cumulative annual distribution-related
fees on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class B or Class C
distribution-related fee on the investment, fluctuations in NAV, the effect of
the return on the investment over this period of time or redemptions when the
CDSC is applicable.
REDUCTION AND WAIVER OF INITIAL SALES CHARGE--CLASS A SHARES
BENEFIT PLAN. 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, deferred compensation
B-32
<PAGE>
or annuity plans under Sections 401(a), 403(b) and 457 of the Internal Revenue
Code, "rabbi" trusts and non-qualified deferred compensation plans that are
sponsored by any employer that has a tax qualified plan with Prudential
(collectively, Benefits 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) of 250 eligible employees or participants. In the case of Benefit
Plans whose accounts are held directly with the Transfer Agent or Prudential
Securities and for which the Transfer Agent or Prudential Securities does
individual account recordkeeping (Direct Account Benefit Plans) and Benefit
Plans sponsored by Prudential or its subsidiaries (Prudential Securities or
Subsidiary Prototype Benefit Plans), Class A shares may be purchased by NAV by
participants who are repaying loans made from such plans to the participant.
PRUDENTIAL RETIREMENT PROGRAMS. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or
non-qualified under the Internal Revenue Code, for which Prudential provides
administrative or recordkeeping services provided that (1) the plan has at least
$1 million in existing assets or 250 eligible employees and (2) the Fund is an
available investment option. These plans include pension, profit-sharing
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code, deferred compensation and annuity plans under Sections 457 and
403(b)(7) of the Internal Revenue Code and plans that participate in the
PruArray Program (benefit plan recordkeeping service) (hereafter referred to as
a PruArray Plan). All Benefit Plans of a company (or affiliated companies under
common control) for which Prudential serves as plan administrator or
recordkeeper are aggregated in meeting the $1 million threshold, provided that
Prudential has been notified in advance of the entitlement to the waiver of the
sales charge based on the aggregated assets. The term "existing assets" includes
stock issued by a plan sponsor, shares of Prudential Mutual Funds and shares of
certain unaffiliated mutual funds that participate in the PruArray Plan
(Participating Fund). "Existing assets" also include monies invested in The
Guaranteed Investment Account (GIA) a group annuity insurance product issued by
Prudential, the Guaranteed Insulated Separate Account, a separate account
offered by Prudential and units of The Stable Value Fund (SVF), an unaffiliated
bank collective fund. Class A shares may also be purchased at NAV by plans that
have monies invested in GIA and SVF, provided (1) the purchase is made with the
proceeds of a redemption from either GIA or SVF and (2) Class A shares are an
investment option of the plan.
PRUARRAY ASSOCIATION BENEFIT PLANS. Class A shares are also offered at NAV
to Benefit Plans or non-qualified plans sponsored by employers which are members
of a common trade, professional or membership association (Association) that
participate in a PruArray Plan provided that the Association enters into a
written agreement with Prudential. Such Benefit Plans or non-qualified plans may
purchase Class A shares at NAV without regard to the assets or number of
participants in the individual employer's qualified Plan(s) or non-qualified
plans so long as the employers in the Association (1) have retirement plan
assets in the aggregate of at least $1 million or 250 participants in the
aggregate and (2) maintain their accounts with the Transfer Agent.
PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at NAV to
employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
at NAV by Individual Retirement Accounts and Savings Accumulation Plans of the
company's employees. The Program is available only to (1) employees who open an
IRA or Savings Accumulation Plan account with the Transfer Agent and (2) spouses
of employees who open an IRA account with the Transfer Agent. The program is
offered to companies that have at least 250 eligible employees.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a Benefit Plan or
PruArray 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 Distribution or the Transfer Agent, by:
o officers of the Prudential Mutual Funds (including the Fund).
o employees of the Distributor, Prudential Securities, PIFM and their
subsidiaries and members of the families of such persons who maintain
an "employee related" account at Prudential Securities or the Transfer
Agent.
o employees of subadvisers of the Prudential Mutual Funds provided that
purchases at NAV are permitted by such person's employer.
o 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.
o registered representatives and employees of brokers who have entered
into a selected dealer agreement with the Distributor provided that
purchases at NAV are permitted by such person's employer.
o investors who have a business relationship with a financial adviser
who joined Prudential Securities from another investment firm,
provided that (1) the purchase is made within 180 days of the
commencement of the financial adviser's
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<PAGE>
employment at Prudential Securities or within one year in the case of
Benefit Plans. (2) the purchase is made with proceeds of a redemption
of shares of any open-end non-money market fund sponsored by the
financial adviser's previous employer (other than a fund which imposes
a distribution or service fee of .25 of 1% or less) and (3) the
financial adviser served as the client's broker on the previous
purchase.
o investors in individual Retirement Accounts, provided the purchase is
made in a directed rollover to such individual Retirement Account or
with the proceeds of a tax-free rollover of assets from a Benefit Plan
for which Prudential provides administrative or recordkeeping services
and further provided that such purchase is made within 60 days of
receipt of the Benefit Plan distribution.
o orders placed by broker-dealers, investment advisers or financial
planners who have entered into an agreement with the Distributor, who
place trades for their own accounts or the accounts of their clients
and who charge a management consulting or other fee for their services
(for example, mutual fund "wrap" or asset allocation programs), and
o orders placed by clients of broker dealers, investment advisers or
financial planners who place trades for customer accounts if the
accounts are linked to the master account of such broker-dealer,
investment adviser or financial planner and the broker dealer,
investment adviser or financial planner charges its clients a separate
fee for its services (for example, mutual fund "supermarket
programs").
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 broker
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
acquired upon the reinvestment of dividends and distributions.
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced or waived sales charges
applicable to larger purchases. See "How to Buy, Sell and Exchange Shares of the
Fund--How to Buy Shares--Reducing or Waiving Class A's Initial Sales Charge" in
the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
o an individual;
o the individual's spouse, their children and their parents;
o the individual's and spouse's Individual Retirement Account (IRA);
o any company controlled by the individual (a person, entity or group
that holds 25% or more of the outstanding voting securities of a
company will be deemed to control the company, and a partnership will
be deemed to be controlled by each of its general partners);
o a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
o a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
o one or more employee benefit plans of a company controlled by an
individual;
In addition, an eligible group of related Fund Investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Transfer Agent, Distributor or your broker must be notified at the time
of purchase that the investor is entitled to a reduced sales charge. The reduced
sales charge will be granted subject to confirmation of the investor's holdings.
The Combined Purchase and Cumulative Purchase Privilege does not apply to
individual participants in any retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. The value of shares held directly with the Transfer Agent
and through your broker will not be aggregated to determine the
B-34
<PAGE>
reduced sales charge. All shares must be held either directly with the Transfer
Agent or through Prudential Securities. The value of existing holdings for
purposes of determining the reduced sales charge is calculated using the maximum
offering or price (NAV plus maximum sales charge) as of the previous business
day. The Distributor or the Transfer Agent must be notified at the time of
purchase that the investor is entitled to a reduced sales charge. The reduced
sales charges will be granted subject to confirmation of the investor's
holdings. Rights of Accumulation are not available to individual participants in
any retirement or group plans.
LETTERS OF INTENT. Reduced sales charges also are available to investors
(or an eligible group of related investors), including retirement and group
plans, who enter into a written Letter of Intent providing for the purchase,
within a thirteen-month period, of shares of the Fund and shares of other
Prudential Mutual Funds (Investment Letter of Intent). Retirement and group
plans may also qualify to purchase Class A shares at NAV by entering into a
Letter of Intent whereby they agree to enroll, within a thirteen-month period, a
specified number of eligible employees or participants (Participant Letter of
Intent).
For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the Transfer
Agent or through Prudential Securities.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant
enrollment goal over a thirteen-month period. Each investment made during the
period, in the case of an Investment Letter of Intent, will receive the reduced
sales charge applicable to the amount represented by the goal as if it were a
single investment. In the case of a Participant Letter of Intent, each
investment made during the period will be made at NAV. Escrowed Class A shares
totaling 5% of the dollar amount of the Letter of Intent will be held by the
Transfer Agent in the name of the purchaser, except in the case of retirement
and group plans where the employer or plan sponsor will be responsible for
paying any applicable sales charge. The effective date of an Investment Letter
of Intent (except in the case of retirement and group plans) may be back-dated
up to 90 days, in order that any investments made during this 90-day period,
valued at the purchaser's cost, can be applied to the fulfillment of the Letter
of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter of
Intent does not obligate the retirement or group plan to enroll the indicated
number of eligible employees or participants. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser (or the
employer or plan sponsor, in the case of any retirement or group plan) is
required to pay the difference between the sales charge otherwise applicable to
the purchases made during this period and sales charges actually paid. Such
payment may be made directly to the Distributor or, if not paid, the Distributor
will liquidate sufficient escrowed shares to obtain such difference. Investors
electing to purchase Class A shares of the Fund pursuant to a Letter of Intent
should carefully read such Letter of Intent.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charges will, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or, in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to any
individual participants in any retirement or group plans.
CLASS B SHARES
The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following receipt
of an order in proper form by the Transfer Agent, your Dealer or the
Distributor. Although there is no sales charge imposed at the time of purchase,
redemptions of Class B shares may be subject to a CDSC. See "Contingent Deferred
Sales Charge" below.
The Distributor will pay, from its own resources, sales commissions of up
to 4% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell Class B shares at the time of sale. 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.
CLASS C SHARES
The offering price of Class C shares is the next determined NAV plus
a 1% sales charge. In connection with the sale of Class C shares, the
Distributor will pay, from its own resources, brokers, financial advisers and
other persons which distribute Class C shares a sales commission of up to 2% of
the purchase price at the time of the sale.
B-35
<PAGE>
WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES
BENEFIT PLANS. Class C shares may be purchased at NAV, without payment of
an initial sales charge, by Benefit Plans (as defined above). In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential Securities
does individual account recordkeeping (Direct Account Benefit Plans) and Benefit
Plans sponsored by Prudential, Prudential Securities or its subsidiaries
(Prudential Securities or Subsidiary Prototype Benefit Plans), Class C shares
may be purchased at NAV by participants who are repaying the loans made from
such plans to the participant.
PRUDENTIAL RETIREMENT PLANS. The initial sales charge will be waived with
respect to purchase of Class C shares by qualified and non-qualified retirement
and deferred compensation plans participating in a PruArray Plan and other plans
for which Prudential provides administrative or recordkeeping services.
INVESTMENTS OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES.
Investors may purchase Class C shares at NAV, without the initial sales charge,
with the proceeds from the redemption of shares of any unaffiliated registered
investment company which were not held through an account with any Prudential
affiliate. Such purchases must be made within 60 days of the redemption.
Investors eligible for this waiver include: (1) investors purchasing shares
through an account at Prudential Securities; (2) investors purchasing shares
through an ADVANTAGE Account or an Investor Account with Pruco Securities
Corporation (Prusec); and (3) investors purchasing shares through other Dealers.
This waiver is not available to investors who purchase shares directly from the
Transfer Agent. You must notify the Transfer Agent directly or through your
Dealer if you are entitled to this waiver and provide the Transfer Agent with
such supporting documents as it may deem appropriate.
CLASS Z SHARES
Class Z shares of the Fund currently are available for purchase by the
following categories of investors:
o pension, profit-sharing or other employee benefit plans qualified
under Section 401 of the Internal Revenue Code, deferred compensation
plans and annuity plans under Sections 457 and 403(b)(7) of the
Internal Revenue Code and non-qualified plans for which the Fund is an
available option (collectively, Benefit Plans), provided such Benefit
Plans (in combination with other plans sponsored by the same employer
or group of related employers) have at least $50 million in defined
contribution assets;
o participants in any fee-based program or trust program sponsored by an
affiliate which includes mutual funds as investment options and for
which the Fund is an available option;
o 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 investment
option;
o Benefit Plans for which an affiliate provides administrative or
recordkeeping services and as of September 20, 1996, (1) were Class Z
shareholders of the Prudential Mutual Funds of (2) executed a letter
of intent to purchase Class Z shares of the Prudential Mutual Funds;
o current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund);
o employees of Prudential and/or Prudential Securities who participate
in a Prudential-sponsored employee savings plan; and
o Prudential with an investment of $10 million or more.
After a Benefit Plan qualifies to purchase Class Z shares, all subsequent
purchases will be for Class Z shares.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay dealers, financial advisers and other persons
which distribute shares a finders' fee from its own resources based on a
percentage of the net asset value of shares sold by such persons.
SALE OF SHARES
You can redeem your shares at any time for cash at NAV next determined
after the redemption request is received in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent the Distributor or your broker. In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable CDSC, as described below. See "Contingent Deferred Sales Charge"
below. If you are redeeming your shares through a
B-36
<PAGE>
broker, your broker must receive your sell order before the Fund computes its
NAV for that day (that is, 4:15 P.M., New York time) in order to receive that
day's NAV. Your broker will be responsible for furnishing all necessary
documentation to the Distributor and may charge you for its services in
connection with redeeming shares of the Fund.
If you hold shares of the Fund through Prudential Securities, you must
redeem your shares through Prudential Securities. Please contact your Prudential
Securities financial adviser.
If you hold shares in non-certificate form, a written request for
redemption signed by you exactly as the account is registered is required. If
you hold certificates, the certificates, signed in the name(s) shown on the face
of the certificates, must be received by the Transfer Agent, the Distributor or
your broker in order for the redemption request to be processed. If redemption
is requested by a corporation, partnership, trust or fiduciary, written evidence
of authority acceptable to the Transfer Agent must be submitted before such
request will be accepted. All correspondence and documents concerning
redemptions should be sent to the Fund in care of its Transfer Agent, Prudential
Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box 15010, New
Brunswick, New Jersey 08906-5010, the Distributor or to your broker.
SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $50,000,
(2) are to be paid to a person other than the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or (4) are
to be paid to a corporation, partnership, trust or fiduciary, and your shares
are held directly with the Transfer Agent, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices. In the case of redemptions
from a PruArray Plan, if the proceeds of the redemption are invested in another
investment option of the plan in the name of the record holder and at the same
address as reflected in the Transfer Agent's records, a signature guarantee is
not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the certificate and/or written request, except as indicated below. If you
hold shares through Prudential Securities, payment for shares presented for
redemption will be credited to your account at your broker, unless you indicate
otherwise. Such payment may be postponed or the right of redemption suspended at
times (1) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (2) when trading on such Exchange is restricted, (3) when
an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or (4) during any
other period when the Commission, by order, so permits; provided that applicable
rules and regulations of the Commission shall govern as to whether the
conditions prescribed in (2), (3) or (4) exist.
Payment for redemption of recently purchased shares will be delayed until
the Fund or its Transfer Agent has been advised that the purchase check has been
honored, which may take up to 10 calendar days from the time of receipt of the
purchase check by the Transfer Agent. Such delay may be avoided by purchasing
shares by wire or by certified or cashier's check.
REDEMPTION IN KIND. If the Directors determine that it would be detrimental
to the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Fund, in lieu of cash, in conformity with applicable rules of the
Commission. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. If your shares are redeemed in kind, you
would incur transaction costs in converting the assets into cash. The Fund,
however, has elected to be governed by Rule 18f-1 under the 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 any 90-day period for any
one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the
Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any such
involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest 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 the redemption. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. (If less than a full repurchase is made,
the credit will be on a PRO RATA basis.) You must notify the Transfer Agent,
either directly or through The Distributor of your broker, at the time the
repurchase privilege is exercised
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<PAGE>
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 Charge" below. Exercise of the
repurchase privilege may affect the federal tax treatment of the redemption.
CONTINGENT DEFERRED SALES CHARGE
Redemptions of Class B shares will be subject to a contingent deferred
sales charge of CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within 18 months 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 18 months, in the case of Class C shares (one year
for Class C shares purchased before November 2, 1998). A CDSC will be applied on
the lesser of the original purchase price or the current value of the shares
being redeemed. Increases in the value of your shares or shares acquired through
reinvestment of dividends or distributions are not subject to a CDSC. The amount
of any CDSC will be paid to and retained by the Distributor.
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.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund.
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
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
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions:
then of amounts representing the increase in NAV above the total amount of
payments for the purchase of Class B shares made during the preceding six years;
then of amounts representing the cost of shares held beyond the applicable CDSC
period; and finally, of amounts representing the cost of shares held for the
longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholders 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), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability.
The CDSC will also be waived in the case of a total or partial redemption
in connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions are:
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(1) in the case of a tax-deferred retirement plan, a lump-sum or other
distribution after retirement:
(2) in the case of an IRA (including a Roth IRA), a lump-sum or other
distribution after attaining age 59-1/2, or a periodic distribution based on
life expectancy:
(3) in the case of a Section 403(b) custodial account, a lump-sum or other
distribution after attaining age 59-1/2:
(4) a tax-free return of an excess contribution or plan distribution
following the death or disability of the shareholder, provided that the shares
were purchased prior to death or disability; and
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 (that is, following
voluntary or involuntary termination of employment or following retirement).
Under no circumstances will the CDSC be waived on redemptions resulting from the
termination of a tax-deferred retirement plan, unless such redemptions otherwise
qualify for a waiver as described above. In the case of Direct Account and
Prudential Securities or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401 (k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.
(5) Finally, the CDSC will be waived to the extent that the proceeds from
shares redeemed are invested in Prudential Mutual Funds, The Guaranteed
Investment Account, and the Guaranteed Insulated Separate Account or units of
the Stable Value Fund.
In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Fund.
You must notify the Fund's Transfer Agent either directly or through your
broker, 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.
In connection with these waivers, the Transfer Agent will require you to
submit the supporting documentation set forth below.
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
- ------------------ ----------------------
<S> <C>
Death A copy of the shareholder's death certificate or, in the case of a
trust, a copy of the grantor's death certificate, plus a copy of the
trust agreement identifying the grantor.
Disability--An individual will be considered disabled A copy of the Social Security Administration award letter or a letter
if he or she is unable to engage in any substantial from a physician on the physician's letterhead stating that the
gainful activity by reason of any medically shareholder (or, in the case of a trust, the grantor) is permanently
determinable physical or mental impairment which can disabled. The letter must also indicate the date of disability.
be expected to result in death or to be of
long-continued and indefinite duration.
Distribution from an IRA or 403(b) Custodial Account A copy of the distribution form from the custodial firm indicating
(i) the date of birth of the shareholder and (ii) that the
shareholder is over age 59-1/2 and is taking a normal
distribution--signed by the shareholder.
Distribution from Retirement Plan A letter signed by the plan administrator/trustee indicating the
reason for the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or the plan administrator/
trustee on company letterhead indicating the amount of the excess and
whether or not taxes have been paid.
The Transfer Agent reserves the right to request such additional documents as it may deem appropriate.
</TABLE>
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<PAGE>
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 our purchase or, for shares purchased prior
to March 1, 1998, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% is reached.
You must notify the Fund's Distributor or Transfer Agent either directly or
through Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES
PRUDENTIAL RETIREMENT PLANS. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in a PruArray Plan and other plans for which Prudential provides
administrative or recordkeeping services. The CDSC will also be waived on
redemptions from Benefit Plans sponsored by Prudential and its affiliates to the
extent that the redemption proceeds are invested in The Guaranteed Investment
Account, the Guaranteed insulated Separate Account and units of the Stable Value
Fund.
OTHER BENEFIT PLANS. The CDSC will be waived on redemptions from Benefit
Plans holding shares through a Dealer not affiliated with Prudential and for
whom the Dealer provides administrative or recordkeeping services.
Finally, the CDSC will be waived to the extent that the proceeds from
shares redeemed are invested in Prudential Mutual Funds, The Guaranteed
Investment Account, The Guaranteed Maturated Separate Account or units of The
Stable Value Fund.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares
bought on each purchase of Class B shares, the number of Class B shares 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 purchased and then held in your account. Each time any
eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (that is, $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equal 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than that
of the Class B shares at the time of conversion. Thus, although the aggregate
dollar value will be the same, you may receive fewer Class A shares than Class B
shares converted.
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during the month will be deemed to have been
made on the last day of the month, or for Class B shares acquired through
exchange, or a series of exchanges, on the last day of the month in which the
original payment for purchases of such Class B shares was made. For Class B
shares previously exchanged for shares of a money market fund, the time period
during which such shares were held in the money market fund will be excluded.
For example, Class B shares held in a money market fund for one year would not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a shares
until approximately eight years from purchase. For purpose 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
B-40
<PAGE>
through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (1) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (2) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class B shares into Class A shares may be
suspended if such opinions or rulings are no longer available. If conversions
are suspended, Class B shares of the Fund will continue to be subject, possibly
indefinitely, to their higher annual distribution and service fee.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which a record of the shares held is
maintained by the Transfer Agent. If a stock certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to its
shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. For the convenience
of investors, all dividends and distributions are automatically reinvested in
full and fractional shares of the Fund. An investor may direct the Transfer
Agent in writing not less than five full business days prior to the record date
to have subsequent dividends or distributions sent in cash rather than
reinvested. In the case of recently purchased shares for which registration
instructions have not been received on the record date, cash payment will be
made directly to the dealer. Any shareholder who receives a cash payment
representing a dividend or distribution may reinvest such dividend or
distribution at NAV by returning the check or the proceeds to the Transfer Agent
within 30 days after the payment date. Such investment will be made at the NAV
per share next determined after receipt of the check or proceeds by the Transfer
Agent. Such shareholder will receive credit for any CDSC paid in connection with
the amount of proceeds being reinvested.
EXCHANGE PRIVILEGE. The Fund makes available to its shareholders the
privilege of exchanging their shares of the Fund for shares of certain other
Prudential Mutual Funds, including one or more specified money market funds,
subject in each case to the minimum investment requirements of such funds.
Shares of such other Prudential Mutual Funds may also be exchanged for shares of
the Fund. All exchanges are made on the basis of the relative NAV next
determined after receipt of an order in proper form. An exchange will be treated
as a redemption and purchase for tax purposes. Shares may be exchanged for
shares of another fund only if shares of such fund may legally be sold under
applicable state laws. For retirement and group plans having a limited menu of
Prudential Mutual Funds, the Exchange Privilege is available for those funds
eligible for investment in the particular program.
It is contemplated that the Exchange Privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the Transfer
Agent and hold shares in non-certificate form. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares on weekdays, except
holidays, between the hours of 8:00 A.M. and 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 shares through Prudential Securities, you must exchange your
shares by contacting your Prudential Securities financial adviser.
If you hold certificates, the certificates, signed in the name(s) show on
the face of the certificates, must be returned in order for the shares to be
exchanged.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
In periods of severe market or economic conditions the telephone exchange
of shares may be difficult to implement and you should make exchanges by mail by
writing to Prudential Mutual Fund Services LLC, at the address noted above.
B-41
<PAGE>
CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential mutual funds, shares of Prudential
Government Securities Trust (Short-Intermediate Term Series) and shares of the
money market funds specified below. No fee or sales load will be imposed upon
the exchange. Shareholders of money market funds who acquired such shares upon
exchange of Class A shares may use the exchange privilege only to acquire Class
A shares of the Prudential Mutual Funds participating in the exchange privilege.
The following money market funds participate in the Class A exchange
privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New York Money Market Series)
(New Jersey Money Market Series)
Prudential MoneyMart Assets, Inc.
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B
and Class C shares of the Fund for Class B and Class C shares, respectively, of
certain other Prudential mutual funds and shares of Prudential Special Money
Market Fund, Inc., a money market fund. No CDSC will be payable upon such
exchange, but a CDSC may be payable upon the redemption of the Class B and Class
C shares acquired as a result of the exchange. The applicable sales charge will
be that imposed by the fund in which shares were initially purchased and the
purchase date will be deemed to be the date of the initial purchase, rather than
the date of the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of
Prudential Special Money Market Fund, Inc. without imposition of any CDSC at the
time of exchange. Upon subsequent redemption from such money market fund or
after re-exchange into the Fund, such shares will be subject to the CDSC
calculated without regard to the time such shares were held in the money market
fund. In order to minimize the period of time in which shares are subject to a
CDSC, shares exchanged out of the money market fund will be exchanged on the
basis of their remaining holding periods, with the longest remaining holding
periods being transferred first. In measuring the time period shares are held in
a money market fund and "tolled" for purposes of calculating the CDSC holding
period, exchanges are deemed to have been made on the last day of the month.
Thus, if shares are exchanged into the Fund from a money market fund during the
month (and are held in the Fund at the end of the month), the entire month will
be included in the CDSC holding period. Conversely, if shares are exchanged into
a money market fund prior to the last day of the month (and are held in the
money market fund on the last day of the month), the entire month will be
excluded from the CDSC holding period. For purposes of calculating the seven
year holding period applicable to the Class B conversion feature, the time
period during which Class B shares were held in a money market fund will be
excluded.
At any time after acquiring shares of other funds participating in the
Class B or Class C exchange privilege, a shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B or Class C
shares of the Fund, respectively, without subjecting such shares to any CDSC.
Shares of any fund participating in the Class B or Class C exchange privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares of other funds, respectively, without
being subject to any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
Additional details about the Exchange Privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Transfer Agent, Prudential
Securities or Prusec. The Exchange Privilege may be modified, terminated or
suspended on 60 days' notice, and any fund, including the Fund, or the
Distributor, has the right to reject any exchange application relating to such
fund's shares.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for shareholders
who qualify to purchase Class Z shares. Under this exchange privilege, amounts
representing
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<PAGE>
any Class B and Class C shares which are not subject to a CDSC, held in such a
shareholder's account will automatically exchanged for Class A shares for
shareholders who qualify to purchase Class A shares at NAV on a quarterly basis
unless the shareholder elects otherwise. Shareholders who qualify to purchase
Class Z shares will have their Class B and Class C shares which are not subject
to a CDSC and their Class A shares exchanged for Class Z shares on a quarterly
basis. Eligibility for this exchange privilege will be calculated on the
business day prior to the date of the exchange. Amounts representing Class B or
Class C shares which are not subject to a CDSC include the following: (1)
amounts representing Class B or Class C shares acquired pursuant to the
automatic reinvestment of dividends distributions, (2) amounts representing the
increase in the net asset value above the total amount of payments for the
purchase of Class B or Class C shares and (3) amounts representing Class B or
Class C shares held beyond the applicable CDSC period. Class B and Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities, Prusec or another broker 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 required through
participation in the program) will be exchanged for Class A shares at net asset
value.
Additional details about the exchange privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Fund's Transfer Agent, the
Distributor or your broker. The exchange privilege may be modified, terminated
or suspended on sixty days' notice, and any fund including the Fund or the
Distributor, has the right to reject any exchange application relating to such
fund's shares. See "How to Buy, Sell and Exchange Shares of the Fund--Frequent
Trading" in the Prospectus.
DOLLAR COST AVERAGING. Dollar cost averaging is a method of accumulating
shares by investing a fixed amount of dollars in shares at set intervals. An
investor buys more shares when the price is low and fewer shares when the price
is high. The average cost per share is lower than it would be if a constant
number of shares were bought at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college may
average around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.(1)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years .............................................. $ 105 $ 158 $ 210 $ 263
20 Years .............................................. 170 255 340 424
15 Years .............................................. 289 433 578 722
10 Years .............................................. 547 820 1,093 1,366
5 Years .............................................. 1,361 2,041 2,721 3,402
</TABLE>
See "Automatic Investment Plan (AIP)" below.
- ----------
(1) Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Average costs for private institutions include tuition, fees, room
and board for the 1993-1994 academic year.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the Fund.
The investment return and principal value of an investment will fluctuate
so that an investor's shares when redeemed may be worth more or less than
their original cost.
AUTOMATIC INVESTMENT PLAN (AIP)
Under AIP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account or
brokerage account (including a Command Account) to be debited to invest
specified dollar amounts in shares of the Fund. The investor's bank must be a
member of the Automatic Clearing House System. Stock certificates are not issued
to AIP participants.
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<PAGE>
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your broker.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through
Prudential Securities or the Transfer Agent. Such withdrawal plan provides for
monthly or quarterly checks in any amount, except as provided below, up to the
value of the shares in the shareholder's account. Withdrawals of Class B or
Class C shares may be subject to a CDSC. See "How to Buy, Sell and Exchange
Shares of the Fund--How to Sell Your Shares--Contingent Deferred Sales Charges
(CDSC)" in the Prospectus.
In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account value applies, (2) withdrawals may not be for less than $100 and (3) the
shareholder must elect to have all dividends and/or distributions automatically
reinvested in additional full and fractional shares at NAV on shares held under
this plan.
The Transfer Agent, the Distributor or your broker act as an agent for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the sales charges applicable to (1) the purchase of Class
A and Class C shares and (2) the redemption of Class B and Class C shares. Each
shareholder should consult his or her own tax adviser with regard to the tax
consequences of the plan, particularly if used in connection with a retirement
plan.
TAX-DEFERRED RETIREMENT PLANS
Various qualified retirement plans, including a 401(k) plan, self-directed
individual retirement accounts and "tax-deferred accounts" under Section
403(b)(7) of the Internal Revenue Code are available through the Distributor.
These plans are for use by both self-employed individuals and corporate
employers. These plans permit either self-direction of accounts by participants,
or a pooled account arrangement. Information regarding the establishment of
these plans, and the administration, custodial fees and other details are
available from the Distributor or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
INDIVIDUAL RETIREMENT ACCOUNTS. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, an 8% rate of return and a 39.6% federal income tax bracket
and shows how much more retirement income can accumulate within an IRA as
opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING(1)
CONTRIBUTIONS MADE OVER: PERSONAL SAVINGS IRA
- ------------------------ ---------------- ---------
10 years ................................. $ 26,165 $ 31,291
15 years ................................. 44,676 58,649
20 years ................................. 68,109 98,846
25 years ................................. 97,780 157,909
30 years ................................. 135,346 244,692
- ----------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated.
Earnings in a traditional IRA account will be subject to tax when withdrawn
from the account. Distributions from a Roth IRA which meet the conditions
required under the Internal Revenue Code will not be subject to tax upon
withdrawal from the account.
B-44
<PAGE>
MUTUAL FUND PROGRAMS
From time to time, the Fund (or a portfolio of the Fund, if applicable) may
be included in a mutual fund program with other Prudential Mutual Funds. Under
such a program, a group of portfolios will be selected and thereafter marketed
collectively. Typically, these programs are created with an investment theme,
for example, to seek greater diversification, protection from interest rate
movements or access to different management styles. In the event such a program
is instituted, there may be a minimum investment requirement for the program as
a whole. The Fund may waive or reduce the minimum initial investment
requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as a part
of a program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, investors should consult their financial
advisor concerning the appropriate blend of portfolios for them. If investors
elect to purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
The price an investor pays for each share is based on the share value. The
Fund's share value-known as the net asset value per share or NAV-is determined
by subtracting its liabilities from the value of its assets and dividing the
remainder by the number of outstanding shares. NAV is calculated separately for
each class. The Directors have fixed the specific time of day for the
computation of the Fund's net asset value to be as of 4:15 P.M., New York time.
Under the Investment Company Act, the Board of Directors are responsible
for determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of
investments listed on a securities exchange and NASDAQ National Market System
securities (other than options on stock and stock indices) are valued at the
last sale price on the day of valuation or, if there was no sale on such day,
the mean between the last bid and asked prices on such day, as provided by a
pricing service or principal market marker. Corporate bonds (other than
convertible debt securities) and U.S. Government securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued on the basis of
valuations provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, agency ratings, market
transactions in comparable securities and various relationships between
securities in determining value. Convertible debt securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued at the mean
between the last reported bid and asked prices provided by principal market
makers. Options on stock and stock indices traded on an exchange are valued at
the mean between the most recently quoted bid and asked prices on the respective
exchange and futures contracts and options thereon are valued at their last sale
prices as of the close of trading on the applicable commodities exchange.
Quotations of foreign securities in a foreign currency are converted to U.S.
dollar equivalents at the current rate obtained from a recognized bank or
dealer, and forward currency exchange contracts are valued at the current cost
of covering or offsetting such contacts. Should an extraordinary event, which is
likely to affect the value of the security, occur after the close of an exchange
on which a portfolio security is traded, such security will be valued at fair
value considering factors determined in good faith by the investment adviser
under procedures established by and under the general supervision of the Fund's
Board of Directors.
Securities or other assets for which reliable market quotations are not
readily available or for which the pricing agent or principal market maker does
not provide a valuation or methodology or provides a valuation or methodology
that, in the judgment of the Manager or Subadviser (or Valuation Committee or
Board of Directors) does not represent fair value, are valued by the Valuation
Committee or Board of Directors in consultation with the Manager or Subadviser.
Short-term debt securities are valued at cost, with interest accrued or discount
amortized to the date of maturity, if their original maturity was 60 days or
less, unless this is determined by the Trustees not to represent fair value.
Short-term securities with remaining maturities of more than 60 days, for which
market quotations are readily available, are valued at their current market
quotations as supplied by an independent pricing agent or principal market
maker.
The Fund will compute its NAV at 4:15 P.M., New York time, on each day the
New York Stock Exchange is open for trading except on days on which no orders to
purchase, sell or redeem Fund shares have been received or days on which changes
in the value of the Fund's portfolio securities do not affect NAV. In the event
the New York Stock Exchange closes early on any business day, the NAV of the
Fund's shares shall be determined at the time between such closing and 4:15
P.M., New York time.
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<PAGE>
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund intends to qualify and elect to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code. This will
relieve the Fund (but not its shareholders) from paying federal income tax on
income which is distributed to shareholders, and, permit net capital gains of
the Fund (that is, the excess of capital gains from the sale of assets held for
more than 12 months over net short-term capital losses) to be treated as capital
gains of the shareholders.
Qualification as a regulated investment company requires, among other
things, that (a) at least 90% of the Fund's annual gross income (without
reduction for losses from the sale or other disposition of securities) be
derived from interest, dividends, payments with respect to securities loans and
gains from the sale or other disposition of securities or options thereon or
foreign currencies, or other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business of
investing in such securities or currencies; (b) the Fund diversify its holdings
so that, at the end of each quarter of the taxable year (i) at least 50% of the
value of the Fund's assets is represented by cash, U.S. Government securities
and other securities limited in respect of any one issuer to an amount not
greater than 5% of the value of the Fund's assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government securities); and (c) the Fund distribute to its shareholders at least
90% of its net investment income and net short-term gains (that is, the excess
of net short-term capital gains over net long-term capital losses) in each year.
Any net capital gains distributed to shareholders will be taxable as
capital gains to the shareholders, whether or not reinvested and regardless of
the length of time a shareholder has owned his or her shares. The maximum
capital gains rate for individuals is 20% with respect to assets held for more
than 12 months. The maximum tax rate for ordinary income is 39.6%. The maximum
capital gains rate for corporate shareholders currently is the same as the
maximum tax rate for ordinary income. In certain cases where the Fund acquires a
put or writes a call on securities or otherwise holds an offsetting position
with respect to the securities, the Fund's holding period in such securities may
be tolled. Other gains or losses on the sale of securities will be short-term
capital gains or losses. Gains and losses on the sale, lapse or other
termination of options on securities will generally be treated as gains and
losses from the sale of securities. If an option written by the Fund on
securities lapses or is terminated through a closing transaction, such as a
repurchase by the Fund of the option from its holder, the Fund will generally
realize short-term capital gain or loss. If securities are sold by the Fund
pursuant to the exercise of a call option written by it, the Fund will include
the premium received in the sale proceeds of the securities delivered in
determining the amount of gain or loss on the sale. Certain of the Fund's
transactions may be subject to wash sale, short sale, conversion transaction,
constructive sale and straddle provisions of the Internal Revenue Code.
Special rules apply to most options on stock indices, futures contracts and
options thereon, and forward foreign currency exchange contracts in which the
Fund may invest. See "Description of the Fund, Its Investments and Risks." These
investments will generally constitute Section 1256 contracts and will be
required to be "marked-to-market" for federal income tax purposes at the end of
the Fund's taxable year; that is, treated as having been sold at market value.
Except with respect to certain forward foreign currency exchange contracts, 60%
of any gain or loss recognized on such "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss.
Gain or loss on the sale, lapse or other termination of options on stock
and on narrowly-based stock indices will be capital gain or loss and will be
long-term or short-term depending upon the holding period of the option. In
addition, positions which are part of a straddle will be subject to certain wash
sale and short sale provisions of the Internal Revenue Code. In the case of a
straddle, the Fund may be required to defer the recognition of losses on
positions it holds to the extent of any unrecognized gain on offsetting
positions held by the Fund. The conversion transaction rules may apply to
certain transactions to treat all or a portion of the gain thereon as ordinary
income rather than as capital gain.
Internal Revenue Code Section 1259 requires the recognition of gain (but
not loss) if the Fund makes a "constructive sale" of an appreciated financial
position (for example, stock). The Fund generally will be considered to make a
constructive sale of an appreciated financial position if it sells the same or
substantially identical property short, enters into a futures or forward
contract to deliver the same or substantially identical property, or enters into
certain other similar transactions.
Debt securities acquired by the Fund, such as zero coupon, pay-in-kind,
deferred payment and distressed securities, may be subject to original issue
discount and market discount rules. In any such case, as income accrues it will
be treated as earned by the Fund and will be subject to the distribution
requirements of the Internal Revenue Code described above. Because the accrued
income may not be represented by cash, the Fund may have to dispose of other
securities and use the proceeds to make the required distributions.
B-46
<PAGE>
The Fund is required to distribute 98% of its ordinary income in the same
calendar year in which it is earned. The Fund is also required to distribute
during the calendar year 98% of the capital gain net income it earned during the
12 months ending on October 31 of such calendar year, as well as all
undistributed ordinary income and undistributed capital gain net income from the
prior year or the twelve-month period ending on October 31 of such prior year,
respectively. To the extent it does not meet these distribution requirements,
the Fund will be subject to a nondeductible 4% excise tax on the undistributed
amount. For purposes of this excise tax, income on which the Fund pays income
tax is treated as distributed.
Any dividends paid shortly after a purchase by an investor may have the
effect of reducing the per share 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 of the Fund
by a shareholder who is not a dealer in securities will be treated as capital
gain or loss. Any such capital gain or loss will be treated as long-term capital
loss if the shares were held for more than 12 months. In the case of an
individual, the maximum long-term capital gains rate is 20%. However, any loss
realized by a shareholder upon the sale of shares of the Fund held by the
shareholder for six months or less will be treated as long-term capital loss to
the extent of any capital gains distributions received by the shareholder.
Any loss realized on a sale, redemption or exchange of shares of the Fund
by a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
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 certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
The per share dividends on Class B and Class C shares will generally be
lower than the per share dividends on Class A and Class Z shares as a result of
the higher distribution-related fee applicable to the Class B and Class C
shares. The per share capital gains distributions, if any, will be paid in the
same amounts for Class A, Class B, Class C and Class Z shares. See "Net Asset
Value."
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain distributions paid to a foreign
shareholder are generally not subject to withholding tax. A foreign shareholder
will, however, be required to pay U.S. income tax on any dividends and capital
gain distributions which are effectively connected with a U.S. trade or business
of the foreign shareholder.
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.
Interest income, capital gain net income, gain or loss from Section 1256
contracts (described above), dividend income from foreign corporations and
income from other sources will not constitute qualified dividends. Individual
shareholders are not eligible for the dividends-received deduction.
If the Fund pays a dividend in January which was declared in the previous
October, November or December to shareholders of record on a specified date in
one of such months, then such dividend or distribution will be treated for tax
purposes as being paid by the Fund and received by its shareholders on December
31 of the year in which such dividend was declared.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which the Fund will be subject, since the amount of the Fund's
assets to be invested in various countries will vary. The Fund does not expect
to meet the requirements of the Internal Revenue Code for "passing-through" to
its shareholders any foreign income taxes paid.
Under the Internal Revenue Code, gains or losses attributable to
fluctuations in exchange rates which occur between the time the Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities are treated as ordinary income or ordinary
loss. Similarly, gains or losses on forward foreign currency exchange contracts
or dispositions of debt securities denominated in a
B-47
<PAGE>
foreign currency attributable to fluctuations in the value of the foreign
currency between the date of acquisition of the security and the date of
disposition also are treated as ordinary gain or loss. These gains, referred to
under the Internal Revenue Code as "Section 988" gains or losses, increases or
decreases the amount of the Fund's investment company taxable income available
to be distributed to its shareholders as ordinary income, rather than increasing
or decreasing the amount of the Fund's net capital gain. If Section 988 losses
exceed other investment company taxable income during a taxable year, the Fund
would not be able to make any ordinary dividend distributions, or distributions
made before the losses were realized would be recharacterized as a return of
capital to shareholders, rather than as an ordinary dividend, reducing each
shareholder's basis in his or her Fund shares.
Foreign shareholders are advised to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in the Fund.
PERFORMANCE INFORMATION
YIELD. The Fund may from time to time advertise its yield as calculated
over a 30-day period. Yield is calculated separately for Class A, Class B, Class
C and Class Z shares. This yield is computed by dividing the Fund's net
investment income per share earned during this 30-day period by the maximum
offering price per share on the last day of this period. Yield is calculated
according to the following formula:
YIELD = 2 [(a - b + 1) (6) - 1]
-----
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
The yield for the 30-day period ended March 31, 1999 for the Fund's Class
A, Class B, Class C and Class Z shares was 9.95%, 9.86%, 9.76%, and 10.63%,
respectively.
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period. Yields for the Fund will vary based on a number of factors
including changes in NAV, market conditions, the level of interest rates and the
level of Fund income and expenses.
The Board of Directors of the Fund has adopted procedures to ensure that
the Fund's yield is calculated in accordance with Commission regulations. Under
those procedures, limitations may be placed on yield to maturity calculations of
particular securities.
AVERAGE ANNUAL TOTAL RETURN. The Fund may also advertise its average annual
total return. Average annual total return is determined separately for Class A,
Class B, Class C and Class Z shares.
Average annual total return is computed according to the following formula:
P (1 + T ) (n) = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the 1, 5 or 10 year periods at the end of
the 1, 5 or 10 year periods (or fractional portion thereof).
Average annual total return assumes reinvestment of all dividends and
distributions, takes into account any applicable initial or deferred sales
charges but does not take into account any federal or state income taxes that
may be payable upon redemption.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares.
B-48
<PAGE>
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1,000.
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the 1, 5 or 10 year periods at the end of
the 1, 5 or 10 year periods (or fractional portion thereof).
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The aggregate total return with respect to Class A, Class B, Class C and
Class Z shares for the inception (May 5, 1998) period ended March 31, 1999 was
- -2.97%, -3.45%, -3.45% and -2.82%, respectively.
The Fund also may include comparative performance information in
advertising or marketing the Fund's shares. Such performance information may
include data from Lipper, Inc., Morningstar Publications, Inc., other industry
publications, business periodicals and market indices. Set forth below is a
chart which compares the performance of different types of investments over the
long-term and the rate of inflation.(1)
PERFORMANCE
COMPARISON OF DIFFERENT
TYPES OF INVESTMENTS
OVER THE LONG TERM
(12/31/25 - 12/31/98)
[GRAPHICAL REPRESENTATION OF CHART]
Common Stock 11.2%
Long-Term Govt. Bonds 5.3%
Inflation 3.1%
- ----------
(1) Source: Ibbotson Associates. Used with permission. All rights reserved.
Common stock returns are based on the Standard and Poor's 500 Stock Index,
a market-weighted, unmanaged index of 500 common stocks in a variety of
industry sectors. It is a commonly used indicator of broad stock price
movements. This chart is for illustrative purposes only, and is not
intended to represent the performance of any particular investment or fund.
Investors cannot invest directly in an index. Past performance is not a
guarantee of future results.
B-49
<PAGE>
PRUDENTIAL HIGH YIELD
Portfolio of Investments as
of March 31, 1999 TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--94.3%
CORPORATE BONDS--86.9%
- ------------------------------------------------------------------------------------------------------------------------------
Aerospace--0.2%
BE Aerospace, Inc., Sr. Sub. Notes B1 9.50% 11/01/08 $ 250 $ 266,875
- ------------------------------------------------------------------------------------------------------------------------------
Airlines--0.3%
Canadian Airlines Corp., Sr. Notes (Canada) Caa2 12.25 8/01/06 1,150 (f) 506,000
- ------------------------------------------------------------------------------------------------------------------------------
Automotive--1.1%
Eagle-Picher Industries, Inc., Sr. Sub. Notes B3 9.375 3/01/08 400 386,000
Hayes Wheels Int'l., Inc., Sr. Sub. Notes B2 9.125 7/15/07 500 521,250
Paragon Corp. Holdings, Inc., Sr. Notes B3 9.625 4/01/08 1,000 800,000
------------
1,707,250
- ------------------------------------------------------------------------------------------------------------------------------
Broadcasting & Other Media--6.5%
Ackerly Group, Inc., Sr. Sub. Notes B2 9.00 1/15/09 1,000 1,030,000
American Lawyer Media Holdings, Inc., Sr. Disc. Notes,
Zero Coupon (until 12/15/02) B3 12.25 12/15/08 1,500 971,250
Capstar Broadcasting, Sr. Disc. Notes, Zero Coupon
(until 2/1/02) B3 12.75 2/01/09 2,000 1,690,000
CD Radio, Inc., Sr. Disc. Notes, Zero Coupon (until
12/1/02) Caa1 15.00 12/01/07 1,000 541,250
Chancellor Media Corp., Sr. Sub. Notes Ba3 9.00 10/01/08 1,000 1,070,000
Coaxial Communications, Inc., Sr. Notes B3 10.00 8/15/06 250 266,250
Grupo Televisa S.A., Sr. Disc. Notes, Zero Coupon
(until 5/15/01) (Mexico) Ba2 13.25 5/15/08 1,000 (f) 835,000
Jacor Communications Co., Sr. Sub. Notes B2 8.75 6/15/07 1,000 1,067,500
Lin Holdings Corp., Sr. Disc. Notes, Zero Coupon (until
3/1/03) B3 10.00 3/01/08 500 352,500
Radio Unica Corp., Sr. Disc. Notes, Zero Coupon (until
8/1/02) NR 11.75 8/01/06 1,500 843,750
SFX Entertainment, Inc., Sr. Sub. Notes B3 9.125 2/01/08 1,500 1,530,000
------------
10,197,500
- ------------------------------------------------------------------------------------------------------------------------------
Building & Related Industries--2.4%
Formica Corp., Sr. Sub. Notes B3 10.875 3/01/09 1,000 995,000
New Millenium Homes, Sr. Notes
(cost $1,945,519; purchased 5/27/98) NR 12.00 9/03/00 2,000 (b) 1,800,000
Presley Cos., Sr. Notes Caa3 12.50 7/01/01 900 760,500
Webb (Del E.) Corp., Sr. Sub. Deb. B2 9.375 5/01/09 250 242,500
------------
3,798,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-50
<PAGE>
PRUDENTIAL HIGH YIELD
Portfolio of Investments as
of March 31, 1999 TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Cable--6.2%
Adelphia Communications Corp.,
Sr. Notes B1 10.50% 7/15/04 $ 500 $ 550,000
Sr. Notes, PIK B1 9.50 2/15/04 43 44,327
Avalon Cable Holdings LLC, Sr. Disc. Notes, Zero Coupon
(until 12/1/03) Caa1 11.875 12/01/08 1,000 653,750
Avalon Cable of Michigan, Inc., Sr. Sub. Notes B3 9.375 12/01/08 750 790,313
Charter Communications Holdings LLC,
Sr. Disc. Notes, Zero Coupon (until 4/1/04) B2 9.92 4/01/11 1,000 643,750
Sr. Notes B2 8.625 4/01/09 500 510,625
Classic Communications, Inc., Sr. Disc. Notes, Zero
Coupon
(until 8/1/03) Caa1 13.25 8/01/09 1,000 (d) 695,000
Diamond Cable Co., Sr. Disc. Notes, Zero Coupon (until
12/15/00)
(United Kingdom) B3 11.75 12/15/05 2,000 (f) 1,740,000
Falcon Holdings Group, L.P., Sr. Disc. Notes, Zero
Coupon
(until 4/15/03) B2 9.285 4/15/10 1,000 695,000
International Cabletel, Inc., Sr. Disc. Notes, Zero
Coupon
(until 4/15/00) B3 12.75 4/15/05 1,000 945,000
Mediacom LLC, Sr. Notes B2 7.875 2/15/11 500 490,000
TVN Entertainment Corp., Sr. Notes NR 14.00 8/01/08 1,000 (d) 850,000
United Int'l. Holdings, Inc., Sr. Disc. Notes, Zero
Coupon
(until 2/15/03) B3 10.75 2/15/08 1,500 1,020,000
------------
9,627,765
- ------------------------------------------------------------------------------------------------------------------------------
Capital Goods--0.5%
Thermadyne Holdings Corp.,
Sr. Disc. Notes, Zero Coupon (until 6/1/03) Caa1 12.50 6/01/08 500 250,000
Sr. Sub. Notes B3 9.875 6/01/08 500 472,500
------------
722,500
- ------------------------------------------------------------------------------------------------------------------------------
Chemicals--1.2%
Borden Chemical & Plastics L.P., Sr. Notes B1 9.50 5/01/05 500 460,000
Equistar Chemicals L.P., Sr. Notes Baa3 8.75 2/15/09 500 507,500
Sterling Chemical, Inc., Sr. Sub. Notes B3 11.75 8/15/06 1,000 940,000
------------
1,907,500
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-51
<PAGE>
PRUDENTIAL HIGH YIELD
Portfolio of Investments as
of March 31, 1999 TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Consumer Products--1.2%
Corning Consumer Product Co., Sr. Sub. Notes B3 9.625% 5/01/08 $ 1,080 $ 901,800
Revlon Consumer Products Corp., Sr. Notes B2 9.00 11/01/06 500 495,000
Windmere Durable Holdings, Inc., Sr. Notes B3 10.00 7/31/08 500 457,500
------------
1,854,300
- ------------------------------------------------------------------------------------------------------------------------------
Containers--1.2%
Ball Corp., Sr. Sub. Notes B1 8.25 8/01/08 250 258,125
Graham Packaging Holdings Co., Sr. Disc. Notes, Zero
Coupon (until 1/15/03) Caa1 10.75 1/15/09 2,000 1,380,000
Tekni Plex, Inc., Sr. Sub. Notes B3 11.25 4/01/07 250 272,500
------------
1,910,625
- ------------------------------------------------------------------------------------------------------------------------------
Drugs & Health Care--4.3%
Fresenius Medical Care Capital Trust, Gtd. Notes Ba3 9.00 12/01/06 650 666,250
Harborside Healthcare Corp., Sr. Sub. Disc. Notes, Zero
Coupon (until 8/1/03) B3 11.00 8/01/08 750 315,000
ICN Pharmaceuticals, Inc., Sr. Notes Ba3 8.75 11/15/08 1,000 1,005,000
Magellan Health Services, Inc., Sr. Sub. Notes Caa1 9.00 2/15/08 1,000 862,500
Mariner Post-Acute Network, Inc., Sr. Sub. Disc. Notes,
Zero Coupon (until 11/1/02) B3 10.50 11/01/07 2,000 380,000
Medaphis Corp., Sr. Notes Caa1 9.50 2/15/05 125 85,000
Mediq, Inc., Sr. Sub. Notes B3 11.00 6/01/08 1,000 870,000
Sun Healthcare Group, Inc., Sr. Sub. Notes Caa3 9.50 7/01/07 1,000 270,000
Team Health, Inc., Sr. Sub. Notes B3 12.00 3/15/09 750 750,000
US Healthworks, Inc., Sr. Disc. Notes NR Zero 10/15/04 1,500 1,575,000
------------
6,778,750
- ------------------------------------------------------------------------------------------------------------------------------
Energy--6.1%
Anker Coal Group, Inc., Sr. Notes Ca 9.75 10/01/07 1,000 530,000
Applied Power, Inc., Sr. Sub. Notes B1 8.75 4/01/09 500 507,500
Bayard Drilling Technologies, Sr. Notes B2 11.00 6/30/05 500 545,000
Calpine Corp., Sr. Notes Ba2 7.75 4/15/09 500 500,000
Chesapeake Energy Corp., Sr. Notes B3 9.625 5/01/05 1,250 1,037,500
Chiles Offshore LLC, Sr. Notes B3 10.00 5/01/08 1,250 906,250
CMS Energy Corp., Sr. Notes Ba3 7.50 1/15/09 125 126,250
DI Industries, Inc., Sr. Notes B1 8.875 7/01/07 1,000 790,000
Gothic Production Corp., Sr. Sec'd Notes B3 11.125 5/01/05 1,250 962,500
Grant Geophysical, Inc., Sr. Notes, B3 9.75 2/15/08 1,000 570,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-52
<PAGE>
PRUDENTIAL HIGH YIELD
Portfolio of Investments as
of March 31, 1999 TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Energy (cont'd.)
Gulf Canada Resources Ltd.,
Sr. Sub. Deb. (Canada) Ba2 9.625% 7/01/05 $ 625(f) $ 639,062
Sr. Sub. Deb. (Canada) Ba2 9.25 1/15/04 500(f) 509,310
Ocean Rig, Gtd. Sr. Sec'd. Notes (Norway) B3 10.25 6/01/08 1,000(f) 700,000
P & L Coal Holdings Corp., Sr. Sub. Notes B2 9.625 5/15/08 1,000 1,043,750
Pride Petroleum Services, Inc., Sr. Notes Ba3 9.375 5/01/07 125 120,000
R & B Falcon Corp., Sr. Notes
(cost $132,124; purchased 3/25/99) Ba3 12.25 3/15/06 130(b) 136,825
------------
9,623,947
- ------------------------------------------------------------------------------------------------------------------------------
Financial Services--0.6%
Amresco, Inc., Sr. Sub. Notes
(cost $736,546; purchased 11/20/98) Caa3 9.875 3/15/05 1,000(b) 740,000
Delta Financial Corp., Sr. Notes B3 9.50 8/01/04 300 225,000
------------
965,000
- ------------------------------------------------------------------------------------------------------------------------------
Food & Beverage--3.1%
Advantica Restaurant Group, Inc., Sr. Notes B2 11.25 1/15/08 1,500 1,530,000
Envirodyne Industries, Inc., Sr. Notes Caa1 10.25 12/01/01 340 261,800
Fresh Foods, Inc., Sr. Sub. Notes B3 10.75 6/01/06 500 500,000
Grupo Azucarero Mexico S.A., Sr. Notes (Mexico) Caa2 11.50 1/15/05 1,700 (f) 578,000
Iowa Select Farms L.P., Sr. Sub. Notes B3 10.75 12/01/05 1,125 900,000
Specialty Foods Corp., Sr. Sub. Notes Caa3 11.25 8/15/03 1,500 1,125,000
------------
4,894,800
- ------------------------------------------------------------------------------------------------------------------------------
Gaming--5.2%
Alliance Gaming Corp., Sr. Sub. Notes B3 10.00 8/01/07 1,000 731,250
Aztar Corp., Sr. Sub. Notes B2 13.75 10/01/04 500 550,625
Blue Chip, Sr. Sub. Notes
(cost $1,264,826; purchased 5/5/98) NR 9.50 9/15/02 1,500 (b) 1,260,000
Casino America Corp., Sr. Notes B1 12.50 8/01/03 750 855,938
Fitzgeralds Gaming Corp., Sr. Notes B3 12.25 12/15/04 625 281,250
Hollywood Park, Inc., Sr. Sub. Notes B2 9.25 2/15/07 750 768,750
Isle Capri Black Hawk LLC, First Mtge. Notes B3 13.00 8/31/04 1,000 1,085,000
Mohegan Tribal Gaming Auth., Sr. Sub. Notes Ba3 8.75 1/01/09 250 261,250
Santa Fe Hotel, Inc., First Mtge. Notes Caa2 11.00 12/15/00 1,000 980,000
Trump Atlantic City Assocs., First Mtge. Notes B2 11.25 5/01/06 1,500 1,335,000
------------
8,109,063
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-53
<PAGE>
PRUDENTIAL HIGH YIELD
Portfolio of Investments as
of March 31, 1999 TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Industrials--3.1%
AMM Holdings, Inc., Sr. Disc. Notes, Zero Coupon (until
7/1/03) Caa1 13.50% 7/01/09 $ 2,000 $ 640,000
Continental Global Group, Inc., Sr. Notes B2 11.00 4/01/07 1,500 1,320,000
Great Lakes Carbon Corp.,
Sr. Disc. Deb., Zero Coupon (until 5/15/03) Caa1 13.125 5/15/09 1,000 557,500
Sr. Sub. Notes, PIK B3 10.25 5/15/08 1,000 1,030,000
ICF Kaiser Int'l., Inc., Sr. Sub. Notes Caa2 13.00 12/31/03 1,770 1,239,000
------------
4,786,500
- ------------------------------------------------------------------------------------------------------------------------------
Leisure & Tourism--2.2%
AMC Entertainment, Inc., Sr. Sub. Notes B3 9.50 2/01/11 375 356,719
Ballys Total Fitness Holdings, Inc., Sr. Sub. Notes B3 9.875 10/15/07 1,000 990,000
Premier Cruise Ltd., Sr. Notes
(cost $973,646; purchased 5/19/98) Caa2 11.00 3/15/08 1,000 (b)(e) 280,000
Production Resource LLC, Sr. Sub. Notes Caa2 11.50 1/15/08 1,000 990,000
Town Sports Int'l., Inc., Sr. Notes B2 9.75 10/15/04 775 751,750
------------
3,368,469
- ------------------------------------------------------------------------------------------------------------------------------
Miscellaneous Services--3.4%
Coinstar, Inc., Sr. Disc. Notes, Zero Coupon (until
10/1/01) NR 13.00 10/01/06 1,550 1,480,250
Desa Int'l., Inc., Sr. Sub. Notes Caa1 9.875 12/15/07 1,000 780,000
ICON Health & Fitness, Inc., Sr. Sub. Notes
(cost $1,369,767; purchased 7/21/98) Caa2 13.00 7/15/02 1,500 (b) 1,125,000
Interact Systems, Inc., Sr. Disc. Notes NR Zero 8/01/03 1,500 630,000
Kindercare Learning Center, Inc., Sr. Sub. Notes B3 9.50 2/15/09 750 753,750
La Petite Academy, Inc., Sr. Notes B3 10.00 5/15/08 500 490,000
------------
5,259,000
- ------------------------------------------------------------------------------------------------------------------------------
Paper & Forest Products--4.7%
Ainsworth Lumber Ltd., Sr. Notes, PIK B3 12.50 7/15/07 2,000 2,110,000
Gaylord Container Corp., Sr. Notes Caa1 9.75 6/15/07 1,500 1,447,500
Maxxam Group Holdings, Inc., Sr. Notes B3 12.00 8/01/03 500 535,000
Millar Western Production Ltd., Sr. Notes B3 9.875 5/15/08 500 445,000
Repap New Brunswick, Inc., Sr. Sec'd. Notes Caa1 10.625 4/15/05 1,000 830,000
Stone Container Corp.,
Sr. Notes B2 12.58 8/01/16 250 267,188
Sr. Sub. Deb. B3 12.25 4/01/02 1,750 1,760,937
------------
7,395,625
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-54
<PAGE>
PRUDENTIAL HIGH YIELD
Portfolio of Investments as
of March 31, 1999 TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Publishing--1.3%
Garden State Newspapers, Sr. Sub. Notes B1 8.625% 7/01/11 $ 250 $ 251,875
Phoenix Color Corp., Sr. Sub. Notes B3 10.375 2/01/09 1,000 1,015,000
World Color Press, Inc.,
Sr. Sub. Notes B1 8.375 11/15/08 500 510,000
Sr. Sub. Notes B1 7.75 2/15/09 250 245,000
------------
2,021,875
- ------------------------------------------------------------------------------------------------------------------------------
Real Estate--0.5%
CB Richards Ellis Services, Inc., Sr. Sub. Notes Ba3 8.875 6/01/06 800 800,000
- ------------------------------------------------------------------------------------------------------------------------------
Retail--3.4%
Big 5 Holdings Corp., Sr. Disc. Notes, Zero Coupon
(until 11/30/02)
(cost $554,565; purchased 2/3/99) NR 13.45 11/30/08 1,000 (b) 550,000
Montgomery Ward Trade Claim
(cost $695,187; purchased 8/19/98) NR Zero 12/31/00 1,986 (b) 466,769
Musicland Group, Inc., Sr. Sub. Notes B3 9.00 6/15/03 1,500 1,509,375
Pamida, Inc., Sr. Sub. Notes Caa1 11.75 3/15/03 950 856,187
Phar-Mor, Inc., Sr. Notes B3 11.72 9/11/02 1,805 1,859,150
------------
5,241,481
- ------------------------------------------------------------------------------------------------------------------------------
Steel & Metals--2.7%
Doe Run Res. Corp., Sr. Notes B3 11.25 3/15/05 1,000 850,000
Kaiser Aluminum & Chemical Corp., Sr. Sub. Notes B2 12.75 2/01/03 1,000 967,500
National Steel Corp., First Mtge. Ba3 9.875 3/01/09 250 256,875
UCAR Global Enterprises, Inc., Sr. Sub. Notes B2 12.00 1/15/05 1,000 1,056,250
WHX Corp., Sr. Notes B3 10.50 4/15/05 1,150 1,115,500
------------
4,246,125
- ------------------------------------------------------------------------------------------------------------------------------
Supermarkets--1.9%
Homeland Stores, Inc., Sr. Notes NR 10.00 8/01/03 350 299,250
Pantry, Inc., Sr. Sub. Notes B3 10.25 10/15/07 1,500 1,575,000
Pathmark Stores, Inc., Sr. Sub. Notes Caa1 9.625 5/01/03 1,000 1,027,500
------------
2,901,750
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-55
<PAGE>
PRUDENTIAL HIGH YIELD
Portfolio of Investments as
of March 31, 1999 TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Technology--1.9%
Ampex Corp., Sr. Notes B+(a) 12.00% 3/15/03 $ 1,000 $ 1,040,000
Anacomp, Inc., Sr. Sub. Notes B3 10.875 4/01/04 1,000 1,040,000
DecisionOne Holdings Corp., Sr. Disc. Deb., Zero Coupon
(until 8/1/02) C 11.50 8/01/08 1,100 (d) 22,000
Viasystems, Inc., Sr. Sub. Notes Caa1 9.75 6/01/07 1,000 941,250
------------
3,043,250
- ------------------------------------------------------------------------------------------------------------------------------
Telecommunications--16.2%
Allegiance Telecom, Inc., Sr. Notes NR 12.875 5/15/08 1,000 1,100,000
AMSC Acquisition Co., Inc., Sr. Notes NR 12.25 4/01/08 500 253,750
Arch Communications Group, Inc., Sr. Notes B3 12.75 7/01/07 500 445,000
Bestel S.A. De CV, Sr. Disc. Notes, Zero Coupon (until
5/15/01) (Mexico) NR 12.75 5/15/05 1,500 (f) 930,000
Birch Telecom, Inc., Sr. Notes NR 14.00 6/15/08 1,000 915,000
Caprock Communications Corp., Sr. Notes Caa1 12.00 7/15/08 500 508,750
Cencall Communications Corp., Sr. Disc. Notes, Zero
Coupon
(until 1/15/99) B2 10.125 1/15/04 250 257,500
Covad Communications Group, Inc., Sr. Disc. Notes B3 12.50 2/15/09 500 502,500
E. Spire Communications, Inc., Sr. Disc. Notes, Zero
Coupon
(until 7/1/03) NR 10.625 7/01/08 900 432,000
Firstworld Communications, Inc., Sr. Disc. Notes, Zero
Coupon
(until 4/15/03) NR 13.00 4/15/08 1,000 380,000
Focal Communications Corp., Sr. Disc. Notes, Zero
Coupon
(until 2/15/03) NR 12.125 2/15/08 1,250 700,000
GST Network Funding, Inc., Sr. Disc. Notes, Zero Coupon
(until 5/1/03) NR 10.50 5/01/08 1,375 735,625
GST USA, Inc., Sr. Disc. Notes, Zero Coupon (until
12/15/00) NR 13.875 12/15/05 500 395,000
ICG Holdings, Inc., Sr. Disc. Notes, Zero Coupon (until
9/15/00) NR 13.50 9/15/05 1,300 1,150,500
ICO Global Communications, Sr. Notes B3 15.00 8/01/05 1,000 (d) 550,000
Impsat Corp., Sr. Notes B2 12.375 6/15/08 1,000 900,000
Iridium Capital Corp., Sr. Notes B3 14.00 7/15/05 1,000 450,000
Jordan Telecommunication Products, Sr. Sub. Notes B3 9.875 8/01/07 500 500,000
Level 3 Communications, Inc.,
Sr. Disc. Notes, Zero Coupon (until 12/1/03) B3 10.50 12/01/08 1,100 690,250
Sr. Notes B3 9.125 5/01/08 250 250,625
McLeodusa, Inc., Sr. Notes B2 8.125 2/15/09 1,000 1,000,000
Nextel Communications, Inc.,
Sr. Disc. Notes, Zero Coupon (until 2/15/03) B2 9.95 2/15/08 600 420,000
Sr. Disc. Notes, Zero Coupon (until 2/15/99) B2 9.75 8/15/04 350 362,250
Nextel International, Inc., Sr. Disc. Notes, Zero
Coupon
(until 4/15/03) Caa1 12.125 4/15/08 500 220,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-56
<PAGE>
PRUDENTIAL HIGH YIELD
Portfolio of Investments as
of March 31, 1999 TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Telecommunications (cont'd.)
Nextel Partners, Inc., Sr. Disc. Notes, Zero Coupon
(until 2/1/04) B3 14.00% 2/01/09 $ 1,000 $ 570,000
Northeast Optic Network, Inc., Sr. Notes NR 12.75 8/15/08 500 520,000
NTL, Inc., Sr. Disc. Notes, Zero Coupon (until 10/1/03) B3 12.375 10/01/08 2,500 1,725,000
Omnipoint Corp., Sr. Notes B3 11.625 8/15/06 2,000 1,750,000
RSL Communications Ltd.,
Sr. Notes B2 12.25 11/15/06 250 273,125
Sr. Notes B3 12.00 11/01/08 350 388,500
Splitrock Services, Inc., Sr. Notes NR 11.75 7/15/08 750 716,250
Time Warner Telecom LLC, Sr. Notes B2 9.75 7/15/08 650 695,500
U.S. Xchange LLC, Sr. Notes NR 15.00 7/01/08 750 810,000
USA Mobil Communications, Inc., Sr. Notes B3 9.50 2/01/04 500 430,000
Versatel Telecom BV, Sr. Notes (Netherlands) NR 13.25 5/15/08 1,000 (f) 1,052,500
Viatel, Inc., Sr. Notes Caa1 11.25 4/15/08 1,000 1,025,000
Winstar Communications, Inc., Sr. Disc. Notes, Zero
Coupon
(until 10/15/00) Caa1 14.00 10/15/05 500 356,250
Worldwide Fiber, Inc., Sr. Notes B3 12.50 12/15/05 1,000 1,052,500
------------
25,413,375
- ------------------------------------------------------------------------------------------------------------------------------
Textiles--1.5%
Cluett American Corp., Sr. Sub. Notes B3 10.125 5/15/08 750 686,250
Simmons Co., Sr. Sub. Notes B3 10.25 3/15/09 1,000 1,035,000
Steel Heddle Mfg. Co., Sr. Sub. Notes B3 10.625 6/01/08 1,000 550,000
------------
2,271,250
- ------------------------------------------------------------------------------------------------------------------------------
Transportation/Trucking/Shipping--1.1%
American Commercial Lines LLC, Sr. Notes B1 10.25 6/30/08 1,000 1,030,000
Stena AB, Sr. Notes (Sweden) B1 10.625 6/01/08 1,000 (f) 760,000
------------
1,790,000
- ------------------------------------------------------------------------------------------------------------------------------
Utilities--0.6%
York Power Funding Cayman Ctd., Sr. Sec'd. Notes
(Cayman Islands) Ba3 12.00 10/30/07 1,000 (f) 1,005,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-57
<PAGE>
PRUDENTIAL HIGH YIELD
Portfolio of Investments as
of March 31, 1999 TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Waste Management--2.3%
Allied Waste North America, Inc.,
Sr. Notes Ba2 7.875% 1/01/09 $ 1,250 $ 1,218,750
Sr. Notes Ba2 7.625 1/01/06 500 487,500
Waste Systems Int'l., Inc., Sub. Notes CCC+(a) 7.00 5/13/05 2,000 1,870,000
------------
3,576,250
------------
Total corporate bonds
(cost $147,843,118) 135,989,825
------------
- ------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS--1.1%
Einstein / Noah Bagel Corp., Sub. Deb. 7.25 6/01/04 1,500 885,000
Key Energy Group, Inc., Sr. Sub. Notes 5.00 9/15/04 1,500 765,000
------------
Total convertible bonds
(cost $1,979,318) 1,650,000
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-58
<PAGE>
PRUDENTIAL HIGH YIELD
Portfolio of Investments as
of March 31, 1999 TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value Value
Description Shares (Note 1) Description Warrants (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS--1.3%
Beverly Enterprises, Inc.(c) 40,000 $ 205,000
Canadian Airlines Corp.(c) 12/1/07 4,400 5,046
Chesapeake Energy Corp. 25,000 35,938
Grand Union Co.(c) 100,772 1,133,685
Intermedia Communications, Inc.(c) 811 21,187
Musicland Stores Corp.(c) 25,000 220,312
Nevada Gold & Casinos, Inc.(c) 8,000 38,000
Northeast Optic Network, Inc.(c) 20,000 282,500
Omnipoint Corp.(c) 5,200 75,075
Paxson Communications Corp.(c) 9,400 80,488
Star Gas Partners L.P. 441 881
Total common stocks
(cost $2,222,200) 2,098,112
------------
- --------------------------------------------------------------
PREFERRED STOCKS--4.9%
Adelphia Communications Corp.,
$13.00 8,750 1,006,250
Century Maintenance Supply, Inc.,
Versatel Telecom BV, expiring
$13.25 10,636 1,095,508
Cluett American Corp., $12.50 7,961 708,525
Concentric Network Corp., $13.50 1 372
Geneva Steel Co., $14.00 1,000 500
Harborside Healthcare Corp.,
$13.50 535 374,160
Intermedia Communications, Inc.,
$7.00 20,000 415,000
IXC Communications, Inc., $12.50 750 813,750
Packaging Corp. America, $12.375 7,500 750,000
Paxson Communications Corp.,
$12.50 1,128 1,015,537
Rural Cellular Corp., $11.375 6 6,224
Supermarkets General Holdings
Corp., $3.52 10,000 365,000
Texas Utilities Co., $9.25 20,000 1,066,250
Viatel, Inc., $10.00 521 78,166
------------
Total preferred stocks
(cost $7,809,893) 7,695,242
------------
<CAPTION>
Value
Description Warrants (Note 1)
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
WARRANTS(c)--0.1%
American Banknote Corp., expiring
12/1/07 @ $5.50 750 7
American Mobile Satellite Corp.,
expiring 4/1/08 @ $12.51 500 1,645
Grand Union Co.(c) 100,772 1,133,685
Bestel S.A. De CV, expiring
5/15/05 1,500 1,500
Birch Telecom, Inc., expiring
6/15/08 1,000 5,000
Classic Communications, Inc.,
expiring 8/1/09 3,000 (d) 0
DecisionOne Holdings Corp.,
expiring 8/1/07 @ $23.00 1,100 (d) 0
Firstworld Communications, Inc.,
expiring 4/15/08 1,000 10,000
ICO Global Communications,
expiring 8/1/05 @ $13.20 1,000 (d) 0
Interact Systems, Inc., expiring
8/1/03 1,500 15
Splitrock Services, Inc., expiring
7/15/08 750 45,000
TVN Entertainment Corp., expiring
8/1/08 1,000 (d) 0
Versatel Telecom BV, expiring
5/15/08 1,000 70,000
------------
Total warrants
(cost $7,515) 133,167
------------
Total long-term investments
(cost $159,862,044) 147,566,346
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-59
<PAGE>
PRUDENTIAL HIGH YIELD
Portfolio of Investments as
of March 31, 1999 TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Interest Maturity Amount Value
Description Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--5.5%
- ------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER--4.4%
General Electric Capital Corp. 5.12% 4/01/99 $ 3,923 $ 3,923,000
Windmill Funding Corp. 4.88 4/19/99 3,000 2,992,680
------------
Total commercial paper
(cost $6,915,680) 6,915,680
------------
- ------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS--1.1%
Aircraft Funding, Sr. Notes, PIK
(cost $1,995,149; purchased 7/1/98) 12.00 7/15/99 2,000 (b) 1,640,000
------------
Total short-term investments
(cost $8,910,829) 8,555,680
------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investments--99.8 %
(cost $168,772,873; Note 4) 156,122,026
Other assets in excess of liabilities--0.2% 251,588
------------
Net Assets--100% $156,373,614
------------
------------
</TABLE>
- ---------------
(a) Standard & Poor's Rating.
(b) Indicates a restricted security; the aggregate cost of such securities is
$9,667,329. The aggregate value $7,998,594 is approximately 5.1% of net
assets.
(c) Non-income producing securities.
(d) Consists of more than one class of securities traded together as a unit;
generally bonds with attached stock or warrants.
(e) Represents issuer in default on interest payments; non-income producing
security.
(f) US$ denominated foreign bonds.
NR--Not rated by Moody's or Standard & Poor's.
PIK--Payment in kind securities.
L.P.--Limited Partnership.
LLC--Limited Liability Company.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-60
<PAGE>
PRUDENTIAL HIGH YIELD
Statement of Assets and Liabilities TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets March 31, 1999
<S> <C>
Investments, at value (cost $168,772,873).................................................................. $156,122,026
Cash....................................................................................................... 893
Interest receivable........................................................................................ 3,452,596
Receivable for investments sold............................................................................ 921,803
Receivable for Fund shares sold............................................................................ 533,492
Prepaid expenses and other assets.......................................................................... 148,785
--------------
Total assets............................................................................................ 161,179,595
--------------
Liabilities
Payable for investments purchased.......................................................................... 3,154,611
Payable for Fund shares reacquired......................................................................... 1,015,068
Dividends payable.......................................................................................... 324,774
Accrued expenses........................................................................................... 184,097
Due to Distributor......................................................................................... 81,391
Due to Manager............................................................................................. 46,040
--------------
Total liabilities....................................................................................... 4,805,981
--------------
Net Assets................................................................................................. $156,373,614
--------------
--------------
Net assets were comprised of:
Common stock, at par.................................................................................... $ 1,756
Paid-in capital in excess of par........................................................................ 172,971,331
--------------
172,973,087
Accumulated net realized loss on investments............................................................ (3,948,626)
Net unrealized depreciation on investments.............................................................. (12,650,847)
--------------
Net assets, March 31, 1999................................................................................. $156,373,614
--------------
--------------
Class A:
Net asset value and redemption price per share $8.91
($37,557,754 / 4,216,698 shares of common stock issued and outstanding)..............................
Maximum sales charge (4% of offering price)............................................................. .37
-----
Maximum offering price to public........................................................................ $9.28
-----
-----
Class B:
Net asset value, offering price and redemption price per share $8.91
($97,453,690 / 10,940,153 shares of common stock issued and outstanding)............................. -----
-----
Class C:
Net asset value and redemption price per share $8.91
($19,248,742 / 2,160,946 shares of common stock issued and outstanding)..............................
Sales charge (1% of offering price)..................................................................... .09
-----
Offering price to public................................................................................ $9.00
-----
-----
Class Z:
Net asset value, offering price and redemption price per share $8.91
($2,113,428 / 237,269 shares of common stock issued and outstanding)................................. -----
-----
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-61
<PAGE>
PRUDENTIAL HIGH YIELD
TOTAL RETURN FUND, INC.
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
May 5, 1998(a)
Through
Net Investment Income March 31, 1999
<S> <C>
Income
Interest.................................... 13,945,929
Dividends................................... 147,729
--------------
14,093,658
--------------
Expenses
Management fee.............................. 864,173
Distribution fee--Class A................... 56,529
Distribution fee--Class B................... 623,305
Distribution fee--Class C................... 122,290
Custodian's fees and expenses............... 160,000
Registration fees........................... 140,000
Transfer agent's fees and expenses.......... 120,000
Amortization of prepaid offering cost....... 110,000
Reports to shareholders..................... 90,000
Audit fee and expenses...................... 30,000
Amortization of deferred organization
cost..................................... 26,000
Legal fees and expenses..................... 20,000
Directors' fees............................. 14,000
Insurance expense........................... 2,000
Miscellaneous............................... 816
--------------
Total expenses........................... 2,379,113
Less: Management fee waiver (Note 2)........ (398,849)
--------------
Net expenses............................. 1,980,264
--------------
Net investment income.......................... 12,113,394
--------------
Realized and Unrealized
Loss on Investments
Net realized loss on investment transactions... (3,948,626)
Net change in unrealized
appreciation/depreciation of investments.... (12,650,847)
--------------
Net loss on investments........................ (16,599,473)
--------------
Net Decrease in Net Assets
Resulting from Operations...................... $ (4,486,079)
--------------
--------------
- ---------------
(a) Commencement of investment operations.
</TABLE>
PRUDENTIAL HIGH YIELD
TOTAL RETURN FUND, INC.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
May 5, 1998(a)
Increase in Through
Net Assets March 31, 1999
<S> <C>
Operations
Net investment income...................... $ 12,113,394
Net realized loss on investment
transactions............................ (3,948,626)
Net change in unrealized
appreciation/depreciation of
investments............................. (12,650,847)
--------------
Net decrease in net assets resulting from
operations.............................. (4,486,079)
--------------
Dividends and distributions (Note 1)
Dividends from net investment income
Class A................................. (3,017,075)
Class B................................. (7,451,879)
Class C................................. (1,460,665)
Class Z................................. (183,775)
--------------
(12,113,394)
--------------
Distributions in excess of net investment
income
Class A................................. (50,574)
Class B................................. (132,431)
Class C................................. (25,580)
Class Z................................. (3,622)
--------------
(212,207)
--------------
Fund share transactions (Net of share
conversions) (Note 5)
Net proceeds from shares sold.............. 200,008,881
Net asset value of shares issued in
reinvestment of dividends and
distributions........................... 7,763,506
Cost of shares reacquired.................. (34,687,093)
--------------
Net increase in net assets from Fund share
transactions............................ 173,085,294
--------------
Total increase................................ 156,273,614
Net Assets
Beginning of period........................... 100,000
--------------
End of period................................. $156,373,614
--------------
--------------
- ---------------
(a) Commencement of investment operations.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-62
<PAGE>
PRUDENTIAL HIGH YIELD
Notes to Financial Statements TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
Prudential High Yield Total Return Fund, Inc. (the 'Fund') is registered under
the Investment Company Act of 1940 as a diversified, open-end management
investment company. The Fund was incorporated in Maryland on February 18, 1997.
The Fund issued 2,500 shares each of Class A, Class B, Class C and Class Z
common stock for $100,000 on February 18, 1998 to Prudential Investments Fund
Management LLC ('PIFM'). The Fund commenced investment operations on May 5,
1998. The primary investment objective of the Fund is total return through high
current income and capital appreciation. It seeks to achieve this objective by
investing 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.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Security Valuation: Portfolio securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at prices provided by
principal market makers and pricing agents. Any security for which the primary
market is on an exchange is valued at the last sales price on such exchange on
the day of valuation or, if there was no sale on such day, the last bid price
quoted on such day. Securities issued in private placements are valued at the
bid price or the mean between the bid and asked prices, if available, provided
by principal market makers. Any security for which a reliable market quotation
is unavailable is valued at fair value as determined in good faith by or under
the direction of the Fund's Board of Directors.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost, which approximates market value.
Repurchase Agreements: In connection with transactions in repurchase agreements,
it is the Fund's policy that its custodian or designated subcustodians, under
triparty repurchase agreements as the case may be, take possession of the
underlying collateral securities, the value of which exceeds the principal
amount of the repurchase transaction, including accrued interest and, to the
extent that any repurchase transaction exceeds one business day, the value of
the collateral is marked-to-market on a daily basis to ensure the adequacy of
the collateral. If the seller defaults and the value of the collateral declines
or if bankruptcy proceedings are commenced with respect to the seller of the
security, realization of the collateral by the Fund may be delayed or limited.
All securities are valued as of 4:15 p.m., New York time.
The Fund may hold up to 15% of its net assets in illiquid securities, including
those which are restricted as to disposition under securities law ('restricted
securities'). Certain issues of restricted securities held by the Fund at March
31, 1999 include registration rights under which the Fund may demand
registration by the issuer, of which the Fund may bear the cost of such
registration. Restricted securities, sometimes referred to as private
placements, are valued pursuant to the valuation procedures noted above.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of portfolio
securities are calculated on an identified cost basis. Interest income is
recorded on an accrual basis and dividend income is recorded on the ex-dividend
date. The Fund accretes discount and amortizes premium as adjustments to
interest income. Income from payment-in-kind bonds is recorded daily based on an
effective interest method. Expenses are recorded on the accrual basis which may
require the use of certain estimates by management.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares of the Fund based
upon the relative proportion of net assets of each class at the beginning of the
day.
Dividends and Distributions: The Fund declares daily and pays dividends of net
investment income monthly and makes distributions at least annually of any net
capital gains. Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Taxes: It is the intent of the Fund to meet the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute all
of its taxable income to its shareholders. Therefore, no federal income tax
provision is required.
Offering and Organization Expenses: Approximately $283,300 were incurred in
connection with the organization of the Fund. Offering cost of approximately
$110,400 and organization cost of approximately $172,900 are being amortized
ratably over a period of twelve months and sixty months, respectively, from the
date the Fund commenced investment operations.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with the American Institute
- --------------------------------------------------------------------------------
B-63
<PAGE>
PRUDENTIAL HIGH YIELD
Notes to Financial Statements TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
of Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to decrease paid-in capital in excess of par and decrease
accumulated net realized losses on investments by $212,207 for certain expenses
not deductible for tax purposes. Net investment income, net realized gains and
net assets were not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'.) Pursuant to this agreement PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'); PIC furnishes investment advisory services in
connection with the management of the Fund. PIFM pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid to PIFM is computed daily and payable monthly, at an
annual rate of .65% of the Fund's average daily net assets. PIFM has agreed to
waive a portion (.30 of 1% of the Fund's average daily net assets) of its
management fee which amounted to $398,849 ($.023 per share for Class A, B, C and
Z shares) for the period ended March 31, 1999. The Fund is not required to
reimburse PIFM for such waiver.
The Fund had a distribution agreement with Prudential Securities Incorporated
('PSI'), which acted as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund through May 31, 1998. Prudential Investment
Management Services LLC ('PIMS') became the distributor of the Fund effective
June 1, 1998 and is serving the Fund under the same terms and conditions as
under the arrangement with PSI. The Fund compensated PSI and PIMS for
distributing and servicing the Fund's Class A, Class B and Class C shares
pursuant to plans of distribution (the 'Class A, B and C Plans'), regardless of
expenses actually incurred by them. The distribution fees are accrued daily and
payable monthly. No distribution or service fees are paid to PSI or PIMS as
distributor of the Class Z shares of the Fund.
Pursuant to the Class A Plan, the Fund compensates PIMS 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. Such
expenses under the Class A Plan were .15 of 1% of the average daily net assets
of the Class A shares for the period May 5, 1998 through December 31, 1998.
Effective January 1, 1999, such expenses under the Class A Plan were .25 of 1%
of the average daily net assets of the Class A shares.
Pursuant to the Class B and C Plans, the Fund compensates PIMS with respect to
Class B and C shares, for distribution-related activities at an annual rate of
up to 1% of the average daily net assets of Class B shares and Class C shares.
Such expenses under the Plans were .75 of 1% of the average daily net assets of
the Class B and C shares for the period ended March 31, 1999.
PSI and PIMS have advised the Fund that they received approximately $1,089,800
and $27,200 in front-end sales charges resulting from sales of Class A and Class
C shares, respectively, during the period May 5, 1998 through March 31, 1999.
From these fees, PSI paid such sales charges to affiliated broker-dealers, which
in turn paid commissions to salespersons and incurred other distribution costs.
PSI and PIMS have advised the Fund that for the period May 5, 1998 through March
31, 1999 they received approximately $283,900 and $27,100 in contingent deferred
sales charges imposed upon certain redemptions by Class B and Class C
shareholders, respectively.
PSI, PIFM, PIC and PIMS are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America.
As of March 11, 1999, the Fund, along with other affiliated registered
investment companies (the 'Funds'), entered into a syndicated credit agreement
(SCA) with an unaffiliated lender. The maximum commitment under the SCA is $1
billion. The Funds pay a commitment fee at an annual rate of .065 of 1% on the
unused portion of the credit facility which is accrued and paid quarterly on a
pro rata basis by the Funds. The SCA expires on March 9, 2000. Prior to March
11, 1999, the Funds had a credit agreement with a maximum commitment of
$200,000,000. The commitment fee was 0.055 of 1% on the unused portion of the
credit facility. The Fund did not borrow any amounts pursuant to either
agreement during the period ended March 31, 1999. The purpose of the agreements
are to serve as an alternative source of funding for capital share redemptions.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC, a wholly owned subsidiary of PIFM, serves
as the Fund's transfer agent and during the period ended March 31, 1999, the
Fund incurred fees of approximately $114,600 for the services of PMFS. As of
March 31, 1999, $10,700 of such fees were due to
- --------------------------------------------------------------------------------
B-64
<PAGE>
PRUDENTIAL HIGH YIELD
Notes to Financial Statements TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
PMFS. Transfer agent fees and expenses in the Statement of Operations include
certain out-of-pocket expenses paid to nonaffiliates.
For the period ended March 31, 1999, PSI earned $2,000 in brokerage commissions
from portfolio transactions executed on behalf of the Fund.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the period ended March 31, 1999 were $289,578,788 and $126,359,836,
respectively.
The federal income tax basis of the Fund's investments, including short-term
investments, as of March 31, 1999 was $168,798,569; accordingly, net unrealized
depreciation for federal income tax purposes was $12,676,543 (gross unrealized
appreciation--$3,306,615; gross unrealized depreciation--$15,983,158).
For federal income tax purposes, the Fund had a capital loss carryforward as of
March 31, 1999, of approximately $1,698,000 which expires in 2007. In addition,
the Fund will elect to treat net capital losses of approximately $2,225,000
incurred in the two month period ended December 31, 1998 as having been incurred
in the following fiscal year. Accordingly, no capital gains distributions are
expected to be paid to shareholders until future net gains have been realized in
excess of such carryforward.
- ------------------------------------------------------------
Note 5. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 4%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. Prior to November 2, 1998, Class C shares were sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase. A special exchange privilege is also available for
shareholders who qualify to purchase Class A shares at net asset value. Class Z
shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
The Fund has 2.5 billion shares of $0.0001 par value common stock authorized; 1
billion shares for Class A and 500 million shares each for Class B, Class C and
Class Z.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------ ------------ ---------------
<S> <C> <C>
May 5, 1998(a) through
March 31, 1999:
Shares sold................... 5,287,840 $ 51,217,401
Shares issued in reinvestment
of dividends................ 223,342 2,028,273
Shares reacquired............. (1,316,676) (11,925,521)
------------ ---------------
Net increase in shares
outstanding before
conversions................. 4,194,506 41,320,153
Shares issued upon conversion
from Class B................ 19,692 174,213
------------ ---------------
Net increase in shares
outstanding................. 4,214,198 $ 41,494,366
------------ ---------------
------------ ---------------
<CAPTION>
Class B
- ------------------------------
<S> <C> <C>
May 5, 1998(a) through
March 31, 1999:
Shares sold................... 12,231,118 $ 119,622,135
Shares issued in reinvestment
of dividends................ 514,809 4,669,308
Shares reacquired............. (1,788,582) (16,165,146)
------------ ---------------
Net increase in shares
outstanding before
conversion.................. 10,957,345 108,126,297
Shares reacquired upon
conversion into Class A..... (19,692) (174,213)
------------ ---------------
Net increase in shares
outstanding................. 10,937,653 $ 107,952,084
------------ ---------------
------------ ---------------
<CAPTION>
Class C
- ------------------------------
<S> <C> <C>
May 5, 1998(a) through
March 31, 1999:
Shares sold................... 2,556,202 $ 24,882,076
Shares issued in reinvestment
of
dividends................... 98,953 898,112
Shares reacquired............. (496,709) (4,436,511)
------------ ---------------
Net increase in shares
outstanding................. 2,158,446 $ 21,343,677
------------ ---------------
------------ ---------------
<CAPTION>
Class Z
- ------------------------------
<S> <C> <C>
May 5, 1998(a) through
March 31, 1999:
Shares sold................... 452,123 $ 4,287,269
Shares issued in reinvestment
of dividends................ 18,552 167,813
Shares reacquired............. (235,906) (2,159,915)
------------ ---------------
Net increase in shares
outstanding................. 234,769 $ 2,295,167
------------ ---------------
------------ ---------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
B-65
<PAGE>
PRUDENTIAL HIGH YIELD
Financial Highlights TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C
-------------- -------------- --------------
May 5, 1998(a) May 5, 1998(a) May 5, 1998(a)
Through Through Through
March 31, March 31, March 31,
1999 1999 1999
-------------- -------------- --------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $ 10.00 $ 10.00 $ 10.00
------ ------ ------
Income from investment operations
Net investment income(d)..................................... 0.79 0.74 0.74
Net realized and unrealized loss on investments.............. (1.08) (1.08) (1.08)
------ ------ ------
Total from investment operations.......................... (0.29) (0.34) (0.34)
------ ------ ------
Less distributions
Dividends from net investment income......................... (0.79) (0.74) (0.74)
Distributions in excess of net investment income............. (0.01) (0.01) (0.01)
------ ------ ------
Total distributions.................................... (0.80) (0.75) (0.75)
------ ------ ------
Net asset value, end of period............................... $ 8.91 $ 8.91 $ 8.91
------ ------ ------
------ ------ ------
TOTAL RETURN(b).............................................. (2.97)% (3.45)% (3.45)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................. $ 37,558 $ 97,454 $ 19,249
Average net assets (000)..................................... $ 35,147 $ 92,201 $ 18,089
Ratios to average net assets:
Expenses, including distribution fees(c)(d)............... 1.06% 1.64% 1.64%
Expenses, excluding distribution fees(c)(d)............... 0.89% 0.89% 0.89%
Net investment income(c)(d)............................... 9.52% 8.97% 8.96%
For Classes A, B, C and Z shares:
Portfolio turnover rate................................... 97%
<CAPTION>
Class Z
--------------
<S> <C>
May 5, 1998(a)
Through
March 31,
1999
--------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $10.00
-----
Income from investment operations
Net investment income(d)..................................... 0.80
Net realized and unrealized loss on investments.............. (1.08)
-----
Total from investment operations.......................... (0.28)
-----
Less distributions
Dividends from net investment income......................... (0.80)
Distributions in excess of net investment income............. (0.01)
-----
Total distributions.................................... (0.81)
-----
Net asset value, end of period............................... $ 8.91
-----
-----
TOTAL RETURN(b).............................................. (2.82)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................. $2,113
Average net assets (000)..................................... $2,060
Ratios to average net assets:
Expenses, including distribution fees(c)(d)............... 0.89%
Expenses, excluding distribution fees(c)(d)............... 0.89%
Net investment income(c)(d)............................... 9.90%
For Classes A, B, C and Z shares:
Portfolio turnover rate...................................
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Net of management fee waiver.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-66
<PAGE>
PRUDENTIAL HIGH YIELD
Report of Independent Accountants TOTAL RETURN FUND, INC.
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Prudential High Yield Total Return Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential High Yield Total Return
Fund, Inc. (the 'Fund') at March 31, 1999, and the results of its operations,
the changes in its net assets and the financial highlights for the period May 5,
1998 (commencement of operations) through March 31, 1999, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as 'financial statements') are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at March 31, 1999 by
correspondence with the custodian and brokers, provides a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
May 20, 1999
B-67
<PAGE>
APPENDIX I--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
The following chart shows the long-term performance of various asset
classes and the rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
[NEED CHART DATA PLOTPOINTS]
[GRAPHICAL REPRESENTATION OF CHART]
Source: Ibbotson Associates. Used with permission. All rights reserved. This
chart is for illustrative purposes only and is not indicative of the past,
present, or future performance of any asset class or any Prudential Mutual Fund.
Generally, stock returns are due to capital appreciation and reinvesting any
gains. Bond returns are due mainly to reinvesting interest. Also, stock prices
usually are more volatile than bond prices over the long-term. Small stock
returns for 1926-1980 are those of stocks comprising the 5th quintile of the New
York Stock Exchange. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P
Composite Index, a market-weighted, unmanaged index of 500 stocks (currently) in
a variety of industries. It is often used as a broad measure of stock market
performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
I-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high-yield bonds and world government bonds on an annual basis from 1988
through 1998. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Fund Expenses" in the Prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
<TABLE>
<CAPTION>
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
'88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6% 10.0%
-----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
MORTGAGE
SECURITIES(2) 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5% 7.0%
-----------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE
CORPORATE
BONDS(3) 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2% 8.6%
-----------------------------------------------------------------------------------------------------------------
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8% 1.6%
-----------------------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS(5) 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3%) 5.3%
=================================================================================================================
DIFFERENCE BETWEEN
HIGHEST AND LOWEST
RETURN PERCENT 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7 17.1 8.4%
</TABLE>
(1) LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.
(2) LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3) LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year. Data retrieved from Lipper, Inc.
(4) LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one year.
(5) SALOMON SMITH BARNEY WORLD GOVERNMENT INDEX (NON U.S.) includes over 800
bonds issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
I-2
<PAGE>
This chart illustrates the performance of major world stock markets for the
period from December 31, 1985 through December 31, 1998. It does not represent
the performance of any Prudential Mutual Fund.
AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS
(12/31/85 - 12/31/98) (IN U.S. DOLLARS)
[GRAPHICAL REPRESENTATION OF CHART]
Source: Morgan Stanley Capital International (MSCI) based on data retrieved from
Lipper Analytical New Application (LANA) as of 9/30/97. Morgan Stanley country
indices are unmanaged indices which include those stocks making up the largest
two-thirds of each country's total stock market capitalization. This chart is
for illustrative purposes only and is not indicative of the past, present or
future performance of any specific investment. Investors cannot invest directly
in stock indices.
This chart shows the growth of a hypothetical $10,000 investment made in
the stock representing the S&P 500 stock index with and without reinvested
dividends.
[GRAPHICAL REPRESENTATION OF CHART]
Source: Liper, Inc. Used with permission. All rights reserved. This chart is for
illustrative purposes only and is not representative of the past, present or
future performance of any Prudential Mutual Fund. Common Stock total returns are
based on the S&P 500 Index, a market-value weighted index made up of 500 of the
largest stocks in the U.S. based upon their stock market value. Investors cannot
buy or invest in market indicies.
WORLD STOCK MARKET CAPITALIZATION BY REGION
WORLD TOTAL: 15.8 TRILLION
[GRAPHICAL REPRESENTATION OF CHART]
Source: Morgan Stanley Capital International, December 31, 1998. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by Morgan Stanley Capital International (MSCI) World Index.
The total market capitalization is based on the value of approximately 1577
companies in 22 countries (representing approximately 60% of the aggregate
market value of the stock exchanges). This chart is for illustrative purposes
only and does not represent the allocation of any Prudential Mutual Fund.
I-3
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1998)
[GRAPHICAL REPRESENTATION OF CHART]
- ----------
SOURCE: IBBOTSON ASSOCIATES. USED WITH PERMISSION. ALL RIGHTS RESERVED. THE
CHART ILLUSTRATES THE HISTORICAL YIELD OF THE LONG-TERM U.S. TREASURY BOND FROM
1926-1998. YIELDS REPRESENT THAT OF AN ANNUALLY RENEWED ONE-BOND PORTFOLIO WITH
A REMAINING MATURITY OF APPROXIMATELY 20 YEARS. THIS CHART IS FOR ILLUSTRATIVE
PURPOSES AND SHOULD NOT BE CONSTRUED TO REPRESENT THE YIELDS OF ANY PRUDENTIAL
MUTUAL FUND.
I-4
<PAGE>
APPENDIX II--GENERAL INVESTMENT INFORMATION
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns, while
enabling investors to work toward their financial goal(s). Asset allocation is
also a strategy to gain exposure to better performing asset classes while
maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.
II-1
<PAGE>
APPENDIX III--INFORMATION RELATING TO PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "How the Fund is Managed--Fund Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1997 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC(1) are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1996. Principal products and services include life and health insurance, other
healthcare products, property and casualty insurance, securities brokerage,
asset management, investment advisory services and real estate brokerage.
Prudential (together with its subsidiaries) employs more than 79,000 persons
worldwide, and maintains a sales force of approximately 11,500 agents and 6,400
financial advisors. Prudential is a major issuer of annuities, including
variable annuities. Prudential seeks to develop innovative products and services
to meet consumer needs in each of its business areas. Prudential uses the Rock
of Gibraltar as its symbol. The Prudential rock is a recognized brand name
throughout the world.
INSURANCE. Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to nearly 50 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of life insurance, Prudential has 25 million life insurance
policies in force today with a face value of $1 trillion. Prudential has the
largest capital base ($12.1 billion) of any life insurance company in the United
States. Prudential provides auto insurance for more than 1.6 million cars and
insures approximately 1.2 million homes.
MONEY MANAGEMENT. The Prudential is one of the largest pension fund
managers in the country, providing pension services to 1 in 3 Fortune 500 firms.
It manages $36 billion of individual retirement plan assets, such as 401(k)
plans. As of December 31, 1997, Prudential had more than $370 billion in assets
under management. Prudential's Investments, a business group of Prudential (of
which Prudential Mutual Funds is a key part) manages over $211 billion in assets
of institutions and individuals. In Individual Investor, July 1998, Prudential
was ranked eighth in terms of total assets under management as of December 31,
1997.
REAL ESTATE. The Prudential Real Estate Affiliates, is one of the leading
real estate residential and commercial brokerage networks in the North America
and has more than 37,000 real estate brokers and agents and with over 1,400
offices across the United States.(2)
HEALTHCARE. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.6
million Americans receive healthcare from a Prudential managed care
membership.(3)
FINANCIAL SERVICES. The Prudential Bank (FSB), a wholly-owned subsidiary of
Prudential, has nearly $1 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of November 30, 1998, Prudential Investments Fund Management LLC was the
eighteenth largest mutual fund company in the country, with over 2.5 million
shareholders invested in more than 50 mutual fund portfolios and variable
annuities with more than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
THE WALL STREET JOURNAL, THE NEW YORK TIMES, BARRON'S and USA TODAY.
- ----------
(1) PIC serves as the Subadviser to substantially all of the Prudential Mutual
Funds. Wellington Management Company serves as the subadviser to Global Utility
Fund, Inc., Nicholas-Applegate Capital Management as the subadviser to
Nicholas-Applegate Fund, Inc., Jennison Associates Capital Corp. as the
subadviser to Prudential Jennison Series Fund, Inc. and Mercater Asset
Management L.P. as the Subadviser to International Stock Series, a portfolio of
Prudential World Fund, Inc. There are multiple subadvisers for The Target
Portfolio Trust.
(2) As of December 31, 1997.
(3) On December 10, 1998, Prudential announced its intention to sell Prudential
Health Care to Aetna, Inc. for $1 billion.
III-1
<PAGE>
EQUITY FUNDS. Prudential Equity Fund is managed with a "value" investment
style by PIC. In 1995, Prudential Securities introduced Prudential Jennison
Growth Fund, a growth-style equity fund managed by Jennison Associates Capital
Corp., a premier institutional equity manager and a subsidiary of Prudential.
HIGH YIELD FUNDS. Investing in high-yield bonds is a complex and research
intensive pursuit. A separate team of high-yield bond analysts monitor
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high-yield
bonds, which may be considered for purchase.(4) Non-investment grade bonds, also
known as junk bonds or high-yield bonds, are subject to a greater risk of loss
of principal and interest including default risk than higher-rated bonds.
Prudential high-yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Investment grade bond analysts monitor the financial
viability of different bond issuers in the investment grade corporate and
municipal bond markets--from IBM to small municipalities, such as Rockaway
Township, New Jersey. These analysts consider among other things sinking fund
provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from PULP AND PAPER FORECASTER to WOMEN'S
WEAR DAILY--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential mutual
fund.
Prudential Mutual Funds trades billions in U.S. and foreign government
securities a year. PIC seeks information from government policy makers.
Prudential's portfolio managers met with several senior U.S. and foreign
government officials, on issues ranging from economic conditions in foreign
countries to the viability of index-linked securities in the United States.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
Annuities. As of December 31, 1998, assets held by Prudential Securities for its
clients approximated $268 billion. During 1998, over 31,000 new customer
accounts were opened each month at Prudential Securities.(5)
Prudential Securities has a two-year Financial Advisor training program
plus advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment and financial
planning areas.
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architects/Financial Advisers(SM) to evaluate a client's objectives
and overall financial plan, and a comprehensive mutual fund information and
analysis system that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ----------
(4) As of December 31, 1997. The number of bonds and the size of the Fund are
subject to change.
(5) As of December 31, 1998.
III-2
<PAGE>
Prudential Mutual Funds
---------------------------------------------
SUPPLEMENT TO STATEMENT OF ADDITIONAL INFORMATION
DATED JULY 23, 1999
Purchase, Redemption and Pricing of Fund Shares
The section entitled "Purchase, Redemption and Pricing of Fund Shares"
is amended as follows:
The first five paragraphs under "Reduction and Waiver of Initial
Sales Charge--Class A Shares" are amended to read in Their entirety as
follows:
Benefit Plans. Certain group retirement and savings plans may
purchase Class A shares without the initial sales charge if they
meet the required minimum for amount of assets, average account
balance or number of eligible employees. For more information
about these requirements, call Prudential at (800) 353-2847.
The following is added after the end of the first paragraph under
"Reduction and Waiver of Initial Sales Charge--Class A Shares--Other
Waivers":
Class A shares may also be purchased at NAV by members of the
Board of Directors of The Prudential Insurance Company of America.
Broker-dealers, investment advisers or financial planners
sponsoring fee-based programs (such as mutual fund "wrap" or asset
allocation programs and mutual fund "supermarket" programs) may offer
their clients more than one class of shares in the Fund(s) in
connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other
fees charged by these programs in connection with investing in each
available share class before selecting a share class.
The section entitled "Reduction and Waiver of Initial Sales
Charge Class A Shares--Letters of Intent" is amended as follows:
<PAGE>
Retirement and group plans no longer qualify to purchase Class A
shares at NAV by entering into a Letter of Intent. All references to
"Participant Letters of Intent" are hereby deleted.
The first two paragraphs under "Waiver of Initial Sales Charge--Class
C Shares" are amended to read in their entirety as follows (not applicable
to Prudential Government Securities Trust):
Benefit Plans. Certain group retirement plans may purchase Class C
shares without the initial sales charge. For more information, call
Prudential at (800) 353-2847.
The first two paragraphs under "Class Z Shares" are amended to read in
their entirety as follows (not applicable to Prudential Distressed
Securities Fund, Inc.):
Benefit Plans. Certain group retirement plans may purchase Class Z
shares if they meet the required minimum for amount of assets, average
account balance or number of eligible employees. For more information
about these requirements, call Prudential at (800) 353-2847.
Mutual Fund Programs. Class Z shares can also be purchased by
participants in any fee-based program or trust program sponsored by
Prudential or an affiliate that includes the Fund(s) as an available
option. Class Z shares can also be purchased by investors in certain
programs sponsored by broker-dealers, investment advisers and
financial planners who have agreements with Prudential Investments
Advisory Group relating to;
o Mutual fund "wrap" or asset allocation programs, where the
sponsor places Fund trades, links its clients' accounts to a
master account in the sponsor's name and charges its clients a
management, consulting or other fee for Its services; or
o Mutual fund "supermarket" programs, whom The sponsor links its
clients' accounts to a master account in the sponsor's name and
the sponsor charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring
these mutual fund programs may offer their clients more than one class of
shares in the Fund(s) in connection with different pricing options for
their programs. Investors should consider carefully any separate
transaction and other fees charged by these programs in connection with
investing in each available share class before selecting a share class.
<PAGE>
Other Types of Investors. Class Z shares are also available for
purchase by the following categories of investors:
o Certain participants in the MEDLEY Program (group variable
annuity contracts) sponsored by Prudential for whom Class Z
shares of the Prudential mutual funds are an available investment
option;
o Current and former Directors/Trustees of the Prudential mutual
funds (including the Fund/Company); and
o Prudential, with an investment of $10 million or more.
The second and third paragraphs under "Sale of Shares--Waiver of Contingent
Deferred Sales Charge--Class B Shares" are amended to read in their entirety as
follows (not applicable to Prudential Government Securities Trust):
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. For more information, call Prudential
at (800) 353-2847.
The section entitled "Sale of Shares--Waiver of Contingent Deferred
Sales Charge--Class C Shares" is amended to read in its entirety as follows
(not applicable to Prudential Government Securities Trust):
Benefit Plans. The CDSC Will be waived for redemptions by certain
group retirement plans for which Prudential or brokers not affiliated
with Prudential provide administrative or recordkeeping services. The
CDSC will also be waived for certain redemptions by benefit plans
sponsored by Prudential and its affiliates. For more information, call
Prudential at (800) 353-2847.
Listed below are the names of the Prudential mutual funds and the date
of each Statement of Additional Information (SAI) to which this supplement
relates.
Name of Fund SAI Date
------------ --------
Nicholas-Applegate Fund, Inc. March 15, 1999
Prudential Distressed Securities Fund, Inc. February 5, 1999
Prudential Diversified Bond Fund, Inc. March 2, 1999
Prudential Emerging Growth Fund, Inc. January 14, 1999
Prudential Equity Fund, Inc. March 1, 1999
Prudential Equity Income Fund January 14, 1999
<PAGE>
Name of Fund SAI Date
------------ --------
Prudential Global Limited Maturity Fund, Inc. January 22, 1999
Prudential Government Income Fund, Inc. May 18, 1999
Prudential High Yield Fund, Inc. March 3, 1999
Prudential High Yield Total Return Fund, Inc. June 1, 1999
Prudential Intermediate Global Income Fund, Inc. March 16, 1999
Prudential International Bond Fund, Inc. March 16, 1999
Prudential Mid-Cap Value Fund April 28, 1999
Prudential Pacific Growth Fund, Inc. February 25, 1999
Prudential Real Estate Securities Fund June 2, 1999
Prudential Sector Funds, Inc. May 20, 1999
Prudential Financial Services Fund
Prudential Health Sciences Fund
Prudential Technology Fund
Prudential Utility Fund
Prudential Small-Cap Quantum Fund, Inc. May 27, 1999
Prudential Structured Maturity Fund, Inc. March 1, 1999
Prudential Tax-Managed Equity Fund January 20, 1999
Prudential World Fund, Inc. January 20, 1999
Global Series
International Stock Series
Prudential 20/20 Focus Fund April 26, 1999
The Global Total Return Fund, Inc. March 1, 1999
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark. NJ07102-4077
(800) 225-1852
http://www.prudential.com
Prudential Distressed Securities Fund, Inc.
[PICTURE APPEARS HERE]
ANNUAL REPORT
Nov. 30, 1998
Directors
Edward D. Beach
Delayne Dedrick Gold
Robert F. Gunia
Douglas H. McCorkindale
Mendel A. Melzer, CFA
Thomas T. Mooney
Stephen P. Munn
Richard A. Redeker
Robin B. Smith
Brian M. Storms
Louis A. Weil, III
Clay T. Whitehead
Officers
Brian M. Storms, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
Marguerite E.H. Morrison, Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07102-3777
Distributor
Prudential Investment Management Services LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
The views expressed in this report and information about the Fund's portfolio
holdings are for the period covered by this report and are subject to change
thereafter.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
[LOGO OF PRUDENTIAL INVESTMENTS APPEARS HERE]
<PAGE>
Prudential Distressed Securities Fund, Inc.
Performance At A Glance.
During the year ended November 30, 1998, investors grew increasingly worried
that a global financial crisis might derail the U.S. economic expansion. The
financial contagion spread beyond Asia in the summer, sparking a dramatic sell-
off in stocks and riskier bonds. Prices of some securities began to rebound in
mid-October after the Federal Reserve took steps to protect U.S. economic
growth. But the Prudential Distressed Securities Fund held lower-quality, high-
yield bonds and small-company stocks whose prices did not recover. Losses on
these positions caused the Fund to post negative returns for the fiscal year,
while the average capital appreciation fund, as measured by Lipper, Inc.,
appreciated in value.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
One Since
Year Inception/2/
---------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Class A -13.19%(-16.12%) 8.92%(1.00%)
Total
Returns/1/ Class B -13.90 (-16.81) 6.74(-2.97)
As of 11/30/98
Class C -13.90 (-16.81) 6.74(-2.97)
Lipper Capital
Appreciation Fund Avg./3/ 8.48 39.28
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
One Since
Year Inception/2/
---------------------------------------------------------------
<S> <C> <C> <C>
Average Class A -19.62%(-22.54%) 0.54%(-3.25%)
Annual
Total Class B -21.11 (-24.15) 0.58 (-3.33)
Returns/1/
As of 12/31/98 Class C -17.94 (-20.95) 1.28 (-2.54)
- --------------------------------------------------------------------------------
</TABLE>
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
/1/ Source: Prudential Investments Fund Management and Lipper, Inc. The
cumulative total returns do not take into account sales charges. The average
annual total returns do take into account applicable sales charges. The Fund
charges a maximum front-end sales load of 5% for Class A shares. Class B shares
are subject to a declining contingent deferred sales charge (CDSC) of 5%, 4%,
3%, 2%, 1% and 1% for six years. Class B shares will automatically convert to
Class A shares, on a quarterly basis, approximately seven years after purchase.
Class C shares are subject to a front-end sales load of 1% and a CDSC of 1% for
18 months. Class C shares bought before November 2, 1998 have a 1% CDSC if sold
within one year. Without waiver of management fees and/or expense subsidization,
the Fund's cumulative and average annual total returns would have been lower, as
indicated in parentheses ( ).
/2/ Inception date: Class A, B, and C, 3/26/96.
/3/ Lipper average returns are for all funds in each share class for the one-
year and since inception periods in the Capital Appreciation Fund category.
[BAR CHART APPEARS HERE]
How Investments Compared.
(As of 11/30/98)
Source: Lipper, Inc. Financial markets change, so a mutual fund's past
performance should never be used to predict future results. The risks to each of
the investments listed above are different -- we provide 12-month total returns
for several Lipper mutual fund categories to show you that reaching for higher
yields means tolerating more risk. The greater the risk, the larger the
potential reward or loss. In addition, we've included historical 20-year average
annual returns. These returns assume the reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors have received higher
historical total returns from stocks than from most other investments. Smaller
capitalization stocks offer greater potential for long-term growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds, which can help smooth
out their total returns year by year. But their prices still fluctuate
(sometimes significantly) and their returns have been historically lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by state governments, state
agencies and/or municipalities. This investment provides income that
is usually exempt from federal and
state income taxes.
U.S. Taxable Money Funds attempt to preserve a constant share value; they don't
fluctuate much in price but, historically, their returns have been generally
among the lowest of the major investment categories.
<PAGE>
George Edwards and Paul Price, Fund Managers
Portfolio [PICTURES OF GEORGE EDWARDS AND PAUL PRICE APPEAR HERE]
Managers'
Report
A Volatile Year
For investors in distressed securities, the fiscal year proved highly volatile.
The Fund produced positive double-digit returns for the first half of the year,
but the tide turned in the second half as a deepening global financial crisis
prompted investors to sell riskier assets and purchase "safe haven" securities
such as U.S. Treasuries.
The Prudential Distressed Securities Fund seeks capital appreciation by
investing in stocks and bonds of companies with operational or financial
difficulties. Some of these companies may be in default or bankruptcy. The Fund
will purchase securities that we believe are undervalued or temporarily out of
favor relative to the long-term appreciation we expect. Investment in these
types of securities may be considered speculative. As a result, the Fund will
assume greater risk than other Prudential mutual funds. There can be no
assurance that the Fund will achieve its investment objective.
Market Perspective.
- --------------------------------------------------------------------------------
For investors in distressed securities, the fiscal year first presented golden
opportunities, then daunting challenges. The U.S. economy grew rapidly in the
final months of 1997 and picked up speed in the first quarter of 1998. Heavy
spending by consumers on goods and services and by corporations building up
their inventories powered economic growth, while declining prices for oil and
other commodities kept inflation in check.
Under these nearly ideal economic conditions, investors drove prices of the
lowest-quality bonds and small- capitalization stocks higher in the first half
of 1998. However, investor sentiment shifted at midyear. Small-caps fell out of
favor in late spring, and there were few buyers for many of these stocks.
By summer, investors were growing increasingly worried that the financial crisis
in Asia would spread to other regions, including the United States. Their worst
fears seemed to come true in August as the financial whirlwind slammed into
Russia, causing that nation's government to effectively devalue its currency and
default on some of its ruble-denominated debt securities. The Russian debacle
gave rise to speculation that Brazil was next in line. In late summer, investors
began to dump riskier assets and purchase U.S. Treasuries and the government
securities of Western European nations for their relative safety. Many hedge
funds that actively participate in the domestic distressed securities market
suffered sharp losses.
In response to these volatile market conditions, the Federal Reserve moved
aggressively. It cut the Federal funds rate (what banks charge each other for
overnight loans) by a quarter percentage point on September 29, October 15, and
November 17, leaving the key short-term rate at 4.75%.
The Fed's decisive actions reassured investors that the U.S. economic expansion
would remain on track. As a result, many buyers returned to the financial
markets, focusing on large-company stocks and growth equities. In the fixed-
income market, the spread, or difference between yields, on investment-grade
corporate bonds and Treasuries shrank. However, spreads on junk bonds remained
at historically high levels. Furthermore, the strong recovery in the prices of
better-quality bonds and large-company stocks did not occur in small-cap value
stocks or distressed bonds.
<PAGE>
Comparing A $10,000 Investment. Prudential Distressed
------------------------------
Securities Fund, Inc.
Prudential Distressed Securities Fund, Inc. vs.
the Lehman Brothers High Yield Bond Index -- Lehman Brothers
High Yield Bond Index
Average Annual Total [CHART APPEARS HERE]
Returns - Class A
-----------------------
With Sales Load
1.28% Since Inception (-2.26%)
-17.53% for One Year (-20.32%)
Without Sales Load $12,554
3.24% Since Inception (0.37%)
-13.19% for One Year (-16.12%) $10,348
3/26/96 11/30/98
- --------------------------------------------------------------------------------
Average Annual Total [CHART APPEARS HERE]
Returns - Class B
- -----------------------
With Sales Load
1.38% Since Inception (-2.27%)
-18.90% for One Year (-21.81%)
Without Sales Load $12,554
2.46% Since Inception (-1.12%)
-13.90% for One Year (-16.81%) $10,374
3/26/96 11/30/98
- --------------------------------------------------------------------------------
Average Annual Total [CHART APPEARS HERE]
Returns - Class C
- ----------------------
With Sales Load
2.08% Since Inception (-1.49%)
-15.76% for One Year (-18.64%)
Without Sales Load $12,554
2.08% Since Inception (-1.12%)
-13.90% for One Year (-16.81%) $10,568
3/26/96 11/30/98
- --------------------------------------------------------------------------------
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in the Prudential Distressed Securities Fund, Inc.
(Class A, B, and C shares) with a similar investment in the Lehman Brothers High
Yield Bond Index by portraying the initial account values at the commencement of
operations of each share class, and subsequent account values at the end of each
fiscal year (November 30), as measured on a quarterly basis, beginning in 1996
for Class A, B, and C shares. For purposes of the graphs, and unless otherwise
indicated in the accompanying tables, it has been assumed (a) that the maximum
applicable front-end sales load was deducted from the initial $10,000 investment
in Class A shares; (b) the maximum applicable contingent deferred sales charges
were deducted from the value of the investment in Class B and Class C shares,
assuming full redemption on November 30, 1998; (c) beginning November 2, 1998,
Class C shares are subject to a front-end sales load of 1% and a CDSC of 1% for
18 months; (d) all recurring fees (including management fees) were deducted; and
(e) all dividends and distributions were reinvested. Class B shares will
automatically convert to Class A shares, on a quarterly basis, approximately
seven years after purchase. This conversion feature is not reflected in the
graphs. Without waiver of management fees and/or expense subsidization, the
Fund's average annual total returns would have been lower, as indicated in
parentheses ( ).
The Lehman Brothers High Yield Bond Index is a weighted index that covers the
universe of fixed-rate, noninvestment-grade debt. The securities must be
dollar-denominated and nonconvertible and have at least one year remaining to
maturity and an outstanding par value of at least $100 million. The Lehman
Brothers High Yield Bond Index is an unmanaged index and the total returns
include the reinvestment of all dividends, but do not reflect the payment of
transaction costs and advisory fees associated with an investment in the Fund.
The securities held in the Index may differ substantially from those held by the
Fund. This index is not the only one that may be used to characterize
performance of equity and/or bond funds, and other indexes may portray different
comparative performance. Investors cannot invest directly in an index.
<PAGE>
What Went Well
- --------------------------------------------------------------------------------
A Good First Half.
The Fund produced double-digit returns for the first half of the fiscal year by
focusing on later- stage distressed securities, which are bonds and stocks of
corporations that announced plans to file for bankruptcy restructuring.
Investing at a later stage of the reorganization process allowed us to judge
more accurately a company's business prospects and financial standing. Among our
good picks were Casino Magic bonds, which rallied following news of a planned
merger with Hollywood Park, a gaming and entertainment holding company. We sold
our position at a considerable profit in the spring.
Five Largest Issuers.
6.4% Waste Systems
International, Inc.
Waste Management
5.7% The Grand Union Co.
Retail
5.3% Dr. Pepper Bottling
Holdings, Inc.
Beverages
4.2% Firearms Training
Systems, Inc.
Interactive Software
3.8% Anker Coal Group, Inc.
Mining.
Expressed as a percentage of net assets as of 11/30/98.
And Not So Well.
- --------------------------------------------------------------------------------
Then A Difficult Finish.
After global financial markets went into a tailspin in August, investors showed
a strong preference for large-company stocks along with government securities.
Of course this "flight-to-quality" trend hurt the performance of portfolios
(including the Fund) that invested in lower-quality securities.
To add insult to injury, the Fund has exposure to extremely speculative debt
securities whose prices typically recover very slowly after a sharp sell-off.
For example, 17% of the Fund's total investments were in high-yield (junk) bonds
rated Ca or lower as of November 30, 1998. Bonds of comparable credit quality
returned a negative 16.12% for the fiscal year, based on the Lehman Brothers
High Yield Bond Index.
Similarly, the Russell 2000 Index, which tracks small-company stocks, declined
more than 6.62% for the 12-month period. Although prices of small-caps began to
rebound late in the fiscal year, they did not erase the dramatic losses of the
summer. This poor performance hurt Fund returns as small-caps comprised roughly
50% of net assets as of November 30, 1998.
[PIE CHART APPEARS HERE]
Looking Ahead.
- --------------------------------------------------------------------------------
We believe some of the bonds in the distressed securities market that are
trading at prices sharply below their maturity values represent good buying
opportunities. Therefore, we plan to shift more of the Fund's holdings out of
stocks into bonds.
- --------------------------------------------------------------------------------
1
<PAGE>
President's Letter January 26, 1999
- --------------------------------------------------------------------------------
[PICTURE APPEARS HERE]
Dear Shareholder:
Many major market indexes ended 1998 on the upswing -- posting an unprecedented
fourth consecutive year of double-digit returns -- as many stocks rebounded off
their early October lows. Bond investors were also cheered by healthy returns on
U.S. Treasuries and investment-grade corporate debt, as well as certain Western
European bonds.
Unfortunately, the equity market's advance was neither broad nor deep. It was
limited primarily to stocks of larger companies with established records of
growth. Investors ignored the stocks of both undervalued companies and smaller
companies in a "flight to quality" stemming from financial turmoil in Asia and
fears of a recession in the United States. Accordingly, growth-style investors
in large-company stocks outperformed value-style investors by the widest margins
in nearly 24 years -- and not since the Great Depression have large-company
stocks so outperformed stocks of small companies.
What We Can Learn From '98
The volatility of 1998 underscores points all investors should keep in mind:
Financial markets will rise and fall, sometimes dramatically. Because asset
classes seldom move in lockstep, owning a mix of value- and growth-oriented
mutual funds in addition to bond and money market funds can help lessen the
effects of market volatility.
Generally speaking, long-term success in investment management comes from
remaining true to an investment discipline -- even when it is out of favor.
Investors who maintain a long-term perspective and don't sell during market lows
are more likely to regain lost ground, and while past events cannot foretell
future performance, stocks and bonds have produced attractive returns ahead of
inflation over time.
Thank you for your continued confidence in Prudential mutual funds.
Sincerely,
/s/ Brian M. Storms
Brian M. Storms
President
- --------------------------------------------------------------------------------
2
<PAGE>
Portfolio of Investments as of PRUDENTIAL DISTRESSED SECURITIES
November 30, 1998 FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--99.9%
COMMON STOCKS(c)--42.8%
- ------------------------------------------------------------
Aerospace--3.6%
25,000 Ladish Company, Inc. $ 250,000
- ------------------------------------------------------------
Beverages--5.4%
12,500 Dr. Pepper Bottling Holdings, Inc. 375,000
- ------------------------------------------------------------
Building & Related Industries--1.1%
4,750 EMCOR Group, Inc. 77,781
- ------------------------------------------------------------
Casinos--2.2%
30,000 Alliance Gaming Corp. 76,875
20,357 Isle of Capri Casinos, Inc. 66,160
2,000 Nevada Gold & Casinos, Inc. 9,750
------------
152,785
- ------------------------------------------------------------
Consumer Goods & Services--4.4%
1,400 Coinstar, Inc. 8,925
122,000 Firearms Training Systems, Inc. 297,375
------------
306,300
- ------------------------------------------------------------
Electronics--2.2%
50,000 Electronic Retailing Systems
International, Inc. 150,000
- ------------------------------------------------------------
Energy--3.2%
29,000 Baycorp Holdings, Ltd. 137,750
28,675 Grant Geophysical, Inc. 86,025
------------
223,775
Food Serving - Fast Foods
50 AmeriKing, Inc. $ 2,000
- ------------------------------------------------------------
Health Services--1.6%
60,000 Unilab Corp. 108,750
- ------------------------------------------------------------
Media--0.9%
8,400 Paxson Communications Corp. 60,900
- ------------------------------------------------------------
Retail--10.4%
6,642 Edison Building LLC(b)
(cost $13,555; purchased 4/30/97) 1
32,751 Grand Union Co. 403,247
5,000 Homeland Holding Corp. 18,125
7,000 Musicland Stores Corp. 118,563
23,750 Samuels Jewelers, Inc. 115,781
50,839 Today's Man, Inc. 71,492
------------
727,209
- ------------------------------------------------------------
Telecommunications--1.1%
250 Jordan Telecommunications Products 50,000
5,000 PageMart Wireless, Inc., Class A 30,000
115 Scott Cable Communications, Inc. 0
------------
80,000
- ------------------------------------------------------------
Textiles & Apparel--0.2%
13,304 Forstmann & Co., Inc. 14,135
- ------------------------------------------------------------
Waste Management--6.5%
78,260 Waste Systems International, Inc. 449,995
------------
Total common stocks
(cost $3,301,298) 2,978,630
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 3
<PAGE>
Portfolio of Investments as of PRUDENTIAL DISTRESSED SECURITIES
November 30, 1998 FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
PREFERRED STOCKS--4.0%
- ------------------------------------------------------------
Metals--0.1%
2,000 Geneva Steel Co.,(c)
Conv. Exch.,14.00%, Ser. B $ 6,000
- ------------------------------------------------------------
Telecommunications--3.9%
250 Jordan Telecommunication
Products,(c)
Conv. Exch., 13.25%, Ser. B 250,000
500 NEXTLINK Communications, Inc.
Conv. Exch., 6.50% 22,000
------------
272,000
------------
Total preferred stocks
(cost $464,500) 278,000
------------
WARRANTS(c)
Units
- ------------
- ------------------------------------------------------------
Building & Related Industries
960 ICF Kaiser International, Inc.,
expiring 12/31/98 0
- ------------------------------------------------------------
Casinos
2,968 Isle of Capri Casinos, Inc.,
expiring 3/5/01 149
- ------------------------------------------------------------
Communications
50 ICO Global Communications, Inc.,
expiring 8/1/05 0
- ------------------------------------------------------------
Recreation
250 TVN Entertainment Corp.,
expiring 8/1/08 0
- ------------------------------------------------------------
Telecommunications
500 People's Choice TV Corp.,
expiring 6/1/00 0
------------
Total warrants
(cost $0) 149
------------
</TABLE>
Portfolio of Investments as of PRUDENTIAL DISTRESSED SECURITIES
November 30, 1998 FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
- ------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS--52.3%
- ------------------------------------------------------------
Air Transportation--1.1%
Caa2 $ 100 Canadian Airlines Corp.,
Sr. Notes,
12.25%, 8/1/06 $ 75,000
- ------------------------------------------------------------
Building & Related Industries--13.4%
B2 250 Clean Harbors, Inc.,(b)
Sr. Notes,
12.50%, 5/15/01
(cost $225,079; purchased
6/24/96) 212,500
Caa 300 DeGeorge Home Alliance,
Inc.,(b)
Sr. Notes,
12.00%, 4/1/01
(cost $264,009; purchased
2/3/97) 240,000
Caa1 225 Hechinger Co.,
Sr Notes,
6.95%, 10/15/03 146,250
B3 250 ICF Kaiser International,
Inc.,
Sr. Sub. Notes,
13.00%, 12/31/03 117,500
B3 250 The Presley Companies,
Sr. Notes,
12.50%, 7/1/01 218,750
----------
935,000
- ------------------------------------------------------------
Casinos--3.4%
Caa 250 Santa Fe Hotel, Inc.,
First Mortgage Notes,
11.00%, 12/15/00 240,000
- ------------------------------------------------------------
Communications--0.5%
B3 50 ICO Global Communications
Holdings,
Sr. Notes,
15.00%, 8/1/05 38,500
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 4
<PAGE>
PRUDENTIAL
Portfolio of Investments as of PRUDENTIAL DISTRESSED SECURITIES
November 30, 1998 FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
- ------------------------------------------------------------
<S> <C> <C> <C>
Consumer Goods--2.4%
B3 $ 200 Syratech Corp.,(b)
Sr. Notes,
11.00%, 4/15/07
(cost $175,083; purchased
3/20/98) $ 165,000
- ------------------------------------------------------------
Consumer Goods & Services--5.0%
NR 50 Coinstar, Inc.,
Sr. Disc. Notes,
Zero Coupon (until 10/1/99),
13.00%, 10/1/06 41,500
Caa2 300 Color Spot Nurseries,
Sr. Sub. Notes,
10.50%, 12/15/07 180,000
B3 340(d) Grupo Azucarero Mexico S.A.,
Sr. Notes (Mexico),
11.50%, 1/15/05 125,800
----------
347,300
- ------------------------------------------------------------
Food & Beverage--1.1%
Ca 250 Specialty Foods Acquisition
Corp.,
Sr. Sec'd. Disc. Deb., Ser.
B
Zero Coupon (until 8/15/99),
13.00%, 8/15/05 10,000
Caa 150 Sr. Sub. Notes, Ser. B
11.25%, 8/15/03 63,750
----------
73,750
- ------------------------------------------------------------
Health Care--3.2%
B2 250 Sun Healthcare Group, Inc.,
Sr. Sub. Notes,
9.50%, 7/1/07 221,250
- ------------------------------------------------------------
Mining--3.9%
B3 500 Anker Coal Group, Inc.,
Sr. Notes,
9.75%, 10/1/07 270,000
Packaging--3.2%
NR $ 284 Packaging Resources, Inc.,
Sr. Notes,
13.00%, 6/30/03 $ 221,174
- ------------------------------------------------------------
Recreation--3.0%
NR 250 TVN Entertainment Corp.,
Sr. Notes,
14.00%, 8/1/08 212,500
- ------------------------------------------------------------
Retail--4.1%
NR 77 Edison Brothers Stores
Inc.(a)
Sr. Notes,
11.00%, 9/26/07 30,800
B1 250 Speedy Muffler King, Inc.,(b)
Sr. Notes,
10.875%, 10/1/06
(cost $221,074; purchased
5/22/98) 255,000
----------
285,800
- ------------------------------------------------------------
Telecommunications--3.5%
Ca 500 People's Choice TV Corp.,
Sr. Disc. Notes,
Zero Coupon (until 6/1/00),
13.125%, 6/1/04 105,000
Scott Cable Communications,
Inc.,
NR 18 Jr. Sub. PIK Notes,
16%, 7/18/02 3,624
NR 115 15%, 3/18/02 133,630
----------
242,254
- ------------------------------------------------------------
Trucking & Shipping--1.7%
B3 250 TRISM, Inc.,
Sr. Sub. Notes,
10.75%, 12/15/00 117,500
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5
<PAGE>
Portfolio of Investments as of PRUDENTIAL DISTRESSED SECURITIES
November 30, 1998 FUND, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
- ------------------------------------------------------------
<S> <C> <C> <C>
Utilities--2.8%
Caa $ 250 Empire Gas Corp.,
Sr. Sec'd. Notes,
7.00% (until 7/15/99),
12.875%, 7/15/04 $ 195,000
----------
Total corporate bonds
(cost $4,280,080) 3,640,028
----------
TRADE CLAIMS--0.8%
- ------------------------------------------------------------
Retail
NR 284 Montgomery Ward Trade
Claim(c),
expires 1/1/49
(cost $99,312) 53,912
----------
- ------------------------------------------------------------
Total Investments--99.9%
(cost $8,145,190; Note 4) 6,950,719
Other assets in excess of
liabilities--0.1% 8,093
----------
Net Assets--100% $6,958,812
==========
</TABLE>
- ---------------
(a) Represents issuer in default on interest payments; non-income producing
security.
(b) Indicates a restricted security; the aggregate cost of such securities is
$898,800. The aggregate value ($872,501) is approximately 12.4% of net
assets.
(c) Non-income producing securities.
(d) US$ Denominated Foreign Bond.
NR--Not rated by Moody's or Standard & Poor's.
PIK--Payment in kind securities.
The Fund's current prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 6
<PAGE>
PRUDENTIAL DISTRESSED SECURITIES
Statement of Assets and Liabilities FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets November 30, 1998
<S> <C>
Investments, at value (cost $8,145,190)................................................................. $ 6,950,719
Interest receivable..................................................................................... 149,186
Receivable for investments sold......................................................................... 99,437
Deferred expenses and other assets...................................................................... 36,286
Due from Manager........................................................................................ 24,885
-----------------
Total assets......................................................................................... 7,260,513
-----------------
Liabilities
Payable for investments purchased....................................................................... 116,988
Accrued expenses........................................................................................ 74,116
Bank overdraft.......................................................................................... 69,723
Payable for Fund shares reacquired...................................................................... 36,684
Distribution fee payable................................................................................ 4,190
-----------------
Total liabilities.................................................................................... 301,701
-----------------
Net Assets.............................................................................................. $ 6,958,812
=================
Net assets were comprised of:
Common stock, at par................................................................................. $ 601
Paid-in capital in excess of par..................................................................... 8,075,393
-----------------
8,075,994
Accumulated net realized gain on investments......................................................... 77,289
Net unrealized depreciation on investments........................................................... (1,194,471)
-----------------
Net assets, November 30, 1998........................................................................... $ 6,958,812
=================
Class A:
Net asset value and redemption price per share
($2,629,125 / 227,198 shares of common stock issued and outstanding).............................. $11.57
Maximum sales charge (5% of offering price).......................................................... .61
-----------------
Maximum offering price to public..................................................................... $12.18
=================
Class B:
Net asset value, offering price and redemption price per share
($3,476,978 / 300,272 shares of common stock issued and outstanding).............................. $11.58
=================
Class C:
Net asset value, and redemption price per share
($852,709 / 73,679 shares of common stock issued and outstanding)................................. $11.57
Sales charge (1% of offering price).................................................................. .12
-----------------
Offering price to public............................................................................. $11.69
=================
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7
<PAGE>
PRUDENTIAL DISTRESSED
SECURITIES FUND, INC.
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
Net Investment Income November 30, 1998
<S> <C>
Income
Interest.............................. $ 595,794
Dividends............................. 14,200
-----------------
609,994
-----------------
Expenses
Management fee........................ 64,913
Distribution fee--Class A............. 6,957
Distribution fee--Class B............. 48,617
Distribution fee--Class C............. 10,106
Custodian's fees and expenses......... 95,000
Registration fees..................... 33,000
Legal fees and expenses............... 32,000
Reports to shareholders............... 30,000
Amortization of deferred
organizational..................... 21,663
Audit fees and expenses............... 20,000
Directors' fees and expenses.......... 11,000
Transfer agent's fees and expenses.... 8,500
Miscellaneous......................... 3,661
-----------------
Total expenses..................... 385,417
Less: expense reimbursement (Note
2)................................. (233,158)
-----------------
Net expenses....................... 152,259
-----------------
Net investment income.................... 457,735
-----------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain on investment
transactions.......................... 291,504
Net change in unrealized
appreciation/depreciation of
investments........................... (2,167,375)
-----------------
Net loss on investments.................. (1,875,871)
-----------------
Net Decrease in Net Assets
Resulting from Operations................ $(1,418,136)
=================
</TABLE>
PRUDENTIAL DISTRESSED
SECURITIES FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended November 30,
in Net Assets 1998 1997
<S> <C> <C>
Operations
Net investment income..... $ 457,735 $ 258,664
Net realized gain on
investments............ 291,504 465,952
Net change in unrealized
appreciation/depreciation
of investments......... (2,167,375) 1,413,109
----------------- -----------------
Net increase (decrease) in
net assets resulting
from operations........ (1,418,136) 2,137,725
----------------- -----------------
Dividends and distributions
(Note 1)
Dividends from net
investment income
Class A................... (254,266) (90,663)
Class B................... (376,002) (108,026)
Class C................... (81,439) (29,623)
----------------- -----------------
(711,707) (228,312)
----------------- -----------------
Distributions in excess of
net investment income
Class A................... (43,045) --
Class B................... (63,654) --
Class C................... (13,787) --
----------------- -----------------
(120,486) --
----------------- -----------------
Distributions from net
realized gains
Class A................... (26,850) --
Class B................... (59,158) --
Class C................... (11,798) --
----------------- -----------------
(97,806) --
----------------- -----------------
Fund share transactions (net
of share conversions)
(Note 5)
Net proceeds from shares
sold................... 3,402,960 909,156
Net asset value of shares
issued to shareholders
in reinvestment of
dividends and
distributions.......... 832,629 216,983
Cost of shares
reacquired............. (2,764,519) (5,475,625)
----------------- -----------------
Net increase (decrease) in
net assets from Fund
share transactions..... 1,471,070 (4,349,486)
----------------- -----------------
Total increase (decrease).... (877,065) (2,440,073)
Net Assets
Beginning of year............ 7,835,877 10,275,950
----------------- -----------------
End of year(a)............... $ 6,958,812 $ 7,835,877
================= =================
- ---------------
(a) Includes undistributed
net investment income
of........................ $ -- $ 253,972
================= =================
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 8
<PAGE>
PRUDENTIAL DISTRESSED SECURITIES
Notes to Financial Statements FUND, INC.
- --------------------------------------------------------------------------------
Prudential Distressed Securities Fund, Inc. (the 'Fund') is registered under the
Investment Company Act of 1940, as a diversified, open-end management company.
The Fund was incorporated in Maryland on November 30, 1995. The Fund had no
significant operations other than the issuance of 2,667 shares of Class A, 2,667
shares of Class B and 2,666 shares of Class C common stock for $100,000 on
February 8, 1996 to Prudential Investments Fund Management LLC ('PIFM').
Investment operations commenced on March 26, 1996.
The investment objective of the Fund is capital appreciation. The Fund seeks to
achieve this objective by investing primarily in debt and equity securities
issued by financially troubled or bankrupt companies (financially troubled
issuers) and in equity securities of companies that in the view of its
investment adviser are currently undervalued, out-of-favor or price-depressed
relative to their long-term potential for growth and income (operationally
troubled issuers). Securities of financially and operationally troubled issuers
are less liquid and more volatile than securities of companies not experiencing
financial difficulties. Investment in such securities may be considered
speculative and may present potential for substantial loss.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: Investments listed on a securities exchange are valued at
the last sales price on the day of valuation, or, if there was no sale on such
day, the mean between the last bid and asked prices on such day or at the bid
price in the absence of an asked price. Corporate bonds and U.S. Government
securities that are actively traded in the over-the-counter market are valued by
an independent pricing service. Convertible debt securities that are traded in
the over-the-counter market are valued at the mean between the most recently
quoted bid and asked prices provided by principal market makers. Debt and equity
securities issued in private placements shall be valued at the bid prices
provided by primary market dealers. Securities for which market quotations are
not available, other than private placements, shall each be valued at a price
supplied by an independent pricing agent. Options on stock and stock indices
traded on an exchange are valued at the mean between the most recently quoted
bid and asked prices provided by the exchange. Futures contracts and options
thereon are valued at the last sales price as of the close of business of the
exchange. Securities for which reliable market quotations are not available or
for which the pricing agent or principal market maker does not provide a
valuation will be valued at fair value determined in good faith by or under the
direction of the Board of Directors of the Fund.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians under triparty repurchase
agreements take possession of the underlying collateral securities, the value of
which exceeds the principal amount of the repurchase transaction, including
accrued interest. If the seller defaults and the value of the collateral
declines or if bankruptcy proceedings are commenced with respect to the seller
of the security, realization of the collateral by the Fund may be delayed or
limited.
The Fund may hold up to 15% of its net assets in illiquid securities, including
those which are restricted as to disposition under securities law ('restricted
securities'). None of the issues of restricted securities held by the Fund at
November 30, 1998 include registration rights under which the Fund may demand
registration by the issuer.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date; interest income is recorded on the accrual basis. The Fund
amortizes premiums and discounts paid on purchases of portfolio securities as
adjustments to interest income. Expenses are recorded on the accrual basis which
may require the use of certain estimates by management.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares of the Fund based
upon the relative proportion of net assets of each class at the beginning of the
day.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.
Dividends and Distributions: The Fund expects to pay dividends out of net
investment income and make distributions of any net capital gains, if any, at
least annually. Dividends and distributions are recorded on the ex-dividend
date.
- --------------------------------------------------------------------------------
9
<PAGE>
PRUDENTIAL DISTRESSED SECURITIES
Notes to Financial Statements FUND, INC.
- --------------------------------------------------------------------------------
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Deferred Organization Costs: The Fund incurred approximately $82,000 in
connection with the organization of the Fund. These costs were deferred and are
being amortized over a period of 60 months ending March 2001.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants (AICPA) Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income; Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to decrease accumulated net realized gains on investments by
$213,880, increase undistributed net investment income by $120,486 and increase
paid-in capital in excess of par by $93,394. This is a result of a
reclassification of distributions. Net investment income, net realized gains and
net assets were not affected by these changes.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with PIFM. Pursuant to this agreement, PIFM
has responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PIFM has entered into a subadvisory
agreement with The Prudential Investment Corporation ('PIC'), doing business as
Prudential Investments ('PI'); PI furnishes investment advisory services in
connection with the management of the Fund and is reimbursed by PIFM for its
reasonable cost and expenses incurred providing such services. The Fund bears
all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .75 of 1% of the average daily net assets of the Fund.
PIFM voluntarily agreed to reimburse the Fund in order to reduce total expenses
so as not to exceed 1.25%, 2.00% and 2.00% of the average daily net assets of
the Class A, Class B and Class C shares, respectively, on an annualized basis.
For the year ended November 30, 1998, such reimbursements amounted to $233,158
(2.69% of average net assets; $.38 per share for Class A, B and C shares).
The Fund had a distribution agreement with Prudential Securities Incorporated
('PSI'), which acted as the distributor of the Class A, Class B and Class C
shares of the Fund through May 31, 1998. Prudential Investment Management
Services LLC ('PIMS') became the distributor of the Fund effective June 1, 1998
and is serving the Fund under the same terms and conditions as under the
agreement with PSI. The Fund compensated PSI and PIMS for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the 'Class A, B and C Plans'), regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI and PIMS for
distribution related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net asset values of the Class A, B and C shares,
respectively. Such expenses under the Plans were .25 of 1%, 1% and 1% of the
average daily net assets of the Class A, Class B and Class C shares for the year
ended November, 30, 1998.
PSI and PIMS have advised the Fund that they have received approximately $22,000
in front-end sales charges resulting from sales of Class A and after November 2,
1998 Class C shares for the year ended November 30, 1998. From these fees, PSI
and PIMS paid such sales charges to dealers, which in turn paid commissions to
salespersons and incurred other distribution costs.
PSI and PIMS have advised the Fund that for the year ended November 30, 1998,
they received approximately $22,600 in contingent deferred sales charges imposed
upon redemptions by certain Class B and Class C shareholders.
PIFM, PIC, PIMS and PSI are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
'Funds'), has a credit agreement (the 'Agreement') with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement for the year ended
November 30, 1998. The Funds pay a commitment fee at an annual rate of .055 of
1% on the unused portion of the credit facility. The commitment fee is accrued
and paid quarterly on a pro rata basis by the Funds. The Agreement expired on
December 30, 1997 and has been extended through December 29, 1998 under the same
terms.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended November 30, 1998 the
Fund incurred fees of approximately $4,600 for the services of PMFS. As of
November 30, 1998, approximately $400 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.
- --------------------------------------------------------------------------------
10
<PAGE>
PRUDENTIAL DISTRESSED SECURITIES
Notes to Financial Statements FUND, INC.
- --------------------------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended November 30, 1998 were $16,362,654 and $15,042,920,
respectively.
The federal income tax basis of the Fund's investments at November 30, 1998 was
substantially the same as for financial reporting purposes and, accordingly, net
unrealized depreciation for federal income tax purposes was $1,194,471 (gross
unrealized appreciation--$821,195; gross unrealized depreciation--$2,015,666).
- ------------------------------------------------------------
Note 5. Capital
The Fund offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Prior to November 2, 1998, Class C shares
were sold with a contingent deferred sales charge of 1% during the first year.
Effective November 2, 1998, Class C shares are sold with a front-end sales
charge of 1% and a contingent deferred sales charge of 1% during the first 18
months. Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. A special exchange
privilege is also available for shareholders who qualify to purchase Class A
shares at net asset value.
On August 26, 1998, the Board of Directors of the Fund approved an amendment to
the Fund's Articles of Incorporation creating Class Z shares. There are 2
billion shares of $.001 par value common stock authorized divided into four
classes, designated Class A, Class B, Class C and Class Z, which each consist of
500 million authorized shares. At November 30, 1998, there were no Class Z
shares issued. Of the 601,149 shares of common stock issued and outstanding at
November 30, 1998, Prudential owned 20,726.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------- -------- -----------
<S> <C> <C>
Year ended November 30, 1998:
Shares sold.......................... 142,139 $ 2,290,931
Shares issued in reinvestment of
dividends
and distributions.................. 22,081 277,784
Shares reacquired.................... (68,517) (956,778)
-------- -----------
Net increase in shares outstanding
before conversion.................. 95,703 1,611,937
Shares issued upon conversion from
Class B............................ 1,381 21,582
-------- -----------
Net increase in shares outstanding... 97,084 $ 1,633,519
======== ===========
<CAPTION>
Class A Shares Amount
- ------------------------------------- -------- -----------
<S> <C> <C>
Year ended November 30, 1997:
Shares sold.......................... 28,654 $ 390,626
Shares issued in reinvestment of
dividends.......................... 7,185 84,009
Shares reacquired.................... (193,700) (2,363,624)
-------- -----------
Net decrease in shares outstanding
before conversion.................. (157,861) (1,888,989)
Shares issued upon conversion from
Class B............................ 715 9,982
-------- -----------
Net decrease in shares outstanding... (157,146) $(1,879,007)
======== ===========
<CAPTION>
Class B
- -------------------------------------
<S> <C> <C>
Year ended November 30, 1998:
Shares sold.......................... 45,545 $ 706,611
Shares issued in reinvestment of
dividends
and distributions.................. 35,420 464,104
Shares reacquired.................... (110,916) (1,612,703)
-------- -----------
Net decrease in shares outstanding
before conversion.................. (29,951) (441,988)
Shares reacquired upon conversion
into Class A....................... (1,383) (21,582)
-------- -----------
Net decrease in shares outstanding... (31,334) $ (463,570)
======== ===========
Year ended November 30, 1997:
Shares sold.......................... 16,501 $ 214,769
Shares issued in reinvestment of
dividends.......................... 8,896 104,821
Shares reacquired.................... (150,167) (1,863,184)
-------- -----------
Net decrease in shares outstanding
before conversion.................. (124,770) (1,543,594)
Shares reacquired upon conversion
into Class A....................... (715) (9,982)
-------- -----------
Net decrease in shares outstanding... (125,485) $(1,553,576)
======== ===========
<CAPTION>
Class C
- -------------------------------------
<S> <C> <C>
Year ended November 30, 1998:
Shares sold.......................... 26,451 $ 405,418
Shares issued in reinvestment of
dividends
and distributions.................. 7,033 90,741
Shares reacquired.................... (14,583) (195,038)
-------- -----------
Net increase in shares outstanding... 18,901 $ 301,121
======== ===========
Year ended November 30, 1997:
Shares sold.......................... 23,901 $ 303,761
Shares issued in reinvestment of
dividends.......................... 2,403 28,153
Shares reacquired.................... (97,442) (1,248,817)
-------- -----------
Net decrease in shares outstanding... (71,138) $ (916,903)
======== ===========
</TABLE>
From time to time, the fund may have a concentration of several shareholders
holding a significant percentage of shares outstanding. Investment activities of
these shareholders may have an impact on the fund and the portfolio.
- --------------------------------------------------------------------------------
11
<PAGE>
PRUDENTIAL DISTRESSED SECURITIES
Financial Highlights FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
--------------------------------------------
<S> <C> <C> <C>
March 26,
1996(d)
Year Ended November 30, Through
------------------------- November 30,
1998(e) 1997(e) 1996
-------- ---------- ------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................... $15.19 $ 11.85 $ 12.50
-------- ---------- ------
Income from investment operations
Net investment income(a)................................................ .87 .49 .25
Net realized and unrealized gain (loss) on investment transactions...... (2.69) 3.23 (.90)
-------- ---------- ------
Total from investment operations..................................... (1.82) 3.72 (.65)
-------- ---------- ------
Less distributions
Dividends from net investment income.................................... (1.39) (.38) --
Distributions in excess of net investment income........................ (.24) -- --
Distributions from net realized gains................................... (.17) -- --
-------- ---------- ------
Total distributions.................................................. (1.80) (.38) --
-------- ---------- ------
Net asset value, end of period.......................................... $11.57 $ 15.19 $ 11.85
======== ========== ======
TOTAL RETURN(b):........................................................ (13.19)% 32.35% (5.20)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......................................... $2,629 $ 1,976 $ 3,404
Average net assets (000)................................................ $2,783 $ 2,167 $ 4,391
Ratios to average net assets(a):
Expenses, including distribution fees................................ 1.25% 2.04% 2.76%(c)
Expenses, excluding distribution fees................................ 1.00% 1.79% 2.51%(c)
Net investment income................................................ 5.80% 3.73% 2.37%(c)
For Class A, B and C shares:
Portfolio turnover rate.............................................. 188% 175% 61%
</TABLE>
- ---------------
(a) Net of expense reimbursement.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Commencement of investment operations.
(e) Calculated based upon weighted average shares outstanding during the year.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 12
<PAGE>
PRUDENTIAL DISTRESSED SECURITIES
Financial Highlights FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
--------------------------------------------
<S> <C> <C> <C>
March 26,
1996(d)
Year Ended November 30, Through
------------------------- November 30,
1998(e) 1997(e) 1996
---------- -------- ------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................................... $15.16 $11.79 $ 12.50
----- -------- ------
Income from investment operations
Net investment income(a)................................................ .76 .39 .16
Net realized and unrealized gain (loss) on investment transactions...... (2.69) 3.24 (.87)
----- -------- ------
Total from investment operations..................................... (1.93) 3.63 (.71)
----- -------- ------
Less distributions
Dividends from net investment income.................................... (1.27) (.26) --
Distributions in excess of net investment income........................ (.21) -- --
Distributions from net realized gains................................... (.17) -- --
----- -------- ------
Total distributions.................................................. (1.65) (.26) --
----- -------- ------
Net asset value, end of period.......................................... $11.58 $15.16 $ 11.79
===== ======== ======
TOTAL RETURN(b):........................................................ (13.90)% 31.44% (5.68)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......................................... $3,477 $5,029 $ 5,387
Average net assets (000)................................................ $4,862 $4,860 $ 6,650
Ratios to average net assets(a):
Expenses, including distribution fees................................ 2.00% 2.79% 3.51%(c)
Expenses, excluding distribution fees................................ 1.00% 1.79% 2.51%(c)
Net investment income................................................ 5.05% 2.98% 1.59%(c)
</TABLE>
- ---------------
(a) Net of expense reimbursement.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Commencement of investment operations.
(e) Calculated based upon weighted average shares outstanding during the year.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 13
<PAGE>
PRUDENTIAL DISTRESSED SECURITIES
Financial Highlights FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
---------------------------------------------
<S> <C> <C> <C>
March 26,
1996(d)
Year Ended November 30, Through
-------------------------- November 30,
1998(e) 1997(e) 1996
----------- -------- ------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................................... $ 15.16 $11.79 $12.50
----- -------- -----
Income from investment operations
Net investment income(a)............................................... .75 .39 .16
Net realized and unrealized gain (loss) on investment transactions..... (2.69) 3.24 (.87)
----- -------- -----
Total from investment operations.................................... (1.94) 3.63 (.71)
----- -------- -----
Less distributions
Dividends from net investment income................................... (1.27) (.26) --
Distributions in excess of net investment income....................... (.21) -- --
Distributions from net realized gains.................................. (.17) -- --
----- -------- -----
Total distributions................................................. (1.65) (.26) --
----- -------- -----
Net asset value, end of period......................................... $ 11.57 $15.16 $11.79
===== ======== =====
TOTAL RETURN(b):....................................................... (13.90)% 31.44% (5.68)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................................ $ 853 $ 831 $1,485
Average net assets (000)............................................... $ 1,011 $1,100 $1,678
Ratios to average net assets(a):
Expenses, including distribution fees............................... 2.00% 2.79% 3.51%(c)
Expenses, excluding distribution fees............................... 1.00% 1.79% 2.51%(c)
Net investment income............................................... 5.05% 2.98% 1.71%(c)
</TABLE>
- ---------------
(a) Net of expense reimbursement.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Commencement of investment operations.
(e) Calculated based upon weighted average shares outstanding during the year.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 14
<PAGE>
PRUDENTIAL DISTRESSED SECURITIES
Report of Independent Accountants FUND, INC.
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Prudential Distressed Securities Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Distressed Securities
Fund, Inc. (the 'Fund') at November 30, 1998, the results of its operations for
the year then ended, and the changes in its net assets and the financial
highlights for each of the two years in the period then ended, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as 'financial statements') are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at November 30, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above. The accompanying financial highlights for the
period March 26, 1996 through November 30, 1996 were audited by other
independent accountants, whose opinion dated January 10, 1997 was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
January 25, 1999
- --------------------------------------------------------------------------------
15
<PAGE>
Getting The Most From Your Prudential Mutual Fund.
When you invest through Prudential Mutual Funds, you receive financial advice
through a Prudential Securities financial advisor or Prudential/Pruco Securities
registered representative. Your advisor or representative can provide you with
the following services:
- --------------------------------------------------------------------------------
There's No Reward Without Risk; But Is This Risk Worth It?
Your financial advisor or registered representative can help you match the
reward you seek with the risk you can tolerate. And risk can be difficult to
gauge -- sometimes even the simplest investments bear surprising risks. The
educated investor knows that markets seldom move in just one direction -- there
are times when a market sector or asset class will lose value or provide little
in the way of total return. Managing your own expectations is easier with help
from someone who understands the markets and who knows you!
- --------------------------------------------------------------------------------
Keeping Up With The Joneses.
A financial advisor or registered representative can help you wade through the
numerous mutual funds available to find the ones that fit your own individual
investment profile and risk tolerance. While the newspapers and popular
magazines are full of advice about investing, they are aimed at generic groups
of people or representative individuals, not at you personally. Your financial
advisor or registered representative will review your investment objectives with
you. This means you can make financial decisions based on the assets and
liabilities in your current portfolio and your risk tolerance -- not just based
on the current investment fad.
- --------------------------------------------------------------------------------
Buy Low, Sell High.
Buying at the top of a market cycle and selling at the bottom are among the most
common investor mistakes. But sometimes it's difficult to hold on to an
investment when it's losing value every month. Your financial advisor or
registered representative can answer questions when you're confused or worried
about your investment, and remind you that you're investing for the long haul.
<PAGE>
Prudential
Distressed
Securities
Fund, Inc.
SEMI
ANNUAL
REPORT
May 31, 1999
[LOGO OF PRUDENTIAL INVESTMENTS]
[LOGO OF PRUDENTIAL INVESTMENTS]
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
<PAGE>
Prudential Distressed Securities Fund, Inc.
Performance At A Glance
During the six months ended May 31, 1999, concern about a potential economic
downturn in the United States declined because the Federal Reserve took steps to
protect the economy in the autumn of 1998. As a result, many investors sold
conservative securities, such as U.S. Treasuries, and purchased riskier assets
that provided higher yields. This trend helped to boost the prices of some bonds
held by the Prudential Distressed Securities Fund. However, the Fund suffered
losses on some of its small-cap stocks and did not own Internet-related shares
that rallied sharply. Fund returns, therefore, significantly trailed the Lipper
Average for the six months.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Cumulative
Total
Returns1 Six One Since
As of 5/31/99 Months Year Inception2
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 5.14% (2.02) -19.64% (-24.13) 14.74% (-4.69)
Class B 4.78 (1.67) -20.28 (-24.75) 12.04 (-6.98)
Class C 4.78 (1.67) -20.28 (-24.75) 12.04 (-6.98)
Lipper Capital
Appreciation Fund Avg.3 17.09 17.54 62.82
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Average
Annual Total
Returns1 One Since
As of 3/31/99 Year Inception2
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Class A -27.32% (-30.87%) 0.47% (-4.57)
Class B -29.14 (-32.85 0.77 (-4.40)
Class C -25.90 (-29.57 1.08 (-4.00)
- --------------------------------------------------------------------------------------------
</TABLE>
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
/1/ Source: Prudential Investments Fund Management and Lipper, Inc. The
cumulative total returns do not take into account sales charges. The
average annual total returns do take into account applicable sales charges.
The Fund charges a maximum front-end sales charge of 5% for Class A shares.
Class B shares are subject to a declining contingent deferred sales charge
(CDSC) of 5%, 4%, 3%, 2%, 1%, and 1% for six years. Class B shares will
automatically convert to Class A shares, on a quarterly basis,
approximately seven years after purchase. Class C shares are subject to a
front-end sales charge of 1% and a CDSC of 1% for 18 months. Class C shares
bought before November 2, 1998, have a 1% CDSC if sold within one year.
Without waiver of management fees and/or expense subsidization, the Fund's
cumulative and average annual total returns would have been lower, as
indicated in parentheses ( ).
/2/ Inception date: Class A, B, and C, 3/26/96.
/3/ Lipper average returns are for all funds in each share class for the six-
month, one-year, and since inception periods in the Capital Appreciation
Fund category.
[BAR CHART APPEARS HERE]
Source: Lipper, Inc. Financial markets change, so a mutual fund's past
performance should never be used to predict future results. The risks to each of
the investments listed above are different--we provide 12-month total returns
for several Lipper mutual fund categories to show you that reaching for higher
returns means tolerating more risk. The greater the risk, the larger the
potential reward or loss. In addition, we've included historical 20-year average
annual returns. These returns assume the reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors have received higher
historical total returns from stocks than from most other investments. Smaller
capitalization stocks offer greater potential for long-term growth, but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds, which can help smooth
out their total returns year by year. But their prices still fluctuate
(sometimes significantly), and their returns have been historically lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by state governments, state
agencies and/or municipalities. This investment provides income that is usually
exempt from federal and state income taxes.
U.S. Taxable Money Funds attempt to preserve a constant share value; they don't
fluctuate much in price but, historically, their returns have been generally
among the lowest of the major investment categories.
<PAGE>
Portfolio Managers' Report
[PICTURE OF GEORGE EDWARDS AND PAUL PRICE APPEARS HERE]
George Edwards and Paul Price
Fund Managers
Performance Review
The Federal Reserve lent a helping hand
Prior to the beginning of our six-month reporting period on November 30, 1998,
the Federal Reserve took decisive steps to prevent a global financial crisis
from causing a recession in the United States that could have harmed the fragile
world economy. The Fed reduced the Federal funds rate (the rate U.S. banks
charge each other for overnight loans) by a quarter percentage point three
times--on September 29, October 15, and November 17--which left the key rate at
4.75%. Cutting this short-term rate stimulates economic growth by lowering
borrowing costs. The rate reductions, therefore, prevented a potential recession
and restored liquidity in the financial markets.
Investment Goals and Style
The Prudential Distressed Securities Fund seeks capital appreciation by
investing in stocks and bonds of companies with operational or financial
difficulties. Some of these companies may be in default or bankruptcy. The Fund
will purchase securities that we believe are undervalued or temporarily out of
favor despite the long-term appreciation we expect. Investment in these types of
securities may be considered speculative. As a result, the Fund will assume
greater risk than other Prudential mutual funds. There can be no assurance that
the Fund will achieve its investment objective.
Demand for higher-yielding bonds
benefited the Fund
Amid renewed confidence in the U.S. economy, many investors began to sell the
most conservative government securities, such as U.S. Treasuries, and purchase
corporate bonds, emerging market bonds, and higher-yielding assets. This trend,
along with several positive developments in the distressed bond market, helped
the Fund's performance during the six-month period.
For example, the Fund owned bonds of People's Choice TV that rallied after
Sprint agreed to purchase the wireless cable company. Both Sprint and MCI
WorldCom are buying wireless cable operators in order to have a way of providing
their customers with local telephone service and quicker Internet access. The
Fund also held bonds of Specialty Foods that gained in value following news that
the baking company had reached an agreement to sell its subsidiary, H&M Food
Systems Company, to IBP, Inc. That transaction was completed in April 1999.
Merger Proposal
The Directors have approved a proposal to merge the Fund into the Prudential
High Yield Total Return Fund, which is also managed by George Edwards and Paul
Price. The proposal must be approved by shareholders. If approved, the merger is
expected to occur in August 1999. The Directors may be asked to consider a
liquidation of the Fund if it is subsequently determined that a tax-free
reorganization or merger is not desirable.
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Directors
Edward D. Beach
Delayne Dedrick Gold
Robert F. Gunia
Douglas H. McCorkindale
Thomas T. Mooney
Stephen P. Munn
Richard A. Redeker
John R. Strangfeld
Robin B. Smith
Louis A. Weil, III
Clay T. Whitehead
Officers
John R. Strangfeld, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
Marguerite E.H. Morrison, Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07102-3777
Distributor
Prudential Investment Management Services LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark St.
Chicago, IL 60610-4795
The views expressed in this report and information about the Fund's portfolio
holdings are for the period covered by this report, and are subject to change
thereafter.
The accompanying financial statements as of May 31, 1999, were not audited and,
accordingly, no opinion is expressed on them.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
<PAGE>
But small-cap stocks hurt the Fund's performance
Price appreciation in the Fund's bond portfolio was largely offset by sharp
declines in the prices of some of its small-cap stocks. Throughout the six
months, we maintained a nearly 50-50 split between bonds and stocks. In
hindsight, we should have cut back on equities and added more debt securities.
Small companies are typically more vulnerable than larger companies during an
economic recession. That is why small-cap stocks sold off sharply during 1998
amid concern that the global financial crisis would cause an economic downturn
in the United States. However, their prices began to rebound in earnest during
late spring of 1999 as investors, looking for bargains, turned to that sector of
the U.S. equity market. The Russell 2000 Index, which tracks small company
stocks, rose approximately 11% for the six months. But this trend did not
benefit the Fund for two important reasons: the Russell 2000 Index at that time
included many Internet-related stocks that rallied strongly, while the Fund held
none; and the Fund's small-cap stocks also tend to have smaller market
capitalizations than the average company found in the Russell 2000 Index and our
benchmark Lipper Average. In addition, our small-cap stocks are generally not
followed by Wall Street analysts. These differences worked against the Fund.
Specific events, such as mergers and acquisitions, are usually the catalysts
that fuel rallies in the Fund's stocks. For example, Waste Systems Inter-
national common stock soared in mid-May after the company's revenues for the
first three months of 1999 jumped substantially from the same period a year
earlier due to acquisitions. In addition, Waste Systems International announced
important acquisitions that the company believes will lead to strong revenue
growth in the future. Waste Systems International common stock was the Fund's
largest holding, accounting for 11.5% of its net assets as of May 31, 1999. By
contrast, the price of Grand Union common stock--the Fund's fourth largest
holding--finished the six-month period lower, despite the chain's strong
operating performance in fiscal 1999, which ended in early April. Dr. Pepper
Bottling Holdings common stock--the Fund's second largest position--finished the
period with its price slightly lower.
Credit Quality
Expressed as a percentage of total investments as of 5/31/99
<TABLE>
<S> <C>
B 17%
Caa 9
Ca 7
Not Rated 12
Cash Equivalents 5
Equity 50
</TABLE>
Five Largest Holdings
Expressed as a percentage of net assets as of 5/31/99
<TABLE>
<S> <C>
Waste Systems Int'l, Inc. 11.5%
Waste Management
Dr. Pepper Bottling Holdings, Inc. 7.7
Beverages
Jordan Telecommunications 7.1
Products
Telecommunications
The Grand Union Co. 6.2
Retail
Anker Coal Group, Inc. 6.0
Mining
</TABLE>
<PAGE>
A Message to Our Shareholders June 18, 1999
[PHOTOGRAPH OF JOHN R. STRANGFELD APPEARS HERE]
Dear Shareholder:
In the last couple of years, the recurring possibility of a global economic
crisis caused investors to focus on securities they perceived to be safe. In the
equity market, they focused on the stocks of a handful of very large companies
that were perceived to be well-buffeted from an economic slowdown. These stocks
became very expensive--out of proportion to their earnings expectations. As a
result, there was a substantial disparity in value between large and small
companies and between growth and value stocks.
Since earlier this year, however, that gap has narrowed significantly amid news
of strong U.S. economic growth and faster-than-expected global stability. While
the long-term prospects of U.S. growth stocks are still very good, many of the
smaller and economically sensitive companies favored by our value managers now
are posting very attractive returns.
In the bond market, U.S. Treasuries and select European government bonds were
the major beneficiaries of the flight to quality that occurred in recent years.
When this trend reversed itself toward the end of 1998, other sectors of the
bond market rebounded. However, with a strong U.S. economy comes the threat of
higher inflation, which erodes the value of bonds' fixed interest payments. The
recent inflation concerns jolted the bond market and helped send long-term
interest rates to a 19-month high.
The winds of change in the equity market and the recent turbulence in the bond
market not only highlight the value of professional portfolio management, but
they illustrate why investors should have a well-diversified asset allocation
strategy. It is also a good practice to rebalance your holdings, when necessary,
to keep your asset allocation consistent with your long-term objectives and risk
tolerance. A properly diversified portfolio of value- and growth-oriented equity
funds, international bond funds, and money market funds could help you weather
inevitable market turbulence and achieve more consistent returns over time.
Prudential offers a wide range of mutual funds to help our shareholders
diversify, as well as several balanced and diversified funds to allow one-
decision diversification.
Thank you for your continued confidence in Prudential mutual funds.
Sincerely,
/s/ John R. Strangfeld
John R. Strangfeld
President
Prudential Distressed Securities Fund, Inc.
<PAGE>
Portfolio of Investments as of PRUDENTIAL DISTRESSED
May 31, 1999 (Unaudited) SECURITIES FUND, INC.
- ---------------------------------------------------------------
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--93.1%
COMMON STOCKS(a)--42.0%
- ------------------------------------------------------------
Beverages--7.7%
12,500 Dr. Pepper Bottling Holdings, Inc. $ 351,563
- ------------------------------------------------------------
Casinos--3.3%
20,357 Isle of Capri Casinos, Inc. 144,407
2,000 Nevada Gold & Casinos, Inc. 6,000
------------
150,407
- ------------------------------------------------------------
Consumer Goods & Services--2.7%
122,000 Firearms Training Systems, Inc. 122,000
- ------------------------------------------------------------
Electronics--1.4%
50,000 Electronic Retailing Systems
International, Inc. 65,625
- ------------------------------------------------------------
Energy--3.5%
29,000 Baycorp Holdings, Ltd. 103,313
28,675 Grant Geophysical, Inc. 57,350
------------
160,663
- ------------------------------------------------------------
Food Serving - Fast Foods
50 AmeriKing, Inc. 2,000
- ------------------------------------------------------------
Health Services--1.9%
10,000 Columbia Laboratories, Inc. 87,500
- ------------------------------------------------------------
Retail--8.6%
27,751 Grand Union Co. 284,448
23,750 Samuels Jewelers, Inc. 105,390
------------
389,838
- ------------------------------------------------------------
Telecommunications--1.1%
2,500 Jordan Telecommunications Products 50,000
Textiles & Apparel--0.3%
13,304 Forstmann & Co., Inc. $ 12,473
- ------------------------------------------------------------
Waste Management--11.5%
76,760 Waste Systems International, Inc. 522,927
------------
Total common stocks
(cost $2,302,097) 1,914,996
------------
- ------------------------------------------------------------
PREFERRED STOCKS--7.1%
- ------------------------------------------------------------
Metals
2,000 Geneva Steel Co.,(a)
Conv. Exch., 14.00%, Ser.B 1,000
- ------------------------------------------------------------
Telecommunications--7.1%
315 Jordan Telecommunication Products,
Conv. Exch., 13.25%, Ser.B 320,802
------------
Total preferred stocks
(cost $507,962) 321,802
------------
WARRANTS(a)
Units
- ------------------------------------------------------------
Casinos
2,968 Isle of Capri Casinos, Inc.,
expiring 3/5/01 30
- ------------------------------------------------------------
Recreation
250 TVN Entertainment Corp.,
expiring 8/1/08 0
------------
Total warrants
(cost $0) 30
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 3
<PAGE>
Portfolio of Investments as of PRUDENTIAL DISTRESSED
May 31, 1999 (Unaudited) SECURITIES FUND, INC.
- ---------------------------------------------------------------
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
CORPORATE BONDS--42.5%
- ------------------------------------------------------------
Air Transportation--0.8%
Caa2 $ 100 Canadian Airlines Corp.,
Sr. Notes,
12.25%, 8/1/06 $ 38,500
- ------------------------------------------------------------
Building & Related Industries--13.6%
B2 250 Clean Harbors, Inc.,
Sr. Notes,
12.50%, 5/15/01 180,000
Caa 300 DeGeorge Home Alliance,
Inc.,
Sr. Notes,
12.00%, 4/1/01 60,000
B3 250 ICF Kaiser International,
Inc.,
Sr. Sub. Notes,
13.00%, 12/31/03 165,000
B3 250 The Presley Companies,
Sr. Notes,
12.50%, 7/1/01 215,000
-----------
620,000
- ------------------------------------------------------------
Consumer Goods & Services--2.4%
B3 240 Grupo Azucarero Mexico
S.A.,(b)
Sr. Notes (Mexico),
11.50%, 1/15/05 108,000
- ------------------------------------------------------------
Food & Beverage--3.2%
Ca 250 Specialty Foods Acquisition
Corp.,
Sr. Sec'd. Disc. Deb., Ser.
B
Zero Coupon (until
8/15/99),
13.00%, 8/15/05 30,000
Caa 150 Sr. Sub, Notes, Ser. B
11.25%, 8/15/03 117,000
-----------
147,000
Mining--6.0%
Ca $ 500 Anker Coal Group, Inc.,
Sr. Notes,
9.75%, 10/1/07 $ 275,000
- ------------------------------------------------------------
Packaging--5.9%
NR 302 Packaging Resources, Inc.,
Sr. Notes,
13.00%, 6/30/03 268,768
- ------------------------------------------------------------
Recreation--4.7%
NR 250 TVN Entertainment Corp.,
Sr. Notes,
14.00%, 8/1/08 212,500
- ------------------------------------------------------------
Telecommunications--0.1%
NR 18 Scott Cable Communications,
Inc.,
Jr. Sub. PIK Notes,
16.00%, 7/18/02 3,624
- ------------------------------------------------------------
Trucking & Shipping--1.9%
B3 250 TRISM, Inc.,
Sr. Sub. Notes,
10.75%, 12/15/00 85,000
- ------------------------------------------------------------
Utilities--3.9%
Caa 250 Empire Gas Corp.,
Sr. Sec'd. Notes,
7.00% (until 7/15/99)
12.875%, 7/15/04 175,625
-----------
Total corporate bonds
(cost $2,730,753) 1,934,017
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 4
<PAGE>
Portfolio of Investments as of PRUDENTIAL DISTRESSED
May 31, 1999 (Unaudited) SECURITIES FUND, INC.
- ---------------------------------------------------------------
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
TRADE CLAIMS--1.5%
- ------------------------------------------------------------
Retail--1.5%
NR $ 284 Montgomery Ward Trade
Claim(a),
expires 1/1/49
(cost $99,312) $ 66,681
-----------
Total long-term investments
(cost $5,640,124) 4,237,526
-----------
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS--4.9%
- ------------------------------------------------------------
REPURCHASE AGREEMENT--4.9%
224 Joint Repurchase Agreement
Account,
4.80%, 6/1/99
(cost $224,000; Note 5) 224,000
-----------
- ------------------------------------------------------------
Total Investments--98.0%
(cost $5,864,124; Note 4) 4,461,526
Other assets in excess of
liabilities--2.0% 90,846
-----------
Net Assets--100% $ 4,552,372
===========
</TABLE>
- ---------------
(a) Non-income producing securities.
(b) US$ Denominated Foreign Bond.
NR--Not rated by Moody's or Standard & Poor's.
PIK--Payment in kind securities.
The Fund's current prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL DISTRESSED
(Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets May 31, 1999
<S> <C>
Investments, at value (cost $5,864,124)...................................................................... $ 4,461,526
Cash......................................................................................................... 988
Interest receivable.......................................................................................... 91,213
Due from Manager............................................................................................. 32,918
Deferred expenses and other assets........................................................................... 25,431
------------
Total assets.............................................................................................. 4,612,076
------------
Liabilities
Accrued expenses............................................................................................. 52,127
Payable for Fund shares reacquired........................................................................... 5,000
Distribution fee payable..................................................................................... 2,577
------------
Total liabilities......................................................................................... 59,704
------------
Net Assets................................................................................................... $ 4,552,372
============
Net assets were comprised of:
Common stock, at par...................................................................................... $ 398
Paid-in capital in excess of par.......................................................................... 5,763,477
------------
5,763,875
Undistributed net investment income....................................................................... 304,355
Distribution in excess of net realized gain on investments................................................ (113,260)
Net unrealized depreciation on investments................................................................ (1,402,598)
------------
Net assets, May 31, 1999..................................................................................... $ 4,552,372
============
Class A:
Net asset value and redemption price per share
($1,576,889 / 137,599 shares of common stock issued and outstanding)................................... $11.46
Maximum sales charge (5% of offering price)............................................................... .60
------------
Maximum offering price to public.......................................................................... $12.06
============
Class B:
Net asset value, offering price and redemption price per share
($2,277,364 / 199,290 shares of common stock issued and outstanding)................................... $11.43
============
Class C:
Net asset value, and redemption price per share
($698,119 / 61,082 shares of common stock issued and outstanding)...................................... $11.43
Sales charge (1% of offering price)....................................................................... .12
------------
Offering price to public.................................................................................. $11.55
============
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 6
<PAGE>
PRUDENTIAL DISTRESSED
SECURITIES FUND, INC.
Statement of Operations (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Six Months
Ended
Net Investment Income May 31, 1999
Income
Interest..................................... $ 282,177
Dividends.................................... 69,020
------------
351,197
------------
Expenses
Management fee............................... 20,631
Distribution fee--Class A.................... 2,622
Distribution fee--Class B.................... 13,248
Distribution fee--Class C.................... 3,772
Custodian's fees and expenses................ 52,000
Registration fees............................ 21,000
Legal fees and expenses...................... 15,000
Reports to shareholders...................... 14,000
Amortization of deferred organizational...... 10,802
Audit fees and expenses...................... 10,000
Directors' fees and expenses................. 4,000
Transfer agent's fees and expenses........... 2,800
Miscellaneous................................ 146
------------
Total expenses............................ 170,021
Less: expense reimbursement (Note 2)......... (123,179)
------------
Net expenses.............................. 46,842
------------
Net investment income........................... 304,355
------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain on investment transactions.... 68,889
Net change in unrealized depreciation of
investments.................................. (208,127)
------------
Net loss on investments......................... (139,238)
------------
Net Increase in Net Assets
Resulting from Operations....................... $ 165,117
============
</TABLE>
PRUDENTIAL DISTRESSED
SECURITIES FUND, INC.
Statement of Changes in Net Assets (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) May 31, November 30,
in Net Assets 1999 1998
<S> <C> <C>
Operations
Net investment income............ $ 304,355 $ 457,735
Net realized gain on
investments................... 68,889 291,504
Net change in unrealized
depreciation of investments... (208,127) (2,167,375)
----------- ------------
Net increase (decrease) in net
assets resulting from
operations.................... 165,117 (1,418,136)
----------- ------------
Dividends and distributions (Note 1)
Dividends from net investment
income
Class A....................... -- (254,266)
Class B....................... -- (376,002)
Class C....................... -- (81,439)
----------- ------------
-- (711,707)
----------- ------------
Distributions in excess of net
investment income
Class A....................... -- (43,045)
Class B....................... -- (63,654)
Class C....................... -- (13,787)
----------- ------------
-- (120,486)
----------- ------------
Distributions from net realized
gains
Class A....................... (95,142) (26,850)
Class B....................... (125,242) (59,158)
Class C....................... (39,054) (11,798)
----------- ------------
(259,438) (97,806)
----------- ------------
Fund share transactions (net of
share conversions) (Note 6)
Net proceeds from shares sold.... 475,817 3,402,960
Net asset value of shares issued
to shareholders in
reinvestment of dividends and
distributions................. 245,149 832,629
Cost of shares reacquired........ (3,033,085) (2,764,519)
----------- ------------
Net increase (decrease) in net
assets from Fund share
transactions.................. (2,312,119) 1,471,070
----------- ------------
Total decrease...................... (2,406,440) (877,065)
Net Assets
Beginning of period................. 6,958,812 7,835,877
----------- ------------
End of period(a).................... $ 4,552,372 $ 6,958,812
=========== ============
- ---------------
(a) Includes undistributed net
investment income of............ $ 304,355 $ --
----------- ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7
<PAGE>
Notes to Financial Statements PRUDENTIAL DISTRESSED
(Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
Prudential Distressed Securities Fund, Inc. (the 'Fund') is registered under the
Investment Company Act of 1940, as a diversified, open-end management company.
The Fund was incorporated in Maryland on November 30, 1995. The Fund had no
significant operations other than the issuance of 2,667 shares of Class A, 2,667
shares of Class B and 2,666 shares of Class C common stock for $100,000 on
February 8, 1996 to Prudential Investments Fund Management LLC ('PIFM').
Investment operations commenced on March 26, 1996.
The investment objective of the Fund is capital appreciation. The Fund seeks to
achieve this objective by investing primarily in debt and equity securities
issued by financially troubled or bankrupt companies (financially troubled
issuers) and in equity securities of companies that in the view of its
investment adviser are currently undervalued, out-of-favor or price-depressed
relative to their long-term potential for growth and income (operationally
troubled issuers). Securities of financially and operationally troubled issuers
are less liquid and more volatile than securities of companies not experiencing
financial difficulties. Investment in such securities may be considered
speculative and may present potential for substantial loss.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: Investments listed on a securities exchange are valued at
the last sales price on the day of valuation, or, if there was no sale on such
day, the mean between the last bid and asked prices on such day or at the bid
price in the absence of an asked price. Corporate bonds and U.S. Government
securities that are actively traded in the over-the-counter market are valued by
an independent pricing service. Convertible debt securities that are traded in
the over-the-counter market are valued at the mean between the most recently
quoted bid and asked prices provided by principal market makers. Debt and equity
securities issued in private placements shall be valued at the bid prices
provided by primary market dealers. Securities for which market quotations are
not available, other than private placements, shall each be valued at a price
supplied by an independent pricing agent. Securities for which reliable market
quotations are not available or for which the pricing agent or principal market
maker does not provide a valuation will be valued at fair value determined in
good faith by or under the direction of the Board of Directors of the Fund.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians under triparty repurchase
agreements take possession of the underlying collateral securities, the value of
which exceeds the principal amount of the repurchase transaction, including
accrued interest. If the seller defaults and the value of the collateral
declines or if bankruptcy proceedings are commenced with respect to the seller
of the security, realization of the collateral by the Fund may be delayed or
limited.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date; interest income is recorded on the accrual basis. The Fund
amortizes premiums and discounts paid on purchases of portfolio securities as
adjustments to interest income. Expenses are recorded on the accrual basis which
may require the use of certain estimates by management.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares of the Fund based
upon the relative proportion of net assets of each class at the beginning of the
day.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.
Dividends and Distributions: The Fund expects to pay dividends out of net
investment income and make distributions of any net capital gains, if any, at
least annually. Dividends and distributions are recorded on the ex-dividend
date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Deferred Organization Costs: The Fund incurred approximately $82,000 in
connection with the organization of the Fund. These costs were deferred and are
being amortized over a period of 60 months ending March 2001.
- --------------------------------------------------------------------------------
8
<PAGE>
Notes to Financial Statements PRUDENTIAL DISTRESSED
(Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with PIFM. Pursuant to this agreement, PIFM
has responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PIFM has entered into a subadvisory
agreement with The Prudential Investment Corporation ('PIC'), doing business as
Prudential Investments ('PI'); PI furnishes investment advisory services in
connection with the management of the Fund and is reimbursed by PIFM for its
reasonable cost and expenses incurred providing such services. The Fund bears
all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .75 of 1% of the average daily net assets of the Fund.
PIFM voluntarily agreed to reimburse the Fund in order to reduce total expenses
so as not to exceed 1.25%, 2.00% and 2.00% of the average daily net assets of
the Class A, Class B and Class C shares, respectively, on an annualized basis.
For the six months ended May 31, 1999, such reimbursements amounted to $123,179
(4.48% of average net assets annualized; $.31 per share for Class A, B and C
shares).
The Fund has a distribution agreement with Prudential Investment Management
Services LLC ('PIMS'), which acts as the distributor of the Fund. The Fund
compensates PIMS for distributing and servicing the Fund's Class A, Class B and
Class C shares, pursuant to plans of distribution, (the 'Class A, B and C
Plans'), regardless of expenses actually incurred by them. The distribution fees
are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the plans were .25 of 1%, 1% and 1% of the average daily net
assets of the Class A, B and C shares, respectively, for the six months ended
May 31, 1999.
PIMS has advised the Fund that for the six months ended May 31, 1999, it
received approximately $14,400 and $600 in contingent deferred sales charges
imposed upon certain redemptions by Class B and C shareholders, respectively.
PIFM, PIC and PIMS are indirect, wholly owned subsidiaries of The Prudential
Insurance Company of America.
As of March 11, 1999, the Fund along with other affiliated registered investment
companies (the 'Funds'), entered into a syndicated agreement ('SCA') with an
unaffiliated lender. The maximum commitment under the SCA is $1 billion. The
Funds pay a commitment fee at an annual rate of .065 of 1% on the unused portion
of the credit facility, which is accrued and paid quarterly on a pro rata basis
by the Funds. The SCA expires on March 9, 2000. Prior to March 11, 1999, the
Funds had a credit agreement with a maximum commitment of $200,000,000. The
commitment fee was .055 of 1% on the unused portion of the credit facility. The
Fund did not borrow any amounts pursuant to either agreement during the six
months ended May 31, 1999. The purpose of the agreements is to serve as an
alternative source of funding for capital share redemptions.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the six months ended May 31, 1999
the Fund incurred fees of approximately $2,600 for the services of PMFS. As of
May 31, 1999, approximately $300 of such fees were due to PMFS. Transfer agent
fees and expenses in the Statement of Operations include certain out-of-pocket
expenses paid to nonaffiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the six months ended May 31, 1999 were $814,087 and $3,445,540,
respectively.
The federal income tax basis of the Fund's investments at May 31, 1999 was
substantially the same as for financial reporting purposes and, accordingly, net
unrealized depreciation for federal income tax purposes was $1,402,598 (gross
unrealized appreciation--$613,296; gross unrealized depreciation--$2,015,894).
- ------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. As of May 31, 1999, the
Portfolio has a 0.033% undivided interest in the joint account. The undivided
interest for the Portfolio represents $224,000 in
- --------------------------------------------------------------------------------
9
<PAGE>
Notes to Financial Statements PRUDENTIAL DISTRESSED
(Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
principal amount. As of such date, each repurchase agreement in the joint
account and the collateral therefor were as follows:
Bear, Stearns & Co. Inc., 4.82%, in the principal amount of $200,000,000,
repurchase price $200,107,111, due 6/1/99. The value of the collateral including
accrued interest was $204,177,828.
Credit Suisse First Boston Corp., 4.60%, in the principal amount of $85,711,000,
repurchase price $85,754,808, due 6/1/99. The value of the collateral including
accrued interest was $88,385,257.
Deutsche Bank Securities Inc., 4.83%, in the principal amount of $200,000,000,
repurchase price $200,107,333, due 6/1/99. The value of the collateral including
accrued interest was $204,000,179.
Morgan (J.P.) Securities, Inc., 4.82%, in the principal amount of $200,000,000,
repurchase price $200,107,111, due 6/1/99. The value of the collateral including
accrued interest was $204,000,892.
- ------------------------------------------------------------
Note 6. Capital
The Fund offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. A special exchange
privilege is also available for shareholders who qualify to purchase Class A
shares at net asset value.
There are 2 billion shares of $.001 par value common stock authorized divided
into four classes, designated Class A, Class B, Class C and Class Z, which each
consist of 500 million authorized shares. At May 31, 1999, there were no Class Z
shares issued. Of the 397,971 shares of common stock issued and outstanding at
May 31, 1999, Prudential owned 8,000.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------- -------- -----------
<S> <C> <C>
Six months ended May 31, 1999:
Shares sold.......................... 17,839 $ 209,224
Shares issued in reinvestment of
dividends
and distributions.................. 8,511 89,792
Shares reacquired.................... (116,890) (1,322,322)
-------- -----------
Net decrease in shares outstanding
before conversion.................. (90,540) (1,023,306)
Shares issued upon conversion from
Class B............................ 941 10,589
-------- -----------
Net decrease in shares outstanding... (89,599) $(1,012,717)
-------- -----------
-------- -----------
Year ended November 30, 1998:
Shares sold.......................... 142,139 $ 2,290,931
Shares issued in reinvestment of
dividends
and distributions.................. 22,081 277,784
Shares reacquired.................... (68,517) (956,778)
-------- -----------
Net increase in shares outstanding
before conversion.................. 95,703 1,611,937
Shares issued upon conversion from
Class B............................ 1,381 21,582
-------- -----------
Net increase in shares outstanding... 97,084 $ 1,633,519
======== ===========
<CAPTION>
Class B
- -------------------------------------
<S> <C> <C>
Six months ended May 31, 1999:
Shares sold.......................... 18,325 $ 215,987
Shares issued in reinvestment of
dividends
and distributions.................. 11,280 118,781
Shares reacquired.................... (129,651) (1,477,114)
-------- -----------
Net decrease in shares outstanding
before conversion.................. (100,046) (1,142,346)
Shares reacquired upon conversion
into Class A....................... (936) (10,589)
-------- -----------
Net decrease in shares outstanding... (100,982) $(1,152,935)
======== ===========
</TABLE>
- --------------------------------------------------------------------------------
10
<PAGE>
Notes to Financial Statements PRUDENTIAL DISTRESSED
(Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares Amount
- ------------------------------------- -------- -----------
<S> <C> <C>
Year ended November 30, 1998:
Shares sold.......................... 45,545 $ 706,611
Shares issued in reinvestment of
dividends
and distributions.................. 35,420 464,104
Shares reacquired.................... (110,916) (1,612,703)
-------- -----------
Net decrease in shares outstanding
before conversion.................. (29,951) (441,988)
Shares reacquired upon conversion
into Class A....................... (1,383) (21,582)
-------- -----------
Net decrease in shares outstanding... (31,334) $ (463,570)
======== ===========
<CAPTION>
Class C
- -------------------------------------
<S> <C> <C>
Six months ended May 31, 1999:
Shares sold.......................... 4,328 $ 50,606
Shares issued in reinvestment of
dividends
and distributions.................. 3,473 36,576
Shares reacquired.................... (20,398) (233,649)
-------- -----------
Net decrease in shares outstanding... (12,597) $ (146,467)
======== ===========
Year ended November 30, 1998:
Shares sold.......................... 26,451 $ 405,418
Shares issued in reinvestment of
dividends
and distributions.................. 7,033 90,741
Shares reacquired.................... (14,583) (195,038)
-------- -----------
Net increase in shares outstanding... 18,901 $ 301,121
======== ===========
</TABLE>
Note 7. Proposed Merger
On May 26, 1999, the Directors approved an Agreement and Plan of Reorganization
and Liquidation of the Fund (the 'Plan of Reorganization') which provides for
the transfer of substantially all of the assets and liabilities of the Fund to
Prudential High Yield Total Return Fund, Inc. Class A, B and C shares of the
Fund will be exchanged at net asset value for Class A, B and C shares of the
equivalent value of Prudential High Yield Total Return Fund, Inc.
- --------------------------------------------------------------------------------
11
<PAGE>
PRUDENTIAL DISTRESSED
Financial Highlights (Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------------
March 26,
Six Months 1996(d)
Ended Year Ended November 30, Through
May 31, ------------------------- November 30,
1999(e) 1998(e) 1997(e) 1996
---------- -------- ---------- ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................... $ 11.57 $15.19 $ 11.85 $ 12.50
---------- -------- ---------- ------
Income from investment operations
Net investment income(a)....................................... .67 .87 .49 .25
Net realized and unrealized gain (loss) on investment
transactions................................................ (.17) (2.69) 3.23 (.90)
---------- -------- ---------- ------
Total from investment operations............................ .50 (1.82) 3.72 (.65)
---------- -------- ---------- ------
Less distributions
Dividends from net investment income........................... -- (1.39) (.38) --
Distributions in excess of net investment income............... -- (.24) -- --
Distributions from net realized gains.......................... (.61) (.17) -- --
---------- -------- ---------- ------
Total distributions......................................... (.61) (1.80) (.38) --
---------- -------- ---------- ------
Net asset value, end of period................................. $ 11.46 $11.57 $ 15.19 $ 11.85
========== ======== ========== ======
TOTAL RETURN(b):............................................... 5.14% (13.19)% 32.35% (5.20)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................................ $ 1,577 $2,629 $ 1,976 $ 3,404
Average net assets (000)....................................... $ 2,103 $2,783 $ 2,167 $ 4,391
Ratios to average net assets(a):
Expenses, including distribution fees....................... 1.25%(c) 1.25% 2.04% 2.76%(c)
Expenses, excluding distribution fees....................... 1.00%(c) 1.00% 1.79% 2.51%(c)
Net investment income....................................... 11.53%(c) 5.80% 3.73% 2.37%(c)
For Class A, B and C shares:
Portfolio turnover rate..................................... 15% 188% 175% 61%
</TABLE>
- ---------------
(a) Net of expense reimbursement.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Commencement of investment operations.
(e) Calculated based upon weighted average shares outstanding during the period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 12
<PAGE>
PRUDENTIAL DISTRESSED
Financial Highlights (Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
-------------------------------------------------------------
March 26,
Six Months 1996(d)
Ended Year Ended November 30, Through
May 31, ------------------------- November 30,
1999(e) 1998(e) 1997(e) 1996
---------- ---------- -------- ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................... $11.58 $15.16 $11.79 $ 12.50
----- ----- -------- ------
Income from investment operations
Net investment income(a)....................................... .60 .76 .39 .16
Net realized and unrealized gain (loss) on investment
transactions................................................ (.14) (2.69) 3.24 (.87)
----- ----- -------- ------
Total from investment operations............................ .46 (1.93) 3.63 (.71)
----- ----- -------- ------
Less distributions
Dividends from net investment income........................... -- (1.27) (.26) --
Distributions in excess of net investment income............... -- (.21) -- --
Distributions from net realized gains.......................... (.61) (.17) -- --
----- ----- -------- ------
Total distributions......................................... (.61) (1.65) (.26) --
----- ----- -------- ------
Net asset value, end of period................................. $11.43 $11.58 $15.16 $ 11.79
===== ===== ======== ======
TOTAL RETURN(b):............................................... 4.78% (13.90)% 31.44% (5.68)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................................ $2,277 $3,477 $5,029 $ 5,387
Average net assets (000)....................................... $2,657 $4,862 $4,860 $ 6,650
Ratios to average net assets(a):
Expenses, including distribution fees....................... 2.00%(c) 2.00% 2.79% 3.51%(c)
Expenses, excluding distribution fees....................... 1.00%(c) 1.00% 1.79% 2.51%(c)
Net investment income....................................... 10.78%(c) 5.05% 2.98% 1.59%(c)
</TABLE>
- ---------------
(a) Net of expense reimbursement.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Commencement of investment operations.
(e) Calculated based upon weighted average shares outstanding during the period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 13
<PAGE>
PRUDENTIAL DISTRESSED
Financial Highlights (Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
-------------------------------------------------------------------
March 26,
Six Months 1996(d)
Ended Year Ended November 30, Through
May 31, ------------------------------ November 30,
1999(e) 1998(e) 1997(e) 1996
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................... $ 11.57 $ 15.16 $11.79 $12.50
----- ----- ----- -----
Income from investment operations
Net investment income(a)................................. .61 .75 .39 .16
Net realized and unrealized gain (loss) on investment
transactions.......................................... (.14) (2.69) 3.24 (.87)
----- ----- ----- -----
Total from investment operations...................... .47 (1.94) 3.63 (.71)
----- ----- ----- -----
Less distributions
Dividends from net investment income..................... -- (1.27) (.26) --
Distributions in excess of net investment income......... -- (.21) -- --
Distributions from net realized gains.................... (.61) (.17) -- --
----- ----- ----- -----
Total distributions................................... (.61) (1.65) (.26) --
----- ----- ----- -----
Net asset value, end of period........................... $ 11.43 $ 11.57 $15.16 $11.79
===== ===== ===== =====
TOTAL RETURN(b):......................................... 4.78% (13.90)% 31.44% (5.68)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......................... $ 698 $ 853 $ 831 $1,485
Average net assets (000)................................. $ 756 $ 1,011 $1,100 $1,678
Ratios to average net assets(a):
Expenses, including distribution fees................. 2.00%(c) 2.00% 2.79% 3.51%(c)
Expenses, excluding distribution fees................. 1.00%(c) 1.00% 1.79% 2.51%(c)
Net investment income................................. 10.78%(c) 5.05% 2.98% 1.71%(c)
</TABLE>
- ---------------
(a) Net of expense reimbursement.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Commencement of investment operations.
(e) Calculated based upon weighted average shares outstanding during the period.
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See Notes to Financial Statements. 14
<PAGE>
Getting The Most From Your Prudential Mutual Fund
How many times have you read these letters -- or other financial materials --and
stumbled across a word that you don't understand?
Many shareholders have run into the same problem. We'd like to help. So we'll
use this space from time to time to explain some of the words you might have
read, but not understood. And if you have a favorite word that no one can
explain to your satisfaction, please write to us.
Basis Point: 1/100th of 1%. For example, one-half of one percent is 50 basis
points.
Collateralized Mortgage Obligations (CMOs): Mortgage-backed bonds that separate
mortgage pools into different maturity classes, called tranches. These
instruments are sensitive to changes in interest rates and homeowner refinancing
activity. They are subject to prepayment and maturity extension risk.
Derivatives: Securities that derive their value from other securities. The rate
of return of these financial instruments rises and falls -- sometimes very
suddenly-- in response to changes in some specific interest rate, currency,
stock, or other variable.
Discount Rate: The interest rate charged by the Federal Reserve on loans to
member banks.
Federal Funds Rate: The interest rate charged by one bank to another on
overnight loans.
Futures Contract: An agreement to purchase or sell a specific amount of a
commodity or financial instrument at a set price at a specified date in the
future.
Leverage: The use of borrowed assets to enhance return. The expectation is that
the interest rate charged on borrowed funds will be lower than the return on the
investment. While leverage can increase profits, it can also magnify losses.
Liquidity: The ease with which a financial instrument (or product) can be bought
or sold (converted into cash) in the financial markets.
Price/Earnings Ratio: The price of a share of stock divided by the earnings per
share for a 12-month period.
Option: An agreement to purchase or sell something, such as shares of stock, by
a certain time for a specified price. An option need not be exercised.
Spread: The difference between two values; often used to describe the difference
between "bid" and "asked" prices of a security, or between the yields of two
similar maturity bonds.
Yankee Bond: A bond sold by a foreign company or government in the U.S. market
and denominated in U.S. dollars.
<PAGE>
Getting The Most From Your Prudential Mutual Fund
When you invest through Prudential Mutual Funds, you receive financial
advice through a Prudential Securities financial advisor or Prudential/Pruco
Securities registered representative. Your advisor or representative can provide
you with the following services:
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There's No Reward Without Risk; But Is This Risk Worth It?
Your financial advisor or registered representative can help you match the
reward you seek with the risk you can tolerate. And risk can be difficult to
gauge--sometimes even the simplest investments bear surprising risks. The
educated investor knows that markets seldom move in just one direction--there
are times when a market sector or asset class will lose value or provide little
in the way of total return. Managing your own expectations is easier with help
from someone who understands the markets and who knows you!
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Keeping Up With The Joneses
A financial advisor or registered representative can help you wade through the
numerous mutual funds available to find the ones that fit your own individual
investment profile and risk tolerance. While the newspapers and popular
magazines are full of advice about investing, they are aimed at generic groups
of people or representative individuals, not at you personally. Your financial
advisor or registered representative will review your investment objectives with
you. This means you can make financial decisions based on the assets and
liabilities in your current portfolio and your risk tolerance--not just based on
the current investment fad.
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Buy Low, Sell High
Buying at the top of a market cycle and selling at the bottom are among the most
common investor mistakes. But, sometimes it's difficult to hold on to an
investment when it's losing value every month. Your financial advisor or
registered representative can answer questions when you're confused or worried
about your investment, and remind you that you're investing for the long haul.
