As filed with the Securities and Exchange Commission on March 5, 1997
Securities Act Registration No. 2-63394
Investment Company Act Registration No. 811-2896
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 29 [X]
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 28 [X]
(Check appropriate box or boxes)
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PRUDENTIAL HIGH YIELD FUND, INC.
(Exact name of registrant as specified in charter)
(formerly Prudential-Bache High Yield Fund, Inc.)
GATEWAY CENTER THREE
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (201) 367-7530
S. Jane Rose, Esq.
Gateway Center Three
Newark, New Jersey 07102
(Name and Address of Agent for Service of Process)
Approximate date of proposed public offering:
As soon as practicable after the effective
date of the Registration Statement.
It is proposed that this filing will become effective
(check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on [date] pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective
date for a previously filed post-effective amendment
Registrant has registered an indefinite number of shares under the Securities
Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act of 1940. The
Rule 24f-2 Notice for the Registrant's most recent fiscal year ended December
31, 1996 was filed on February 28, 1997.
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<PAGE>
CROSS REFERENCE SHEET
(as required by Rule 495)
<TABLE>
<CAPTION>
<S> <C>
N-1a Item No. Location
- ------------- --------
Part A
Item 1. Cover Page Cover Page
Item 2. Synopsis Fund Expenses
Item 3. Condensed Financial Information Fund Expenses; Financial Highlights;
How the Fund Calculates Performance
Item 4. General Description of Registrant Cover Page; Fund Highlights; How the
Fund Invests; General Information
Item 5. Management of the Fund Financial Highlights; How the Fund
is Managed
Item 5a. Management's Discussion of
Fund Performance Financial Highlights
Item 6. Capital Stock and Other Securities General Information; Shareholder
Services; Taxes, Dividends and
Distributions
Item 7. Purchase of Securities Being Offered Shareholder Guide; How the Fund
Values its Shares; Fund Expenses
Item 8. Redemption or Repurchase Shareholder Guide; How the Fund
Values its Shares; General Information
Item 9. Pending Legal Proceedings Not Applicable
Part B
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History General Information
Item 13. Investment Objectives and Policies Investment Objective and Policies;
Investment Restrictions; Portfolio
Item 14. Management of the Fund Directors and Officers; Manager;
Distributor
Item 15. Control Persons and Principal Holders of Securities Not Applicable
Item 16. Investment Advisory and Other Services Manager; Distributor; Custodian;
Transfer and Dividend Disbursing
Agent and Independent Accountants
Item 17. Brokerage Allocation and Other Practices Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities Not Applicable
Item 19. Purchase, Redemption and Pricing of Securities Being Offered Purchase and Redemption of Fund
Shares; Shareholder Investment
Account; Net Asset Value
Item 20. Tax Status Taxes, Dividends and Distributions
Item 21. Underwriters Distributor
Item 22. Calculation of Performance Data Performance Information
Item 23. Financial Statements Financial Statements
<FN>
Part C
Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C to this Post-
Effective Amendment to the Registration Statement.
</FN>
</TABLE>
<PAGE>
Prudential High Yield Fund, Inc.
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Prospectus dated March 6, 1997
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Prudential High Yield Fund, Inc. (the Fund) is an open-end, diversified
management investment company whose primary investment objective is to maximize
current income through investment in a diversified portfolio of high yield
fixed-income securities. Capital appreciation is a secondary investment
objective which will only be sought when consistent with the primary objective.
The high yield securities sought by the Fund will generally be securities rated
in the medium to lower categories by recognized rating services (Baa or lower by
Moody's Investors Service, or BBB or lower by Standard & Poor's Ratings Group or
comparably rated by any other Nationally Recognized Statistical Rating
Organization) or non-rated securities which are, in the opinion of the Fund's
investment adviser, of comparable quality. There can be no assurance that the
Fund's investment objectives will be achieved. See "How the Fund
Invests-Investment Objectives and Policies."
The Fund may invest up to 100% of its assets in lower-rated bonds, commonly
known as "junk bonds." Investments of this type are subject to greater risk of
loss of principal and interest, including default risk, than higher rated bonds.
"The Fund may also invest in distressed securities." Purchasers should carefully
assess the risks associated with an investment in the Fund. See "How the Fund
Invests-Investment Objective and Policies" at page 9. See also "How the Fund
Invests-Risk Factors-Risks Relating to Investing in High Yield Securities,"
"-Risks Relating to Investing in Distressed Securities" at page 14 and
"Description of Corporate Bond Ratings" at page A-1.
The Fund's address is Gateway Center Three, Newark, New Jersey 07102, and its
telephone number is (800) 225-1852.
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This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated March 6, 1997, which information is
incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.
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Investors are advised to read this Prospectus and retain it for future
reference.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
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FUND HIGHLIGHTS
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The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
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What is Prudential High Yield Fund, Inc.?
Prudential High Yield Fund, Inc. is a mutual fund. A mutual fund pools the
resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, diversified
management investment company.
What are the Fund's Investment Objectives?
The primary investment objective of the Fund is to maximize current income
through investment in a diversified portfolio of high yield fixed-income
securities rated Baa or lower by Moody's Investors Service (Moody's), or BBB or
lower by Standard & Poor's Ratings Group (Standard & Poor's) or comparably rated
by any other Nationally Recognized Statistical Rating Organization (NRSRO), and
which in the opinion of the Fund's investment adviser do not subject a fund
investing in such securities to unreasonable risks. As a secondary investment
objective, the Fund will seek capital appreciation but only when consistent with
its primary objective. Capital appreciation may result, for example, from an
improvement in the credit standing of an issuer whose securities are held in the
Fund's portfolio or from a general lowering of interest rates, or a combination
of both. There can be no assurance that the Fund's objectives will be achieved.
See "How the Fund Invests-Investment Objectives and Policies" at page 9.
What are the Fund's Risk Factors and Special Characteristics?
The Fund invests primarily in lower-rated bonds, commonly known as "junk
bonds." Investments of this type are subject to greater risk of loss of
principal and interest. The Fund may also invest in "distressed securities".
Purchasers should carefully assess the risks associated with an investment in
the Fund. See "How the Fund Invests--Investment Objectives and Policies" at page
9. See also "How the Fund Invests--Risk Factors--Risks Relating to Investing in
High Yield Securities", "--Risks Relating to Investing in Distressed Securities"
at page 14 and "Description of Corporate Bond Ratings" at page A-1. As with an
investment in any mutual fund, an investment in this Fund can decrease in value
and you can lose money.
The Fund may also engage in various hedging and return enhancement
strategies, including using derivatives, which may be considered speculative and
may result in higher risks and costs to the Fund. See "How the Fund Invests-Risk
Factors- Hedging and Return Enhancement Strategies" at page 11.
Who Manages the Fund?
Prudential Mutual Fund Management LLC (PMF or the Manager) is the Manager of
the Fund and is compensated for its services at an annual rate of .50 of 1% of
the Fund's average daily net assets up to and including $250 million, .475 of 1%
of the next $500 million, .45 of 1% of the next $750 million, .425 of 1% of the
next $500 million, .40 of 1% of the next $500 million, .375 of 1% of the next
$500 million and .35 of 1% of the Fund's average daily net assets in excess of
$3 billion. As of January 31, 1997, PMF served as manager or administrator to 62
investment companies, including 40 mutual funds, with aggregate assets of
approximately $55.8 billion. The Prudential Investment Corporation, which does
business under the name of Prudential Investments (PI, the Subadviser or the
investment adviser) furnishes investment advisory services in connection with
the management of the Fund under a Subadvisory Agreement with PMF. See "How the
Fund is Managed-Manager" at page 16.
Who Distributes the Fund's Shares?
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's Class A, Class B, Class C and Class Z shares.
Prudential Securities is paid an annual distribution and service fee which is
currently being charged at the rate of .15 of 1% of the average daily net assets
of the Class A shares, at the rate of up to .75 of 1% of the average daily net
assets of the Class B shares and which is currently being charged at the rate of
.75 of 1% of the average daily net assets of the Class C shares. Prudential
Securities incurs the expense of distributing the Fund's Class Z shares under a
Distribution Agreement with the Fund, none of which is reimbursed by the Fund.
See "How the Fund is Managed-Distributor" at page 17.
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2
<PAGE>
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What is the Minimum Investment?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for Class A, Class B and Class C shares. Class Z shares are not subject to any
minimum investment requirement. There is no minimum investment requirement for
certain retirement and employee savings plans or custodial accounts for the
benefit of minors. For purchases made through the Automatic Savings Accumulation
Plan, the minimum initial and subsequent investment is $50. See "Shareholder
Guide-How to Buy Shares of the Fund" at page 23 and "Shareholder
Guide-Shareholder Services" at page 34.
How Do I Purchase Shares?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent) at the
net asset value per share (NAV) next determined after receipt of your purchase
order by the Transfer Agent or Prudential Securities plus a sales charge which
may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). Class Z shares are offered to a
limited group of investors at net asset value without any sales charge. See "How
the Fund Values its Shares" at page 20 and "Shareholder Guide-How to Buy Shares
of the Fund" at page 23.
What are My Purchase Alternatives?
The Fund offers four classes of shares through this Prospectus:
<TABLE>
<S> <C>
* Class A Shares: Sold with an initial sales charge of up to 4% of the offering price.
* Class B Shares: Sold without an initial sales charge but are subject to a contingent deferred
sales charge or CDSC (declining from 5% to zero of the lower of the amount
invested or the redemption proceeds) which will be imposed on certain
redemptions made within six years of purchase. Although Class B shares are
subject to higher ongoing distribution-related expenses than Class A shares,
Class B shares will automatically convert to Class A shares (which are subject
to lower ongoing distribution-related expenses) approximately seven years
after purchase.
* Class C Shares: Sold without an initial sales charge and, for one year after purchase, are subject
to a 1% CDSC on redemptions. Like Class B shares, Class C shares are
subject to higher ongoing distribution-related expenses than Class A shares
but do not convert to another class.
* Class Z Shares: Sold without either an initial or contingent deferred sales charge to a limited
group of investors. Class Z shares are not subject to any ongoing service or
distribution expenses.
See "Shareholder Guide-Alternative Purchase Plan" at page 24.
</TABLE>
How Do I Sell My Shares?
You may redeem shares of the Fund at any time at the NAV next determined
after Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide-How to Sell Your Shares" at page 28.
How are Dividends and Distributions Paid?
The Fund expects to declare daily and pay monthly dividends of net
investment income and make distributions of any net capital gains, if any, at
least annually. Dividends and distributions will be automatically reinvested in
additional shares of the Fund at NAV without a sales charge unless you request
that they be paid to you in cash. See "Taxes, Dividends and Distributions" at
page 21.
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3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
Shareholder Transaction Expenses+ Class A Shares Class B Shares Class C Shares Class Z Shares
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price) .................. 4% None None None
Maximum Sales Load on
Reinvested Dividends ............. None None None None
Maximum Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower) .............. None 5% during the first year, 1% on redemptions None
decreasing by 1% made within one
annually to 1% in the year of purchase
fifth and sixth years and
0% the seventh year*
Redemption Fees None None None None
Exchange Fees None None None None
Annual Fund Operating Expenses (as a percentage of average net assets)
Class A Shares Class B Shares Class C Shares Class Z Shares
-------------- -------------- -------------- --------------
Management Fees .................... .41% .41% .41% .41%
12b-1 Fees (After Reduction) ....... .15%++ .75% .75%++ None
Other Expenses ..................... .16% .16% .16% .16%
Total Fund Operating Expenses ...... .72% 1.32% 1.32% .57%
</TABLE>
<TABLE>
<CAPTION>
Example 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time
period:
Class A ......................................................... $47 $62 $78 $126
Class B ......................................................... $63 $72 $82 $135
Class C ......................................................... $23 $42 $72 $159
Class Z** ....................................................... $ 6 $18 $32 $ 71
You would pay the following expenses on the same investment, assuming
no redemption:
Class A ......................................................... $47 $62 $78 $126
Class B ......................................................... $13 $42 $72 $135
Class C ......................................................... $13 $42 $72 $159
Class Z** ....................................................... $ 6 $18 $32 $ 71
</TABLE>
The above example is based on data for the Fund's fiscal year ended December 31,
1996. The example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Fund will bear, whether directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "How the Fund is Managed." "Other Expenses" include operating expenses of
the Fund, such as Directors' and professional fees, registration fees, reports
to shareholders, transfer agency and custodian fees.
*Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide-Conversion Feature-Class B
Shares."
**Estimated based on expenses expected to have been incurred if Class Z shares
had been in existence throughout the entire fiscal year ended December 31,
1996.
+Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Fund may not exceed 6.25% of total gross sales,
subject to certain exclusions. This 6.25% limitation is imposed on each class
of the Fund rather than on a per shareholder basis. Therefore, long-term
shareholders of the Fund may pay more in total sales charges than the economic
equivalent of 6.25% of such shareholders' investment in such shares. See "How
the Fund is Managed-Distributor."
++Although the Class A and Class C Distribution and Service Plans provide that
the Fund may pay a distribution fee of up to .30 of 1% per annum and 1% per
annum of the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees with
respect to Class A and Class C shares of the Fund to no more than .15 of 1%
and .75 of 1% of the average daily net asset value of the Class A and Class C
shares, respectively, for the year ending December 31, 1997. Total operating
expenses without such limitations would be .87% and 1.57% for Class A and
Class C shares, respectively. See "How the Fund is Managed-Distributor."
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4
<PAGE>
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FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the periods indicated)
(Class A Shares)
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The following financial highlights with respect to each of the five years in the
period ended December 31, 1996 have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and the notes
thereto, which appear in the Statement of Additional Information. The financial
highlights contain selected data for a Class A share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for each of the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report which may be obtained without charge. See
"Shareholder Guide-Shareholder Services-Reports to Shareholders."
<TABLE>
<CAPTION>
January 22,
1990(b)
Year Ended December 31, through
---------------------------------------------------------- December 31,
1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period ............................. $ 8.19 $ 7.68 $ 8.70 $ 8.19 $ 7.88 $ 6.72 $ 8.45
-------- -------- -------- -------- -------- ------- -------
Income from investment operations:
Net investment income ................ .75 .81 .80 .84 .90 .93 1.01
Net realized and unrealized gain
(loss) on investments .............. .22 .53 (1.00) .52 .32 1.26 (1.70)
-------- -------- -------- -------- -------- ------- -------
Total from investment
operations ....................... .97 1.34 (.20) 1.36 1.22 2.19 (.69)
-------- -------- -------- -------- -------- ------- -------
Less distributions:
Dividends from net investment income . (.75) (.81) (.80) (.84) (.90) (.93) (1.01)
Distributions in excess of net
investment income .................. (.02) (.02) (.02) (.01) - - -
Distributions from paid-in
capital in excess of par ........... - - - - (.01) (.10) (.03)
-------- -------- -------- -------- -------- ------- -------
Total distributions ................ (.77) (.83) (.82) (.85) (.91) (1.03) (1.04)
-------- -------- -------- -------- -------- ------- -------
Net asset value, end of period ....... $ 8.39 $ 8.19 $ 7.68 $ 8.70 $ 8.19 $ 7.88 $ 6.72
======== ======== ======== ======== ======== ======= =======
TOTAL RETURN:(a) ..................... 12.60% 18.17% (2.35)% 17.32% 15.97% 34.29% (9.15)%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of period (000) ...... $1,564,429 $1,336,354 $161,435 $171,364 $106,188 $54,025 $21,448
Average net assets (000) ............. $1,385,143 $1,056,555 $165,517 $149,190 $ 81,129 $37,194 $15,594
Ratios to average net assets:
Expenses, including
distribution fees ................ .72% .75% .78% .76% .85% .88% .93%(c)
Expenses, excluding
distribution fees ................ .57% .60% .63% .61% .70% .73% .78%(c)
Net investment income .............. 9.20% 10.13% 9.86% 9.93% 10.96% 12.73% 13.58%(c)
Portfolio turnover rate ............ 89% 78% 74% 85% 68% 51% 40%
<FN>
- ----------------
(a) 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.
(b) Commencement of offering of Class A shares.
(c) Annualized.
</FN>
</TABLE>
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5
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the years indicated)
(Class B Shares)
- --------------------------------------------------------------------------------
The following financial highlights with respect to each of the five years in the
period ended December 31, 1996, have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and the notes
thereto, which appear in the Statement of Additional Information. The financial
highlights contain selected data for a Class B share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for each of the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report which may be obtained without charge. See
"Shareholder Guide-Shareholder Services-Reports to Shareholders."
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988(b) 1987
---- ---- ---- ---- ---- ---- ---- ---- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year ..... $ 8.18 $ 7.67 $ 8.69 $ 8.19 $ 7.88 $ 6.71 $ 8.52 $ 9.71 $ 9.69 $10.66
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from
investment
operations:
Net investment income ... .71 .76 .76 .79 .85 .88 1.00 1.10 1.10 1.05
Net realized and
unrealized gain
(loss) on
investments ........... .22 .53 (1.00) .51 .32 1.26 (1.76) (1.19) - (.85)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from
investment
operations ........ .93 1.29 (.24) 1.30 1.17 2.14 (.76) (.09) 1.10 .20
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions:
Dividends from net
investment income ..... (.71) (.76) (.76) (.79) (.85) (.88) (1.02) (1.10) (1.08) (1.15)
Distributions in
excess of net
investment income ...... (.02) (.02) (.02) (.01) - - - - - -
Distributions from
paid-in capital
in excess of par ...... - - - - (.01) (.09) (.03) - - -
Distributions from
net realized
gains ................. - - - - - - - - - (.02)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total
distributions ..... (.73) (.78) (.78) (.80) (.86) (.97) (1.05) (1.10) (1.08) (1.17)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of year ........... $ 8.38 $ 8.18 $7.67 $ 8.69 $ 8.19 $ 7.88 $ 6.71 $ 8.52 $ 9.71 $ 9.69
====== ====== ===== ====== ====== ====== ====== ======= ====== ======
TOTAL RETURN:(a) ........ 11.97% 17.49% (2.92)% 16.54% 15.30% 33.62% (9.52)% (1.38)% 11.87% 1.05%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
year (000) ........ $2,596,207 $2,730,903 $3,311,323 $3,745,985 $2,887,698 $2,199,127 $1,626,067 $2,405,670 $2,561,016 $2,139,618
Average net
assets (000) ...... $2,652,883 $2,725,385 $3,566,709 $3,389,439 $2,582,922 $1,970,257 $1,994,229 $2,689,992 $2,427,581 $2,174,808
Ratio to average
net assets:
Expenses, including
distribution fees ... 1.32% 1.35% 1.38% 1.36% 1.45% 1.48% 1.55% 1.36% 1.30% 1.33%
Expenses, excluding
distribution fees ... .57% .60% .63% .61% .70% .73% .80% .71% .67% .69%
Net investment
income .............. 8.62% 9.56% 9.28% 9.35% 10.29% 11.65% 13.34% 11.70% 10.93% 10.11%
Portfolio turnover rate . 89% 78% 74% 85% 68% 51% 40% 59% 57% 49%
- ----------------
(a) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the first
day and a sale on the last day of each year reported and includes reinvestment of dividends and distributions.
(b) On May 2, 1988, Prudential Mutual Fund Management, Inc. succeeded The Prudential Insurance Company of America as investment
adviser and since then has acted as manager of the Fund. See "Manager" in the Statement of Additional Information.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the periods indicated)
(Class C Shares)
- --------------------------------------------------------------------------------
The following financial highlights have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and the notes
thereto, which appear in the Statement of Additional Information. The financial
highlights contain selected data for a Class C share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the period indicated. The information is based on data contained in the
financial statements. Further performance information is contained in the annual
report which may be obtained without charge. See "Shareholder Guide-Shareholder
Services-Reports to Shareholders."
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, August 1, 1994(b)
--------------------------- through
1996 1995 December 31, 1994
------------ ------------ -----------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ........................... $ 8.18 $ 7.67 $ 8.05
------ ------ ------
Income from investment operations:
Net investment income .......................................... .71 .76 .32
Net realized and unrealized gain (loss) on investments ......... .22 .53 (.37)
------ ------ ------
Total from investment operations ............................. .93 1.29 (.05)
------ ------ ------
Less distributions:
Dividends from net investment income ........................... (.71) (.76) (.32)
Distributions in excess of net investment income ............... (.02) (.02) (.01)
------ ------ ------
Total distributions .......................................... (.73) (.78) (.33)
------ ------ ------
Net asset value, end of period ................................. $ 8.38 $ 8.18 $ 7.67
====== ====== ======
TOTAL RETURN:(a) ............................................... 11.97% 17.49% (0.79)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ................................ $43,374 $24,021 $4,860
Average net assets (000) ....................................... $28,647 $12,063 $2,840
Ratios to average net assets:
Expenses, including distribution fees ........................ 1.32% 1.35% 1.48%(c)
Expenses, excluding distribution fees ........................ .57% .60% .73%(c)
Net investment income ........................................ 8.60% 9.49% 9.80%(c)
Portfolio turnover rate ........................................ 89% 78% 74%
- ----------------
(a) 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.
(b) Commencement of offering of Class C shares.
(c) Annualized.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the indicated period)
(Class Z Shares)
- --------------------------------------------------------------------------------
The following financial highlights have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and the notes
thereto, which appear in the Statement of Additional Information. The financial
highlights contain selected data for a share of Class Z common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the period indicated. The information is based on data contained in the
financial statements. Further performance information is contained in the annual
report which may be obtained without charge. See "Shareholder Guide-Shareholder
Services-Reports to Shareholders."
Class Z
March 1,
1996(b)
through
December 31,
1996
------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ........................... $ 8.34
-------
Income from investment operations:
Net investment income .......................................... .63
Net realized and unrealized gains on investments ............... .07
-------
Total from investment operations ............................. .70
-------
Less distributions:
Dividends from net investment income ........................... (.63)
Distributions in excess of net investment income ............... (.02)
-------
Total distributions .......................................... (.65)
-------
Net asset value, end of period ................................. $ 8.39
=======
TOTAL RETURN:(a) ............................................... 8.77%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ................................ $31,748
Average net assets (000) ....................................... $28,978
Ratios to average net assets:
Expenses, including distribution fees ........................ .57%(c)
Expenses, excluding distribution fees ........................ .57%(c)
Net investment income ........................................ 9.31%(c)
Portfolio turnover rate ........................................ 89%
- ----------------
(a) 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.
(b) Commencement of offering of Class Z shares.
(c) Annualized.
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of the Fund is to maximize current income
through investment in a diversified portfolio of high yield fixed-income
securities which in the opinion of the Fund's investment adviser do not subject
a fund investing in such securities to unreasonable risks. As a secondary
investment objective, the Fund will seek capital appreciation but only when
consistent with its primary objective. Capital appreciation may result, for
example, from an improvement in the credit standing of an issuer whose
securities are held in the Fund's portfolio or from a general lowering of
interest rates, or a combination of both. Conversely, capital depreciation may
result, for example, from a lowered credit standing or a general rise in
interest rates, or a combination of both. The achievement of the Fund's
objectives will depend upon the investment adviser's analytical and portfolio
management skills. There can be no assurance that these objectives will be
achieved.
As with an investment in any mutual fund, an investment in this Fund can
decrease in value and you can lose money.
The Fund's investment objectives are fundamental policies and, therefore,
may not be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities as defined in the Investment Company Act of
1940, as amended (the Investment Company Act). Fund policies that are not
fundamental may be modified by the Board of Directors.
The higher yields sought by the Fund are generally obtainable from
securities rated in the lower categories by recognized rating services. The Fund
expects to seek high current income by investing principally in fixed income
securities rated Baa or lower by Moody's Investors Service (Moody's), or BBB or
lower by Standard & Poor's Ratings Group (Standard & Poor's) or comparably rated
by any other Nationally Recognized Statistical Rating Organization (NRSRO).
Corporate bonds which are rated Baa by Moody's are described by Moody's as being
investment grade, but are also characterized as having speculative
characteristics. Corporate bonds rated below Baa by Moody's and BBB by Standard
& Poor's are considered speculative. It is the present policy of the Fund not to
invest in securities rated below B by both Moody's and Standard & Poor's unless
in the opinion of the investment adviser the financial condition of the issuer
or the protection afforded to the particular securities is stronger than would
otherwise be indicated by such lower ratings (except with respect to distressed
Securities), however, this policy is evaluated from time to time and is subject
to change. A description of corporate bond ratings is contained in Appendix A to
this Prospectus. Since some issuers do not seek ratings for their securities,
non-rated securities will also be considered for investment by the Fund but 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 which are consistent with the Fund's objectives and policies.
Medium to 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 other issuers. Since medium to lower rated securities
generally involve greater risk of loss of income and principal than higher rated
securities, investors should consider carefully the relative risks associated
with investments in securities which carry medium to lower ratings and in
comparable non-rated securities.
The investment adviser will perform its own investment analysis and will not
rely principally on the ratings assigned by the rating services, although such
ratings will be considered by the investment adviser. The investment adviser
will consider, among other things, the financial history and condition, the
prospects and the management of an issuer in selecting securities for the Fund's
portfolio.
Consistent with its primary investment objective, under normal conditions at
least 80% of the value of the Fund's total assets will be invested in the high
yield, medium to lower rated fixed-income securities previously described.
However, when prevailing economic conditions cause a narrowing of the spreads
between the yields derived from medium to lower rated or comparable non-rated
securities and those derived from higher rated issues, the Fund may invest in
higher rated fixed-income securities which provide similar yields but have less
risk. Fixed-income
9
<PAGE>
securities appropriate for the Fund may include both convertible and
nonconvertible debt securities and preferred stock. Generally, the Fund's
average weighted maturity will range from 7 to 12 years. As of December 31,
1996, the Fund's average weighted maturity was 8.1 years.
The Fund may also 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 comparably rated securities paying cash interest at regular
interest payment periods. See "Portfolio Characteristics--Zero Coupon,
Pay-in-Kind and Deferred Payment Securities" in the Statement of Additional
Information.
When market conditions dictate a more defensive investment strategy, the
Fund may invest temporarily 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. In addition, the Fund may on occasion lend portfolio
securities to brokers or dealers in corporate or governmental securities, banks
or other recognized institutional borrowers of securities and may invest up to
20% of its assets in United States currency denominated fixed income issues of
foreign governments and other foreign issuers and up to 10% of its total assets
in foreign currency denominated debt issues of foreign or domestic issuers. Such
investment strategies involve certain risks. See "Portfolio Characteristics" in
the Statement of Additional Information.
The Fund may invest in non-fixed income equity securities which are not
attached to or included in a unit with fixed income securities, such as equity
securities of financially troubled or bankrupt companies (financially troubled
issuers) and in 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 referred to with financially troubled issuers as
"distressed securities"). Equity securities include common stocks, preferred
stocks and warrants. The Board has adopted a non-fundamental policy that the
Fund initially will limit its investments in such securities to no more than 10%
of its total assets. To the extent the Fund invests in equity securities, there
will be a diminution in the Fund's overall yield. See "Risk Factors--Risks
Relating to Investing in Distressed Securities."
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
10
<PAGE>
of the Lender, the Fund may be treated as a general creditor of the Lender and
may not benefit from any set-off between the Lender and the borrower. In
Assignments, by contrast, the Fund acquires direct rights against the borrower,
except that under certain circumstances such rights may be more limited than
those held by the assigning Lender. See "Portfolio Characteristics--Debt
Obligations" in the Statement of Additional Information.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
The Fund may engage in various portfolio strategies, including using
derivatives, to reduce certain risks of its investments and to attempt to
enhance return, but not for speculation. The Fund, and thus the investor, may
lose money through any unsuccessful use of these strategies. These strategies
currently include the use of futures contracts and options thereon (including
interest rate futures contracts and options thereon). The Fund's ability to use
these strategies may be limited by market conditions, regulatory limits and tax
considerations and there can be no assurance that any of these strategies will
succeed. See "Additional Investment Policies" in the Statement of Additional
Information. New financial products and risk management techniques continue to
be developed and the Fund may use these new investments and techniques to the
extent consistent with its investment objectives and policies.
Futures Contracts
The Fund may enter into futures contracts for the purchase or sale of debt
securities and financial indices (collectively, interest rate futures contracts)
in accordance with the Fund's investment objectives. 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, U.S.
government securities, or other liquid, unencumbered assets, with a futures
commission merchant or in a segregated custodial 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."
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 interest rate 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 a
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 interest rate 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 SEC to maintain a segregated asset account with
the Custodian (or a futures commissions merchant) sufficient to cover the Fund's
obligations with respect to such futures contracts, which will consist of cash,
U.S. government securities, or other liquid, unencumbered assets,
marked-to-market daily, 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 the Custodian (or a futures
commissions merchant) with respect to such futures contracts. Offsetting the
contract by another identical contract eliminates the segregation requirement.
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
11
<PAGE>
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 with the Custodian (or a futures
commissions merchant) for the term of the options cash or other 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 the Custodian (or futures commissions
merchants) with respect to such option).
Uses of Interest Rate Futures Contracts
Interest rate 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
closely correlated or are expected to closely correlate 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 net asset value 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 positions, 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.
12
<PAGE>
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 (i.e., sell) "covered" put
and call options on futures contracts that are traded on commodity and futures
exchanges.
If the Fund purchased 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.
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 a 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 with the Custodian for the term
of the option cash or liquid securities 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 interest rate 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 interest rate 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 option is below the exercise price, the
Fund would
13
<PAGE>
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. See
"Portfolio Characteristics-Futures Contracts" in the Statement of Additional
Information.
RISK FACTORS
Risks Relating To Investing In High Yield Securities
Fixed-income securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and general
market liquidity (market risk). Lower rated or unrated (i.e., high yield)
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.
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.
The amount of high yield securities outstanding proliferated in the 1980's
in conjunction with the increase in merger and acquisition and leveraged buyout
activity. Under adverse economic conditions, there is a risk that highly
leveraged issuers may be unable to service their debt obligations or to repay
their obligations upon maturity. In addition, the secondary market for high
yield securities, which is concentrated in relatively few market makers, may not
be as liquid as the secondary market for more highly rated securities. Under
adverse market or economic conditions, the secondary market for high yield
securities could contract further, independent of any specific adverse changes
in the condition of a particular issuer. As a result, the investment adviser
could find it more difficult to sell these securities or may be able to sell the
securities only at prices lower than if such securities were widely traded.
Prices realized upon the sale of such lower rated or unrated securities, under
these circumstances, may be less than the prices used in calculating the Fund's
net asset value. Under circumstances where the Fund owns the majority of an
issue, market and credit risks may be greater.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the Fund's portfolio and increasing
the exposure of the Fund to the risks of high yield securities.
During the fiscal year ended December 31, 1996, the monthly dollar weighted
average ratings of the debt obligations held by the Fund, expressed as a
percentage of the Fund's total investments, were as follows:
Percentage of Total
Ratings Investments
------- -------------------
AAA/Aaa -
AA/Aa -
A/A -
BBB/Baa 0.5%
BB/Ba 19.2
B/B 64.4
CCC/Caa 6.5
CC/Ca .01
C/C -
Unrated 9.3
See "Investment Objectives and Policies" in the Statement of Additional
Information.
14
<PAGE>
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 the investor, may lose money through any
unsuccessful use of these strategies. If the investment adviser's prediction 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
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 and markets; (2) imperfect correlation
between the price of options and futures contracts and options thereon and
movements in the prices of the securities being hedged; (3) the fact that skills
needed to use these strategies are different from those needed to select
portfolio securities; (4) the possible absence of a liquid secondary market for
any particular instrument at any time; (5) the possible need to defer closing
out certain hedged positions to avoid adverse tax consequences; and (6) the
possible inability of 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 security at a disadvantageous time, due to the need for the
Fund to maintain "cover" or to segregate securities in connection with hedging
techniques. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
Risks Relating to Investing in Distressed Securities
Distressed securities involve a high degree of credit and market risk and
are subject to greater credit and market risk and price volatility than the
securities in which the Fund generally invests. Although the Fund would 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 economic
downturn or recession, securities of financially troubled issuers are more
likely to go into default than securities of other issuers. In addition, it may
be difficult to obtain information about financially and operationally troubled
issuers.
Securities of financially troubled issuers are less liquid and more volatile
than securities of companies not experiencing financial difficulties. The market
prices of such securities are subject to erratic and abrupt market movements and
the spread between bid and asked prices may be greater than normally expected.
In addition, it is anticipated that many of 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.
Distressed securities which the Fund may purchase may also include
securities of companies involved in bankruptcy proceedings, reorganizations and
financial restructurings. To the extent the Fund invests in such securities, it
may have a more active participation in the affairs of issuers than is generally
assumed by an investor. This may subject the Fund to litigation risks or prevent
the Fund from disposing of securities.
OTHER INVESTMENTS AND POLICIES
Repurchase Agreements
The Fund may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase a security from the Fund at a mutually agreed
upon time and price. The period of maturity is usually quite short, possibly
overnight or a few days, although it may extend over a number of months. The
resale price is in excess of the purchase price, reflecting an agreed upon rate
of return effective for the period of time the Fund's money is invested in the
security. The Fund's repurchase agreements will at all times be fully
collateralized in an amount at least equal to the resale price.
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The instruments held as collateral are valued daily, and if the value of
instruments declines, the Fund will require additional collateral. If the seller
defaults and the value of the collateral securing the repurchase agreement
declines, the Fund may incur a loss. The Fund participates in a joint repurchase
account with other investment companies managed by PMF pursuant to an order of
the Securities and Exchange Commission (SEC). See "Portfolio
Characteristics-Repurchase Agreements" in the Statement of Additional
Information.
When-Issued and Delayed Delivery Securities
The Fund may purchase securities on a when-issued or delayed basis.
When-issued or delayed delivery transactions arise when securities are purchased
by the Fund with payment and delivery taking place a month or more in the future
in order to secure what is considered to be an advantageous price and yield to
the Fund at the time of entering into the transaction. While the Fund will only
purchase securities on a when-issued or delayed delivery basis with the
intention of acquiring the securities, the Fund may sell the securities before
the settlement date, if it is deemed advisable. At the time the Fund makes the
commitment to purchase securities on a when-issued or delayed delivery basis,
the Fund will record the transaction and thereafter reflect the value, each day,
of such security in determining the net asset value of the Fund. At the time of
delivery of the securities, the value may be more or less than the purchase
price. The Fund's custodian will maintain, in a segregated account of the Fund,
cash, U.S. Government securities, equity securities or other liquid,
unencumbered assets, marked to market daily, having a value equal to or greater
than the Fund's purchase commitments. Subject to this requirement, the Fund may
purchase securities on such basis without limit.
Borrowing
The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) from banks for temporary,
extraordinary or emergency purposes or for the clearance of transactions. The
Fund may pledge up to 20% of its total assets to secure these borrowings.
However, 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 illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended (Securities Act), that have a readily available market would
not be considered illiquid for purposes of this limitation. The Fund's
investment in Rule 144A securities could have the effect of increasing
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing Rule 144A securities. The investment adviser
will monitor the liquidity of such restricted securities under the supervision
of the Board of Directors. Repurchase agreements subject to demand are deemed to
have a maturity equal to the applicable notice period.
Restricted securities are sometimes referred to as private placement
securities. Such securities may be purchased directly from the issuer or in the
secondary market (Direct Placement Securities). The Fund will purchase Direct
Placement Securities when, in the opinion of the investment adviser, such
securities provide greater value due either to higher yields, attractive
technical features (such as call or refunding protection) or both.
Direct Placement Securities are subject to statutory or contractual
restrictions and delays on resale. Limitations on the resale of such securities
may have an adverse effect on their marketability, which may prevent the Fund
from disposing of them promptly at reasonable prices. The Fund may have to bear
the expense of registering such securities for resale and the risk of
substantial delays in effecting such registration. At certain times, adverse
conditions in the public securities markets may preclude a public offering of an
issuer's securities.
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<PAGE>
Investments in Securities of Other Investment Companies
The Fund may invest up to 10% of its total assets in shares of other
investment companies. To the extent that the Fund does invest in securities of
other investment companies, shareholders of the Fund may be subject to duplicate
managment and advisory fees.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objectives, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
- --------------------------------------------------------------------------------
HOW THE FUND IS MANAGED
- --------------------------------------------------------------------------------
The Fund has a Board of Directors which, in addition to overseeing the
actions of the Fund's Manager, Subadviser and Distributor, as set forth below,
decides upon matters of general policy. The Fund's Manager conducts and
supervises the daily business operations of the Fund. The Fund's Subadviser
furnishes daily investment advisory services.
For the year ended December 31, 1996, the Fund's total expenses as a
percentage of average net assets for the Fund's Class A, Class B, Class C and
Class Z shares were .72%, 1.32%, 1.32% and .57% (annualized), respectively. See
"Financial Highlights."
MANAGER
Prudential Mutual Fund Management LLC (PMF or the Manager), Gateway Center
Three, Newark, New Jersey 07102, is the Manager of the Fund and is compensated
for its services at an annual rate of .50 of 1% of the Fund's average daily net
assets up to and including $250 million, .475 of 1% of the next $500 million,
.45 of 1% of the next $750 million, .425 of 1% of the next $500 million, .40 of
1% of the next $500 million, .375 of 1% of the next $500 million and .35 of 1%
of the Fund's average daily net assets in excess of $3 billion. PMF is organized
in New York as a limited liability company. It is the successor to Prudential
Mutual Fund Management, Inc., which transferred its assets to PMF in September
1996. For the fiscal year ended December 31, 1996, the Fund paid management fees
to PMF of .41% of the Fund's average net assets. See "Manager" in the Statement
of Additional Information.
As of January 31, 1997, PMF served as the manager to 40 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately 55.8 billion.
Under the Management Agreement with the Fund, PMF manages the investment
operations of the Fund and also administers the Fund's corporate affairs. See
"Manager" in the Statement of Additional Information.
Under a Subadvisory Agreement between PMF and The Prudential Investment
Corporation (PIC), doing business as Prudential Investments (PI, the Subadviser
or the investment adviser), PI furnishes investment advisory services in
connection with the management of the Fund and is reimbursed by PMF for its
reasonable costs and expenses incurred in providing such services. PMF continues
to have responsibility pursuant to the Management Agreement for all investment
advisory services and supervises PI's performance of such services.
The current portfolio manager of the Fund is Lars M. Berkman, a Managing
Director of PI. Mr. Berkman has managed the Fund's portfolio since July 1991 and
has been employed by PI as a portfolio manager since 1990. Prior thereto, he was
with the Corporate Finance Group (from 1989 to 1990) and the Financial Services
Group (from 1987 to
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<PAGE>
1988) of The Prudential Insurance Company of America (Prudential). In managing
the Fund, he seeks to identify well priced, high yield securities consistent
with the Fund's investment objective. Mr. Berkman is assisted by a team of
credit analysts who analyze corporte cash flows, sales, earnings and management
trends.
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance
Company of America (Prudential), a major diversified insurance and financial
services company.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, is a corporation organized under the
laws of the State of Delaware and serves as the distributor of the shares of the
Fund. It is an indirect, wholly-owned subsidiary of Prudential.
Under separate Distribution and Service Plans (the Class A Plan, the Class B
Plan and the Class C Plan, collectively, the Plans) adopted by the Fund under
Rule 12b-1 under the Investment Company Act and a distribution agreement (the
Distribution Agreement), Prudential Securities (the Distributor) incurs the
expenses of distributing the Fund's Class A, Class B and Class C shares.
Prudential Securities also incurs the expenses of distributing the Fund's Class
Z shares under the Distribution Agreement, none of which is reimbursed by or
paid for by the Fund. These expenses include commissions and account servicing
fees paid to, or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of Prudential Securities and Prusec associated with the sale
of Fund shares, including lease, utility, communications and sales promotion
expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
Under the Class A Plan, the Fund may pay Prudential Securities for its
distribution-related activities with respect to Class A shares at an annual rate
of up to .30 of 1% of the average daily net assets of the Class A shares. The
Class A Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1% of the
average daily net assets of the Class A shares. It is expected that in the case
of Class A Shares, proceeds from the distribution fee will be used primarily to
pay account servicing fees to finanical advisers. Prudential Securities has
agreed to limit its distribution-related fees payable under the Class A Plan to
.15 of 1% of the average daily net assets of the Class A shares for the current
fiscal year ending December 31, 1997.
Under the Class B and Class C Plans, the Fund may pay Prudential Securities
for its distribution-related activities with respect to Class B and Class C
shares at an annual rate of up to .75 of 1% and 1% of the average daily net
assets of the Class B and Class C shares, respectively. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .75 of 1% of the average daily net assets of the Class B shares
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.75 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities has agreed to limit its distribution-
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<PAGE>
related fees payable under the Class C Plan to .75 of 1% of the average daily
net assets of the Class C shares for the fiscal year ending December 31, 1997.
Prudential Securities also receives contingent deferred sales charges from
certain redeeming shareholders. See "Shareholder Guide-How to Sell Your
Shares-Contingent Deferred Sales Charge."
For the fiscal year ended December 31, 1996, the Fund paid distribution
expenses of .15%, .75% and .75% of the average net assets of the Class A, Class
B and Class C shares, respectively. The Fund records all payments made under the
Plans as expenses in the calculation of net investment income. See "Distributor"
in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B and Class
C shares of the Fund will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Fund, including a
majority of the Directors who are not "interested persons" of the Fund (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to the
Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each Plan
may be terminated at any time by vote of a majority of the Rule 12b-1 Directors
or of a majority of the outstanding shares of the applicable class of the Fund.
The Fund will not be obligated to pay expenses incurred under any Plan if it is
terminated or not continued.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons which distribute shares of the Fund (including
Class Z shares). Such payments may be calculated by reference to the net asset
value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of
a $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted
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<PAGE>
by the United States for the offenses charged in the complaint. If on the other
hand, during the course of the three year period, PSI violates the terms of the
agreement, the U.S. Attorney can then elect to pursue these charges. Under the
terms of the agreement, PSI agreed, among other things, to pay an additional
$330,000,000 into the fund established by the SEC to pay restitution to
investors who purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker for the Fund, provided that the
commissions, fees or other remuneration it receives are fair and reasonable. See
"Portfolio Transactions and Brokerage" in the Statement of Additional
Information.
From time to time Prudential Securities (and other affiliates of Prudential)
render investment banking services which may relate to or involve issuers of
securities held by the Fund or sought to be purchased or sold by the Fund.
Accordingly, Prudential Securities and its clients may have interests in actual
or potential conflict with the interests of the Fund. Under such circumstances,
the Manager will act in the best interests of the Fund without regard to the
interests of Prudential Securities or its clients.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company (State Street or the Custodian), One
Heritage Drive, North Quincy, Massachusetts 02171, serves as Custodian for the
Fund's portfolio securities and cash and, in that capacity, maintains certain
financial and accounting books and records pursuant to an agreement with the
Fund. Its mailing address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), Raritan
Plaza One, Edison, New Jersey 08837, serves as Transfer Agent and Dividend
Disbursing Agent and, in those capacities, maintains certain books and records
for the Fund. PMFS is a wholly-owned subsidiary of PMF. Its mailing address is
P.O. Box 15005, New Brunswick, New Jersey 08906-5005.
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HOW THE FUND VALUES ITS SHARES
- --------------------------------------------------------------------------------
The Fund's net asset value per share or NAV is determined by subtracting its
liabilities from the value of its assets and dividing the remainder by the
number of outstanding shares. NAV is calculated separately for each class. The
Board of Directors has fixed the specific time of day for the computation of the
Fund's NAV to be as of 4:15 P.M., New York time.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Fund or days on which changes in the
value of the Fund's portfolio securities do not materially affect the NAV. The
New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
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<PAGE>
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. The
NAV of Class Z shares will generally be higher than the NAV of the other three
classes because Class Z shares are not subject to any distribution and/or
service fees. It is expected, however, that the NAV of the four classes will
tend to converge immediately after the recording of dividends, which will differ
by approximately the amount of the distribution and/or service fee expense
accrual differential among the classes.
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HOW THE FUND CALCULATES PERFORMANCE
- --------------------------------------------------------------------------------
From time to time the Fund may advertise its "yield" and "total return"
(including "average annual" total return and "aggregate" total return) in
advertisements and sales literature. Yield and total return are calculated
separately for Class A, Class B, Class C and Class Z shares. These figures are
based on historical earnings and are not intended to indicate future
performance. The "yield" refers to the income generated by an investment in the
Fund over a one-month or 30-day period. This income is then "annualized"; that
is, the amount of income generated by the investment during that 30-day period
is assumed to be generated each 30-day period for twelve periods and is shown as
a percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. The "total
return" shows how much an investment in the Fund would have increased
(decreased) over a specified period of time (i.e., one, five or ten years or
since inception of the Fund) assuming that all distributions and dividends by
the Fund were reinvested on the reinvestment dates during the period and less
all recurring fees. The "aggregate" total return reflects actual performance
over a stated period of time. "Average annual" total return is a hypothetical
rate of return that, if achieved annually, would have produced the same
aggregate total return if performance had been constant over the entire period.
Average annual total return smooths out variations in performance and takes into
account any applicable initial or contingent deferred sales charges. Neither
"average annual" total return nor "aggregate" total return takes into account
any federal or state income taxes which may be payable upon redemption. The Fund
also may include comparative performance information in advertising or marketing
the Fund's shares. Such performance information may include data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. Further performance
information is contained in the Fund's annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder
Guide-Shareholder Services-Reports to Shareholders."
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TAXES, DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
Taxation of the Fund
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under the Internal Revenue Code. Accordingly, the
Fund will not be subject to federal income taxes on its net investment income
and capital gains, if any, that it distributes to its shareholders. See "Taxes,
Dividends and Distributions" in the Statement of Additional Information.
Taxation of Shareholders
All dividends out of net investment income, together with distributions of
net short-term capital gains in excess of net long-term capital losses, will be
taxable as ordinary income to the shareholder whether or not reinvested. Any net
long-term capital gains (i.e., the excess of net long-term capital gains over
net short-term capital losses) distributed to
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<PAGE>
shareholders will be taxable as such to the shareholders, whether or not
reinvested and regardless of the length of time a shareholder has owned his or
her shares. The maximum long-term capital gains rate for individual shareholders
is 28% and the maximum tax for ordinary income is 39.6%. The maximum long-term
capital gains rate for corporate shareholders is currently the same as the 35%
maximum corporate tax rate for ordinary income.
Any gain or loss realized upon a sale or redemption of Fund shares by a
shareholder who is not a dealer in securities will be treated as a long-term
capital gain or loss if the shares have been held for more than one year and
otherwise as a short-term capital gain or loss. Any such loss, with respect to
shares that are held for six months or less, however, will be treated as a
long-term capital loss to the extent of any capital gains distributions received
by the shareholder.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of any
class of the Fund's shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes. See "Taxes, Dividends
and Distributions" in the Statement of Additional Information.
Shareholders not subject to tax on their income will generally not be
required to pay tax on amounts distributed to them.
Withholding Taxes
Under the Internal Revenue Code, the Fund is generally required to withhold
and remit to the U.S. Treasury 31% of dividends, capital gain distributions and
redemption proceeds payable to individuals and certain noncorporate shareholders
who fail to furnish correct tax identification numbers on IRS Form W-9 (or IRS
Form W-8 in the case of certain foreign shareholders). Withholding at this rate
is also required from dividends and capital gains distributions (but not
redemption proceeds) payable to shareholders who are otherwise subject to backup
withholding. Dividends of net investment income and net short-term capital gains
payable to a foreign shareholder will generally be subject to U.S. withholding
tax at the rate of 30% (or lower treaty rate).
Dividends and Distributions
The Fund expects to declare daily and pay monthly dividends based on actual
net investment income determined in accordance with generally accepted
accounting principles; however, a portion of such dividend may also include
projected net investment income. The Fund expects to make distributions at least
annually of any net capital gains, if any. Dividends paid by the Fund with
respect to each class of shares, to the extent any dividends are paid, will be
calculated in the same manner, at the same time, on the same day and will be in
the same amount except that each class will bear its own distribution expenses,
generally resulting in lower dividends for Class B and Class C shares in
relation to Class A and Class Z shares and lower dividends for Class A shares in
relation to Class Z shares. Distributions of net capital gains, if any, will be
paid in the same amount for each class of shares. See "How the Fund Values its
Shares."
Dividends and distributions will be paid in additional Fund shares based on
the net asset value of each class of Fund shares on the payment date and record
date, respectively, or such other date as the Board of Directors may determine,
unless the shareholder elects in writing not less than five business days prior
to the record date to receive such dividends and distributions in cash. Such
election should be submitted to Prudential Mutual Fund Services LLC, Attention:
Account Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. The
Fund will notify each shareholder after the close of the Fund's taxable year
both of the dollar amount and the taxable status of that year's dividends and
distributions on a per share basis. If you hold shares through Prudential
Securities, you should contact your financial adviser to elect to receive
dividends and distributions in cash.
As of December 31, 1996 the Fund had a capital loss carryforward for federal
income tax purposes of $673,926,900. Accordingly, no capital gains distribution
is expected to be paid to shareholders until net gains have been realized in
excess of such carryforward amount.
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<PAGE>
To the extent that, in a given year, distributions to shareholders exceed
the Fund's current and accumulated earnings and profits, shareholders will
receive a return of capital in respect of such year and, in an annual statement,
will be notified of the amount of any return of capital for such year.
Any distributions of net capital gains paid shortly after a purchase by an
investor will have the effect of reducing the per share net asset value of the
investor's shares by the per share amount of the distributions. Such
distributions, although in effect a return of invested principal, are subject to
federal income taxes. Accordingly, prior to purchasing shares of the Fund, an
investor should carefully consider the impact of capital gains distributions
which are expected to be or have been announced.
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GENERAL INFORMATION
- --------------------------------------------------------------------------------
DESCRIPTION OF COMMON STOCK
The Fund was incorporated in Maryland on January 5, 1979. The Fund is
authorized to issue 3 billion shares of common stock, $.01 par value per share,
divided into four classes, designated Class A, Class B, Class C and Class Z
common stock, which consists of 750 million authorized Class A shares, 750
million authorized Class B shares, 750 million authorized Class C shares and 750
million authorized Class Z shares. Each class of common stock represents an
interest in the same assets of the Fund and is identical in all respects except
that (i) each class is subject to different sales charges and distribution
and/or service fees (except for Class Z shares, which are not subject to any
sales charges and distribution and/or service fees), which may affect
performance, (ii) each class has exclusive voting rights on any matter submitted
to shareholders that relates solely to its arrangement and has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of any other class, (iii) each class has a
different exchange privilege, (iv) only Class B shares have a conversion feature
and (v) Class Z shares are offered exclusively for sale to a limited group of
investors. See "How the Fund is Managed-Distributor." In accordance with the
Fund's Articles of Incorporation, the Board of Directors may authorize the
creation of additional series of common stock and classes within such series,
with such preferences, privileges, limitations and voting and dividend rights as
the Board may determine. Currently, the Fund is offering only four classes,
designated Class A, Class B, Class C and Class Z shares.
The Board of Directors may increase or decrease the number of authorized
shares without approval by the shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances as described under "Shareholder Guide-How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except that, as noted above, each class of shares
(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 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 debt 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 Class Z shares are not subject to any distribution and/or
service fee. 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% of the
Fund's outstanding shares for the purpose of voting on the removal of one or
more Directors or to transact any other business.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under
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the Securities Act. Copies of the Registration Statement may be obtained at a
reasonable charge from the SEC or may be examined, without charge, at the office
of the SEC in Washington, D.C.
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SHAREHOLDER GUIDE
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HOW TO BUY SHARES OF THE FUND
You may purchase shares of the Fund through Prudential Securities, Prusec or
directly from the Fund through its Transfer Agent, Prudential Mutual Fund
Services LLC (PMFS or Transfer Agent), Attention: Investment Services, P.O. Box
15020, New Brunswick, New Jersey 08906-5020. The purchase price is the net asset
value per share next determined following receipt of an order by the Transfer
Agent or Prudential Securities plus a sales charge which, at your option, may be
imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). Class Z shares are offered to a
limited group of investors at NAV without any sales charge. Participants in
programs sponsored by Prudential Retirement Series should contact their client
representative for more information about Class Z shares. See "Alternative
Purchase Plan" and "How the Fund Values its Shares."
The minimum initial investment for Class A and Class B shares is $1,000 and
$5,000 for Class C shares, except that the minimum initial investment for Class
C shares may be waived from time to time. There is no minimum initial investment
for Class Z shares. The minimum subsequent investment is $100 for all classes,
except for Class Z shares for which there is no such minimum. All minimum
investment requirements are waived for certain retirement and employee savings
plans or custodial accounts for the benefit of minors. For purchases through the
Automatic Savings Accumulation Plan, the minimum initial and subsequent
investment is $50. See "Shareholder Services" below.
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a stock certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders who
hold their shares through Prudential Securities will not receive stock
certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
Purchase by Wire. For an initial purchase of shares of the Fund by wire, you
must first telephone PMFS to receive an account number at (800) 225-1852
(toll-free). The following information will be requested: your name, address,
tax identification number, class election, dividend distribution election,
amount being wired and wiring bank. Instructions should then be given by you to
your bank to transfer funds by wire to State Street Bank and Trust Company,
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 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 Fund,
Inc., Class A, Class B, Class C or Class Z shares and your name and individual
account number. It is not necessary to call PMFS to make subsequent purchase
orders utilizing Federal Funds. The minimum amount which may be invested by wire
is $1,000.
ALTERNATIVE PURCHASE PLAN
The Fund offers four classes of shares through this Prospectus (Class A,
Class B, Class C and Class Z shares) which allows you to choose the most
beneficial sales charge structure for your individual circumstances given the
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amount of the purchase, the length of time you expect to hold the shares and
other relevant circumstances (Alternative Purchase Plan).
<TABLE>
<CAPTION>
Annual 12b-1 Fees
(as a % of average daily
Sales Charge net assets) Other information
-------------------------------------- -------------------- --------------------------------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of 4% of .30 of 1% (Currently Initial sales charge waived or reduced
the public offering price being charged at for certain purchases
a rate of .15 of 1%)
Class B Maximum contingent deferred sales .75 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
Class C Maximum CDSC of 1% of the lesser of 1% (Currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
Class Z None None Sold to a limited
group of investors.
</TABLE>
The four classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
(with the exception of Class Z shares which are not subject to any distribution
or service fees) bears the separate expenses of its Rule 12b-1 distributor and
service plan. (ii) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, (iii) only
Class B shares have a conversion feature, and (iv) Class Z shares are
exclusively offered for sale to a limited group of investors. The four classes
also have separate exchange privileges. See "How to Exchange Your Shares" below.
The income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee (if any) of
each class. Class B and Class C shares bear the expenses of a higher
distribution fee which will generally cause them to have higher expense ratios
and to pay lower dividends than the Class A and Class Z shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B, Class C and Class Z
shares and will generally receive more compensation initially for selling Class
A and Class B shares than for selling Class C or Class Z shares.
In selecting a purchase alternative, you should consider, among other
things, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares automatically
convert to Class A shares approximately seven years after purchase (see
"Conversion Feature-Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 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 6 years, you should
consider purchasing Class A shares over either Class B or Class C shares
regardless of whether or not you qualify for a reduced sales charge on Class A
shares.
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If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and Class C shares for the
higher cumulative annual distribution-related fee on those shares to exceed the
initial sales charge plus cumulative annual distribution-related fees on Class A
shares. This does not take into account the time value of money, which further
reduces the impact of the higher Class B or Class C distribution-related fee on
the investment, fluctuations in net asset value, the effect of the return on the
investment over this period of time or redemptions during which the CDSC is
applicable.
All purchases of $1 million or more, either as part of a single investment
or under Rights of Accumulation or Letters of Intent, must be for Class A shares
unless the purchaser is eligible to purchase Class Z shares. See "Reduction and
Waiver of Initial Sales Charges" and "Class Z Shares" below.
Class A Shares
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested) as
shown in the following table:
Sales Charge as Sales Charge as Dealer Concession
Percentage of Percentage of as Percentage of
Amount of Purchase Offering Price Amount Invested Offering Price
------------------ -------------- --------------- --------------
Less than $50,000 ........ 4.00% 4.17% 3.75%
$50,000 to $99,999 ....... 3.50% 3.63% 3.25%
$100,000 to $249,999 ..... 2.75% 2.83% 2.50%
$250,000 to $499,999 ..... 2.00% 2.04% 1.90%
$500,000 to $999,999 ..... 1.50% 1.52% 1.40%
$1,000,000 and above ..... None None None
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in the
Securities Act.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisors and other persons which distribute shares
of the Fund finders' fees based on a percentage of the NAV of shares sold by
such person.
Reduction and Waiver of Initial Sales Charges. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares-Reduction and Waiver of Initial Sales Charges-Class A Shares" in the
Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (collectively, Benefit Plans), provided that the Benefit Plan has
existing assets of at least $1 million invested in shares of Prudential Mutual
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Funds (excluding money market funds other than those acquired pursuant to the
exchange privilege) or 250 eligible employees or participants. In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential Securities
does individual account recordkeeping (Direct Account Benefit Plans) and Benefit
Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary Prototype Benefit
Plans), Class A shares may be purchased at NAV by participants who are repaying
loans made from such plans to the participant.
PruArray and SmartPath Plans. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or
non-qualified under the Internal Revenue Code, including pension, profit-
sharing, stock-bonus or other employee benefit plans under Section 401 of the
Internal Revenue Code and deferred compensation and annuity plans under Sections
457 or 403(b)(7) of the Internal Revenue Code that participate in the Transfer
Agent's PruArray or SmartPath Programs (benefit plan recordkeeping services)
(hereafter referred to as a PruArray or SmartPath Plan); provided (i) that the
plan has at least $1 million in existing assets or 250 eligible employees or
participants.The term "existing assets" for this purpose includes stock issued
by a PruArray or SmartPath Plan sponsor, shares of non-money market Prudential
Mutual Funds and shares of certain unaffiliated non-money market mutual funds
that participate in the PruArray or SmartPath Programs (Participating Funds).
"Existing assets" also include shares of money market funds acquired by exchange
from a Participating Fund, monies invested in The Guaranteed Interest Account
(GIA), a group annuity insurance product issued by Prudential, and units of The
Stable Value Fund (SVF), an unaffiliated bank collective Fund. Class A shares
may also be purchaesd at NAV by plans that have monies invested in the GIA and
SVF, provided the purchase is made with the proceeds of a redemption from either
GIA or SVF and (ii) Class A shares are an investment option of the plan.
PruArray Association Benefit Plans. Class A shares are also offered at net
asset value to Benefit Plans or non-qualified plans sponsored by employers which
are members of a common trade, professional or membership association
(Association) that participate in the PruArray Program provided that the
Association enters into a written agreement with Prudential. Such Benefit Plans
or non-qualified plans may purchase Class A shares at net asset value without
regard to the assets or number of participants in the individual employer's
qualified Plan(s) or non-qualified plans so long as the employers in the
Association (i) have retirement plan assets in the aggregate of at least $1
million or 250 participants in the aggregate and (ii) maintain their accounts
with the Fund's transfer agent.
PruArray Savings Program. Class A shares are also offered at net asset value
to employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
at net asset value by Individual Retirement Accounts and Savings Accumulation
Plans of the company's employees. The Program is available only to (i) employees
who open an IRA or Savings Accumulation Plan account with the Fund's transfer
agent and (ii) spouses of employees who open an IRA account with the Fund's
transfer agent. The program is offered to companies that have at least 250
eligible employees.
Special Rules Applicable to Retirement Plans. After a Benefit Plan, PruArray
Plan or SmartPath Plan qualifies to purchase Class A shares at NAV, all
subsequent purchases will be made at NAV.
Other Waivers. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers and current and former Directors/Trustees of the Prudential Mutual
Funds (including the Fund), (b) employees of Prudential Securities and PMF and
their subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees of subadvisers of the Prudential Mutual Funds, provided that purchases
at NAV are permitted by such person's employer, (d) Prudential employees and
special agents of Prudential and its subsidiaries and all persons who
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<PAGE>
have retired directly from active service with Prudential or one of its
subsidiaries, (e) registered representatives and employees of dealers who have
entered into a selected dealer agreement with Prudential Securities provided
that purchases at NAV are permitted by such persons's employer and (f) investors
who have a business relationship with a financial adviser who joined Prudential
Securities from another investment firm, provided that (i) the purchase is made
within 180 days of the commencement of the financial adviser's employment at
Prudential Securities, or within one year in the case of Benefit Plans, (ii) the
purchase is made with proceeds of a redemption of shares of any open-end, non-
money market fund sponsored by the financial adviser's previous employer (other
than a fund which imposes a distribution or service fee of .25 of 1% or less)
and (iii) the financial adviser served as the client's broker on the previous
purchases.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
purchased upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares-Reduction and Waiver of Initial Sales
Charges-Class A Shares" in the Statement of Additional Information.
Class B and Class C Shares
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-Contingent Deferred Sales Charges." The Distributor will pay sales
commissions of up to 4% of the purchase price of Class B shares to dealers,
financial advisers and other persons who sell the Class B shares at the time of
sale from its own resources. This facilitates the ability of the Fund to sell
the Class B shares without an initial sales charge being deducted at the time of
purchase. The Distributor anticipates that it will recoup its advancement of
sales commissions from the combination of the CDSC and the distribution fee. See
"How the Fund is Managed-Distributor." In connection with the sale of Class C
shares, the Distributor will pay dealers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 1% of the purchase
price at the time of the sale.
Class Z Shares
Class Z shares of the Fund are available for purchase by the following
categories of investors:
(i) pension, profit-sharing or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code, deferred compensation and annuity
plans under Sections 457 and 403(b)(7) of the Internal Revenue Code and
non-qualified plans for which the Fund is an available option (collectively,
Benefit Plans), provided such Benefit Plans (in combination with other plans
sponsored by the same employer or group of related employers) have at least $50
million in defined contribution assets; (ii) participants in any fee-based
program sponsored by Prudential Securities or its affiliates which includes
mutual funds as investment options and for which the Fund is an available
option; and (iii) investors who are, or have executed a letter of intent to
become shareholders of any series of Prudential Dryden Fund (formerly The
Prudential Institutional Fund (Dryden Fund)) on or before one or more series of
Dryden Fund reorganized or investors who on that date had investments in certain
products for which Dryden Fund provided exchangeability. After a Benefit Plan
qualifies to purchase Class Z shares, all subsequent purchases will be for Class
Z shares.
In connectlon with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay dealers, financial advisers and other persons
which distribute shares a finders' fee based on a percentage of the net asset
value of shares sold by such persons.
HOW TO SELL YOUR SHARES
You can redeem your shares at any time for cash at NAV next determined after
the redemption request is received in proper form by the Transfer Agent or
Prudential Securities. See "How the Fund Values its Shares." In certain cases,
however, redemption proceeds will be reduced by the amount of any applicable
contingent deferred sales charge, as described below. See "Contingent Deferred
Sales Charges" below.
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<PAGE>
If you hold shares of the Fund through Prudential Securities, you must
redeem your shares by contacting your Prudential Securities financial adviser.
If you hold shares in non-certificate form, a written request for redemption
signed by you exactly as the account is registered is required. If you hold
certificates, the certificates, signed in the name(s) shown on the face of the
certificates, must be received by the Transfer Agent in order to be redeemed,
which may delay receipt of the proceeds for the redemption request to be
processed. If redemption is requested by a corporation, partnership, trust or
fiduciary, written evidence of authority acceptable to the Transfer Agent must
be submitted before such request will be accepted. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services LLC, Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power, must be guaranteed by
an "eligible guarantor institution." An "eligible guarantor institution"
includes any bank, broker, dealer or credit union. The Transfer Agent reserves
the right to request additional information from, and make reasonable inquiries
of, any eligible guarantor institution. For clients of Prusec, a signature
guarantee may be obtained from the agency or office manager of most Prudential
Insurance and Financial Services or Preferred Services offices. In the case of
redemptions from a PruArray or SmartPath Plan, if the proceeds of the redemption
are invested in another investment option of the plan, in the name of the record
holder and at the same address as reflected in the Transfer Agent's records, a
signature guarantee is not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent of the certificate and/or written
request except as indicated below. If you hold shares through Prudential
Securities, payment for shares presented for redemption will be credited to your
Prudential Securities account, unless you indicate otherwise. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during any other period when the SEC, by
order, so permits; provided that applicable rules and regulations of the SEC
shall govern as to whether the conditions prescribed in (b), (c) or (d) exist.
Payment for redemption of recently purchased shares will be delayed until
the Fund or its Transfer Agent has been advised that the purchase check has been
honored, up to 10 calendar days from the time of receipt of the purchase check
by the Transfer Agent. Such delay may be avoided by purchasing shares by wire or
by certified or official bank check.
Redemption in Kind. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you would incur transaction costs in converting the
assets into cash. The Fund, 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 net asset value
of the Fund during any 90-day period for any one shareholder.
Involuntary Redemption. In order to reduce expenses of the Fund, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any involuntary redemption.
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<PAGE>
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 net asset
value 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
Fund's Transfer Agent, either directly or through Prudential Securities, at the
time the repurchase privilege is exercised to adjust your account for the CDSC
you previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege may affect federal tax
treatment of any gain realized upon redemption. See "Taxes" in the Statement of
Additional Information.
Contingent Deferred Sales Charges
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares 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. See "How
the Fund is Managed-Distributor" and "Waiver of the Contingent Deferred Sales
Charges-Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares" below.
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
Contingent Deferred Sales
Charge as a Percentage
Year Since Purchase of Dollars Invested or
Payment Made Redemption Proceeds
------------------- -------------------
First .................................... 5.0%
Second ................................... 4.0%
Third .................................... 3.0%
Fourth ................................... 2.0%
Fifth .................................... 1.0%
Sixth .................................... 1.0%
Seventh .................................. None
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 net asset value above the total amount of
payments for the purchase of Fund shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
then of amounts representing the cost of shares acquired prior to July 1, 1985;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
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<PAGE>
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 net
asset value had appreciated to $12 per share, the value of your Class B shares
would be $1,260 (105 shares at $12 per share). The CDSC would not be applied to
the value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500 minus
$260) would be charged at a rate of 4% (the applicable rate in the second year
after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
Waiver of the Contingent Deferred Sales Charges-Class B shares. The CDSC
will be waived in the case of a redemption following the death or disability of
a shareholder or, in the case of a trust, 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 the shares were purchased prior to death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59-1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (i.e.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.
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.
In addition, the CDSC will be waived on redemptions of shares held by a
Director of the Fund.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares-Waiver of the Contingent Deferred Sales Charge-Class B Shares" in
the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased
prior to August 1, 1994. See "Purchase and Redemption of Fund Shares-Quantity
Discount-Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
Waiver of Contingent Deferred Sales Charges-Class C Shares
PruArray or SmartPath Plans. The CDSC will be waived on redemptions from
certain qualified and non-qualified retirement and deferred compensation plans
that participate in the Transfer Agent's PruArray and SmartPath Programs,
provided that the investment options of the plan include shares of Prudential
Mutual Funds and shares of non-affiliated mutual funds.
31
<PAGE>
CONVERSION FEATURE-CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
The first conversion of Class B shares occurred in February 1995, when the
conversion feature was first implemented.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share net asset value of the Class A shares may be
higher than that of the Class B shares at the time of conversion. Thus, although
the aggregate dollar value will be the same, you may receive fewer Class A
shares than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year will not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase of
such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (ii) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
As a shareholder of the Fund, you have an exchange privilege with certain
other Prudential Mutual Funds, including one or more specified money market
funds, subject to the minimum investment requirement of such funds. Class A,
Class B, Class C and Class Z shares may be exchanged for Class A, Class B, Class
C and Class Z shares, respectively, of another fund on the basis of the relative
NAV. No sales charge will be imposed at the time of
32
<PAGE>
the exchange. Any applicable CDSC payable upon the redemption of shares
exchanged will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. Class B
and Class C shares may not be exchanged into money market funds other than the
Prudential Special Money Market Fund, Inc. For purposes of calculating the
holding period applicable to the Class B conversion feature, the time period
during which Class B shares were held in a money market fund will be excluded.
See "Conversion Feature-Class B Shares" above. An exchange will be treated as a
redemption and purchase for tax purposes. See "Shareholder Investment
Account-Exchange Privilege" in the Statement of Additional Information.
In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the Transfer
Agent and hold shares in non-certificate form. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. Neither
the Fund nor its agents will be liable for any loss, liability or cost which
results from acting upon instructions reasonably believed to be genuine under
the foregoing procedures. (The Fund or its agents could be subject to liability
if they fail to employ reasonable procedures.) All exchanges will be made on the
basis of the relative NAV of the two funds next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
If you hold shares through Prudential Securities you must exchange your
shares by contacting your Prudential Securities financial adviser.
If you hold certificates, the certificates, signed in the name(s) shown on
the face of the certificates, must be returned in order for the shares to be
exchanged. See "How to Sell Your Shares" above.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
In periods of severe market or economic conditions the telephone exchange of
shares may be difficult to implement and you should make exchanges by mail by
writing to Prudential Mutual Fund Services LLC at the address noted above.
Special Exchange Privileges. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan-Class A Shares-Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan-Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares, which are not subject to a CDSC, and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B or Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities or Prusec that
they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged to Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value. Similarly, participants in PSI's 401(k) Plan for which the Fund's Class Z
shares is an available option and who wish to transfer their
33
<PAGE>
Class Z shares out of the PSI 401(k) Plan following separation from service
(i.e. voluntary or involuntary termination of employment or retirement) will
have their Class Z shares exchanged to Class A shares at NAV.
The Fund reserves the right to reject any exchange order including exchanges
(and market timing transactions) which are of the size and/or frequency engaged
in by one or more accounts acting in concert or otherwise, that have or may have
an adverse effect on the ability of the Subadviser to manage the portfolio. The
determination that such exchanges or activity may have an adverse effect and the
determination to reject any exchange order shall be in the discretion of the
Manager and the Subadviser.
The Exchange Privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you can
take advantage of the following additional services and privileges:
*Automatic Reinvestment of Dividends and/or Distributions Without a Sales
Charge. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold your shares
through Prudential Securities, you should contact your financial adviser.
*Automatic Savings Accumulation Plan (ASAP). Under ASAP you may make regular
purchases of the Fund's shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
*Tax-Deferred Retirement Plans. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or the
Transfer Agent. If you are considering adopting such a plan, you should consult
with your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.
*Systematic Withdrawal Plan. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-Contingent Deferred Sales Charges."
*Reports to Shareholders. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses the Fund will provide one annual report and semi-annual shareholder
report and annual prospectus per household. You may request additional copies of
such reports by calling (800) 225-1852 or by writing to the Fund at Gateway
Center Three, Newark, New Jersey 07102. In addition, monthly unaudited financial
data are available upon request from the Fund.
*Shareholder Inquiries. Inquiries should be addressed to the Fund at Gateway
Center Three, Newark, New Jersey 07102, or by telephone at (800) 225-1852 (toll
free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
34
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS
- --------------------------------------------------------------------------------
Moody's Investors Service Corporate Bond Ratings:
Aaa-Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa-Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than the Aaa securities.
Moody's applies numerical modifiers 1, 2 and 3 in the Aa and A rating
categories. The modifier 1 indicates that the security ranks at a higher end of
the rating category, the modifier 2 indicates a mid-range rating and the
modifier 3 indicates that the issue ranks at the lower end of the rating
category.
A-Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa-Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba-Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B-Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa-Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca-Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C-Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
A-1
<PAGE>
Standard & Poor's Ratings Group corporate bond ratings:
AAA-Bonds rated AAA have the highest rating assigned by Standard & Poor's to
a debt obligation and indicate an extremely strong capacity to pay principal and
interest.
AA-Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only to a small degree.
A-Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB-Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC, C-Debt rated BB, B, CCC, CC and C is regarded, as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB-rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC typically is applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C: The rating C typically is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
debt service payments are continued.
C1: The rating C1 is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
A-2
<PAGE>
- --------------------------------------------------------------------------------
THE PRUDENTIAL MUTUAL FUND FAMILY
- --------------------------------------------------------------------------------
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec registered representative or telephone
the Fund at (800) 225-1852 for a free prospectus. Read the prospectus carefully
before you invest or send money.
- --------------------------------------------------------------------------------
(left column)
Taxable Bond Funds
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
Tax-Exempt Bond Funds
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
Global Funds
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Find, Inc.
Global Series
International Stock Series
Global Utility Fund, Inc.
The Global Government Plus Fund, Inc.
The Global Total Return Fund, Inc.
(right column)
Equity Funds
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balance Fund
Prudential Stock Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth &
Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small Companies Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Money Market Funds
* Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets, Inc.
* Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
* Command Funds
Command Money Fund
Command Government Securities Fund
Command Tax-Free Fund
* Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
B-1
<PAGE>
(left column)
No dealer, sales representative or any other person has
been authorized to give any information or to make any
representations, other than those contained in this
Prospectus, in connection with the offer contained
herein, and, if given or made, such other information
or representations must not be relied upon as having
been authorized by the Fund or the Distributor. This
Prospectus does not constitute an offer by the Fund or
by the Distributor to sell or a solicitation of an
offer to buy any of the securities offered hereby in
any jurisdiction to any person to whom it is unlawful
to make such offer in such jurisdiction.
TABLE OF CONTENTS
Page
FUND HIGHLIGHTS.................................... 2
What are The Fund's Risk Factors and
Special Characteristics?...................... 2
FUND EXPENSES...................................... 4
FINANCIAL HIGHLIGHTS............................... 5
HOW THE FUND INVESTS............................... 9
Investment Objectives and Policies.............. 9
Hedging and Return Enhancement Strategies....... 11
Risk Factors.................................... 14
Other Investments and Policies.................. 15
Investment Restrictions ........................ 16
HOW THE FUND IS MANAGED............................ 16
Manager......................................... 17
Distributor..................................... 17
Portfolio Transactions.......................... 19
Custodian and Transfer and
Dividend Disbursing Agent..................... 20
HOW THE FUND VALUES ITS SHARES..................... 20
HOW THE FUND CALCULATES PERFORMANCE................ 20
TAXES, DIVIDENDS AND DISTRIBUTIONS................. 21
GENERAL INFORMATION................................ 22
Description of Common Stock..................... 22
Additional Information.......................... 23
SHAREHOLDER GUIDE.................................. 23
How to Buy Shares of the Fund................... 23
Alternative Purchase Plan....................... 24
How to Sell Your Shares......................... 28
Conversion Feature - Class B Shares............. 32
How to Exchange Your Shares..................... 32
Shareholder Services ........................... 34
DESCRIPTION OF CORPORATE BOND RATINGS.............. A-1
THE PRUDENTIAL MUTUAL FUND FAMILY.................. B-1
MF110A 4400096
- -------------------------------------------------------
Class A: 74435F-10-6
CUSIP Nos.: Class B: 74435F-20-5
Class C: 74435F-30-4
Class Z: 74435F-40-3
- -------------------------------------------------------
(right column)
Prudential
High
Yield
Fund, Inc.
- --------------------------------------------------------
PROSPECTUS
March 6, 1997
(LOGO)
<PAGE>
PRUDENTIAL HIGH YIELD FUND, INC.
Statement of Additional Information
March 6, 1997
Prudential High Yield Fund, Inc. (the Fund), is an open-end diversified
management investment company whose primary investment objective is to maximize
current income through Investment in a diversified portfolio of high yield
fixed-income securities. Capital appreciation is a secondary investment
objective which will only be sought when consistent with the primary objective.
The high yield securities sought by the Fund will generally be securities rated
in the medium to lower categories by recognized rating services (Baa or lower by
Moody's Investors Service or BBB or lower by Standard & Poor's Ratings Group or
comparably rated by any other Nationally Recognized Statistical Rating
Organization) or non-rated securities of comparable quality. There can be no
assurance that the Fund's investment objectives will be achieved. See
"Investment Objectives and Policies."
The Fund's address is Gateway Center Three, Newark, New Jersey 07102, and
its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus, dated March 6, 1997, a copy of
which may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Cross-reference
to page in
Page Prospectus
---- ----------
<S> <C> <C>
General Information ............................................................... B-2 23
Investment Objectives and Policies ................................................ B-2 9
Portfolio Characteristics ......................................................... B-2 19
Investment Restrictions ........................................................... B-7 17
Directors and Officers ............................................................ B-8 17
Manager ........................................................................... B-12 17
Distributor ....................................................................... B-13 18
Portfolio Transactions and Brokerage .............................................. B-16 20
Purchase and Redemption of Fund Shares ............................................ B-16 24
Shareholder Investment Account .................................................... B-20 24
Net Asset Value ................................................................... B-23 20
Taxes, Dividends and Distributions ................................................ B-24 21
Performance Information ........................................................... B-25 21
Custodian, Transfer and Dividend Disbursing Agent and Independent Accountants ..... B-27 20
Financial Statements .............................................................. B-28 -
Report of Independent Accountants ................................................. B -
Appendix A-General Investment Information ......................................... A-1 -
Appendix B-Historical Performance Data ............................................ B-1 -
Appendix C-Information about the Prudential ....................................... C-1 -
</TABLE>
- --------------------------------------------------------------------------------
MF110B 4440084
<PAGE>
GENERAL INFORMATION
At a special meeting held on July 19, 1994, shareholders approved an
amendment to the Fund's Articles of Incorporation to change the Fund's name from
Prudential-Bache High Yield Fund, Inc. to Prudential High Yield Fund, Inc.
INVESTMENT OBJECTIVES AND POLICIES
The primary investment objective of the Fund is to maximize current income
through investment in a diversified portfolio of high yield fixed-income
securities which in the opinion of the Fund's investment adviser do not subject
a fund investing in such securities to unreasonable risks. As a secondary
investment objective, the Fund will seek capital appreciation but only when
consistent with its primary objective. Capital appreciation may result, for
example, from an improvement in the credit standing of an issuer whose
securities are held in the Fund's portfolio or from a general lowering of
interest rates, or a combination of both. Conversely, capital depreciation may
result, for example, from a lowered credit standing or a general rise in
interest rates, or a combination of both. The achievement of the Fund's
objectives will depend upon the investment adviser's analytical and portfolio
management skills. There can be no assurance that these objectives will be
achieved. All investment objectives and policies of the Fund other than those
described under "How the Fund Invests-Investment Restrictions" may be changed by
the Board of Directors of the Fund without shareholder approval.
Since investors generally perceive that there are greater risks associated
with the medium to 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 market
resulting in greater yield and price volatility.
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.
Medium to 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 other issuers. Since medium to 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 medium to lower ratings
and in comparable non-rated securities. 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.
Certain of the high 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 also may be recognized for federal
income tax purposes on the retirement of such securities or may be recognized
upon the sale of securities.
PORTFOLIO CHARACTERISTICS
When market conditions dictate a more "defensive" investment strategy, the
Fund may invest temporarily without limit in high quality money market
instruments, including commercial paper of corporations organized under the laws
of any state or political subdivision of the United States, certificates of
deposit, bankers' acceptances and other obligations of domestic banks, including
foreign branches of such banks, having total assets of at least $1 billion,
obligations of foreign banks subject to the limitations set forth in Investment
Restriction No. 16 and obligations issued or guaranteed by the United States
Government, its instrumentalities or agencies. The yield on these securities
will tend to be lower than the yield on other securities to be purchased by the
Fund.
The Fund may also employ, in its discretion, the following strategies in
order to help achieve its primary investment objective of maximizing current
income.
B-2
<PAGE>
Zero Coupon, Pay-In-Kind and Deferred Payment Securities
The Fund may invest in zero coupon, pay-in-kind and 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 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.
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 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.
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
investing in debt instruments which the Fund is currently authorized to
purchase, 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 lack of a highly liquid secondary market for loans 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 loans 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 (i.e. the Lender) interposed between the Fund and the borrower.
Futures Contracts
The Fund may enter into futures contracts for the purchase or sale of debt
securities and financial indices (collectively, interest rate futures contracts)
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
B-3
<PAGE>
futures commission merchant or in a segregated custodial 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."
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
markets. 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. 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.
Risks inherent in the use of these strategies include (1) dependence on the
investment adviser's ability to predict correctly movements in the direction of
interest rates, securities prices and markets; (2) imperfect correlation between
the price of futures contracts and options thereon and movement in the prices of
the securities being hedged; (3) the fact that the skills needed to use these
strategies are different from those needed to select portfolio securities; (4)
the possible absence of a liquid secondary market for any particular instrument
at any time; (5) the possible need to defer closing out certain hedged positions
to avoid adverse tax consequences; and (6) the possible inability of the Fund to
sell a portfolio security at a time that otherwise would be favorable for it to
do so. In the event it did sell the security and eliminated its "cover," it
would have to replace its "cover" with an appropriate futures contract or option
or segregate securities with the required value, as described under "Segregation
Requirements" in the Prospectus.
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 Subadviser'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.
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.
Repurchase Agreements
The Fund's repurchase agreements will be collateralized by U.S. Government
obligations. The Fund will enter into repurchase transactions only with parties
meeting creditworthiness standards approved by the Fund's Board of Directors.
The Fund's investment adviser will monitor the creditworthiness of such parties,
under the general supervision of the Board of Directors. In the event of a
default or bankruptcy by a seller, the Fund will promptly seek to liquidate the
collateral. To the extent that the
B-4
<PAGE>
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 the loss.
The Fund participates in a joint repurchase agreement account with other
investment companies managed by Prudential Mutual Fund Management LLC (PMF)
pursuant to an order of the Securities and Exchange Commission (SEC). On a daily
basis, any uninvested cash balances of the Fund may be aggregated with those of
such other investment companies and invested in one or more repurchase
agreements. Each fund participates in the income earned or accrued in the joint
account based on the percentage of its investment.
Lending of Securities
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities in any amount to brokers, dealers and financial
institutions, 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 the interest and
dividends on the loaned securities, while at the same time earning interest on
the collateral which will be invested in short-term obligations.
A loan may be terminated by the borrower on one business day's notice or by
the Fund at any time. If the borrower fails to maintain the requisite amount of
collateral, the loan automatically terminates, and the Fund could use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases even 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.
When-Issued and Delayed Delivery Securities
From time to time, in the ordinary course of business, the Fund may purchase
securities on a when-issued or delayed delivery basis-i.e., 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 net asset value each day. The
Fund will make commitments for such when-issued transactions only with the
intention of actually acquiring the securities, and to facilitate such
acquisitions, the Fund's custodian bank will maintain, in a separate account of
the Fund, portfolio securities having value equal to or greater than such
commitments. On delivery dates for such transactions, the Fund will meet its
obligations from maturities or sales of the securities held in the separate
account and/or from then available cash flow. 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 other portfolio obligations, incur a gain or loss due
to market fluctuation.
Securities of Foreign Issuers
The Fund may invest up to 20% of its total assets in United States currency
denominated fixed-income issues of foreign governments and other foreign
issuers, including preferred stock.
The Fund believes that in many instances such foreign fixed-income
securities may provide higher yields than securities of domestic issuers which
have similar maturities and quality. Many of these investments currently enjoy
increased liquidity, although, under certain market conditions, such securities
may be less liquid than the securities of United States corporations, and are
certainly less liquid than securities issued or guaranteed by the United States
Government, its instrumentalities or agencies.
The above-described foreign investments 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 issue, the difficulty of
predicting international trade patterns and the possibility of imposition of
exchange controls. Such securities may also be subject to greater fluctuations
in price than securities issued by United States corporations or issued or
guaranteed by the United States Government, its
B-5
<PAGE>
instrumentalities or agencies. In addition, there may be less publicly available
information about a foreign company than about a domestic company. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. There is generally less government regulation of securities
exchanges, brokers and listed companies abroad than in the United States, and,
with respect to certain foreign countries, there is a possibility of
expropriation or confiscatory taxation or diplomatic developments which could
affect investment in those countries. Finally, in the event of a default of any
such foreign debt obligations, it may be more difficult for the Fund to obtain
or to enforce a judgment against the issuers of such securities.
The Fund may also invest up to 10% of its total assets in foreign currency
denominated debt securities of foreign or domestic issuers; however, the Fund
will not engage in such investment activity unless it has been first authorized
to do so by its Board of Directors. In addition to the risks listed in the
preceding paragraph with respect to fixed-income securities of foreign issuers,
foreign currency denominated securities may be affected favorably or unfavorably
by changes in currency rates and in exchange control regulations, and costs may
be incurred in connection with conversions between various currencies. It may
not be possible to hedge against the risks of currency fluctuations.
Illiquid Securities
The Fund may not hold more than 15% of its net assets in repurchase
agreements which have a maturity longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market (either within or outside of the United States) or
legal or contractual restrictions on resale. Historically, illiquid securities
have included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (Securities Act), securities which are otherwise not readily marketable
and repurchase agreements having a maturity of longer than seven days.
Securities which have not been registered under the Securities Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Board of Directors. In reaching liquidity decisions, the investment adviser will
consider, inter alia, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security and (4) the nature of the security
and the nature of the marketplace trades (e.g., the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the
transfer). In addition, in order for commercial paper that is issued in reliance
on Section 4(2) of the Securities Act to be considered liquid, (i) it must be
rated in one of the two highest rating categories by at least two nationally
recognized statistical rating organizations (NRSRO), or if only one NRSRO rates
the securities, by that NRSRO, or, if unrated, be of comparable quality in the
view of the investment adviser; and (ii) it must not be "traded flat" (i.e.,
without accrued interest) or in default as to principal or interest. Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.
B-6
<PAGE>
The staff of the SEC has taken the position, which the Fund will follow,
that purchased OTC options and the assets used as "cover" for written OTC
options are illiquid securities unless the Fund and the counterparty have
provided for the Fund, at its election, to unwind the OTC option. The exercise
of such an option ordinarily would involve the payment by the Fund of an amount
designed to reflect the counterparty's economic loss from an early termination
but does allow the Fund to treat the assets used as "cover" as liquid. See "How
the Fund Invests-Illiquid Securities" in the Prospectus.
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. It is not anticipated that the Fund's portfolio
turnover rate will exceed 150%. Since the Fund's inception, the annual portfolio
turnover rate has not exceeded 100%. A portfolio turnover rate of 150% may
exceed that of other investment companies with similar objectives. The portfolio
turnover rate is computed by dividing the lesser of the amount of the securities
purchased or securities sold (excluding securities whose maturities at
acquisition were one year or less) by the average monthly value of securities
owned during the year. A 100% turnover rate would occur, for example, if all of
the securities held in the Fund's portfolio were sold and replaced within one
year. However, when portfolio changes are deemed appropriate due to market or
other conditions, such turnover rate may be greater than anticipated. A higher
rate of turnover results in increased transaction costs to the Fund. For the
fiscal years ended December 31, 1995 and 1996, the Fund's portfolio turnover
rate was 78% and 89%, respectively.
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) Invest more than 5% of the market or other fair value of its total
assets in the securities of any one issuer (other than obligations of, or
guaranteed by, the United States Government, its agencies or instrumentalities).
(2) Purchase more than 10% of the voting securities of any issuer.
(3) Invest more than 25% 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.
(4) Make short sales of securities.
(5) Purchase securities on margin, except for such short-term credits as are
necessary for the clearance of purchases and sales of portfolio securities and
the making of margin payments in connection with transactions in financial
futures contracts.
(6) Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow up to 20% of the value of its total assets (calculated when
the loan is made) for temporary, extraordinary or emergency purposes or for the
clearance of transactions. The Fund may pledge up to 20% of the value of its
total assets to secure such borrowings. Secured borrowings may take the form of
reverse repurchase agreements, pursuant to which the Fund would sell portfolio
securities for cash and simultaneously agree to repurchase them at a specified
date for the same amount of cash plus an interest component. For purposes of
this restriction, obligations of the Fund to Directors pursuant to deferred
compensation arrangements and the purchase and sale of securities on a
when-issued or delayed delivery basis and engaging in financial futures
contracts and related options are not deemed to be the issuance of a senior
security or a pledge of assets.
(7) Engage in the underwriting of securities except insofar as the Fund may
be deemed an underwriter under the Securities Act in disposing of a portfolio
security.
(8) Purchase or sell real estate or real estate mortgage loans, although it
may purchase marketable securities of issuers which engage in real estate
operations or securities which are secured by interests in real estate.
(9) Purchase or sell commodities or commodity futures contracts except
financial futures contracts and options thereon.
B-7
<PAGE>
(10) Make loans of money or securities, except through the purchase of debt
obligations, bank debt (i.e. loan participations), repurchase agreements and
loans of securities.
(11) Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Fund may invest in the
securities of companies which invest in or sponsor such programs.
(12) Purchase securities of other investment companies, except in the open
market involving only customary brokerage commissions and as a result of which
no more than 10% of its total assets (determined at the time of investment)
would be invested in such securities or except in connection with a merger,
consolidation, reorganization or acquisition of assets.
(13) Invest for the purpose of exercising control or management of another
company.
(14) Invest more than 20% of the market or other fair value of its total
assets in United States currency denominated issues of foreign governments and
other foreign issuers; or invest more than 10% of the market or other fair value
of its total assets in securities which are payable in currencies other than
United States dollars. The Fund will not engage in investment activity in
non-U.S. dollar denominated issues without first obtaining authorization to do
so from its Board of Directors. See "Portfolio Characteristics-Securities of
Foreign Issuers."
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
Position with Principal Occupations
Name, Address and Age Fund During Past 5 Years
- --------------------- ------------- ---------------------
<S> <C> <C>
Edward D. Beach (72) Director President and Director of BMC Fund, Inc., a closed-end
c/o Prudential investment company; previously, Vice Chairman of
Mutual Fund Broyhill Furniture Industries, Inc.; Certified Public
Management LLC Accountant; Secretary and Treasurer of Broyhill Family
Gateway Center Three Foundation, Inc.; Member of the Board of Trustees of
Newark, NJ 07102 Mars Hill College; President, Director of The High Yield
Income Fund, Inc.
Eugene C. Dorsey (69) Director Retired President, Chief Executive Officer and Trustee of
c/o Prudential the Gannett Foundation (now Freedom Forum); former
Mutual Fund Publisher of four Gannett newspapers and Vice
Management LLC President of Gannett Company; past Chairman of
Gateway Center Three Independent Sector (national coalition of philanthropic
Newark, NJ 07102 organizations); former Chairman of the American
Council for the Arts; Director of the Advisory Board of
Chase Manhattan Bank of Rochester and The High
Yield Income Fund, Inc.
Delayne Dedrick Gold (58) Director Marketing and Management Consultant. Director
c/o Prudential Mutual Fund of The High Yield Income Fund, Inc.
Management LLC
Gateway Center Three
Newark, NJ 07102
*Robert F. Gunia (50) Director Comptroller, Prudential Investments (since May 1996);
One Seaport Plaza Executive Vice President and Treasurer, Prudential
New York, New York Mutual Fund Management LLC (PMF); 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 Man-
agement, Inc.; Vice President and Director of The Asia
Pacific Fund, Inc. (since May 1989); Director of The High
Yield Income Fund, Inc.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupations
Name, Address and Age Fund During Past 5 Years
- --------------------- ------------- ---------------------
<S> <C> <C>
*Harry A. Jacobs, Jr. (75) Director Senior Director (since January 1986) of Prudential Securi-
One Seaport Plaza ties Incorporated (Prudential Securities); formerly
New York, New York Interim Chairman and Chief Executive Officer of
Prudential Mutual Fund Management, Inc. (June-
September 1993); formerly Chairman of the Board of
Prudential Securities (1982-1985) and Chairman of the
Board and Chief Executive Officer of Bache Group Inc.
(1977-1982); Trustee of the Trudeau Institute; Director of
the Center for National Policy, The First Australia Fund,
Inc. and The First Australia Prime Income Fund, Inc.,
Director of The High Yield Income Fund, Inc.
Donald D. Lennox (78) Director Chairman (since February 1990) and Director (since
c/o Prudential April 1989) of International Imaging Materials, Inc.;
Mutual Fund Retired Chairman, Chief Executive Officer and Director
Management LLC of Shlegel Corporation (industrial manufacturing)
Gateway Center Three (March 1987-February 1989); Director of Gleason
Newark, NJ 07102 Corporation, Personal Sound Technologies, Inc. and
The High Yield Income Fund, Inc.
*Mendel A. Melzer (35) Director Chief Investment Officer (since October 1996) of
CFA, ChFC, CLU Prudential Mutual Funds; formerly Chief Financial
751 Broad Street Officer of Prudential Investments (November 1995-
Newark, NJ September 1996), Senior Vice President and Chief
Financial Officer of Prudential Preferred Financial
Services (April 1993-November 1995), Managing
Director of Prudential Investment Advisors (April
1991-April 1993) and Senior Vice President of
Prudential Capital Corporation (July 1989-April 1991);
Director of The High Yield Income Fund, Inc.
Thomas T. Mooney (55) Director President of the Greater Rochester Metro Chamber of
c/o Prudential Commerce; formerly Rochester City Manager; Trustee
Mutual Fund of Center for Governmental Research, Inc.; Director of
Management LLC Monroe County Water Authority, Rochester Jobs, Inc.,
Gateway Center Three Blue Cross of Rochester, Executive Service Corps of
Newark, NJ 07102 Rochester, Monroe County Industrial Development
Corporation, Northeast Midwest Institute, First
Financial Fund, Inc., The Global Government Plus
Fund, Inc., The High Yield Plus Fund, Inc. and The
High Yield Income Fund, Inc.
Thomas H. O'Brien (72) Director President of O'Brien Associates (Financial and
c/o Prudential Management Consultants) (since April 1984);
Mutual Fund formerly President of Jamaica Water Securities Corp.
Management LLC (holding company) (February 1989-August 1990);
Gateway Center Three Chairman of the Board and Chief Executive Officer
Newark, NJ 07102 (September 1987-February 1989) of Jamaica Water
Supply Company and Director (September 1987-April
1991); Director of Ridgewood Savings Bank and The
High Yield Income Fund, Inc.; Trustee of Hofstra
University.
</TABLE>
B-9
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupations
Name, Address and Age Fund During Past 5 Years
- --------------------- ------------- ---------------------
<S> <C> <C>
*Richard A. Redeker (53) President and Director Employee of Prudential Investments; formerly President,
One Seaport Plaza Chief Executive Officer and Director (October 1993-
New York, New York September 1996); Prudential Mutual Fund
Management, Inc.; Executive Vice President, formerly
Director and Member of the Operating Committee
(October 1993) of Prudential Securities; formerly
Director (October 1993-September 1996) of Prudential
Securities Group, Inc. (PSG); Executive Vice President,
The Prudential Investment Corporation (since January
1994); Director (since January 1994) of Prudential
Mutual Fund Distributors, Inc. (PMFD) and Prudential
Mutual Fund Services, Inc. (PMFS); formerly Senior
Executive Vice President and Director of Kemper
Financial Services, Inc. (September 1978-September
1993); Director of The High Yield Income Fund, Inc.
Nancy H. Teeters (66) Director Economist; formerly Vice President and Chief Economist
c/o Prudential Mutual of International Business Machines Corporation
Fund Management LLC (March 1986-June 1990); Director of Inland Steel
Gateway Center Three Industries (since July 1991) and The High Yield
Newark, NJ 07102 Income Fund, Inc.
Louis A. Weil, III (55) Director President and Chief Executive Officer (since January
Phoenix Newspapers, Inc. 1996) and Director (since September 1991) of
120 E. Van Buren Central Newspapers, Inc.; Chairman (since January 1996),
Phoenix, Arizona Publisher and Chief Executive Officer of Phoenix
Newspapers, Inc. (August 1991-December 1995), prior
thereto, Publisher of Time Magazine (May 1989-March
1991); formerly President, Publisher and Chief Executive
Officer of The Detroit News (February 1986-August
1989); formerly member of the Advisory Board, Chase
Manhattan Bank-Westchester. Director of The High Yield
Income Fund, Inc.
Susan A. Cote (42) Vice President Executive Vice President and Chief Financial Officer of
c/o Prudential Mutual PMF (since May 1996); formerly Chief Operating
Fund Management LLC Officer and Managing Director of Prudential
Gateway Center Three Investments (March 1995-May 1996) and formerly
Newark, NJ 07102 Senior Vice President-Fund Administration
(September 1983-February 1995) of PMF.
Thomas A. Early (42) Vice President Executive Vice President, Secretary and General Counsel
c/o Prudential Mutual of PMF (since December 1996); Vice President and
Fund Management LLC General Counsel, Prudential Retirement Services
Gateway Center Three (since March 1994); formerly Associate General
Newark, NJ 07102 Counsel and Chief Financial Services Officer, Frank
Russell Company (1988-1994).
S. Jane Rose (51) Secretary Senior Vice President (since December 1996) of PMF;
c/o Prudential Mutual Senior Vice President (January 1991-September
Fund Management LLC 1996) and Senior Counsel (June 1987-September
Gateway Center Three 1996) of Prudential Mutual Fund Management, Inc.;
Newark, NJ 07102 Senior Vice President and Senior Counsel (since July
1992) of Prudential Securities; formerly Vice President
and Associate General Counsel of Prudential
Securities.
</TABLE>
B-10
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupations
Name, Address and Age Fund During Past 5 Years
- --------------------- ------------- ---------------------
<S> <C> <C>
Grace C. Torres (37) Treasurer and First Vice President (since March 1994) of PMF; First
Principal Vice President (since March 1994) of Prudential
Financial and Securities; Vice President of Bankers Trust (July 1989-
Accounting Officer March 1994).
Stephen M. Ungerman (43) Assistant Treasurer Tax Director of Prudential Investments and the Private
Gateway Center Three Asset Group of Prudential (since March 1996); First
Newark, NJ 07102 Vice President of Prudential Mutual Fund
Management, Inc. (February 1993-September 1996);
prior thereto, Senior Tax Manager of Price Waterhouse
(1981-January 1993).
Deborah A. Docs (39) Assistant Secretary Vice President (since December 1996) of PMF; Vice
Gateway Center Three President and Associate General Counsel (June 1991-
Newark, NJ 07102 September 1996) of PMF; Vice President and
Associate General Counsel of Prudential Securities.
<FN>
- ------------
* "Interested" director, as defined in the Investment Company Act by reason of
his affiliation with Prudential Securities or PMF.
</FN>
</TABLE>
Directors and officers of the Fund are also trustees, directors and
officers of some or all of the other investment companies distributed by
Prudential Securities Incorporated or Prudential Mutual Fund Distributors, Inc.
The officers conduct and supervise the daily business operations of the
Fund, while the directors, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
The Fund pays each of its directors who is not an affiliated person of PMF
or The Prudential Investment Corporation (PIC) annual compensation of $4,500, in
addition to certain out-of-pocket expenses. The amount of annual compensation
paid to each Director may change as a result of the introduction of additional
funds upon the board of directors of which the Director will be asked to serve.
Directors may receive their Director's fee pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of such Director's fee in installments which accrue interest at
a rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury
Bills at the beginning of each calendar quarter or, pursuant to an SEC exemptive
order, at the daily rate of return of the Fund (the Fund rate). 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 Director's
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. Lennox,
Jacobs, Beach and O'Brien are scheduled to retire on December 31, 1997, 1998,
1999 and 1999, respectively.
Pursuant to the terms of the Management Agreement with the Fund, the Manager
pays all compensation of officers and employees of the Fund as well as the fees
and expenses of all Directors of the Fund who are affiliated persons of the
Manager.
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended December 31, 1996 to the Directors who are not
affiliated with the Manager and the aggregate compensation paid to such
Directors for service on the Fund's board and that of all other funds managed by
Prudential Mutual Fund Management LLC (Fund Complex) for the calendar year ended
December 31, 1996. In October 1996, shareholders elected a new Board of
Directors. Below is listed all Directors who have served the Fund during its
most recent fiscal year as well as the new Directors who took office after the
shareholders meeting in October.
B-11
<PAGE>
Compensation Table
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement From Fund
Aggregate Benefits Accrued Estimated Annual and Fund
Compensation As Part of Fund Benefits Upon Complex Paid
Name and Position From Fund Expenses Retirement to Directors
<S> <C> <C> <C> <C>
Edward D. Beach, Director - None N/A $166,000(21/39)*
Eugene C. Dorsey, Director - None N/A $ 98,583(12/36)*
Delayne Dedrick Gold, Director $9,200 None N/A $175,308(21/42)*
Robert F. Gunia, Director+ - None N/A -
Arthur Hauspurg, Former Director $9,000 None N/A $ 38,250(5/7)*
Harry A. Jacobs, Jr., Director+ - None N/A -
Donald D. Lennox, Director - None N/A $ 90,000(10/22)*
Mendel A. Melzer, Director+ - None N/A -
Thomas T. Mooney, Director - None N/A $135,375(18/36)*
Stephen P. Munn, Former Director $9,000 None N/A $ 49,125(6/8)*
Thomas H. O'Brien, Director - None N/A $ 32,250(5/20)*
Richard A. Redeker, Director and President+ - None N/A -
Nancy H. Teeters, Director - None N/A $103,583(11/28)*
Louis A. Weil, III, Director $9,000 None N/A $ 91,250(13/18)*
</TABLE>
- ------------
*Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
+Robert F. Gunia, Harry A. Jacobs, Jr., Mendel A. Melzer and Richard A.
Redeker, who are each interested Directors, do not receive compensation from
the Fund or any fund in the Prudential Mutual Fund family.
**Total compensation from all of the funds in the Fund complex for the calendar
year ended December 31, 1996, includes amounts deferred at the election of
Directors under the Fund's deferred compensation plans. Including accrued
interest, total compensation amounted to $111,535 and $139,869 for Eugene C.
Dorsey and Thomas T. Mooney, respectively.
As of February 7, 1997, the directors and officers of the Fund, as a group,
owned less than 1% of the outstanding common stock of the Fund.
As of February 7, 1997, there were no beneficial owners, directly or
indirectly, of more than 5% of the outstanding shares of any class of beneficial
interest.
As of February 7, 1997, Prudential Securities was the record holder for
other beneficial owners of 69,243,401 Class A shares (or 37% of the outstanding
Class A shares), 154,700,227 Class B shares (or 50% of the outstanding Class B
shares) 3,972,499 Class C shares (or 86% of the outstanding Class C shares) and
224,407 Class Z shares (or 6% 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.
MANAGER
The manager of the Fund is Prudential Mutual Fund Management LLC (PMF or the
Manager), Gateway Center Three, Newark, New Jersey 07102. PMF serves as manager
to substantially 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 January 31, 1997, PMF managed and/or administered open-end
and closed-end management investment companies with assets of approximately
$55.8 billion. According to the Investment Company Institute, as of December 31,
1996, Prudential Mutual Funds were the 15th largest family of mutual funds in
the United States. According to data provided by Lipper Analytical Services,
Inc., the Fund is among the oldest and largest U.S. mutual funds in the high
current yield category of taxable fixed income funds.
PMF 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
qualifed plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, 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. In connection
therewith, PMF is obligated to keep certain books and records of the Fund. PMF
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, and Prudential Mutual Fund Services LLC
(PMFS or the Transfer Agent), the Fund's transfer and dividend disbursing agent.
The
B-12
<PAGE>
management services of PMF for the Fund are not exclusive under the terms of the
Management Agreement and PMF is free to, and does, render management services to
others.
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .50 of 1% of the Fund's average daily net assets up to and
including $250 million, .475 of 1% of the next $500 million, .45 of 1% of the
next $750 million, .425 of 1% of the next $500 million, .40 of 1% of the next
$500 million, .375 of 1% of the next $500 million and .35 of 1% over $3 billion
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 PMF, but excluding interest, taxes, brokerage
commissions, distribution fees and litigation and indemnification expenses and
other extraordinary expenses not incurred in the ordinary course of the Fund's
business) for any fiscal year exceed the lowest applicable annual expense
limitation established and enforced pursuant to the statutes or regulations of
any jurisdiction in which the Fund's shares are qualified for offer and sale,
the compensation due to PMF will be reduced by the amount of such excess.
Reductions in excess of the total compensation payable to PMF will be paid by
PMF to the Fund. No such reductions were required during the fiscal year ended
December 31, 1996. No jurisdiction currently limits the Fund's expenses.
In connection with its management of the corporate affairs of the Fund, PMF
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 PMF or the
Fund's investment adviser;
(b) all expenses incurred by PMF or by the Fund in connection with managing
the ordinary course of the Fund's business, other than those assumed by the Fund
as described below; and
(c) the costs and expenses payable to The Prudential Investment Corporation,
doing business as Prudential Investments (PI), pursuant to the subadvisory
agreement between PMF and PIC (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b) the
fees and expenses of Directors who are not affiliated persons of the Manager or
the Fund's investment adviser, (c) the fees and certain expenses of the
Custodian and Transfer and Dividend Disbursing Agent, including the cost of
providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities transactions, (f) all taxes and
corporate fees payable by the Fund to governmental agencies, (g) the fees of any
trade associations of which the Fund may be a member, (h) the cost of stock
certificates representing shares of the Fund, (i) the cost of fidelity and
liability insurance, (j) the fees and expenses involved in registering and
maintaining registration of the Fund and of its shares with the SEC, registering
the Fund and qualifying its shares under state securities laws, including the
preparation and printing of the Fund's registration statements and prospectuses
for such purposes, (k) allocable communications expenses with respect to
investor services and all expenses of shareholders' and Directors' meetings and
of preparing, printing and mailing reports, proxy statements and prospectuses to
shareholders in the amount necessary for distribution to the shareholders, (l)
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business and (m) distribution
fees.
The Management Agreement provides that PMF will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act. The Management Agreement
was last approved by the Board of Directors of the Fund, including a majority of
the Directors who are not parties to the contract or interested persons of any
such party as defined in the Investment Company Act on May 2, 1995 and by
shareholders of the Fund on April 28, 1988.
For the fiscal years ended December 31, 1994, 1995 and 1996, the Fund paid
PMF a management fee of $15,562,791, $15,779,009 and $16,817,042, respectively.
PMF has entered into the Subadvisory Agreement with PIC (the Subadviser), a
wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that
PIC will furnish investment advisory services in connection with the management
of the Fund. In connection therewith, PIC is obligated to keep certain books and
records of the Fund. PMF continues to have responsibility for all investment
advisory services pursuant to the Management Agreement and supervises PIC's
performance of such services. PIC is reimbursed by PMF for the reasonable costs
and expenses incurred by PIC in furnishing those services. Investment advisory
services are provided to the Fund by a business group of the Subadviser, known
as Prudential Investments.
B-13
<PAGE>
The Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the Directors who are not parties to the contract or
interested persons of any such party as defined in the Investment Company Act,
on April 10, 1996, and by shareholders of the Fund on April 28, 1988.
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, PMF or PIC upon not more than 60 days', nor less than 30
days', written notice. The Subadvisory Agreement provides that it will continue
in effect for a period of more than two years from its execution only so long as
such continuance is specifically approved at least annually in accordance with
the requirements of the Investment Company Act.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, acts as the distributor of the shares
of the Fund. Prior to January 2, 1996, Prudential Mutual Fund Distributors, Inc.
(PMFD), One Seaport Plaza, New York, New York 10292, acted as distributor of the
Class A shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and a distribution agreement
(the Distribution Agreement), PMFD and Prudential Securities (collectively, the
Distributor) serve as distributor of the Fund's Class A, Class B and Class C
shares. Prudential Securities incurs the expenses of distributing the Fund's
Class Z shares under the Distribution Agreement with the Fund, none of which are
reimbursed by or paid for by the Fund. At a meeting held on November 3-4, 1995,
the Board of Directors approved an assignment of the Class A Distribution
Agreement to Prudential Securities. See "How the Fund is Managed-Distributor" in
the Prospectus.
Prior to January 22, 1990, the Fund offered only one class of shares (the
then existing Class B shares). On October 6, 1989, the Board of Directors,
including a majority of the Directors who are not interested persons of the Fund
and who have no direct or indirect financial interest in the operation of the
Class A Plan or Class B Plan or in any agreement related to either Plan (the
Rule 12b-1 Directors), at a meeting called for the purpose of voting on each
Plan, adopted a new plan of distribution for the Class A shares of the Fund (the
Class A Plan) and approved an amended and restated plan of distribution with
respect to the Class B shares of the Fund (the Class B Plan). On February 28,
1993, the Board of Directors, including a majority of the Rule 12b-1 Directors,
at a meeting called for the purpose of voting on each Plan, approved
modifications to the Fund's Class A and Class B Plans and Distribution
Agreements to conform them to recent amendments to the National Association of
Securities Dealers, Inc. (NASD) maximum sales charge rule described below. As so
modified, the Class A Plan provides that (i) up to .25 of 1% of the average
daily net assets of the Class A shares may be used to pay for personal service
and the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30 of
1%. As so modified, the Class B Plan provides that (i) up to .25 of 1% of the
average daily net assets of the Class B shares may be paid as a service fee and
(ii) up to .75 of 1% (including the service fee) of the average daily net assets
of the Class B shares (asset-based sales charge) may be used as reimbursement
for distribution-related expenses with respect to the Class B shares. On May 3,
1993, the Board of Directors, including a majority of the Rule 12b-1 Directors,
at a meeting called for the purpose of voting on each Plan, adopted a plan of
distribution for the Class C shares of the Fund and approved further amendments
to the plans of distribution for the Fund's Class A and Class B shares changing
them from reimbursement type plans to compensation type plans. The plans were
last approved by the Board of Directors, including a majority of the Rule 12b-1
Directors, on April 10, 1996. The Class A Plan, as amended, was approved by the
Class A and Class B shareholders and the Class B Plan, as amended, was approved
by Class B shareholders on July 19, 1994. The Class C Plan was approved by the
sole shareholder of Class C shares on August 1, 1994.
Class A Plan. For the fiscal year ended December 31, 1996, PSI received
payments of approximately $2,077,714 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. PSI received $1,021,400 in initial sales charges with
respect to sales of Class A shares.
Class B Plan. For the fiscal year ended December 31, 1996, Prudential
Securities received $19,896,618 from the Fund under the Class B Plan. It is
estimated that Prudential Securities incurred aggregate distribution expenses of
approximately $17,459,500 on behalf of the Fund during such period. It is
estimated that of this amount approximately 0.4% ($67,600) was spent on printing
and mailing of prospectuses to other than current shareholders; 38.8%
($6,771,600) 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 $10,620,300 (60.8%) on the aggregate of (i) payments of commissions to
account executives ($4,814,800 or 27.6%) and (ii) an allocation of overhead and
other branch office distribution-related expenses ($5,805,500 or 33.2%). The
term "overhead and other branch office distribution-related expenses" represents
(a) the expenses of operating Prudential Securities'
B-14
<PAGE>
branch offices in connection with the sale of Fund shares, including lease
costs, the salaries and employee benefits of operations and sales support
personnel, utility costs, communications costs and the costs of stationery and
supplies, (b) the costs of client sales seminars, (c) expenses of mutual fund
sales coordinators to promote the sale of Fund shares and (d) other incidental
expenses relating to branch promotion of Fund sales.
Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by holders of Class B shares upon certain redemptions of
Class B shares. See "Shareholder Guide-How to Sell Your Shares-Contingent
Deferred Sales Charges" in the Prospectus. For the fiscal year ended December
31, 1996, Prudential Securities received approximately $4,841,400 contingent
deferred sales charges.
Class C Plan. For the fiscal year ended December 31, 1996, Prudential
Securities received $214,854 under the Class C Plan and spent approximately
$252,600 in distributing Class C Shares. Prudential Securities also receives the
proceeds of contingent deferred sales charges paid by investors upon certain
redemptions of Class C shares. See "Shareholder Guide-How to Sell Your
Shares-Contingent Deferred Sales Charges" in the Prospectus. For the year ended
December 31, 1996, Prudential Securities received $33,600 in contingent deferred
sales charges.
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 Rule 12b-1 Directors,
cast in person at a meeting called for the purpose of voting on such
continuance. The Plans may each be terminated at any time, without penalty, by
the vote of a majority of the Rule 12b-1 Directors or by the vote of the holders
of a majority of the outstanding shares of the applicable class on not more than
30 days' written notice to any other party to the Plans. The Plans may not be
amended to increase materially the amounts to be spent for the services
described therein without approval by the shareholders of the applicable class
(by both Class A and Class B shareholders, voting separately, in the case of
material amendments to the Class A Plan), and all material amendments are
required to be approved by the Board of Directors in the manner described above.
Each Plan will automatically terminate in the event of its assignment. The Fund
will not be contractually obligated to pay expenses incurred under any Plan if
it is terminated or not continued.
Pursuant to each Plan, the Board of Directors will review at least quarterly
a written report of the distribution expenses incurred on behalf of each class
of shares of the Fund by the Distributor. The report 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
Prudential Securities to the extent permitted by applicable law against certain
liabilities under the Securities Act of 1933, as amended. The Distribution
Agreement was approved by the Board of Directors, including a majority of the
Rule 12b-1 Directors, on April 10, 1996.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the safety, potential returns
and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSI's
conduct violated the federal securities laws and that an order issued by the SEC
in 1986 requiring PSI to adopt, implement and maintain certain supervisory
procedures had not been complied with; (ii) directed PSI to cease and desist
from violating the federal securities laws and imposed a $10 million civil
penalty; and (iii) required PSI to adopt certain remedial measures including the
establishment of a Compliance Committee of its Board of Directors. Pursuant to
the terms of the SEC settlement, PSI established a settlement fund in the amount
of $330,000,000 and procedures, overseen by a court approved Claims
Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend the creation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Dallas office to new customers during a period of twenty consecutive
business days, and
B-15
<PAGE>
agreed that its other Texas offices would be subject to the same restrictions
for a period of five consecutive business days. PSI also agreed to institute
training programs for its securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. and PSI entered into
agreements with the United States Attorney deferring prosecution (provided PSI
complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the Fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director will also serve as an independent "ombudsman" whom PSI
employees can call anonymously with complaints about ethics and compliance. PSI
shall report any allegations or instances of criminal conduct and material
improprieties to the new director. The new director will submit compliance
reports which shall identify all such allegations or instances of criminal
conduct and material improprieties every three months for a three-year period.
NASD Maximum Sales Charge Rule. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred sales
charges and asset-based sales charges to 6.25% of total gross sales of each
class of shares. Interest charges on unreimbursed distribution expenses equal to
the prime rate plus one percent per annum may be added to the 6.25% limitation.
Sales from the reinvestment of dividends and distributions are not included in
the calculation of the 6.25% limitation. The annual asset-based sales charge on
shares of the Fund may not exceed .75 of 1% per class. The 6.25% limitation
applies to the Fund rather than on a per shareholder basis. If aggregate sales
charges were to exceed 6.25% of total gross sales of shares of any class, all
sales charges on shares of that class would be suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of brokerage commissions, if any. For purposes of this section, the
term "Manager" 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 the policy of
obtaining most favorable price and efficient execution, the Manager will
consider research and investment services provided by brokers or dealers 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 furnishing such services may be selected for the
execution of transactions of such other accounts, whose aggregate assets are far
larger than those of the Fund, and the services furnished by such brokers may be
used by the Manager in providing investment management for the Fund. Commission
rates are established pursuant to negotiations with the broker 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 of orders among
brokers and the commission rates paid are reviewed periodically by the Fund's
Board of Directors.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities (or any affiliate), during the
existence of the syndicate, is a principal underwriter, except in accordance
with rules of the SEC. The Fund may not participate in any transaction where
Prudential Securities (or any affiliate) is acting as principal, nor may the
Fund deal with Prudential Securities in any transaction in which Prudential
Securities (or any affiliate) acts as principal or market maker, except as may
be permitted by the SEC. These limitations, in the opinion of the Manager, will
not significantly affect the Fund's ability to pursue its investment objective.
However, the Fund may be at a disadvantage because of these limitations in
comparison to other funds not subject to such limitations.
Subject to the above considerations, the Manager may use Prudential
Securities as a broker for the Fund. In order for Prudential Securities or any
affiliate to effect any portfolio transactions for the Fund, the commissions,
fees and other
B-16
<PAGE>
remuneration received by Prudential Securities or any affiliate must be
reasonable and fair compared to the commissions, fees or other remuneration paid
to other brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during a comparable
period of time. This standard would allow Prudential Securities or any affiliate
to receive no more than the remuneration which would be expected to be received
by an unaffiliated broker in a commensurate arm's-length transaction.
Furthermore, the Board of Directors of the Fund, including a majority of the
noninterested Directors, has adopted procedures which are reasonably designed to
provide that any commissions, fees or other remuneration paid to Prudential
Securities or any affiliate are consistent with the foregoing standard. In
accordance with Section 11(a) of the Securities Exchange Act of 1934, Prudential
Securities may not retain compensation for effecting transactions on a national
securities exchange for the Fund unless the Fund has expressly authorized the
retention of such compensation. Prudential Securities must furnish to the Fund
at least annually a statement setting forth the total amount of all compensation
retained by Prudential Securities from transactions effected for the Fund during
the applicable period. Brokerage transactions with Prudential Securities or any
afffiliate are also subject to such fiduciary standards as may be imposed upon
Prudential Securities or such affiliate by applicable law.
The Fund paid no brokerage commissions to Prudential Securities for the
fiscal years ended December 31, 1994, 1995 and 1996.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis (Class B or Class C shares). Class Z shares of the Fund
are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors at net asset value. See
"Shareholder Guide-How to Buy Shares of the Fund" in the Prospectus.
Each class represents an interest in the same assets of the Fund and is
identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service fees (except for Class Z shares,
which are not subect to any sales charges and distribution and/or service fees),
which may affect performance, (ii) each class has exclusive voting rights with
respect to any matter submitted to shareholders that relates solely to its
arrangement and has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class has a different exchange privilege, (iv) only
Class B shares have a conversion feature and (v) Class Z shares are offered
exclusively for sale to a limited group of investors. See "Distributor" and
"Shareholder Investment Account-Exchange Privilege."
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
B*, Class C* and Class Z** shares of the Fund are sold at net asset value. Using
the Fund's net asset value at December 31, 1996, the maximum offering price of
the Fund's shares is as follows:
Class A
- -------
Net asset value and redemption price per Class A share ................... $8.39
-----
Maximum sales charge (4% of offering price) .............................. .35
-----
Offering price to public ................................................. $8.74
=====
Class B
- -------
Net asset value, offering price and redemption price per Class B share* .. $8.38
=====
Class C
- -------
Net asset value, offering price and redemption price per Class C share* .. $8.38
=====
Class Z
- -------
Net asset value, offering price and redemption price per Class Z share** . $8.39
=====
- ------------
*Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "Shareholder Guide-How to Sell Your
Shares-Contingent Deferred Sales Charges" in the Prospectus.
**Class Z shares did not exist prior to March 1, 1996.
B-17
<PAGE>
Reduction and Waiver of Initial Sales Charges-Class A Shares
Combined Purchase and Cumulative Purchase Privilege. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See the table of breakpoints under "Shareholder
Guide-Alternative Purchase Plan" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a company will be
deemed to control the company, and a partnership will be deemed to be controlled
by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse;
(g) one or more employee benefit plans of a company controlled by an
individual;
(h) 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); and
(i) (1) a client of a Prudential Securities financial adviser who gives such
financial adviser discretion to purchase the Prudential Mutual Funds for his or
her account only in connection with participation in a market timing program and
for which program Prudential Securities receives a separate advisory fee or (2)
a client of an unaffiliated registered investment adviser which is a client of
Prudential Securities financial adviser, if such unaffiliated adviser has
discretion to purchase the Prudential Mutual Funds for the accounts of his or
her customers but only if the client of such unaffiliated adviser participates
in a market timing program conducted by such unaffiliated adviser; provided such
accounts in the aggregate have assets of at least $15 million invested in the
Prudential Mutual Funds.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in any
retirement or group plans.
Rights of Accumulation. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential Securities. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering price (net asset value plus maximum sales charge) as
of the previous business day. See "How the Fund Values its Shares" in the
Prospectus. The Distributor must be notified at the time of purchase that the
investor is entitled to a reduced sales charge. The reduced sales charges will
be granted subject to confirmation of the investor's holdings. Rights of
accumulation are not available to individual participants in any retirement or
group plans.
Letters of Intent. Reduced sales charges are also available to investors (or
an eligible group of related investors), including retirement and 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
qualify to purchase Class A shares at net asset value by entering into a Letter
of Intent whereby they agree to enroll, within a thirteen month period, a
special number of eligible employees or participants (Participant 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. The
Distributor must be notified at the time of purchase that the investor is
entitled to a reduced sales charge. The reduced sales charges will be granted
subject to confirmation of the investor's holdings. Letters of Intent are not
available to individual participants in any retirement or group plans.
B-18
<PAGE>
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 goal
over a thirteen month period. Each investment made during the period, in the
case of an Investment Letter of Intent will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. In the case of a Participant Letter of Intent, each investment made
during the period will be made at net asset value. Escrowed Class A shares
totaling 5% of the dollar amount of the Letter of Intent will be held by the
Transfer Agent in the name of the purchaser, except in the case of retirement
and group plans where the employer or plan sponsor will be responsible for
paying any applicable sales charge. The effective date of an Investment Letter
of Intent (except in the case of retirement and group plans) may be back-dated
up to 90 days, in order that any investments made during this 90-day period,
valued at the purchaser's cost, can be applied to the fulfillment of the Letter
of Intent goal, except in the case of retirement and group plans.
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 oblige 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 charge will, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to individual
participants in any retirement or group plans.
Waiver of the Contingent Deferred Sales Charge-Class B Shares
The Contingent Deferred Sales Charge is waived under circumstances described
in the Prospectus. See "Shareholder Guide-How to Sell Your Shares-Waiver of
Contingent Deferred Sales Charges-Class B Shares" in the Prospectus. In
connection with these waivers, the Transfer Agent will require you to submit the
supporting documentation set forth below.
<TABLE>
<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 if A copy of the Social Security Administration award
he or she is unable to engage in any substantial letter or a letter from a physician on the physician's
gainful activity by reason of any medically letterhead stating that the shareholder (or, in the
determinable physical or mental impairment which can be case of a trust, the grantor) is permanently disabled.
expected to result in death or to be of long-continued The letter must also indicate the date of disability.
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.
</TABLE>
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
B-19
<PAGE>
Quantity Discount-Class B Shares Purchased Prior to August 1, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchase an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares of
the Fund following the second purchase was $550,000, the quantity discount would
be available for the second purchase of $450,000 but not for the first purchase
of $100,000. The quantity discount will be imposed at the following rates
depending on whether the aggregate value exceeded $500,000 or $1 million:
Contingent Deferred Sales Charge
as a Percentage of Dollars Invested
or Redemption Proceeds
Year Since Purchase -----------------------------------------
Payment Made $500,000 to $1 million Over $1 million
---------------------- ---------------
First 3.0% 2.0%
Second 2.0% 1.0%
Third 1.0% 0%
Fourth and thereafter 0% 0%
You must notify the Fund's Transfer Agent either directly or through
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.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor 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 the
shareholders the following privileges and plans.
Automatic Reinvestment of Dividends and/or Distributions
For the convenience of investors, all dividends and capital gains
distributions are automatically reinvested in full and fractional shares of the
Fund at net asset value. An investor may direct the Transfer Agent in writing
not less than 5 full business days prior to the record date to have subsequent
dividends and/or distributions sent to him or her 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 distribution at net
asset value by returning the check or the proceeds to the Transfer Agent within
30 days after the payment date. Such investment will be made at the net asset
value per share next determined after receipt of the check or proceeds by the
Transfer Agent.
Exchange Privilege
The 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, respectively, of the Fund. All
exchanges are made on the basis of relative net asset value next determined
after receipt of an order in proper form. An exchange will be treated as a
redemption and purchase for tax purposes. Shares may be exchanged for shares of
another fund only if shares of such fund may legally be sold under applicable
state laws. For retirement and group plans having a limited menu of Prudential
Mutual Funds, the Exchange Privilege is available for those funds eligible for
investment in the particular program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
Class A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential Mutual Funds, shares of Prudential
Structured Maturity Fund and 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.
B-20
<PAGE>
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 Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc.
Prudential Tax-Free Money Fund
Class B and Class C. Shareholders of the Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential Mutual Funds and shares of Prudential Special Money Market Fund, a
money market fund. No CDSC will be payable upon such exchange, but a CDSC may be
payable upon the redemption of the Class B and Class C shares acquired as a
result of the exchange. The applicable sales charge will be that imposed by the
fund in which shares were initially purchased and the purchase date will be
deemed to be the first day of the month after 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 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 by
excluding 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 the 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.
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on 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.
Class Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
Additional details about the Exchange Privilege for each of the Prudential
Mutual Funds are available from the Fund's Transfer Agent, Prudential Securities
or Prusec. The Exchange Privilege may be modified, terminated or suspended on
sixty (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.
Prudential Allocation Fund
(Balanced Portfolio)
Prudential Equity Income Fund
Prudential Equity Fund, Inc.
Prudential Global Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
(Money Market Series)
B-21
<PAGE>
Prudential Growth Opportunity Fund, Inc.
Prudential Jennison Fund, Inc.
(expected to be available later in 1996)
Prudential MoneyMart Assets, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Utility Fund, Inc.
Dollar Cost Averaging
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.1
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.2
Period of
Monthly investments: $100,000 $150,000 $200,000 $250,000
-------------------- -------- -------- -------- --------
25 years ................ $ 110 $ 165 $ 220 $ 275
20 years ................ 176 264 352 440
15 years ................ 296 444 592 740
10 years ................ 555 833 1,110 1,388
5 years ................. 1,371 2,057 2,742 3,428
See "Automatic Savings Accumulation Plan."
- ------------
1Source 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.
Automatic Savings Accumulation Plan (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account or
Prudential Securities account (including a Command Account) to be debited to
invest specified dollar amounts in shares of the Fund. The investor's bank must
be a member of the Automatic Clearing House System. Stock certificates are not
issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or
Prusec.
Systematic Withdrawal Plan
A systematic withdrawal plan is available to shareholders through Prudential
Securities or the Transfer Agent. Such withdrawal plan provides for monthly or
quarterly checks in any amount, except as provided below, up to the value of the
shares in the shareholder's account. Withdrawals of Class B or Class C shares
may be subject to a CDSC. See "Shareholder Guide-How to Sell Your
Shares-Contingent Deferred Sales Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment
Account-Automatic Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals exceed reinvested dividends and distributions, the
shareholder's original investment may be correspondingly reduced and ultimately
exhausted.
B-22
<PAGE>
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 charge applicable to (i) the purchase of Class
A shares and (ii) the withdrawal of Class B or Class C shares. Shareholders
should consult their tax advisers regarding the tax consequences of the
systematic withdrawal 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 sheltered accounts" under Section
403(b)(7) of the Internal Revenue Code are available through the Distributor.
These plans are for use by both self-employed individuals and corporate
employers. These plans permit either self-direction of accounts by participants,
or a pooled account arrangement. Information regarding the establishment of
these plans, the administration, custodial fees and other details are available
from Prudential Securities or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
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 Compounding1
Contributions Personal
Made Over: Savings IRA
---------- -------- --------
10 years $ 26,165 $ 31,291
15 years 44,675 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
the IRA account will be subject to tax when withdrawn from the account.
Mutual Fund Programs
From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, e.g., to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event 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 requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as part of
the program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, individuals should consult their Prudential
Securities Financial Advisor or Prudential/Pruco Securities Representative
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
The net asset value per share is the net worth of the Fund (assets,
including securities at value, minus liabilities) divided by the number of
shares outstanding. Net asset value is calculated separately for each class. The
Fund will compute its net asset value on each day the New York Stock Exchange is
open for trading except on days on which no orders to purchase, sell or redeem
Fund shares have been received or days on which changes in the value of the
Fund's portfolio securities do not affect net asset value. In the event the New
York Stock Exchange closes early on any business day, the net asset value of the
Fund's shares shall be determined at a time between such closing and 4:15 P.M.,
New York time.
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. Portfolio
securities that are actively traded in the over-the-counter market, including
listed securities for
B-23
<PAGE>
which the primary market is believed to be over-the-counter, are valued at
prices provided by principal market makers and other pricing agents. Any
security for which the primary market is on an exchange is valued at the last
sale 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. Short-term investments which
mature in 60 days or less are valued at amortized cost or by amortizing their
value on the 61st day prior to maturity, if their term to maturity from date of
purchase exceeds 60 days, unless the Board of Directors determines that such
valuation does not represent fair value. Securities issued in private placements
shall be valued at the mean between the bid and asked prices provided by primary
market makers. Securities which are otherwise not readily marketable or
securities for which reliable market quotations are not available are valued in
good faith at fair value under the supervision of the Board of Directors of the
Fund, taking into account such factors as the cost of the securities,
transactions in comparable securities, relationships among various securities
and other such factors as may be determined by the Fund's investment adviser to
materially affect the value of such securities. The Board of Directors may
consider prices provided by an independent pricing service in determining fair
value.
Net asset value is calculated separately for each class. The net asset value
of Class B and Class C shares will generally be lower than the net asset value
of Class A shares as a result of the larger distribution-related fee to which
Class B and Class C shares are subject. The net asset value of Class Z shares
will generally be higher than the net asset value of Class A, Class B or Class C
shares as a result of the fact that, the Class Z shares are not subject to any
distribution and/or service fee. It is expected, however, that the net asset
value of the four classes will tend to converge immediately after the recording
of dividends, if any, which will differ by approximately the amount of the
distribution and/or service fee expense accrual differential among the classes.
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends on a daily basis in an amount based on actual
net investment income determined in accordance with generally accepted
accounting principles. A portion of such dividend may also include projected net
investment income. Such dividends will be payable monthly in additional shares
of the Fund unless otherwise requested by the shareholder.
Net capital gains, if any, will be distributed at least annually. In
determining the amount of capital gains to be distributed, any capital loss
carry forwards from prior years will be offset against capital gains. The Fund
had a capital loss carry forward for federal income tax purposes at December 31,
1996 of approximately $673,926,900, of which $323,340,600 expires in 1998,
$77,895,200 expires in 1999, $110,441,500 expires in 2000 and $162,249,600
expires in 2003. Accordingly, no capital gains distribution (short-term or
long-term) is expected to be paid to shareholders until net capital gains have
been realized in excess of the aggregate of such amounts. The Fund will elect
to treat net capital losses of approximately $14,134,100 incurred in the two
month period ended December 31, 1996 as having been incurred in the following
fiscal year. Distributions, if any, will be paid in additional Fund shares
based on the net asset value unless the shareholder elects in writing not less
than 5 full business days prior to the record date to receive such distributions
in cash.
The Fund has qualified and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code. Under
Subchapter M, the Fund is not subject to federal income taxes on the taxable
income it distributes to shareholders, provided that it distributes to
shareholders each year at least 90% of its net investment income and net
short-term capital gains in excess of net long-term capital losses, if any.
Qualification as a regulated investment company under the Internal Revenue
Code generally requires, among other things, that the Fund (a) derive at least
90% of its annual gross income (without offset for losses from the sale or other
disposition of securities or foreign currencies) from interest, payments with
respect to securities loans, dividends and gains from the sale or other
disposition of securities or foreign currencies and certain financial futures,
options and forward contracts; (b) derive less than 30% of its gross income from
gains from the sale or other disposition of securities or options thereon held
for less than three months; and (c) diversify its holdings so that, at the end
of each quarter of the taxable year, (i) at least 50% of the market value of the
Fund's assets is represented by cash, U.S. Government securities and other
securities limited in respect of any one issuer to an amount not greater than 5%
of the market value of the Fund's assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than U.S. Government
securities).
The Fund's ability to hold foreign currencies, engage in hedging activities,
or close out certain positions may be limited by the 30% short-short rule
discussed above.
The Fund generally will be subject to a nondeductible excise tax of 4% to
the extent that it does not meet certain minimum distribution requirements as of
the end of each calendar year. The Fund intends to make timely distributions of
the Fund's income in compliance with these requirements. As a result, it is
anticipated that the Fund will not be subject to the excise tax.
The Fund may purchase debt securities that contain original issue discount.
Original issue discount that accrues in a taxable year is treated as income
earned by the Fund and therefore is subject to the distribution requirements of
the Internal Revenue
B-24
<PAGE>
Code. Because the original issue discount income earned by the Fund in a taxable
year may not be represented by cash income, the Fund may have to dispose of
other securities and use the proceeds to make distributions to satisfy the
Internal Revenue Code's distribution requirements.
Distributions of net investment income and realized net short-term capital
gains of the Fund are taxable to shareholders of the Fund as ordinary income,
whether such distributions are taken in cash or reinvested in additional shares.
Distributions of net long-term capital gains (i.e., the excess of net long-term
capital gains over net short-term capital losses), if any, are taxable as
long-term capital gains regardless of whether the shareholder received such
distribution in additional shares or in cash or of how long shares of the Fund
have been held. Distributions and dividends paid by the Fund generally will not
be eligible for the dividends-received deduction for corporate shareholders.
Tax-exempt shareholders will not be required to pay taxes on amounts distributed
to them.
Gains or losses on sales of securities by the Fund will be treated as
long-term capital gains or losses if the securities have been held by it for
more than one year except in certain cases where the Fund acquires a put. Other
gains or losses on the sale of securities will be short-term capital gains or
losses. Certain financial futures contracts held by the Fund will be required to
be "marked to market" for federal income tax purposes, that is, treated as
having been sold at their fair market value on the last day of the Fund's
taxable year. Any gain or loss recognized on actual or deemed sales of these
financial futures contracts will be treated as 60% long-term capital gain or
loss and 40% short-term capital gain or loss. The Fund may be required to defer
the recognition of losses on financial futures contracts to the extent of any
unrecognized gains on related positions held by the Fund.
The Fund's gains and losses on the sale, lapse, or other termination of call
options it holds on financial futures contracts will generally be treated as
gains and losses from the sale of financial futures contracts. If call options
written by the Fund expire unexercised, the premiums received by the Fund give
rise to short-term capital gains at the time of expiration. The Fund may also
have short-term gains and losses associated with closing transactions with
respect to call options written by the Fund. If call options written by the Fund
are exercised, the selling price of the financial futures contract is increased
by the amount of the premium received by the Fund, and the capital gain or loss
on the sale of the futures contract is long-term or short-term, depending on the
contract's holding period.
Upon the exercise of a put held by the Fund, the premium initially paid for
the put is offset against the amount received for the futures contract, bond or
note sold pursuant to the put thereby decreasing any gain (or increasing any
loss) realized on the sale. Generally, such gain or loss is short-term or
long-term capital gain or loss, depending on the holding period of the futures
contract, bond or note. However, in certain cases in which the put is not
acquired on the same day as the underlying securities identified to be used in
the put's exercise, gain on the exercise, sale or disposition of the put is
short-term capital gain. If a put is sold prior to exercise, any gain or loss
recognized by the Fund would be short-term or long-term capital gain or loss,
depending on the holding period of the put. If a put expires unexercised, the
Fund would realize short-term or long-term capital loss, depending on the
holding period of the put, in an amount equal to the premium paid for the put.
In certain cases in which the put and securities identified to be used in its
exercise are acquired on the same day, however, the premium paid for the
unexercised put is added to the basis of the identified securities. In certain
cases, a put may affect the holding period of the underlying security for
purposes of the 30% of gross income test described above, and accordingly, the
Fund's ability to utilize puts or dispose of securities with respect to which it
has held a put may be limited.
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.
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A and Class Z shares as a result of the higher
distribution-related fee applicable with respect to the Class B and Class C
shares. The per share distributions of net capital gains, if any, will be paid
in the same amount for Class A, Class B, Class C and Class Z shares. See "Net
Asset Value."
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 long-term
capital gain or loss if the shares have been held for more than one year and
otherwise as short-term capital gain or loss. 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
long-term 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 or distribution will
constitute a replacement of shares.
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
B-25
<PAGE>
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.
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 Fund may be subject to state or local tax in certain states where it is
deemed to be doing business. Further, in those states which have income tax
laws, the tax treatment of the Fund and of shareholders of the Fund with respect
to distributions by the Fund and sales on Fund shares may differ from federal
tax treatment. Distributions to, and sales of Fund shares by, shareholders may
be subject to additional state and local taxes.
Pennsylvania Personal Property Tax. The Fund has received a written letter
of determination from the Pennsylvania Department of Revenue that the Fund will
be subject to the Pennsylvania foreign franchise tax. Accordingly, it is
believed that Fund shares are exempt from Pennsylvania personal property taxes.
The Fund anticipates that it will continue such business activities but reserves
the right to suspend them at any time, resulting in the termination of the
exemption.
Statements as to the tax status of distributions to shareholders of the Fund
will be mailed annually. Shareholders are urged to consult their own tax
advisers regarding specific questions as to federal, state or local taxes.
PERFORMANCE INFORMATION
Yield. The Fund may from time to time advertise its "yield" as calculated
over a 30-day period. The yield is determined separately for Class A, Class B,
Class C and Class Z shares. The yield will be computed by dividing the Fund's
net investment income per share earned during this 30-day period by the net
asset value per share on the last day of this period.
Yield is calculated according to the following formula:
a - b
YIELD = 2 [(-------+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 December 31, 1996 for the Fund's Class
A, Class B, Class C and Class Z shares was 9.03%, 8.80%, 8.80% and 9.57%,
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. Yield for the Fund will vary depending on a number of factors
including changes in net asset value, 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 SEC regulations. Under those
procedures, limitations may be placed on yield to maturity calculations of
particular securities.
Average Annual Total Return. The Fund may also from time to time advertise
its average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares. See "How the Fund
Calculates Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical $1000
investment made at the beginning of the 1, 5 or 10 year
periods at the end of the 1, 5 or 10 year periods (or
fractional portion thereof).
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.
The average annual total return with respect to the Class A shares for the
one year, five year and since inception (January 22, 1990) periods ended
December 31, 1996 was 8.1%, 11.2% and 11.1%, respectively. The average annual
total return for the Class B shares of the Fund for the one, five and ten year
periods ended on December 31, 1996 was 7.0%, 11.3% and 8.8%, respectively. The
average annual total return for Class C shares for the one year and since
inception period (August 1, 1994) ended December 31, 1996 was 11.0% and 11.6%,
respectively.
B-26
<PAGE>
Aggregate Total Return. The Fund may from time to time advertise its
aggregate total return. Aggregate total return is determined separately for
Class A, Class B, Class C and Class Z shares. See "How the Fund Calculates
Performance" in the Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1000.
ERV = Ending Redeemable Value at the end of the 1, 5, or 10 year periods (or
fractional portion thereof) of a hypothetical $1000 investment made
at the beginning of the 1, 5 or 10 year periods.
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The aggregate total return with respect to the Class A shares for the one
year, five year and since inception periods ended December 31, 1996 was 12.6%,
76.8% and 115.7%, respectively. The aggregate total return with respect to the
Class B shares of the Fund for the one, five and ten-year periods ended on
December 31, 1996 was 12.0%, 71.8% and 132.8%, respectively. The aggregate total
return for Class C shares for the one year and since inception (August 1, 1994)
period ended December 31, 1996 was 12.0% and 30.5%, respectively. The aggregate
total return for the Class Z shares for the since inception (March 1, 1996)
period ended December 31, 1996 was 8.8%.
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.1
CHART
- ------------
(1)Source:Ibbotson Associates Stocks, Bonds, Bills and Inflation-1995 Yearbook
(annually updates the work of Roger G. Ibbotson and Rex A. Sinquefield). Used
with permission. All rights reserved. Common stock returns are based on the
Standard and Poor's 500 Stock Index, a market-weighted, unmanaged index of 500
common stocks in a variety of industry sectors. It is a commonly used indicator
of broad stock price movements. This chart is for illustrative purposes only and
is not intended to represent the performance of any particular investment or
fund. Investors cannot invest directly in an index. Past performance is not a
guarantee of future results.
CUSTODIAN, TRANSFER AND DIVIDEND
DISBURSING AGENT AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to agreements with the Fund.
B-27
<PAGE>
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the Fund.
It is a wholly-owned subsidiary of PMF. PMFS provides customary transfer agency
services to the Fund, including the handling of shareholder communications, the
processing of shareholder transactions, the maintenance of shareholder account
records, payment of dividends and distributions, and related functions. For
these services, PMFS receives an annual fee per shareholder account, a new
account set-up fee for each manually established account and a monthly inactive
zero balance account fee per shareholder account. PMFS is also reimbursed for
its out-of-pocket expenses, including but not limited to postage, stationery,
printing, allocable communications expenses and other costs. For the fiscal year
ended December 31, 1996, the Fund incurred fees of $3,578,500 for the services
of PMFS.
Price Waterhouse 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.
B-28
<PAGE>
Portfolio of Investments
as of December 31, 1996 PRUDENTIAL HIGH YIELD 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--93.8%
BONDS--89.5%
- ------------------------------------------------------------------------------------------------------------------------------
Aerospace--0.7%
Sequa Corp., Sr. Sub. Notes B3 9.375% 12/15/03 $ 27,750 $ 28,305,000
- ------------------------------------------------------------------------------------------------------------------------------
Automotive Parts--2.5%
Exide Corp., Sr. Notes B1 10.00 4/15/05 25,050 25,989,375
Foamex JPS Automotive L.P.,
Sr. Disc. Notes, Zero Coupon (until 7/1/99) NR 14.00 7/01/04 20,250 16,807,500
Sr. Notes B2 11.125 6/15/01 21,700 23,273,250
Sr. Sub. Deb. B3 11.875 10/01/04 2,000 2,130,000
Foamex L.P., Sr. Sub. Deb., Ser. B B3 11.875 10/01/04 6,910 7,324,600
Hayes Wheels Int'l., Inc., Sr. Sub. Notes B3 11.00 7/15/06 26,500 28,918,125
--------------
104,442,850
- ------------------------------------------------------------------------------------------------------------------------------
Broadcasting & Other Media--5.9%
Allbritton Communications Co., Sr. Sub. Deb. B3 9.75 11/30/07 9,400 9,118,000
Benedek Broadcasting Corp., Sr. Notes Ba3 11.875 3/01/05 16,650 18,148,500
Benedek Communications, Inc., Sr. Disc. Notes,
Zero Coupon (until 5/15/01) B3 13.25 5/15/06 12,000 6,900,000
Globo Communications, Sr. Notes NR 10.50 12/20/06 25,900 26,126,625
Grupo Televisa S. A.,
Sr. Notes Ba3 11.375 5/15/03 25,500 27,157,500
Sr. Notes NR 11.875 5/15/06 9,000 9,945,000
Jacor Communications Co., Sr. Sub. Notes B2 9.75 12/15/06 17,500 17,850,000
Lamar Advertising Co., Sr. Sub. Notes B1 9.625 12/01/06 13,500 13,905,000
Outdoor Systems, Inc., Sr. Sub. Notes B1 9.375 10/15/06 28,000 28,840,000
Paxson Communications Corp., Sr. Sub. Notes B3 11.625 10/01/02 10,500 10,946,250
SFX Broadcasting, Inc., Sr. Sub. Notes B3 10.75 5/15/06 22,820 24,075,100
Telemundo Group, Inc., Sr. Disc. Notes B1 7.00 2/15/06 20,000 19,300,000
Universal Outdoor, Inc., Sr. Sub. Notes B1 9.75 10/15/06 14,900 15,384,250
Young Broadcasting, Inc.,
Sr. Sub. Notes B2 10.125 2/15/05 21,300 21,832,500
Sr. Sub. Notes B2 9.00 1/15/06 4,000 3,890,000
--------------
253,418,725
- ------------------------------------------------------------------------------------------------------------------------------
Building & Related Industries--3.2%
Building Material Corp. of America, Sr. Notes,
Zero Coupon (until 7/1/99) Ba3 11.75 7/01/04 28,750 24,868,750
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-29
<PAGE>
Portfolio of Investments
as of December 31, 1996 PRUDENTIAL HIGH YIELD 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>
- ------------------------------------------------------------------------------------------------------------------------------
Building & Related Industries (cont'd.)
Greystone Homes Corp., Sr. Notes B2 10.75% 3/01/04 $ 14,900 $ 15,235,250
Kaufman & Broad Home Corp., Sr. Sub. Notes Ba3 9.625 11/15/06 25,000 25,062,500
Nortek, Inc., Sr. Sub. Notes B3 9.875 3/01/04 27,125 27,396,250
NVR, Inc., Sr. Notes B2 11.00 4/15/03 15,600 16,380,000
U.S. Home Corp., Sr. Notes Ba2 9.75 6/15/03 24,580 25,501,750
--------------
134,444,500
- ------------------------------------------------------------------------------------------------------------------------------
Cable--17.8%
Adelphia Communications Corp., Sr. Notes, PIK B3 9.50 2/15/04 39,043 33,771,998
American Telecasting, Inc.,
Sr. Disc. Notes, Zero Coupon (until 6/15/99) Caa 14.50 6/15/04 8,500 3,485,000
Sr. Disc. Notes, Zero Coupon (until 8/15/00) Caa 14.50 8/15/05 36,000 12,600,000
Bell Cablemedia Co.,
Sr. Disc. Notes, Zero Coupon (until 1/15/00) B2 11.95 7/15/04 26,975 23,535,687
Sr. Disc. Notes, Zero Coupon (until 9/15/00) B2 11.875 9/15/05 3,150 2,527,875
C S Wireless Systems, Inc., Sr. Disc. Notes,
Zero Coupon (until 3/1/01) Caa 11.375 3/01/06 16,000 5,840,000
Cablevision Systems Corp.,
Sr. Sub. Notes B2 9.25 11/01/05 48,060 47,579,400
Sr. Sub. Notes B2 9.875 2/15/13 25,950 25,560,750
CAI Wireless Systems, Inc., Sr. Notes Caa 12.25 9/15/02 25,950 11,937,000
Comcast Corp.,
Sr. Sub. Deb. B1 9.375 5/15/05 17,300 17,948,750
Sr. Sub. Notes B1 9.125 10/15/06 23,500 24,087,500
Comcast UK Cable Corp., Sr. Disc. Deb.,
Zero Coupon (until 11/15/00) B2 11.20 11/15/07 9,850 6,845,750
Diamond Cable Co., Sr. Disc. Notes, Zero Coupon
(until 3/31/04) B3 13.25 9/30/04 27,400 22,468,000
Echostar Satellite,
Sr. Disc. Notes, Zero Coupon (until 3/15/00) Caa 13.125 3/15/04 28,500 21,517,500
Echostar Communications Corp.,
Sr. Disc. Notes, Zero Coupon (until 6/1/99) B2 12.875 6/01/04 32,291 26,640,075
Falcon Holdings Corp. L.P., Sr. Sub. Notes, PIK NR 11.00 9/15/03 35,270 31,566,819
Heartland Wireless Communication, Inc., Sr. Notes NR 13.00 4/15/03 6,500 6,305,000
Intermedia Capital Partners, Sr. Notes B2 11.25 8/01/06 35,250 36,263,437
International Cabletel, Inc.,
Sr. Disc. Notes, Zero Coupon (until 4/15/00) B3 12.75 4/15/05 25,950 19,462,500
Sr. Disc. Notes, Zero Coupon (until 2/1/01) B3 11.50 2/01/06 25,500 17,340,000
Kablemedia Holdings, Sr. Disc. Notes, Zero Coupon
(until 8/1/01) B3 13.625 8/01/06 17,000 9,520,000
Lenfest Communications, Inc.,
Sr. Notes Ba3 8.375 11/01/05 64,650 62,468,063
Sr. Sub. Notes B2 10.50 6/15/06 10,000 10,500,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-30
<PAGE>
Portfolio of Investments
as of December 31, 1996 PRUDENTIAL HIGH YIELD 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 (cont'd.)
Lodgenet Entertainment Corp., Sr. Notes B1 10.25% 12/15/06 $ 3,000 $ 3,007,500
Marcus Cable Operating Co., Sr. Sub. Disc. Notes,
Zero Coupon (until 8/1/99) B3 13.50 8/01/04 54,000 44,280,000
Rifkin Acquisitions Partners L.P., Sr. Sub. Notes B3 11.125 1/15/06 17,750 18,504,375
Rogers Cablesystems, Inc.,
Sr. Sec'd Notes Ba3 10.00 3/15/05 66,075 70,369,875
Sr. Sec'd. Deb. Ba3 10.00 12/01/07 12,000 12,660,000
Sr. Sec'd. Deb. Ba3 10.125 9/01/12 19,575 20,309,062
Telewest Plc, Sr. Disc. Deb., Zero Coupon (until
10/1/00) B1 11.00 10/01/07 45,400 31,666,500
Tevecap S.A., Sr. Notes B2 12.625 11/26/04 15,000 15,337,500
United Int'l. Holdings, Inc., Sr. Disc. Notes B3 Zero 11/15/99 51,600 36,894,000
Videotron Holdings Plc,
Sr. Disc. Notes, Zero Coupon (until 1/1/00) B3 11.125 7/01/04 12,375 10,766,250
Sr. Disc. Notes, Zero Coupon (until 8/15/00) B3 11.00 8/15/05 10,300 8,291,500
--------------
751,857,666
- ------------------------------------------------------------------------------------------------------------------------------
Casinos--1.4%
Casino America Corp., Sr. Sec'd. Notes B1 12.50 8/01/03 10,000 9,475,000
Empress River Casino Finance Corp., Sr. Notes Ba3 10.75 4/01/02 16,000 17,360,000
Majestic Star Casino LLC., Sr. Notes NR 12.75 5/15/03 6,000 6,435,000
Trump Atlantic City Assocs., First Mtge. Notes B1 11.25 5/01/06 25,600 25,344,000
--------------
58,614,000
- ------------------------------------------------------------------------------------------------------------------------------
Chemicals--2.4%
ISP Holdings, Inc.,
Sr. Notes Ba3 9.75 2/15/02 29,081 29,808,025
Sr. Notes Ba3 9.00 10/15/03 26,250 26,643,750
Sterling Chemical Holdings, Inc.,
Sr. Disc. Notes, Zero Coupon (until 8/15/01) Caa 13.50 8/15/08 5,450 3,188,250
Sr. Sub. Notes B3 11.75 8/15/06 10,000 10,600,000
Terra Industries, Inc., Sr. Notes Ba3 10.50 6/15/05 24,100 26,148,500
Texas Petrochemical Corp., Sr. Sub. Notes NR 11.125 7/01/06 5,000 5,375,000
--------------
101,763,525
- ------------------------------------------------------------------------------------------------------------------------------
Computer Services--0.7%
Unisys Corp., Sr. Notes B1 11.75 10/15/04 30,000 32,025,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-31
<PAGE>
Portfolio of Investments
as of December 31, 1996 PRUDENTIAL HIGH YIELD 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--1.3%
Knoll Furniture, Inc., Sr. Sub. Notes B3 10.875% 3/15/06 $ 16,500 $ 18,232,500
Lifestyle Furnishings, Inc., Sr. Sub. Notes B1 10.875 8/01/06 27,500 29,493,750
Radnor Holdings Corp., Sr. Notes B2 10.00 12/01/03 8,400 8,568,000
--------------
56,294,250
- ------------------------------------------------------------------------------------------------------------------------------
Diversified Industries--0.3%
Newflo Corp., Sub. Notes B3 13.25 11/15/02 10,500 11,589,375
- ------------------------------------------------------------------------------------------------------------------------------
Drugs & Health Care--6.4%
Fresenius Med Care Capital Trust Ba3 9.00 12/01/06 40,500 41,208,750
Imed Corp., Sr. Sub. Notes B3 9.75 12/01/06 22,475 22,868,313
Integrated Health Services, Inc., Sr. Sub. Notes B1 10.25 4/30/06 37,500 39,375,000
Magellan Health Services, Inc., Sr. Sub. Notes B2 11.25 4/15/04 48,350 53,426,750
Owens & Minor, Inc., Sr. Sub. Notes B1 10.875 6/01/06 9,600 10,296,000
Tenet Healthcare Corp., Sr. Sub. Notes Ba3 10.125 3/01/05 94,000 104,105,000
--------------
271,279,813
- ------------------------------------------------------------------------------------------------------------------------------
Energy--8.2%
AES China Generating Co., Notes Ba3 10.125 12/15/06 6,750 6,952,500
AES Corp., Sr. Sub. Notes Ba1 10.25 7/15/06 27,000 29,092,500
Benton Oil & Gas Co., Sr. Notes NR 11.625 5/01/03 11,300 12,444,125
Cal Energy Co., Inc., Sr. Notes Ba2 9.50 9/15/06 13,000 13,520,000
California Energy Co., Inc.,
Disc. Notes, Zero Coupon (until 1/15/97) Ba2 10.25 1/15/04 56,500 59,536,875
Sr. Notes Ba2 9.875 6/30/03 7,100 7,455,000
Cliffs Drilling Co., Sr. Notes B1 10.25 5/15/03 8,800 9,361,000
Coda Energy, Inc., Notes B3 10.50 4/01/06 10,000 10,500,000
Forcenergy, Inc., Sr. Sub. Notes B2 9.50 11/01/06 10,000 10,400,000
Gulf Canada Resources, Ltd.,
Sr. Sub. Deb. Ba3 9.25 1/15/04 29,730 31,439,475
Sr. Sub. Notes Ba3 9.625 7/01/05 31,720 34,336,900
KCS Energy, Inc., Sr. Notes B1 11.00 1/15/03 14,250 15,390,000
McDermott J. Ray, Sr. Sub. Notes Ba3 9.375 7/15/06 24,000 25,200,000
Parker Drilling Corp., Sr. Notes B1 9.75 11/15/06 13,600 14,348,000
Petroleum Heat & Power, Inc., Sub. Notes B2 10.125 4/01/03 8,010 7,809,750
Plains Resources, Inc., Sr. Sub. Notes B2 10.25 3/15/06 11,000 11,770,000
Transtexas Gas Corp., Sr. Sec'd. Notes B2 11.50 6/15/02 27,250 29,430,000
Triton Energy Corp., Sr. Sub. Disc. Notes B1 9.75 12/15/00 16,314 17,027,737
--------------
346,013,862
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-32
<PAGE>
Portfolio of Investments
as of December 31, 1996 PRUDENTIAL HIGH YIELD 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>
- ------------------------------------------------------------------------------------------------------------------------------
Financial Services--1.1%
First Nationwide Holdings, Inc.,
Sr. Notes B2 12.50% 4/15/03 $ 26,750 $ 29,960,000
Sr. Sub. Notes Ba3 10.625 10/01/03 16,000 17,280,000
--------------
47,240,000
- ------------------------------------------------------------------------------------------------------------------------------
Food & Beverage--3.2%
Canandaigua Wine, Inc., Sr. Sub. Notes B1 8.75 12/15/03 14,750 14,381,250
Curtice Burns Foods, Inc., Sr. Sub. Notes B3 12.25 2/01/05 21,080 21,975,900
Del Monte Corp., Sub. Notes, PIK,
(cost $14,871,749; purchased on various dates:
3/12/93 through 9/11/96) NR 12.25 9/01/02 14,713(b) 15,007,260
Fresh Del Monte Produce, N.V., Sr. Notes Caa 10.00 5/01/03 32,698 31,226,590
International Home Foods, Inc., Sr. Sub. Notes B2 10.375 11/01/06 9,600 9,912,000
PM Holdings Corp., Sr. Sub. Disc. Notes,
Zero Coupon (until 9/1/98) B3 11.50 9/01/05 13,237 8,537,865
PSF Holdings, LLC, Sr. Sec'd. Notes, PIK,
(cost $10,480,477; purchased 5/20/94) NR 11.00 9/17/03 10,480(b) 10,847,294
Specialty Foods Corp.,
Sr. Notes B3 11.125 10/01/02 9,490 9,015,500
Sr. Unsec'd. Notes B3 10.25 8/15/01 16,500 15,262,500
--------------
136,166,159
- ------------------------------------------------------------------------------------------------------------------------------
Industrials--0.4%
Clark Materials Handling Corp., Sr. Notes B1 10.75 11/15/06 8,000 8,320,000
IMO Industries, Inc., Sr. Sub. Notes Caa 11.75 5/01/06 10,000 9,300,000
--------------
17,620,000
- ------------------------------------------------------------------------------------------------------------------------------
Leisure & Tourism--4.5%
HMC Acquisition Properties, Inc., Sr. Notes Ba3 9.00 12/15/07 48,260 48,983,900
HMH Properties, Inc., Sr. Notes Ba3 9.50 5/15/05 90,500 94,120,000
John Q Hammons Hotels,
First Mtge. Notes B1 8.875 2/15/04 34,365 33,935,438
First Mtge. Notes B1 9.75 10/01/05 13,750 13,990,625
--------------
191,029,963
- ------------------------------------------------------------------------------------------------------------------------------
Miscellaneous Services--0.6%
Coinstar, Inc., Sr. Sub. Notes, Zero Coupon (until
10/1/99),
(cost $6,550,652; purchased 10/17/96) NR 13.00 10/01/06 9,300(b)(d) 6,603,093
United Stationer Supply Co., Sr. Sub. Notes B3 12.75 5/01/05 18,000 19,890,000
--------------
26,493,093
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-33
<PAGE>
Portfolio of Investments
as of December 31, 1996 PRUDENTIAL HIGH YIELD 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>
- ------------------------------------------------------------------------------------------------------------------------------
Paper & Forest Producrts--4.4%
Container Corp., Sr. Notes B1 11.25% 5/01/04 $ 28,500 $ 30,922,500
Gaylord Container Corp., Sr. Sub. Disc. Notes Caa 12.75 5/15/05 40,090 44,299,450
Ivex Packaging Corp., Sr. Sub. Notes B3 12.50 12/15/02 11,000 11,907,500
Pacific Lumber Co., Sr. Notes B3 10.50 3/01/03 27,653 28,067,795
Repap New Brunswick, Inc., Sr. Sec'd. Notes B3 10.625 4/15/05 24,350 25,324,000
Stone Consolidated, Inc., Sr. Sec'd. Notes Ba1 10.25 12/15/00 41,650 44,357,250
--------------
184,878,495
- ------------------------------------------------------------------------------------------------------------------------------
Plastic Products--0.5%
Applied Extrusion Technology, Inc., Sr. Notes B2 11.50 4/01/02 19,800 20,790,000
- ------------------------------------------------------------------------------------------------------------------------------
Publishing--0.3%
Affiliated Newspapers, Sr. Disc. Notes, Zero Coupon
(until 7/1/99) B3 13.25 7/01/06 10,250 8,456,250
Big Flower Press, Inc., Sr. Sub. Notes B2 10.75 8/01/03 4,334 4,615,710
--------------
13,071,960
- ------------------------------------------------------------------------------------------------------------------------------
Retail--1.0%
Brylane L.P., Sr. Sub. Notes B2 10.00 9/01/03 10,000 10,300,000
Cole National Group, Inc., Sr. Sub. Notes,
(cost $17,149,750; purchased 11/13/96 and
11/22/96) B2 9.875 12/31/06 17,200(b) 17,716,000
Specialty Retailers, Inc., Sr. Sub. Notes B3 11.00 8/15/03 14,290 14,718,700
--------------
42,734,700
- ------------------------------------------------------------------------------------------------------------------------------
Steel & Metals--1.2%
Maxxam Group Holdings, Inc., Sr. Notes B3 12.00 8/01/03 9,000 9,180,000
Silgan Corp., Sr. Sub. Notes B3 11.75 6/15/02 16,695 17,780,175
United States Can Corp., Sr. Sub. Notes B2 10.125 10/15/06 8,000 8,410,000
WCI Steel, Inc., Sr. Notes B2 10.00 12/01/04 15,000 15,300,000
--------------
50,670,175
- ------------------------------------------------------------------------------------------------------------------------------
Supermarkets--2.2%
Food 4 Less Holdings, Inc., Sr. Disc. Deb.,
Zero Coupon (until 6/15/00) Caa 13.625 7/15/05 15,200 9,576,000
Pathmark Stores, Inc.,
Sr. Sub. Notes B3 9.625 5/01/03 10,288 9,850,760
Sub. Notes Caa 11.625 6/15/02 10,000 10,150,000
Sub. Notes Caa 12.625 6/15/02 10,500 10,893,750
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-34
<PAGE>
Portfolio of Investments
as of December 31, 1996 PRUDENTIAL HIGH YIELD 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>
- ------------------------------------------------------------------------------------------------------------------------------
Supermarkets (cont'd.)
Pueblo Xtra Int'l., Inc., Sr. Notes B2 9.50% 8/01/03 $ 8,855 $ 8,190,875
Ralphs Grocey Co., Sr. Notes B1 10.45 6/15/04 3,500 3,723,125
Smiths Food & Drug, Sr. Sub. Notes B3 11.25 5/15/07 29,000 32,045,000
Southland Corp., Sr. Sub. Deb. B2 12.00 6/15/09 10,000 10,000,000
--------------
94,429,510
- ------------------------------------------------------------------------------------------------------------------------------
Telecommunications--17.7%
Arch Communications Group, Inc., Sr. Disc. Notes,
Zero Coupon (until 3/15/01) B3 10.875 3/15/08 15,170 8,646,900
Brooks Fiber Properties, Inc., Sr. Disc. Notes,
Zero Coupon (until 11/1/01) NR 11.875 11/01/06 19,400 12,998,000
Cellnet Data Systems, Inc., Sr. Disc. Notes, Zero
Coupon (until 6/15/99), (cost $17,182,743;
purchased 6/15/95 and 11/17/95) NR 13.00 6/15/05 27,000(b) 21,195,000
Cencall Communications Corp., Sr. Disc. Notes,
Zero Coupon (until 1/15/99) B3 10.125 1/15/04 61,330 41,934,387
Centennial Cellular Corp.,
Sr. Notes B1 8.875 11/01/01 36,575 35,294,875
Sr. Notes B1 10.125 5/15/05 11,945 12,034,588
Clearnet Communications, Inc., Sr. Disc. Notes,
Zero Coupon (until 12/15/00) B3 14.75 12/15/05 33,150 20,553,000
Communication Cellular, S.A., Sr. Def'd. Bonds,
Zero Coupon (until 11/15/00) B3 13.125 11/15/03 30,000 19,950,000
Dial Call Communications, Inc., Sr. Disc. Notes,
Zero Coupon (until 4/15/99) B3 12.25 4/15/04 13,000 9,360,000
Geotek Communications, Inc., Sr. Conv. Notes,
(cost $12,000,000; purchased 3/5/96) Caa 12.00 2/15/01 12,000(b) 12,180,000
GST Telecommunciations, Inc., Conv. Sr. Disc. Notes,
Zero Coupon (until 12/15/00) NR 13.875 12/15/05 2,262 1,786,980
GST USA, Inc., Sr. Disc. Notes, Zero Coupon (until
12/15/00) NR 13.875 12/15/05 18,096 11,083,800
Hyperion Telecommunications, Sr. Disc. Notes,
Zero Coupon (until 4/15/01) NR 13.00 4/15/03 22,000 12,485,000
ICG Holdings, Inc., Sr. Disc. Notes, Zero Coupon
(until 9/15/00) NR 13.50 9/15/05 48,730 34,720,125
Impsat Corp., Sr. Notes B2 12.125 7/15/03 16,000 16,960,000
Intercel, Inc., Sr. Disc. Notes, Zero Coupon (until
5/1/01) B2 12.00 5/01/06 10,500 6,510,000
Intermedia Communications of Florida,
Sr. Notes B3 13.50 6/01/05 11,250 12,881,250
Sr. Disc. Notes, Zero Coupon (until 5/15/01) B3 12.50 5/15/06 20,000 13,600,000
International Wireless Communications, Inc., Sr.
Disc. Notes NR Zero 8/15/01 23,000 12,420,000
Metrocall, Inc., Sr. Sub. Notes B3 10.375 10/01/07 17,500 15,050,000
MFS Communications, Inc.,
Sr. Disc. Notes, Zero Coupon (until 7/15/99) B1 9.375 1/15/04 54,950 47,669,125
Sr. Disc. Notes, Zero Coupon (until 1/15/01) B1 8.875 1/15/06 55,150 40,121,625
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-35
<PAGE>
Portfolio of Investments
as of December 31, 1996 PRUDENTIAL HIGH YIELD 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.)
Millicom Int'l. Cellular, Sr. Disc. Notes,
Zero Coupon (until 12/1/01) B3 13.50% 6/01/06 $ 14,500 $ 8,990,000
Nextel Communications, Inc., Sr. Disc. Notes,
Zero Coupon (until 8/15/99) B3 9.75 8/15/04 14,000 9,555,000
Omnipoint Corp., Sr. Notes B2 11.625 8/15/06 22,500 23,343,750
Pagemart Nationwide, Inc., Sr. Disc. Notes,
Zero Coupon (until 2/1/00) NR 15.00 2/01/05 23,000 15,812,500
Pagemart, Inc., Sr. Disc. Notes,
Zero Coupon (until 11/1/98) NR 12.25 11/01/03 16,525 13,220,000
Paging Network, Inc.,
Sr. Sub. Notes B2 8.875 2/01/06 21,300 20,288,250
Sr. Sub. Notes B2 10.125 8/01/07 26,500 27,030,000
Sr. Sub. Notes B2 10.00 10/15/08 11,000 11,178,750
PriCellular Wireless Corp.,
Sr. Disc. Notes, Zero Coupon (until 11/15/97) B3 14.00 11/15/01 14,770 14,474,600
Sr. Disc. Notes, Zero Coupon (until 10/1/98) B3 12.25 10/01/03 33,100 28,300,500
Rogers Cantel, Inc., Deb. Ba3 9.375 6/01/08 44,500 46,725,000
Teleport Communications,
Sr. Disc. Notes, Zero Coupon (until 7/1/01) B1 11.125 7/01/07 25,000 17,125,000
Sr. Notes B1 9.875 7/01/06 10,400 11,102,000
USA Mobil Communications, Inc.,
Sr. Notes B2 9.50 2/01/04 7,350 6,982,500
Sr. Notes B2 14.00 11/01/04 8,000 9,120,000
Western Wireless Corp.,
Sr. Sub. Notes B3 10.50 6/01/06 12,000 12,570,000
Sr. Sub. Notes B3 10.50 2/01/07 12,500 13,109,375
Winstar Communications, Inc.,
Sr. Disc. Notes, Zero Coupon (until 10/15/00) NR 14.00 10/15/05 48,100 29,461,250
Conv. Sr. Disc. Notes, Zero Coupon (until
10/15/00) NR 14.00 10/15/05 17,550 12,636,000
--------------
750,459,130
- ------------------------------------------------------------------------------------------------------------------------------
Textiles--0.5%
Polysindo Int'l. Finance Co., Notes Ba3 11.375 6/15/06 18,050 19,719,625
- ------------------------------------------------------------------------------------------------------------------------------
Transportation/Trucking/Shipping--0.2%
Ameritruck Distribution Corp., Sr. Sub. Notes B-(a) 12.25 11/15/05 9,900 9,924,750
- ------------------------------------------------------------------------------------------------------------------------------
Waste Management--0.9%
Allied Waste N.A., Inc., Sr. Sub. Notes B3 10.25 12/01/06 35,000 36,750,000
Total bonds (cost $3,647,996,919) 3,792,026,126
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-36
<PAGE>
Portfolio of Investments
as of December 31, 1996 PRUDENTIAL HIGH YIELD FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Description Shares (Note 1)
<S> <C> <C>
- ------------------------------------------------------------
PREFERRED STOCKS--3.1%
AmeriKing, Inc., $13.00 80,000(d) $ 2,200,000
Cablevision Systems Corp.,
$11.125, PIK 3,733 33,503,675
$11.125, PIK 61,773 5,544,087
$11.75, PIK 167,337 15,646,031
Time Warner Inc., $10.25, Ser. M,
PIK 69,896 75,837,160
--------------
Total preferred stocks
(cost $125,172,039) 132,730,953
--------------
- ------------------------------------------------------------
COMMON STOCKS(c)--0.3%
Affiliated Newspapers 12,250 612,500
C S Wireless Systems, Inc. 4,400 44
Dr Pepper Bottling Co., Cl. A 72,580 725,800
EnviroSource, Inc. 428,333 1,151,145
Gaylord Container Corp., Cl. A 324,735 1,989,002
Metromedia Corp. 69,374 685,068
Pagemart Nationwide, Inc. 71,750 502,250
Peachtree Cable Assn., Ltd. 31,559 307,700
PM Holdings Corp. 3,679 1,287,650
Rite Aid Corp. 62,985 2,503,654
Smith's Food & Drug Centers,
Inc.,
Cl. B, (cost $0; purchased
6/22/94) 13,553(b) 420,143
Triton Group Ltd. 1,051,135 919,743
U.S. West Communications Group 18,202 587,015
U.S. West Media Group 20,832 385,392
Walter Industries, Inc. 7,641 107,929
--------------
Total common stocks
(cost $11,523,421) 12,185,035
--------------
- ------------------------------------------------------------
COMMON TRUST UNITS(c)--0.6% Units
PSF Holdings, LLC,
(cost $32,569,430; purchased
5/20/94) 951,717 (b) 25,696,359
--------------
</TABLE>
<TABLE>
<CAPTION>
Value
Description Warrants (Note 1)
<S> <C> <C>
- ------------------------------------------------------------
WARRANTS(c)--0.3%
American Telecasting, Inc.,
expiring 6/15/99 41,000 $ 246,000
Cellnet Data Systems, Inc.,
expiring 6/15/05, (cost $0;
purchased 6/6/95 and 11/17/95) 108,000(b) 1,080
Cellular Communications Int'l.,
Inc., expiring 8/15/03 22,250 445,000
Clearnet Communications, Inc.,
expiring 9/15/05 109,395 793,114
Comcel, expiring 11/15/03 30,000 2,250,000
Foamex JPS Automotive L.P.,
expiring 7/1/99 20,250 506,250
Gaylord Container Corp.,
expiring 11/1/02 417,518 2,583,393
Heartland Wireless Communication,
Inc., expiring 12/31/00 39,000 78,000
Hyperion Telecommunications,
expiring 4/15/01 22,000 440,000
Intelcom Group, Inc., expiring
9/15/05 127,809 1,661,517
Intermedia Communications of
Florida, expiring 6/1/00,
(cost $0; purchased 5/25/95) 11,250(b) 393,750
International Wireless
Communications Holdings, Inc.,
expiring 8/15/01 23,000 230
Nextel Communications, Inc.,
expiring 12/15/98 14,273 2,141
expiring 4/25/99 7,000 1,050
President Riverboat Casinos,
Inc., expiring 9/30/99 44,150 441
Sterling Chemical Holdings, Inc.,
expiring 8/15/08 5,450 190,750
United Int'l. Holdings, Inc.,
expiring 11/15/99 44,500 890,000
--------------
Total warrants (cost $220,009) 10,482,716
--------------
Total long-term investments
(cost $3,817,481,818) 3,973,121,189
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-37
<PAGE>
Portfolio of Investments
as of December 31, 1996 PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Interest Maturity Amount Value
Description Rate Date (000) (Note 1)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--4.8%
- ------------------------------------------------------------------------------------------------------------------------------
Commercial Paper--4.0%
Canadian Imperial Bank of Commerce 6.75% 1/2/97 $153,667 $ 153,667,000
First Data Corp. 7.00 1/2/97 15,000 14,997,083
GTE Corp. 5.50 1/2/97 1,000 996,945
--------------
Total commercial paper (cost $169,661,028) 169,661,028
- ------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreement--0.8%
Joint Repurchase Agreement Account (cost $34,336,000;
Note 5) 6.61 1/2/97 34,336 34,336,000
--------------
Total short-term investments (cost $203,997,028) 203,997,028
--------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investments--98.6 %
(cost $4,021,478,846; Note 4) 4,177,118,217
Other assets in excess of liabilities--1.4% 58,639,334
--------------
Net Assets--100% $4,235,757,551
--------------
--------------
</TABLE>
- ---------------
(a) Standard & Poor's Rating.
(b) Indicates a restricted security; the aggregate cost of such securities is
$110,804,801. The aggregate value ($110,059,979) is approximately 2.6% 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.
NR--Not rated by Moody's or Standard & Poor's.
PIK--Payment in kind securities.
L.P.--Limited Partnership.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-38
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets December 31, 1996
Investments, at value (cost $4,021,478,846)............................................................. $ 4,177,118,217
Cash.................................................................................................... 2,129,505
Interest receivable..................................................................................... 59,803,491
Receivable for Fund shares sold......................................................................... 12,098,591
Receivable for investments sold......................................................................... 342,000
Deferred expenses and other assets...................................................................... 108,694
-----------------
Total assets......................................................................................... 4,251,600,498
-----------------
Liabilities
Payable for Fund shares reacquired...................................................................... 7,742,532
Payable for investments purchased....................................................................... 2,041,453
Distribution Fee Payable................................................................................ 1,880,617
Accrued expenses........................................................................................ 1,680,742
Management Fee Payable.................................................................................. 1,463,204
Dividends payable....................................................................................... 1,034,399
-----------------
Total liabilities.................................................................................... 15,842,947
-----------------
Net Assets.............................................................................................. $ 4,235,757,551
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................................. $ 5,053,672
Paid-in capital in excess of par..................................................................... 4,765,552,790
-----------------
4,770,606,462
Distributions in excess of net investment income..................................................... (1,034,399)
Accumulated net realized loss on investments......................................................... (689,453,883)
Net unrealized appreciation on investments........................................................... 155,639,371
-----------------
Net assets, December 31, 1996........................................................................... $ 4,235,757,551
-----------------
-----------------
Class A:
Net asset value and redemption price per share
.
($1,564,428,642 - 186,478,079 shares of common stock issued and outstanding)...................... $8.39
.
Maximum sales charge (4.00% of offering price)....................................................... .35
-----
Maximum offering price to public..................................................................... $8.74
Class B:
Net asset value, offering price and redemption price per share
.
($2,596,207,015 - 309,928,968 shares of common stock issued and outstanding)...................... $8.38
. =====
Class C:
Net asset value, offering price and redemption price per share
.
($43,373,860 - 5,177,510 shares of common stock issued and outstanding)........................... $8.38
. =====
Class Z:
Net asset value, offering price and redemption price per share
.
($31,748,034 - 3,782,645 shares of common stock issued and outstanding)........................... $8.39
. =====
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-39
<PAGE>
PRUDENTIAL HIGH YIELD FUND, INC.
HIGH YIELD FUND, INC.
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income December 31, 1996
<S> <C>
Income
Interest.............................. $ 401,639,265
Dividends............................. 4,681,278
-----------------
Total Income....................... 406,320,543
-----------------
Expenses
Distribution fee--Class A............. 2,077,714
Distribution fee--Class B............. 19,896,618
Distribution fee--Class C............. 214,854
Management Fee........................ 16,817,042
Transfer agent's fees and expenses.... 4,175,000
Reports to shareholders............... 1,503,000
Custodian's fees and expenses......... 308,000
Registration fees..................... 150,000
Insurance expense..................... 74,000
Audit fee and expenses................ 71,000
Directors' fees and expenses.......... 37,000
Legal fees and expenses............... 35,000
Miscellaneous......................... 32,750
-----------------
Total operating expenses........... 45,391,978
Loan commitment fees (Note 2)......... 75,000
-----------------
Total expenses..................... 45,466,978
-----------------
Net investment income.................... 360,853,565
-----------------
Realized and Unrealized
Gain on Investments
Net realized gain on investment
transactions.......................... 33,923,042
Net change in unrealized appreciation of
investments........................... 75,350,872
-----------------
Net gain on investments.................. 109,273,914
-----------------
Net Increase in Net Assets
Resulting from Operations................ $ 470,127,479
-----------------
-----------------
</TABLE>
PRUDENTIAL HIGH YIELD FUND, INC.
HIGH YIELD FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended December 31,
in Net Assets 1996 1995
<S> <C> <C>
Operations
Net investment income....... $ 360,853,565 $ 368,711,713
Net realized gain (loss) on
investment
transactions............. 33,923,042 (129,423,086)
Net change in unrealized
appreciation of
investments.............. 75,350,872 373,919,552
---------------- ----------------
Net increase in net assets
resulting from
operations............... 470,127,479 613,208,179
---------------- ----------------
Net equalization credits....... -- 155,052
---------------- ----------------
Dividends and distributions
(Note 1)
Dividends from net
investment income
Class A.................. (127,419,210) (107,009,035)
Class B.................. (228,744,279) (260,558,397)
Class C.................. (2,463,825) (1,144,281)
Class Z.................. (2,226,251) --
---------------- ----------------
(360,853,565) (368,711,713)
---------------- ----------------
Dividends in excess of net
investment income
Class A.................. (3,542,829) (2,494,359)
Class B.................. (6,360,123) (5,281,164)
Class C.................. (68,506) (32,071)
Class Z.................. (61,900) --
---------------- ----------------
(10,033,358) (7,807,594)
---------------- ----------------
Fund share transactions (Net of
share conversions) (Note 6)
Net proceeds from shares
sold..................... 2,157,396,910 1,732,422,699
Net asset value of shares
issued in reinvestment of
dividends and
distributions............ 181,172,994 180,623,667
Cost of shares reacquired... (2,293,331,143) (1,536,230,023)
---------------- ----------------
Net increase in net assets
from Fund share
transactions............. 45,238,761 376,816,343
---------------- ----------------
Total increase................. 144,479,317 613,660,267
Net Assets
Beginning of year.............. 4,091,278,234 3,477,617,967
---------------- ----------------
End of year.................... $ 4,235,757,551 $ 4,091,278,234
---------------- ----------------
---------------- ----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-40
<PAGE>
Notes to Financial Statements PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
Prudential High Yield Fund, Inc. (the ``Fund'') is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The primary investment objective of the Fund is to maximize current
income through investment in a diversified portfolio of high yield fixed-income
securities which, in the opinion of the Fund's investment adviser, do not
subject the Fund to unreasonable risks. As a secondary investment objective, the
Fund will seek capital appreciation but only when consistent with its primary
objective. Lower rated or unrated (i.e. high yield) securities are more likely
to react to developments affecting market risk (general market liquidity) and
credit risk (an issuer's inability to meet principal and interest payments on
its obligations) than are more highly rated securities, which react primarily to
movements in the general level of interest rates. The ability of issuers of debt
securities held by the Fund to meet their obligations may be affected by
economic developments in a specific industry or region.
- ------------------------------------------------------------
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.
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.
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
December 31, 1996 include registration rights under which the Fund may demand
registration by the issuer, some of which are currently under contract to be
registered. 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 original issue discounts 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.
Federal Income Taxes: It is the intent of the Fund to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
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. These differences are primarily due to differing treatments for
market discount and wash sales.
Equalization: Effective January 1, 1996, the Fund discontinued the accounting
practice of equalization. Equalization is a practice whereby a portion of the
proceeds from sales and costs of repurchases of capital shares, equivalent on a
per share basis to the amount of distributable net
- --------------------------------------------------------------------------------
B-41
<PAGE>
Notes to Financial Statements PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
investment income on the date of the transaction, is credited or charged to
undistributed net investment income. A portion ($6,076,709) of undistributed net
investment income at December 31, 1995, resulting from equalization, was
transferred to paid-in capital in excess of par. Such reclassification has no
effect on net assets, results of operations, or net asset value per share.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with 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 distributions in excess of net
investment income by $11,104,473, increase accumulated net realized loss on
investments by $5,406,601 and decrease paid-in capital in excess of par by
$5,697,782. This was primarily resulting from: (i) sales of securities purchased
with market discounts and, (ii) an overdistribution of taxable income for the
year ended December 31, 1996. 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 Mutual Fund Management LLC
(``PMF''). Pursuant to this agreement PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF 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. PMF 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 PMF is computed daily and payable monthly, at an annual
rate of .50% of the Fund's average daily net assets up to $250 million, .475% of
the next $500 million, .45% of the next $750 million, .425% of the next $500
million, .40% of the next $500 million, .375% of the next $500 million and .35%
of the Fund's average daily net assets in excess of $3 billion.
The Fund has a distribution agreement with Prudential Securities Incorporated
(``PSI''), which acts as the distributor of the Class A, B, C and Z shares of
the Fund. The Fund compensates PSI for distributing and servicing the Fund's
Class A, Class B and Class C shares, pursuant to plans of distribution (the
``Class A, B and C Plans''), regardless of expenses actually incurred by them.
The distribution fees for Class A, B and C shares are accrued daily and payable
monthly. No distribution or service fees are paid to PSI as distributor of the
Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI with respect to
Class A, B and C shares, for distribution-related activities at an annual rate
of up to .30 of 1%, .75 of 1% and 1%, of the average daily net assets of the
Class A, B and C shares, respectively. Such expenses under the Plans were .15 of
1%, .75 of 1% and .75 of 1% of the average daily net assets of the Class A, B
and C shares, respectively, for the year ended December 31, 1996
PSI has advised the Fund that it has received approximately $1,021,400 in
front-end sales charges resulting from sales of Class A shares during the year
ended December 31, 1996. From these fees, PSI paid such sales charges to Pruco
Securities Corporation, an affiliated broker-dealer, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the year ended December 31, 1996, it received
approximately $4,841,400 and $33,600 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PSI, PMF and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
The Fund entered into a credit agreement with State Street Bank and Trust Co.
with a maximum commitment of $75,000,000 which was due to expire on December 2,
1997. Such agreement was terminated on January 2, 1997. The Fund has not
borrowed any monies pursuant to such credit agreement. The Fund accrued and paid
quarterly commitment fees at an annual rate of .10 of 1% on the $75,000,000, the
unused portion of the credit facility.
The Fund, along with other affiliated registered investment companies (the
``Funds''), entered into a credit agreement (the ``Agreement'') on December 31,
1996 with Deutsche Bank. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purposes of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement as of December 31,
1996. 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.
- --------------------------------------------------------------------------------
B-42
<PAGE>
Notes to Financial Statements PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC, a wholly-owned subsidiary of PMF, serves as
the Fund's transfer agent and during the year ended December 31, 1996, the Fund
incurred fees of approximately $3,578,500 for the services of PMFS. As of
December 31, 1996, $295,900 of such fees were due to PMFS. Transfer agent fees
and expenses in the Statement of Operations include certain out-of-pocket
expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended December 31, 1996 were $3,489,974,465 and $3,701,287,552,
respectively.
The federal income tax basis of the Fund's investments, including short-term
investments, as of December 31, 1996 was $4,022,871,730; accordingly, net
unrealized appreciation for federal income tax purposes was $154,246,487 (gross
unrealized appreciation--$217,880,106; gross unrealized
depreciation--$63,633,619).
For federal income tax purposes, the Fund has a capital loss carryforward as of
December 31, 1996 of approximately $673,926,900 of which $323,340,600 expires in
1998, $77,895,200 expires in 1999, $110,441,500 expires in 2000, $162,249,600
expires in 2003. Such carryforward is after utilization of approximately
$36,819,400 of net taxable gains realized and recognized during the year ended
December 31, 1996. Accordingly, no capital gains distribution is expected to be
paid to shareholders until net gains have been realized in excess of the
aggregate of such amounts.
For federal income tax purposes, the Fund will elect to treat net capital losses
of approximately $14,134,100 incurred in the two month period ended December 31,
1996 as having been incurred in the following fiscal year.
- ------------------------------------------------------------
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 December 31, 1996, the
Fund has a 3.1% undivided interest in the joint account. The undivided interest
for the Fund represents $34,336,000 in the principal amount. As of such date,
each repurchase agreement in the joint account and the collateral therefor were
as follows:
Bear, Stearns & Co., 6.75%, in the principal amount of $341,000,000, repurchase
price $341,127,875, due 1/2/97. The value of the collateral including accrued
interest was $349,151,276.
Goldman, Sachs & Co. Inc., 6.60%, in the principal amount of $341,000,000,
repurchase price $341,125,033, due 1/2/97. The value of the collateral including
accrued interest was $347,820,889.
J.P. Morgan Securities, 6.60%, in the principal amount of $341,000,000,
repurchase price $341,125,033, due 1/2/97. The value of the collateral including
accrued interest was $347,822,540.
Sanwa Securities USA, 6.00%, in the principal amount of $68,014,000, repurchase
price $68,036,671, due 1/2/97. The value of the collateral including accrued
interest was $69,375,117.
- ------------------------------------------------------------
Note 6. 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 4.00%. Class B shares are sold with
a contingent deferred sales charge which declines from 5% to zero depending on
the period of time the shares are held. Class C shares are sold with a
contingent deferred sales charge of 1% during the first year. Class B shares
will automatically convert to Class A shares on a quarterly basis approximately
seven years after purchase. A special exchange privilege is also available for
shareholders who qualify to purchase Class A shares at net asset value.
Effective March 1, 1996, the Fund commenced offering Class Z shares. Class Z
shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
The Fund has 3 billion shares of $.01 par value common stock authorized; equally
divided into four classes, designated Class A, Class B, Class C and Class Z
shares.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------ ------------ ---------------
<S> <C> <C>
Year ended December 31, 1996:
Shares sold................... 131,810,870 $ 1,086,630,794
Shares issued in reinvestment
of dividends and
distributions............... 8,520,554 69,971,317
Shares reacquired............. (156,945,056) (1,293,344,935)
------------ ---------------
Net decrease in shares
outstanding before
conversions................. (16,613,632) (136,742,824)
Shares issued upon conversion
from Class B................ 39,887,682 327,279,932
------------ ---------------
Net increase in shares
outstanding................. 23,274,050 $ 190,537,108
------------ ---------------
------------ ---------------
</TABLE>
- --------------------------------------------------------------------------------
B-43
<PAGE>
Notes to Financial Statements PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------ ------------ ---------------
<S> <C> <C>
Year ended December 31, 1995:
Shares sold................... 85,065,787 $ 680,939,054
Shares issued in reinvestment
of dividends and
distributions............... 7,260,503 58,391,158
Shares reacquired............. (86,586,970) (693,700,291)
------------ ---------------
Net increase in shares
outstanding before
conversion.................. 5,739,320 45,629,921
Shares issued upon conversion
from Class B................ 136,453,614 1,063,977,235
------------ ---------------
Net increase in shares
outstanding................. 142,192,934 $ 1,109,607,156
------------ ---------------
------------ ---------------
<CAPTION>
Class B
- ------------------------------
Year ended December 31, 1996:
Shares sold................... 115,557,562 $ 947,645,600
Shares issued in reinvestment
of dividends and
distributions............... 13,114,875 107,516,476
Shares reacquired............. (112,666,220) (923,331,159)
------------ ---------------
Net increase in shares
outstanding before
conversion.................. 16,006,217 131,830,917
Shares reacquired upon
conversion into Class A..... (39,936,363) (327,279,932)
------------ ---------------
Net decrease in shares
outstanding................. (23,930,146) $ (195,449,015)
------------ ---------------
------------ ---------------
Year ended December 31, 1995:
Shares sold................... 127,682,310 $ 1,017,983,490
Shares issued in reinvestment
of dividends and
distributions............... 15,200,641 121,565,304
Shares reacquired............. (104,007,242) (826,907,079)
------------ ---------------
Net increase in shares
outstanding before
conversion.................. 38,875,709 312,641,715
Shares reacquired upon
conversion into Class A..... (136,628,901) (1,063,977,235)
------------ ---------------
Net decrease in shares
outstanding................. (97,753,192) $ (751,335,520)
------------ ---------------
------------ ---------------
<CAPTION>
Class C Shares Amount
- ------------------------------ ------------ ---------------
<S> <C> <C>
Year ended December 31, 1996:
Shares sold................... 8,109,246 $ 66,598,614
Shares issued in reinvestment
of dividends and
distributions............... 178,716 1,465,941
Shares reacquired............. (6,047,207) (49,472,410)
------------ ---------------
Net increase in shares
outstanding................. 2,240,755 $ 18,592,145
------------ ---------------
------------ ---------------
Year ended December 31, 1995:
Shares sold................... 4,161,922 $ 33,500,155
Shares issued in reinvestment
of dividends and
distributions............... 82,802 667,205
Shares reacquired............. (1,941,398) (15,622,653)
------------ ---------------
Net increase in shares
outstanding................. 2,303,326 $ 18,544,707
------------ ---------------
------------ ---------------
<CAPTION>
Class Z
- ------------------------------
March 1, 1996(a) through
December 31, 1996:
Shares sold................... 6,826,290 $ 56,521,902
Shares issued in reinvestment
of dividends and
distributions............... 270,685 2,219,260
Shares reacquired............. (3,314,330) (27,182,639)
------------ ---------------
Net increase in shares
outstanding................. 3,782,645 $ 31,558,523
------------ ---------------
------------ ---------------
</TABLE>
- ---------------
(a) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
B-44
<PAGE>
Financial Highlights PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................... $ 8.19 $ 7.68 $ 8.70 $ 8.19 $ 7.88
---------- ---------- -------- -------- --------
Income from investment operations
Net investment income........................................ .75 .81 .80 .84 .90
Net realized and unrealized gain (loss) on investments....... .22 .53 (1.00) .52 .32
---------- ---------- -------- -------- --------
Total from investment operations.......................... .97 1.34 (.20) 1.36 1.22
---------- ---------- -------- -------- --------
Less distributions
Dividends from net investment income......................... (.75) (.81) (.80) (.84) (.90)
Distributions in excess of net investment income............. (.02) (.02) (.02) (.01) --
Distributions from paid-in capital in excess of par.......... -- -- -- -- (.01)
---------- ---------- -------- -------- --------
Total distributions....................................... (.77) (.83) (.82) (.85) (.91)
---------- ---------- -------- -------- --------
Net asset value, end of year................................. $ 8.39 $ 8.19 $ 7.68 $ 8.70 $ 8.19
---------- ---------- -------- -------- --------
---------- ---------- -------- -------- --------
TOTAL RETURN(a).............................................. 12.60% 18.17% (2.35)% 17.32% 15.97%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................................ $1,564,429 $1,336,354 $161,435 $171,364 $106,188
Average net assets (000)..................................... $1,385,143 $1,056,555 $165,517 $149,190 $ 81,129
Ratios to average net assets:
Expenses, including distribution fees..................... .72% .75% .78% .76% .85%
Expenses, excluding distribution fees..................... .57% .60% .63% .61% .70%
Net investment income..................................... 9.20% 10.13% 9.86% 9.93% 10.96%
For Classes A, B, C and Z shares:
Portfolio turnover rate...................................... 89% 78% 74% 85% 68%
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
</TABLE>
B-45
<PAGE>
Financial Highlights PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................... $ 8.18 $ 7.67 $ 8.69 $ 8.19 $ 7.88
---------- ---------- ---------- ---------- ----------
Income from investment operations
Net investment income........................................ .71 .76 .76 .79 .85
Net realized and unrealized gain (loss) on investments....... .22 .53 (1.00) .51 .32
---------- ---------- ---------- ---------- ----------
Total from investment operations.......................... .93 1.29 (.24) 1.30 1.17
---------- ---------- ---------- ---------- ----------
Less distributions
Dividends from net investment income......................... (.71) (.76) (.76) (.79) (.85)
Distributions in excess of net investment income............. (.02) (.02) (.02) (.01) --
Distributions from paid-in capital in excess of par.......... -- -- -- -- (.01)
---------- ---------- ---------- ---------- ----------
Total distributions....................................... (.73) (.78) (.78) (.80) (.86)
--------- ---------- ---------- ---------- ----------
Net asset value, end of year................................. $ 8.38 $ 8.18 $ 7.67 $ 8.69 $ 8.19
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
TOTAL RETURN(a).............................................. 11.97% 17.49% (2.92)% 16.54% 15.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................................ $2,596,207 $2,730,903 $3,311,323 $3,745,985 $2,887,698
Average net assets (000)..................................... $2,652,883 $2,725,385 $3,566,709 $3,389,439 $2,582,922
Ratios to average net assets:
Expenses, including distribution fees..................... 1.32% 1.35% 1.38% 1.36% 1.45%
Expenses, excluding distribution fees..................... .57% .60% .63% .61% .70%
Net investment income..................................... 8.62% 9.56% 9.28% 9.35% 10.29%
Portfolio turnover rate ..................................... 89% 78% 74% 85% 68%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-46
<PAGE>
Financial Highlights PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
---------------------------------------------- ----------------
August 1,
1994(c) March 1, 1996(d)
Year Ended December 31, Through Through
----------------------------- December 31, December 31,
1996 1995 1994 1996
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $ 8.18 $ 7.67 $ 8.05 $ 8.34
------ ------ ----- --------
Income from investment operations
Net investment income........................................ .71 .76 .32 .63
Net realized and unrealized gain (loss) on investments....... .22 .53 (.37) .07
------ ------ ----- --------
Total from investment operations.......................... .93 1.29 (.05) .70
------ ------ ----- --------
Less distributions
Dividends from net investment income......................... (.71) (.76) (.32) (.63)
Distributions in excess of net investment income............. (.02) (.02) (.01) (.02)
------ ------ ----- --------
Total distributions....................................... (.73) (.78) (.33) (.65)
------ ------ ----- --------
Net asset value, end of period............................... $ 8.38 $ 8.18 $ 7.67 $ 8.39
------ ------ ----- --------
------ ------ ----- --------
TOTAL RETURN(a).............................................. 11.97% 17.49% (0.79)% 8.77%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................. $ 43,374 $ 24,021 $4,860 $ 31,748
Average net assets (000)..................................... $ 28,647 $ 12,063 $2,840 $ 28,978
Ratios to average net assets:
Expenses, including distribution fees..................... 1.32% 1.35% 1.48%(b) .57%(b)
Expenses, excluding distribution fees..................... .57% .60% .73%(b) .57%(b)
Net investment income..................................... 8.60% 9.49% 9.80%(b) 9.31%(b)
Portfolio turnover rate ..................................... 89% 78% 74% \ 89%
</TABLE>
- ---------------
(a) 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.
(b) Annualized.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-47
<PAGE>
Consent of Independent Accountants
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 29 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
February 25, 1997, relating to the financial statements and financial highlights
of Prudential High Yield Fund, Inc., which appears in such Statement of
Additional Information, and to the incorporation by reference of our report into
the Prospectus which constitutes part of this Registration Statement. We also
consent to the reference to us under the heading "Custodian, Transfer and
Dividend Disbursing Agent and Independent Accountants" in such Statement of
Additional Information and to the reference to us under the heading "Financial
Highlights" in such Prospectus.
PRICE WATERHOUSE LLP
New York, New York
February 25, 1997
B-48
<PAGE>
Supplemental Proxy Information PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
The Annual Meeting of Shareholders of the Prudential High Yield Fund, Inc.
was held on Wednesday, October 30, 1996 at the offices of Prudential Securities
Incorporated, One Seaport Plaza, New York, New York. The meeting was held for
the following purposes:
(1) To elect Directors as follows: Edward D. Beach, Eugene C. Dorsey, Delayne
Dedrick Gold, Robert F. Gunia, Harry A. Jacobs, Jr., Donald D. Lennox,
Mendel A. Melzer, Thomas T. Mooney, Thomas H. O'Brien, Richard A. Redeker,
Nancy H. Teeters and Louis A. Weil, III.
(2a) To approve the proposed elimination of the Fund's fundamental investment
restriction relating to investment in shares of other investment companies.
(2b) To approve the proposed elimination of the Fund's fundamental investment
restriction relating to investment in securities of unseasoned issuers.
(2c) To approve the proposed elimination of the Fund's investment restriction
relating to the Fund's use of futures contracts and options.
(2d) To approve the proposed elimination of the Fund's investment restriction
relating to investing in non-fixed income equity securities.
(2e) To approve the proposed elimination of the Fund's investment restriction
regarding the making of loans.
(3) To ratify the selection of Price Waterhouse LLP as independent public
accountants for the fiscal year ending December 31, 1996.
The results of the proxy solicitation on the above matters were as follows:
<TABLE>
<CAPTION>
Director/Matter Votes for Votes against Abstentions
- --------------- ---------------- ------------- -----------
<S> <C> <C> <C>
(1) Edward D. Beach 243,093,164 -- 7,553,330
Eugene C. Dorsey 243,481,913 -- 7,164,581
Delayne Dedrick Gold 243,345,911 -- 7,300,583
Robert F. Gunia 243,542,766 -- 7,103,729
Harry A. Jacobs, Jr. 242,945,526 -- 7,700,968
Donald D. Lennox 243,199,909 -- 7,446,585
Mendel A. Melzer 243,433,078 -- 7,213,416
Thomas T. Mooney 243,533,054 -- 7,113,440
Thomas H. O'Brien 243,487,143 -- 7,159,351
Richard A. Redeker 243,547,223 -- 7,099,271
Nancy H. Teeters 243,450,912 -- 7,195,582
Louis A. Weil, III 243,436,711 -- 7,209,783
(2) Amending of Investment Restrictions:
(a) Relating to investment in shares of other investment
companies 189,468,143 9,984,009 11,839,467
(b) Relating to investment in securities of unseasoned
issuers 184,480,788 14,137,805 12,673,026
(c) Relating to the Fund's use of futures contracts and
options 183,176,258 15,169,860 12,945,501
(d) Relating to investing in non-fixed income equity
securities 186,476,592 12,189,641 12,625,386
(e) Regarding the making of loans 184,265,196 14,334,424 12,691,999
(3) Price Waterhouse LLP 238,506,869 2,323,623 9,816,003
</TABLE>
Tax Information PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
During the fiscal year ended December 31, 1996, the Fund paid ordinary income
dividends per share totalling $0.77, $0.73, $0.73 and $0.65 for Class A, B, C
and Z shares, respectively. Accordingly, we wish to advise you that 1.28% of the
dividends paid qualified for the corporate dividend received deduction available
to corporate taxpayers.
- --------------------------------------------------------------------------------
B-49
<PAGE>
APPENDIX A
GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
Asset Allocation
Asset allocation is a technique for reducing risk and providing balance.
Asset allocation among different types of securities within an overall
investment portfolio helps to reduce risk and to potentially provide stable
returns, while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.
Diversification
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.
Duration
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
Market Timing
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
Power of Compounding
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
A-1
<PAGE>
APPENDIX B
HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the
rate of inflation.
CHART
Source: Stocks, Bonds, Bills and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
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 attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile than
bond prices over the long-term.
Small stock returns for 1926-1989 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.
Long-term government bond returns are represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. At the beginning of each year
a new bond with a then-current coupon replaces the old bond. Treasury bill
returns are for a one-month bill. Treasuries are guaranteed by the government as
to the timely payment of principal and interest; equities are not. Inflation is
measured by the consumer price index (CPI).
Impact of Inflation. The "real" rate of investment return is that which exceeds
the rate of inflation, the percentage change in the value of consumer goods and
the general cost of living. A common goal of long-term investors is to outpace
the erosive impact of inflation on investment returns.
B-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987
through 1995. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Fund Expenses" in the prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on the historical total
returns, including the compounded effect over time, could be substantial.
Historical Total Returns of Different Bond Market Sectors
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
YTD
'87 '88 '89 '90 '91 '92 '93 '94 9/95
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
Treasury Bonds1 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 13.2%
- -----------------------------------------------------------------------------------------------------------
U.S. Government
Mortgage Securities2 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 13.1%
- -----------------------------------------------------------------------------------------------------------
U.S. Investment Grade
Corporate Bonds3 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 16.5%
- -----------------------------------------------------------------------------------------------------------
U.S. High Yield
Corporate Bonds4 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 15.6%
- -----------------------------------------------------------------------------------------------------------
World
Government Bonds5 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 17.1%
- -----------------------------------------------------------------------------------------------------------
Difference between highest
and lowest return percent 33.2% 10.2% 18.8% 24.9% 30.9% 11.0% 10.3% 9.9% 4.0%
- -----------------------------------------------------------------------------------------------------------
<FN>
1Lehman 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.
2Lehman 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).
3Lehman 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.
4Lehman 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.
5Salomon Brothers World Government Index (Non U.S.) includes 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.
</FN>
</TABLE>
B-2
<PAGE>
The chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.
CHART
- ------------
Source: Stocks, Bonds, Bills and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart illustrates the historical
yield of the long-term U.S. Treasury Bond from 1926-1994. Yields represent that
of an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes only and should
not be construed to represent the yields of any Prudential Mutual Fund.
The following chart, although not relevant to share ownership in the Fund,
may provide useful information about the effects of a hypothetical investment
diversified over different asset portfolios. The chart shows the range of annual
total returns for major stock and bond indices for the period from December 31,
1975 through December 31, 1995. The horizontal "Best Returns Zone" band shows
that a hypothetical blended portfolio constructed of one-third U.S. stock (S&P
500), one-third foreign stock (EAFE Index), and one-third U.S. bonds (Lehman
Index) would have eliminated the "highest highs" and "lowest lows" of any single
asset class.
- ------------
*Source: Prudential Investment Corporation based on data from Lipper Analytical
New Application (LANA). Past perfomance is not indicative of future results. The
S&P 500 Index is a weighted, unmanaged index comprised of 500 stocks which
provides a broad indication of stock price movements. The Morgan Stanley EAFE
Index is an unmanaged index comprised of 20 overseas stock markets in Europe,
Australia, New Zealand and the Far East. The Lehman Aggregate Index includes all
publicly-issued investment grade debt with maturities over one year, including
U.S. government and agency issues, 15 and 30 year fixed-rate government agency
mortgage securites, dollar denominated SEC registered corporate and government
securities, as well as asset-backed securities. Investors cannot invest directly
in stock or bond market indices.
B-3
<PAGE>
APPENDIX C-INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "Management of the Fund-Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1995 and is subject to change thereafter. All information relies on data
provided by the Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC1 are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1995. Its primary business is to offer a full range of products and services in
three areas: insurance, investments and home ownership for individuals and
families; health-care management and other benefit programs for employees of
companies and members of groups; and asset management for institutional clients
and their associates. Prudential (together with its subsidiaries) employs more
than 92,000 persons worldwide, and maintains a sales force of approximately
13,000 agents and 5,600 financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.
Insurance. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to more than 50 million people
worldwide-one of every five people in the United States. Long one of the largest
issuers of individual life insurance, the Prudential has 19 million life
insurance policies in force today with a face value of $1 trillion. Prudential
has the largest capital base ($11.4 billion) of any life insurance company in
the United States. The Prudential provides auto insurance for more than 1.7
million cars and insures more than 1.4 million homes.
Money Management. The Prudential is one of the largest pension fund managers
in the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k) plans.
In July 1995, Institutional Investors ranked Prudential the third largest
institutional money manager of the 300 largest money management organizations in
the United States as of December 31, 1994. As of December 31, 1995, Prudential
had more than $314 billion in assets under management. Prudential Investments, a
business group of Prudential (of which Prudential Mutual Funds is a key part)
manages over $190 billion in assets of institutions and individuals.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest real
estate broker network in the United States, has more than 34,000 brokers and
agents and more than 1,100 offices in the United States.2
Healthcare. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 5 million
Americans receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Bank, a wholly-owned subsidiary of the
Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.
- ------------
1Prudential Investments, a business group of PIC, serves as the Subadviser to
substantially all of the Prudential Mutual Funds. Wellington Management Company
serves as the subadviser to Global Utility Fund, Inc., Nicholas-Applegate
Capital Management as subadviser to Nicholas-Applegate Fund, Inc., Jennison
Associates Capital Corp. as the subadviser to Prudential Jennisen Series Fund,
Inc. and Prudential Active Balanced Fund, a portfolio of Prudential Dryden Fund,
Xereator Asset Management LP as the Subadviser to International Stock Series, a
portfolio of Prudential World Fund, Inc. and BlackRock Financial Management,
Inc. as subadviser to the BlackRock Government Income Trust. There are multiple
subadvisrs for the Target Portfolio Trust.
2As of December 31, 1994.
C-1
<PAGE>
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
Prudential Mutual Fund Management is one of the sixteen largest mutual fund
companies in the country, with over 2.5 million shareholders invested in more
than 50 mutual fund portfolios and variable annuities with more than 3.7 million
shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
The Wall Street Journal, The New York Times, Barron's and USA Today.
Equity Funds. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honoress are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years, Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Fund, a growth-style equity
fund managed by Jennison Associates Capital Corp., a premier institutional
equity manager and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of its
kind in the country) along with 100 or so other high yield bonds, which may be
considered for purchase.3 Non-investment grade bonds, also known as junk bonds
or high yield bonds, are subject to a greater risk of loss of principal and
interest including default risk than higher-rated bonds. Prudential high yield
portfolio managers and analysts meet face-to-face with almost every bond issuer
in the High Yield Fund's portfolio annually, and have additional telephone
contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets-from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers-from Pulp and Paper Forecasters to Women's
Wear Daily-to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential mutual
fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
- ------------
3As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
C-2
<PAGE>
Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).
Trading Data.4 On an average day, Prudential Mutual Funds' U.S. and foreign
equity trading desks traded $77 million in securities representing over 3.8
million shares with nearly 200 different firms. Prudential Mutual Funds' bond
trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.5 Prudential Mutual Funds'money market desk traded
$3.3 billion in money market securities on an average day, or over $800 billion
a year. They made a trade every 3 minutes of every trading day. In 1994, the
Prudential Mutual Funds affected more than 40,000 trades in money market
securities and held an average $20 billion of money market securities.6
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services LLC, the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI.7
Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university," which
provides advanced education in a wide array of investment areas. Prudential
Securities is the only Wall Street firm to have its own in-house Certified
Financial Planner (CFP) program. In the December 1995 issue of Registered Rep,
an industry publication, Prudential Securities' Financial Adviser training
program received a grade of A\'96 (compared to an industry average of B+).
In 1995, Prudential Securities' equity research team ranked 9th in
Institutional Investor Magazine's 1993 "All America Research Team" survey. Five
Prudential Securities analysts were ranked as first-team finishers.8
In addition to training, Prudential Securities provides its financial
advisers with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architects SM, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
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.
- ------------
4Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios of
the Prudential Series Fund and institutional and non-US accounts managed by
Prudential Mutual Fund Investment Management, a division of PIC, for the year
ended December 31, 1995.
5Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate U.S.
Government, Short Investment Grade Debt, Intermediate Investment Grade Debt,
General U.S. Treasury, General U.S. Government and Mortgage Funds.
6As of December 31, 1994.
7As of December 31, 1994.
8On an annual basis, Institutional Investor magazine surveys more than 700
institutional money managers, chief investment officers and research directors,
asking them to evaluate analysts in 76 industry sectors. Scores are produced by
taking the number of votes awarded to an individual analyst and weighting them
based on the size of the voting institution. In total, the magazine sends its
survey to approximately 2,000 institutions and a group of European and Asian
institutions.
C-3
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements:
(1) Financial statements included in the Prospectus constituting Part A of
this Registration Statement:
Financial Highlights for each of the ten years in the period ended
December 31, 1996.
(2) Financial statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
Portfolio of Investments at December 31, 1996.
Statement of Assets and Liabilities at December 31, 1996.
Statement of Operations for the year ended December 31, 1996.
Statement of Changes in Net Assets for the years ended December 31,
1995 and 1996.
Notes to Financial Statements.
Financial Highlights with respect to each of the five years in the
period ended December 31, 1996.
Report of Independent Accountants.
(b) Exhibits:
1. (a) Restated Articles of Incorporation. Incorporated by reference to
Exhibit 1 to Post-Effective Amendment No. 22 to the Registration
Statement filed on Form N-1A via EDGAR on March 1, 1994 (File No.
2-63394).
(b) Articles of Amendment. Incorporated by reference to Exhibit 1(b)
to Post-Effective Amendment No. 25 to the Registration Statement filed
on Form N-1A via EDGAR on March 1, 1995 (File No. 2-63394).
(c) Articles Supplementary. Incorporated by reference to Exhibit 1(c)
to Post-Effective Amendment No. 25 to the Registration Statement filed
on Form N-1A via EDGAR on March 1, 1995 (File No. 2-63394).
(d) Articles Supplementary. Incorporated by reference to Exhibit 1(d)
to Post-Effective Amendment No. 28 to the Registration Statement on
Form N-1A filed via EDGAR on February 28, 1996 (File No. 2-63394).
2. Amended and Restated By-Laws. Incorporated by reference to Exhibit 2
to Post-Effective Amendment No. 22 to the Registration Statement filed
on Form N-1A via EDGAR on March 1, 1994 (File No. 2-63394).
3. Not Applicable.
4. Instruments defining rights of holders of the securities being
offered. Incorporated by reference to Exhibits Nos. 1 and 2 above.
5. (a) Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc.*
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation.*
6. (a) Form of Selected Dealers Agreement (Continuous Offering)*
(b) Restated Distribution Agreement.*
8. Custodian Agreement between the Registrant and State Street Bank &
Trust Company.*
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc.*
10. Opinion of Sullivan & Cromwell.
11. Consent of Independent Accountants.*
13. Purchase Agreement.
15. (a) Distribution and Service Plan for Class A Shares. Incorporated by
reference to Exhibit 15(a) to Post-Effective Amendment No. 25 to the
Registration Statement filed on Form N-1A via EDGAR on March 1, 1995
(File No. 2-63394).
C-1
<PAGE>
(b) Distribution and Service Plan for Class B Shares. Incorporated by
reference to Exhibit 15(b) to Post-Effective Amendment No. 25 to the
Registration Statement filed on Form N-1A via EDGAR on March 1, 1995
(File No. 2-63394).
(c) Distribution and Service Plan for Class C Shares. Incorporated by
reference to Exhibit 15(c) to Post-Effective Amendment No. 25 to the
Registration Statement filed on Form N-1A via EDGAR on March 1, 1995
(File No. 2-63394).
16. (a) Calculation of Performance Information for Class B shares.*
(b) Schedule of Computation of Performance Quotations relating to
Average Annual Total Return for Class A shares.*
(c) Schedule of Computation of Performance Quotations relating to
Aggregate Total Return for Class A and Class B shares.*
17. Financial Data Schedule.*
18. Rule 18f-3 Plan. Incorporated by reference to Exhibit 18 to
Post-Effective Amendment No. 28 to the Registration Statement filed on
Form N-1A via EDGAR on February 28, 1998 (File No. 2-63394).
- ------------
**Filed herewith.
Item 25. Persons Controlled by or under Common Control with Registrant.
None.
Item 26. Number of Holders of Securities.
As of February 7, 1997 there were 114,589, 144,182, 1,937 and 2,790 record
holders of Class A, Class B, Class C and Class Z shares of common stock,
respectively, $.01 par value per share, of the Registrant.
Item 27. Indemnification.
As permitted by Sections 17(h) and (i) of the Investment Company Act of 1940
(as amended, the 1940 Act) and pursuant to Article VI of the Fund's By-Laws
(Exhibit 2 to the Registration Statement), officers, directors, employees and
agents of the Registrant will not be liable to the Registrant, any stockholder,
officer, director, employee, agent or other person for any action or failure to
act, except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Section 2-418 of Maryland General Corporation Law permits indemnification of
directors who acted in good faith and reasonably believed that the conduct was
in the best interests of the Registrant. As permitted by Section 17(i) of the
1940 Act, pursuant to Section 10 of the Distribution Agreement (Exhibit 6(b) to
the Registration Statement), each Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities arising
from bad faith, gross negligence, willful misfeasance or reckless disregard of
duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1940 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
director, officer or controlling person in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1940 Act and will be governed by the final
adjudication of such issue.
The Registrant intends to purchase an insurance policy insuring its officers
and directors against liabilities, and certain costs of defending claims against
such officers and directors, to the extent such officers and directors are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and directors under certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(b) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(a) to the
Registration Statement) limit the liability of Prudential Mutual Fund
Management, LLC (PMF) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from reckless
disregard by them of their respective obligations and duties under the
agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and each Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretation of Sections 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
C-2
<PAGE>
Item 28. Business and other Connections of Investment Adviser
(a) Prudential Mutual Fund Management LLC.
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PMF are listed in
Schedules A and D of Form ADV of PMF as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104, filed on March 30, 1995).
The business and other connections of PMF's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, Newark, New Jersey 07102.
<TABLE>
<CAPTION>
Name and Address Position with PMF Principal Occupations
- ---------------- ----------------- ---------------------
<S> <C> <C>
Brian Storms Officer-in-Charge, Officer-in-Charge, President, Chief Executive Officer and
President, Chief Executive Chief Operating Officer, PMF
Officer and Chief
Operating Officer
Robert F. Gunia Executive Vice President Comptroller, Prudential Investments; Executive Vice President
and Treasurer and Treasurer, PMF; Senior Vice President of Prudential
Securities Incorporated (Prudential Securities)
Thomas A. Early Executive Vice President, Executive Vice President, Secretary and General Counsel,
Secretary and General PMF; Vice President and General Counsel, Prudential
Counsel Retirement Services
Susan C. Cote Executive Vice President, Executive Vice President, Chief Financial Officer, PMF
Chief Financial Officer
Neil A. McGuinness Executive Vice President Executive Vice President, PMF
Robert J. Sullivan Executive Vice President Executive Vice President, PMF
</TABLE>
(b) Prudential Investment Corporation (PIC)
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of PIC's directors and executive officers
are as set forth below. The address of each person is Prudential Plaza, Newark,
NJ 07102.
<TABLE>
<CAPTION>
Name and Address Position with PIC Principal Occupations
- ---------------- ----------------- ---------------------
<S> <C> <C>
E. Michael Caulfield Chairman of the Board, Chief Executive Officer of Prudential Investments of The
President and Chief Prudential Insurance Company of America (Prudential)
Executive Officer and
Director
Jonathan M. Greene Senior Vice President and President--Investment Management of Prudential Investments
Director of Prudential
John R. Strangfeld Vice President and President of Private Asset Management Group of Prudential
Director
</TABLE>
Item 29. Principal Underwriters
(a) Prudential Securities
Prudential Securities Incorporated is distributor for The BlackRock
Government Income Trust, Command Government Fund, Command Money Fund, Command
Tax-Free Fund, The Global Government Plus Fund, Inc., The Global Total Return
Fund, Inc., Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc.
(Nicholas-Applegate Growth Equity Fund), Prudential Allocation Fund, Prudential
California Municipal Fund, Prudential Diversified Bond Fund, Inc., Prudential
Distressed Securities Fund, Inc., Prudential Dryden Fund, Prudential Emerging
Growth Fund, Inc., Prudential Equity Fund, Inc., Prudential Equity Income Fund,
Prudential Europe Growth Fund, Inc., Prudential Global Genesis Fund, Inc.,
Prudential Global Limited Maturity Fund, Inc., Prudential Government Income
Fund, Inc., Prudential Government Securities Trust, Prudential High Yield Fund,
Inc., Prudential Institutional Liquidity Portfolio, Inc., Prudential
Intermediate Global Income Fund, Inc., Prudential Jennison
C-3
<PAGE>
Series Fund, Inc., Prudential MoneyMart Assets Inc., Prudential Mortgage Income
Fund, Inc., Prudential Multi-Sector Fund, Inc., Prudential Municipal Bond Fund,
Prudential Municipal Series Fund, Prudential National Municipals Fund, Inc.,
Prudential Natural Resources Fund, Inc., Prudential Pacific Growth Fund, Inc.,
Prudential Small Companies Fund, Inc., Prudential Special Money Market Fund,
Inc., Prudential Structured Maturity Fund, Inc., Prudential Utility Fund, Inc.,
Prudential World Fund, Inc. and The Target Portfolio Trust.
Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
(b)(i) Information concerning the directors and officers of Prudential
Securities Incorporated is set forth below.
<TABLE>
<CAPTION>
Positions and Positions and
Offices with Offices with
Name(1) Underwriter the Registrant
- ------- ----------- --------------
<S> <C> <C>
Robert C. Golden ..... Executive Vice President None
One New York Plaza and Director
New York, NY 10292
Alan D. Hogan ........ Executive Vice President, None
Chief Administrative
Officer and Director
George A. Murray ..... Executive Vice President and Director None
Leland B. Paton ...... Executive Vice President and None
One New York Plaza Director
New York, NY 10292
Martin Pfinsgraff .... Executive Vice President, None
Chief Financial Officer and Director
Vincent T. Pica, II .. Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Hardwick Simmons ..... Chief Executive Officer, None
President and Director
Lee B. Spencer, Jr. .. General Counsel, Executive Vice President None
and Director
</TABLE>
- ------------
(1)The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
Item 30. Location of Accounts and Records
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, The Prudential Investment Corporation, Prudential Plaza,
745 Broad Street, Newark, New Jersey 07102, the Registrant, Gateway Center
Three, Newark, New Jersey 07102 and Prudential Mutual Fund Services, LLC,
Raritan Plaza One, Edison, New Jersey 08837. Documents required by Rules
31a-1(b)(5), (6), (7), (9), (10) and (11) and 31a-1(f) will be kept at 2 Gateway
Center, Newark, New Jersey, documents required by Rules 31a-1(b)(4) and (11) and
31a-1(d) at One Seaport Plaza and the remaining accounts, books and other
documents required by such other pertinent provisions of Section 31(a) and the
Rules promulgated thereunder will be kept by State Street Bank and Trust Company
and Prudential Mutual Fund Services, LLC.
Item 31. Management Services
Other than as set forth under the captions "How the Fund is
Managed--Manager" and "How the Fund is Managed--Distributor" in the Prospectus
and the captions "Manager" and "Distributor" in the Statement of Additional
Information, constituting Parts A and B, respectively, of this Registration
Statement, Registrant is not a party to any management-related service contract.
Item 32. Undertakings
The Registrant hereby undertakes to furnish each person to whom a Prospectus
is delivered with a copy of Registrant's latest annual report to shareholders
upon request and without charge.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Newark, and
State of New Jersey, on the 28th day of February, 1997.
PRUDENTIAL HIGH YIELD FUND, INC.
/s/ Richard A. Redeker
---------------------------------
(Richard A. Redeker, President)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
Signature Title Date
/s/ Richard A. Redeker President and Director February 28, 1997
- ----------------------------
Richard A. Redeker
/s/ Delayne D. Gold Director February 28, 1997
- ----------------------------
Delayne D. Gold
/s/ Edward D. Beach Director February 28, 1997
- ----------------------------
Edward D. Beach
/s/ Harry A. Jacobs, Jr. Director February 28, 1997
- ----------------------------
Harry A. Jacobs, Jr.
/s/ Eugene C. Dorsey Director February 28, 1997
- ----------------------------
Eugene C. Dorsey
/s/ Louis A. Weil, III Director February 28, 1997
- ----------------------------
Louis A. Weil, III
/s/ Robert F. Gunia Director February 28, 1997
- ----------------------------
Robert F. Gunia
/s/ David D. Lennox Director February 28, 1997
- ----------------------------
David D. Lennox
/s/ Mendel A. Melzer Director February 28, 1997
- ----------------------------
Mendel A. Melzer
/s/ Thomas T. Mooney Director February 28, 1997
- ----------------------------
Thomas T. Mooney
/s/ Thomas H. O'Brien Director February 28, 1997
- ----------------------------
Thomas H. O'Brien
/s/ Nancy H. Teeters Director February 28, 1997
- ----------------------------
Nancy H. Teeters
/s/ Grace C. Torres Treasurer and Principal February 28, 1997
- ----------------------------
Grace C. Torres Financial and Accounting
Officer
C-5
<PAGE>
EXHIBIT INDEX
1. (a) Restated Articles of Incorporation. Incorporated by reference to Exhibit
1 to Post-Effective Amendment No. 22 to the Registration Statement filed on
Form N-1A via EDGAR on March 1, 1994 (File No. 2-63394).
(b) Articles of Amendment. Incorporated by reference to Exhibit 1(b) to
Post-Effective Amendment No. 25 to the Registration Statement filed on Form
N-1A via EDGAR on March 1, 1995 (File No. 2-63394).
(c) Articles Supplementary. Incorporated by reference to Exhibit 1(c) to
Post-Effective Amendment No. 25 to the Registration Statement filed on Form
N-1A via EDGAR on March 1, 1995 (File No. 2-63394).
(d) Articles Supplementary. Incorporated by reference to Exhibit 1(d) to
Post-Effective Amendment No. 28 to the Registration Statement on Form N-1A
filed via EDGAR on February 28, 1996 (File No. 2-63394).
2. Amended and Restated By-Laws. Incorporated by reference to Exhibit 2 to
Post-Effective Amendment No. 22 to the Registration Statement filed on Form
N-1A via EDGAR on March 1, 1994 (File No. 2-63394).
4. Instruments defining rights of holders of the securities being offered.
Incorporated by reference to Exhibits Nos. 1 and 2 above.
5. (a) Management Agreement between the Registrant and Prudential Mutual Fund
Management, Inc.*
(b) Subadvisory Agreement between Prudential Mutual Fund Management, Inc.
and The Prudential Investment Corporation.*
6. (a) Form of Selected Dealers Agreement (Continuous Offering).*
(b) Restated Distribution Agreement.*
8. Custodian Agreement between the Registrant and State Street Bank & Trust
Company.*
9. Transfer Agency and Service Agreement between the Registrant and Prudential
Mutual Fund Services, Inc.*
10. Opinion of Sullivan & Cromwell.
11. Consent of Independent Accountants.*
13. Purchase Agreement.
15. (a) Distribution and Service Plan for Class A Shares. Incorporated by
reference to Exhibit 15(a) to Post-Effective Amendment No. 25 to the
Registration Statement filed on Form N-1A via EDGAR on March 1, 1995 (File
No. 2-63394).
(b) Distribution and Service Plan for Class B Shares. Incorporated by
reference to Exhibit 15(b) to Post-Effective Amendment No. 25 to the
Registration Statement filed on Form N-1A via EDGAR on March 1, 1995 (File
No. 2-63394).
(c) Distribution and Service Plan for Class C Shares. Incorporated by
reference to Exhibit 15(c) to Post-Effective Amendment No. 25 to the
Registration Statement filed on Form N-1A via EDGAR on March 1, 1995 (File
No. 2-63394).
16. (a) Calculation of Performance Information for Class B shares.*
(b) Schedule of Computation of Performance Quotations relating to Average
Annual Total Return for Class A shares.*
(c) Schedule of Computation of Performance Quotations relating to Aggregate
Total Return for Class A and Class B shares.*
17. Financial Data Schedule.*
18. Rule 18f-3 Plan. Incorporated by reference to Exhibit 18 to Post-Effective
Amendment No. 28 to the Registration Statement filed on Form N-1A via EDGAR
on February 28, 1996 (File No. 2-63394).
- ------------
**Filed herewith.
Prudential-Bache High Yield Fund, Inc.
Management Agreement
Agreement made this 2nd day of May, 1988, as amended on
January 22, 1990, between Prudential-Bache High Yield Fund, Inc.,
a Maryland corporation (the "Fund"), and Prudential Mutual Fund
Management, Inc., a Delaware corporation (the "Manager").
W I T N E S S E T H
WHEREAS, the Fund is a diversified, open-end management
investment company registered under the Investment Company Act of
1940, as amended (the "1940 Act"); and
WHEREAS, the Fund desires to retain the Manager to render
or contract to obtain as hereinafter provided investment advisory
services to the Fund and the Fund also desires to avail itself of
the facilities available to the Manager with respect to the
administration of its day to day corporate affairs, and the Manager
is willing to render such investment advisory and administrative
services.
NOW, THEREFORE, the parties agree as follows:
1. The Fund hereby appoints the Manager to act as manager
of the Fund and administrator of its corporate affairs for the
period and on the terms set forth in this Agreement. The Manager
accepts such appointment and agrees to render the services herein
described, for the compensation herein provided. The Manager is
authorized to enter into an agreement with The Prudential
Investment Corporation ("PIC") pursuant to which PIC shall furnish
to the Fund the investment advisory services specified therein in
connection with the management of the Fund. Such agreement in the
<PAGE>
form attached as Exhibit A is hereinafter referred to as the
"Subadvisory Agreement." The Manager will continue to have
responsibility for all investment advisory services furnished
pursuant to the Subadvisory Agreement.
2. Subject to the supervision of the Board of Directors
of the Fund, the Manager shall administer the Fund's corporate
affairs and, in connection therewith, shall furnish the Fund with
office facilities and with clerical, bookkeeping and recordkeeping
services at such office facilities and, subject to Section 1 hereof
and the Subadvisory Agreement, the Manager shall manage the
investment operations of the Fund and the composition of the Fund's
portfolio, including the purchase, retention and disposition
thereof, in accordance with the Fund's investment objectives,
policies and restrictions as stated in the Prospectus (hereinafter
defined) and subject to the following understandings:
(a) The Manager shall provide supervision of the Fund's
investments and determine from time to time what investments
or securities will be purchased, retained, sold or loaned by
the Fund, and what portion of the assets will be invested or
held uninvested as cash.
(b) The Manager, in the performance of its duties and
obligations under this Agreement, shall act in conformity with
the Articles of Incorporation, By-Laws and Prospectus
(hereinafter defined) of the Fund and with the instructions and
directions of the Board of Directors of the Fund and will
conform to and comply with the requirements of the 1940 Act and
2
<PAGE>
all other applicable federal and state laws and regulations.
(c) The Manager shall determine the securities and
futures contracts to be purchased or sold by the Fund and will
place orders pursuant to its determinations with or through
such persons, brokers, dealers or futures commission merchants
(including but not limited to Prudential Securities
Incorporated) in conformity with the policy with respect to
brokerage as set forth in the Fund's Registration Statement and
Prospectus (hereinafter defined) or as the Board of Directors
may direct from time to time. In providing the Fund with
investment supervision, it is recognized that the Manager will
give primary consideration to securing the most favorable price
and efficient execution. Consistent with this policy, the
Manager may consider the financial responsibility, research and
investment information and other services provided by brokers,
dealers or futures commission merchants who may effect or be
a party to any such transaction or other transactions to which
other clients of the Manager may be a party. It is understood
that Prudential Securities Incorporated may be used as
principal broker for securities transactions but that no
formula has been adopted for allocation of the Fund's
investment transaction business. It is also understood that
it is desirable for the Fund that the Manager have access to
supplemental investment and market research and security and
economic analysis provided by brokers or futures commission
merchants and that such brokers may execute brokerage
3
<PAGE>
transactions at a higher cost to the Fund than may result when
allocating brokerage to other brokers or futures commission
merchants on the basis of seeking the most favorable price and
efficient execution. Therefore, the Manager is authorized to
pay higher brokerage commissions for the purchase and sale of
securities and futures contracts for the Fund to brokers or
futures commission merchants who provide such research and
analysis, subject to review by the Fund's Board of Directors
from time to time with respect to the extent and continuation
of this practice. It is understood that the services provided
by such broker or futures commission merchant may be useful to
the Manager in connection with its services to other clients.
On occasions when the Manager deems the purchase or sale of a
security or a futures contract to be in the best interest of
the Fund as well as other clients of the Manager or the
Subadviser, the Manager, to the extent permitted by applicable
laws and regulations, may, but shall be under no obligation to,
aggregate the securities or futures contracts to be so sold or
purchased in order to obtain the most favorable price or lower
brokerage commissions and efficient execution. In such event,
allocation of the securities or futures contracts so purchased
or sold, as well as the expenses incurred in the transaction,
will be made by the Manager in the manner it considers to be
the most equitable and consistent with its fiduciary
obligations to the Fund and to such other clients.
(d) The Manager shall maintain all books and records with
4
<PAGE>
respect to the Fund's portfolio transactions and shall render
to the Fund's Board of Directors such periodic and special
reports as the Board may reasonably request.
(e) The Manager shall be responsible for the financial
and accounting records to be maintained by the Fund (including
those being maintained by the Fund's Custodian).
(f) The Manager shall provide the Fund's Custodian on
each business day with information relating to all transactions
concerning the Fund's assets.
(g) The investment management services of the Manager to
the Fund under this Agreement are not to be deemed exclusive,
and the Manager shall be free to render similar services to
others.
3. The Fund has delivered to the Manager copies of each
of the following documents and will deliver to it all future
amendments and supplements, if any:
(a) Articles of Incorporation of the Fund, as filed with
the Secretary of State of Maryland (such Articles of
Incorporation, as in effect on the date hereof and as amended
from time to time, are herein called the "Articles of
Incorporation");
(b) By-Laws of the Fund (such By-Laws, as in effect on
the date hereof and as amended from time to time, are herein
called the "By-Laws");
(c) Certified resolutions of the Board of Directors of
the Fund authorizing the appointment of the Manager and
5
<PAGE>
approving the form of this agreement;
(d) Registration Statement under the 1940 Act and the
Securities Act of 1933, as amended, on Form N-1A (the
"Registration Statement"), as filed with the Securities and
Exchange Commission (the "Commission") relating to the Fund and
shares of the Fund's Common Stock and all amendments thereto;
(e) Notification of Registration of the Fund under the
1940 Act on Form N-8A as filed with the Commission and all
amendments thereto; and
(f) Prospectus of the Fund (such Prospectus and Statement
of Additional Information, as currently in effect and as
amended or supplemented from time to time, being herein called
the "Prospectus").
4. The Manager shall authorize and permit any of its
directors, officers and employees who may be elected as directors
or officers of the Fund to serve in the capacities in which they
are elected. All services to be furnished by the Manager under this
Agreement may be furnished through the medium of any such
directors, officers or employees of the Manager.
5. The Manager shall keep the Fund's books and records
required to be maintained by it pursuant to paragraph 2 hereof.
The Manager agrees that all records which it maintains for the Fund
are the property of the Fund and it will surrender promptly to the
Fund any such records upon the Fund's request, provided however
that the Manager may retain a copy of such records. The Manager
further agrees to preserve for the periods prescribed by Rule 31a-2
6
<PAGE>
under the 1940 Act any such records as are required to be
maintained by the Manager pursuant to paragraph 2 hereof.
6. During the term of this Agreement, the Manager shall
pay the following expenses:
(i) the salaries and expenses of all personnel of the Fund
and the Manager except the fees and expenses of directors who
are not affiliated persons of the Manager or the Fund's
investment adviser,
(ii) all expenses incurred by the Manager or by the Fund
in connection with managing the ordinary course of the Fund's
business other than those assumed by the Fund herein, and
(iii) the costs and expenses payable to PIC pursuant to
the Subadvisory Agreement.
The Fund assumes and will pay the expenses described below:
(a) the fees and expenses incurred by the Fund in
connection with the management of the investment and
reinvestment of the Fund's assets,
(b) the fees and expenses of directors who are not
affiliated persons of the Manager or the Fund's investment
adviser,
(c) the fees and expenses of the Custodian that relate
to (i) the custodial function and the recordkeeping connected
therewith, (ii) preparing and maintaining the general
accounting records of the Fund and the providing of any such
records to the Manager useful to the Manager in connection with
the Manager's responsibility for the accounting records of the
7
<PAGE>
Fund pursuant to Section 31 of the 1940 Act and the rules
promulgated thereunder, (iii) the pricing of the shares of the
Fund, including the cost of any pricing service or services
which may be retained pursuant to the authorization of the
Board of Directors of the Fund, and (iv) for both mail and wire
orders, the cashiering function in connection with the issuance
and redemption of the Fund's securities,
(d) the fees and expenses of the Fund's Transfer and
Dividend Disbursing Agent, which may be the Custodian, that
relate to the maintenance of each shareholder account,
(e) the charges and expenses of legal counsel and
independent accountants for the Fund,
(f) brokers' commissions and any issue or transfer taxes
chargeable to the Fund in connection with its securities and
futures transactions,
(g) all taxes and corporate fees payable by the Fund to
federal, state or other governmental agencies,
(h) the fees of any trade associations of which the Fund
may be a member,
(i) the cost of stock certificates representing, and/or
non-negotiable share deposit receipts evidencing, shares of the
Fund,
(j) the cost of fidelity, directors and officers and
errors and omissions insurance,
(k) the fees and expenses involved in registering and
maintaining registration of the Fund and of its shares with the
8
<PAGE>
Securities and Exchange Commission, registering the Fund as a
broker or dealer and qualifying its shares under state
securities laws, including the preparation and printing of the
Fund's registration statements, prospectuses and statements of
additional information for filing under federal and state
securities laws for such purposes,
(l) allocable communications expenses with respect to
investor services and all expenses of shareholders' and
directors' meetings and of preparing, printing and mailing
reports to shareholders in the amount necessary for
distribution to the shareholders,
(m) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of
the Fund's business, and
(n) any expenses assumed by the Fund pursuant to a Plan
of Distribution adopted in conformity with Rule 12b-1 under the
1940 Act.
7. In the event the expenses of the Fund for any fiscal
year (including the fees payable to the Manager 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) exceed the lowest applicable annual expense limitation
established and enforced pursuant to the statute or regulations of
any jurisdictions in which shares of the Fund are then qualified
for offer and sale, the compensation due the Manager will be
9
<PAGE>
reduced by the amount of such excess, or, if such reduction exceeds
the compensation payable to the Manager, the Manager will pay to
the Fund the amount of such reduction which exceeds the amount of
such compensation.
8. For the services provided and the expenses assumed
pursuant to this Agreement, the Fund will pay to the Manager as
full compensation therefor a fee at an annual rate of .50 of 1% of
the Fund's average daily net assets up to and including $250
million, .475 of 1% of the next $250 million, .425 of 1% of the
next $250 million, .40 of 1% of the next $250 million and .375 of
1% of the Fund's average daily net assets in excess of $1.5
billion. This fee will be computed daily and will be paid to the
Manager monthly. Any reduction in the fee payable and any payment
by the Manager to the Fund pursuant to paragraph 7 shall be made
monthly. Any such reductions or payments are subject to
readjustment during the year.
9. The Manager shall not be liable for any error of
judgment or for any loss suffered by the Fund in connection with
the matters to which this Agreement relates, except a loss
resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services (in which case any award of
damages shall be limited to the period and the amount set forth in
Section 36(b)(3) of the 1940 Act) or loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement.
10
<PAGE>
10. This Agreement shall continue in effect for a period
of more than two years from the date hereof only so long as such
continuance is specifically approved at least annually in
conformity with the requirements of the 1940 Act; provided,
however, that this Agreement may be terminated by the Fund at any
time, without the payment of any penalty, by the Board of Directors
of the Fund or by vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Fund, or by the
Manager at any time, without the payment of any penalty, on not
more than 60 days' nor less than 30 days' written notice to the
other party. This Agreement shall terminate automatically in the
event of its assignment (as defined in the 1940 Act).
11. Nothing in this Agreement shall limit or restrict the
right of any director, officer or employee of the Manager who may
also be a director, officer or employee of the Fund to engage in
any other business or to devote his or her time and attention in
part to the management or other aspects of any business, whether of
a similar or dissimilar nature, nor limit or restrict the right of
the Manager to engage in any other business or to render services
of any kind to any other corporation, firm, individual or
association.
12. Except as otherwise provided herein or authorized by
the Board of Directors of the Fund from time to time, the Manager
shall for all purposes herein be deemed to be an independent
contractor and shall have no authority to act for or represent the
Fund in any way or otherwise be deemed an agent of the Fund.
11
<PAGE>
13. During the term of this Agreement, the Fund agrees
to furnish the Manager at its principal office all prospectuses,
proxy statements, reports to shareholders, sales literature, or
other material prepared for distribution to shareholders of the
Fund or the public, which refer in any way to the Manager, prior to
use thereof and not to use such material if the Manager reasonably
objects in writing within five business days (or such other time as
may be mutually agreed) after receipt thereof. In the event of
termination of this Agreement, the Fund will continue to furnish to
the Manager copies of any of the above mentioned materials which
refer in any way to the Manager. Sales literature may be furnished
to the Manager hereunder by first-class or overnight mail,
facsimile transmission equipment or hand delivery. The Fund shall
furnish or otherwise make available to the Manager such other
information relating to the business affairs of the Fund as the
Manager at any time, or from time to time, reasonably requests in
order to discharge its obligations hereunder.
14. This Agreement may be amended by mutual consent, but
the consent of the Fund must be obtained in conformity with the
requirements of the 1940 Act.
15. Any notice or other communication required to be
given pursuant to this Agreement shall be deemed duly given if
delivered or mailed by registered mail, postage prepaid, (1) to the
Manager at One Seaport Plaza, New York, N.Y. 10292, Attention:
Secretary; or (2) to the Fund at One Seaport Plaza, New York, N.Y.
10292, Attention: President.
12
<PAGE>
16. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
17. The Fund may use the name "Prudential-Bache High
Yield Fund, Inc." or any name including the word "Prudential" or
"Bache" only for so long as this Agreement or any extension, renewal
or amendment hereof remains in effect, including any similar
agreement with any organization which shall have succeeded to the
Manager's business as Manager or any extension, renewal or
amendment thereof remain in effect. At such time as such an
agreement shall no longer be in effect, the Fund will (to the
extent that it lawfully can) cease to use such a name or any other
name indicating that it is advised by, managed by or otherwise
connected with the Manager, or any organization which shall have so
succeeded to such businesses. In no event shall the Fund use the
name "Prudential-Bache High Yield Fund, Inc." or any name including
the word "Prudential" or "Bache" if the Manager's function is
transferred or assigned to a company of which The Prudential
Insurance Company of America does not have control.
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below as of
the day and year first above written.
PRUDENTIAL-BACHE HIGH YIELD
FUND, INC.
By /s/ Lawrence C. McQuade
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
By /s/ Michael J. Downey
14
PRUDENTIAL-BACHE HIGH YIELD FUND, INC.
Subadvisory Agreement
Agreement made as of this 2nd day of May, 1988 between
Prudential Mutual Fund Management Inc., a Delaware Corporation
("PMF" or the "Manager"), and The Prudential Investment Corporation,
a New Jersey Corporation (the "Subadviser").
WHEREAS, the Manager has entered into a Management Agreement,
dated May 2, 1988(the "Management Agreement"), with Prudential-Bache
High Yield Fund, Inc. (the "Fund"), a Maryland corporation and a
diversified open-end management investment company registered under
the Investment Company Act of 1940 (the "1940 Act"), pursuant to
which PMF will act as Manager of the Fund.
WHEREAS, PMF desires to retain the Subadviser to provide
investment advisory services to the Fund in connection with the
management of the Fund and the Subadviser is willing to render such
investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the
Board of Directors of the Fund, the Subadviser shall manage
the investment operations of the Fund and the composition of
the Fund's portfolio, including the purchase, retention and
disposition thereof, in accordance with the Fund's investment
objectives, policies and restrictions as stated in the
Prospectus (such Prospectus and Statement of Additional
Information as currently in effect and as amended or
supplemented from time to time, being herein called the
"Prospectus"), and subject to the following understandings:
(i) The Subadviser shall provide supervision of the
Fund's investments and determine from time to time what
investments and securities will be purchased, retained,
sold or loaned by the Fund, and what portion of the
assets will be invested or held uninvested as cash.
(ii) In the performance of its duties and
obligations under this Agreement, the Subadviser shall
act in conformity with the Articles of Incorporation,
By-Laws and Prospectus of the Fund and with the
instructions and directions of the Manager and of the
Board of Directors of the Fund and will conform to and
comply with the requirements of the 1940 Act, the
Internal Revenue Code of 1986 and all other applicable
federal and state laws and regulations.
1
<PAGE>
(iii) The Subadviser shall determine the securities
to be purchased or sold by the Fund and will place
orders with or through such persons, brokers or dealers
(including but not limited to Prudential-Bache
Securities Inc.) to carry out the policy with respect to
brokerage as set forth in the Fund's Registration
Statement and Prospectus or as the Board of Directors
may direct from time to time. In providing the Fund
with investment supervision, it is recognized that the
Subadviser will give primary consideration to securing
the most favorable price and efficient execution.
Within the framework of this policy, the Subadviser may
consider the financial responsibility, research and
investment information and other services provided by
brokers or dealers who may effect or be a party to any
such transaction or other transactions to which the
Subadviser's other clients may be a party. It is
understood that Prudential-Bache Securities Inc. may be
used as principal broker for securities transactions but
that no formula has been adopted for allocation of the
Fund's investment transaction business. It is also
understood that it is desirable for the Fund that the
Subadviser have access to supplemental investment and
market research and security and economic analysis
provided by brokers who may execute brokerage
transactions at a higher cost to the Fund than may
result when allocating brokerage to other brokers on the
basis of seeking the most favorable price and efficient
execution. Therefore, the Subadviser is authorized to
place orders for the purchase and sale of securities
for the Fund with such brokers subject to review by the
Fund's Board of Directors from time to time with respect
to the extent and continuation of this practice. It is
understood that the services provided by such brokers
may be useful to the Subadviser in connection with the
Subadviser's services to other clients.
On occasions when the Subadviser deems the
purchase or sale of a security to be in the best
interest of the Fund as well as other clients of the
Subadviser, the Subadviser, to the extent permitted by
applicable laws and regulations, may, but shall be under
no obligation to, aggregate the securities to be sold or
purchased in order to obtain the most favorable price or
lower brokerage commissions and efficient execution. In
such event, allocation of the securities so purchased or
sold, as well as the expenses incurred in the
transaction, will be made by the Subadviser in the
manner the Subadviser considers to be the most
equitable and consistent with its fiduciary obligations
to the Fund and to such other clients.
2
<PAGE>
(iv) The Subadviser shall maintain all books and
records with respect to the Fund's portfolio
transactions required by subparagraphs (b)(5), (6), (7),
(9), (10) and (11) and paragraph (f) of Rule 31a-1 under
the 1940 Act and shall render to the Fund's Board of
Directors such periodic and special reports as the Board
may reasonably request.
(v) The Subadviser shall provide the Fund's Custodian
on each business day with information relating to all
transactions concerning the Fund's assets and shall
provide the Manager with such information upon request
of the Manager.
(vi) The investment management services provided by
the Subadviser hereunder are not to be deemed exclusive,
and the Subadviser shall be free to render similar
services to others.
(b) The Subadviser shall authorize and permit any of its
directors, officers and employees who may be elected as
directors or officers of the Fund to serve in the capacities
in which they are elected. Services to be furnished by the
Subadviser under this Agreement may be furnished through the
medium of any of such directors, officers or employees.
(c) The Subadviser shall keep the Fund's books and records
required to be maintained by the Subadviser pursuant to
paragraph 1(a) hereof and shall timely furnish to the Manager
all information relating to the Subadviser's services
hereunder needed by the Manager to keep the other books and
records of the Fund required by Rule 31a-1 under the 1940
Act. The Subadviser agrees that all records which it
maintains for the Fund are the property of the Fund and the
Subadviser will surrender promptly to the Fund any of such
records upon the Fund's request, provided however that the
Subadviser may retain a copy of such records. The Subadviser
further agrees to preserve for the periods prescribed by Rule
31a-2 of the Commission under the 1940 Act any such records
as are required to be maintained by it pursuant to paragraph
1(a) hereof.
2. The Manager shall continue to have responsibility for
all services to be provided to the Fund pursuant to the
Management Agreement and shall oversee and review the
Subadviser's performance of its duties under this Agreement.
3. The Manager shall reimburse the Subadviser for
reasonable costs and expenses incurred by the Subadviser
determined in a manner acceptable to the Manager in
furnishing the services described in paragraph 1 hereof.
3
<PAGE>
4. The Subadviser shall not be liable for any error of
judgment or for any loss suffered by the Fund or the Manager
in connection with the matters to which this Agreement
relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the Subadviser's part in the
performance of its duties or from its reckless disregard of
its obligations and duties under this Agreement.
5. This Agreement shall continue in effect for a period of
more than two years from the date hereof only so long as such
continuance is specifically approved at least annually in
conformity with the requirements of the 1940 Act; provided,
however, that this Agreement may be terminated by the Fund at
any time, without the payment of any penalty, by the Board of
Directors of the Fund or by vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of
the Fund, or by the Manager or the Subadviser at any time,
without the payment of any penalty, on not more than 60 days'
nor less than 30 days' written notice to the other party.
This Agreement shall terminate automatically in the event of
its assignment (as defined in the 1940 Act) or upon the
termination of the Management Agreement.
6. Nothing in this Agreement shall limit or restrict the
right of any of the Subadviser's directors, officers, or
employees who may also be a director, officer or employee of
the Fund to engage in any other business or to devote his or
her time and attention in part to the management or other
aspects of any business, whether of a similar or a dissimilar
nature, nor limit or restrict the Subadviser's right to
engage in any other business or to render services of any
kind to any other corporation, firm, individual or
association.
7. During the term of this Agreement, the Manager agrees to
furnish the Subadviser at its principal office all
prospectuses, proxy statements, reports to stockholders,
sales literature or other material prepared for distribution
to stockholders of the Fund or the public, which refer to the
Subadviser in any way, prior to use thereof and not to use
material if the Subadviser reasonably objects in writing five
business days (or such other time as may be mutually agreed)
after receipt thereof. Sales literature may be furnished to
the Subadviser hereunder by first-class or overnight mail,
facsimile transmission equipment or hand delivery.
4
<PAGE>
8. This Agreement may be amended by mutual consent, but the
consent of the Fund must be obtained in conformity with the
requirements of the 1940 Act.
9. This Agreement shall be governed by the laws of the
State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below as of
the day and year first above written.
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
BY /s/ Michael J. Downey
President
THE PRUDENTIAL INVESTMENT CORPORATION
BY /s/ John Bookmeyer, Jr.
5
PRUDENTIAL SECURITIES INCORPORATED
One Seaport Plaza
New York, NY 10292
Selected Dealer Agreement
,1996
[Dealer Name]
[Address]
Dear [Name]:
As the distributor of shares of certain investment companies
presently or hereafter managed by Prudential Mutual Fund
Management, Inc. ("PMF"), shares of which companies are distributed
by us at their respective net asset values plus sales charges, if
any, pursuant to Distribution Agreements between us and each such
company (collectively, the "Funds"), we invite you to participate
as a selected dealer in the distribution of shares of any and all
of the Funds as set forth at Schedule A, upon the following terms
and conditions:
1. You are to offer and sell such shares only at the public
offering prices which shall be currently in effect, in accordance
with the terms of the then current prospectus of each Fund. You
shall not have authority to act as agent for any Fund, for us, or
for any other dealer in any respect. All orders are subject to
acceptance by us and become effective only upon confirmation by us.
2. On each sale of shares by you, the total sales charges or
discounts, if any, to selected dealers shall be as stated in
Schedule A, which Schedule A may be amended from time to time in
accordance with the provisions of Section 16. Schedule A may be
provided in written or electronic format.
Such sales charges or discounts to selected dealers are
subject to reductions under a variety of circumstances as described
in the then current prospectus of the Funds. To obtain these
reductions, we must be notified when the sale takes place which
would qualify for the reduced charge. There is no sales charge or
discount to selected dealers on the reinvestment of dividends or
capital gains reinvestment or on shares acquired in exchange for
shares of another Fund. Subject to other provisions of this
Agreement, from time to time an account servicing fee shall be paid
<PAGE>
to selected dealer with respect to shares of the Funds. Such
account servicing fees should be payable only on accounts for which
you provide personal service and/or maintenance services for
shareholder accounts.
3. As a selected dealer, you are hereby authorized to: (i)
place purchase orders on behalf of your customers or for your own
bona fide investment through us for shares of the Funds which
orders are to be effected subject to the applicable compensation
provisions set forth in each Fund's then current prospectus; and
(ii) tender shares directly to the Fund or its agent for redemption
subject to the applicable terms and conditions set forth in each
Fund's then current prospectus.
4. Redemption of shares will be made at the net asset value
of such shares in accordance with the then current prospectus of
each Fund.
5. You represent and warrant that:
(a) You are a registered broker-dealer with the
Securities and Exchange Commission ("SEC") and a member of the
National Association of Securities Dealers, Inc. ("NASD") and
that you agree to abide by the Conduct Rules of the NASD;
(b) You are a corporation duly organized and existing and
in good standing under the laws of the state, commonwealth or
other jurisdiction in which you are organized and that you are
duly registered or exempt from registration as a broker-dealer
in all fifty states, Puerto Rico and the District of Columbia
and that you will not offer shares of any Fund for sale in any
state where we have informed you in writing that they are not
qualified for sale under the Blue Sky laws and regulations of
such states or where you are not qualified to act as a broker-
dealer;
(c) You are empowered under applicable laws and by your
charter and by-laws to enter into and perform this Agreement
and that there are no impediments, prior or existing,
regulatory, self-regulatory, administrative, civil or criminal
matters affecting your ability to perform under this
Agreement;
(d) All requisite corporate proceedings have been taken
to authorize you to enter into and perform this Agreement;
(e) You agree to keep in force appropriate broker's
blanket bond insurance policies covering any and all acts of
your employees, officers and directors adequate to reasonably
2
<PAGE>
protect and indemnify Prudential Securities Incorporated
("PSI") and the Funds against any loss which any party may
suffer or incur, directly or indirectly, as a result of any
action by you, or your employees, officers and directors; and
(f) You agree to maintain the required net capital as
warranted by the rules and regulations of the SEC, NASD and
other regulatory authorities.
6. We represent and warrant that:
(a) We are a registered broker-dealer with the SEC and
a member of the NASD and that we agree to abide by the Conduct
Rules of the NASD;
(b) We are a corporation duly organized and existing and
in good standing under the laws of the state, commonwealth or
other jurisdiction in which we are organized and that we are
duly registered or exempt from registration as a broker-dealer
in all fifty states, Puerto Rico and the District of Columbia;
(c) We are empowered under applicable laws and by our
charter and by-laws to enter into and perform this Agreement
and that there are no impediments, prior or existing,
regulatory, self-regulatory, administrative, civil or criminal
matters affecting our ability to perform under this Agreement;
(d) All requisite corporate procedures have been taken
to authorize us to enter into and perform this Agreement; and
3
<PAGE>
(e) We agree to maintain the required net capital as
warranted by the rules and regulations of the SEC, NASD and
other regulatory authorities.
7. This Agreement is in all respects subject to Rule 2830 of
the Conduct Rules of the NASD which shall control any provisions to
the contrary in this Agreement.
8. You agree:
(a) To purchase shares on behalf of your customers only
through us or to sell shares only on behalf of your
customers.
(b) To purchase shares on behalf of your customers
through us only for the purpose of covering
purchase orders already received from your
customers or for your own bona fide investment.
(c) That you will not purchase from, or sell any shares
on behalf of, investors at prices lower than the
redemption prices then quoted by the Funds, subject
to any applicable charges as stated in such Fund's
then current prospectus. You shall, however, be
permitted to sell shares for the account of their
record owners to the Fund at the redemption prices
currently established for such shares and may
charge the owner a fair commission for handling the
transaction.
(d) That you will not delay placing customers' orders
for shares.
(e) That if any shares confirmed to you hereunder are
redeemed by the Funds within seven business days
after such confirmation of your original order, you
shall forthwith refund to us the full sales charge
or discount, if any, allowed to you on such sales.
We shall forthwith pay to the Fund our share of the
sales charge, if any, on the original sale, and
shall also pay to the Fund the refund from you as
herein provided. Termination or cancellation of
4
<PAGE>
this Agreement shall not relieve you or us from the
requirements of this subparagraph.
(f) To (i) be liable for, (ii) hold PSI, the Funds, PMF
and Prudential Mutual Fund Services, Inc. ("PMFS")
(the Funds' transfer agent), our officers,
directors and employees harmless from and (iii)
indemnify us and them from any loss, liability,
cost and expense arising from: (A) any statements
or representations that you or your employees make
concerning the Funds that are inconsistent with
either the pertinent Fund's current prospectus and
statement of additional information or any other
written material we have provided to you, (B) any
sale of shares of a Fund in any state, any U.S.
territory or the District of Columbia where the
Fund's shares were not properly registered or
qualified, when we have indicated to you that the
Fund's shares were not properly registered and
qualified; and (C) any of your actions relating to
the processing of purchase, exchange and redemption
orders and the servicing of shareholder accounts.
Your obligation under this paragraph shall survive
the termination of this Agreement.
(g) As a condition of the receipt of an account
servicing fee as described at Sections 2 and 14,
you agree to provide to shareholders of the Funds
personal service and/or maintenance services with
respect to shareholder accounts.
9. We agree to be liable for, and to hold you, your
officers, directors and employees harmless from and to indemnify
you and each of them for any loss, liability, cost and expense
arising from: (A) any material misstatement in or omission of a
material fact from a Fund's current prospectus or statement of
additional information or in the written material we provided you;
(B) any failure of any Fund's shares to be properly registered and
available for sale under any applicable federal law and regulation
or the laws and regulations of any state, any U.S. territory or the
District of Columbia when we have represented to you that the
Fund's shares are so registered and qualified; and (C) any of our
actions, or the actions of our affiliates, relating to the
5
<PAGE>
processing of purchase, exchange and redemption orders and the
servicing of shareholder accounts. Our obligation under this
Section 9 shall survive the termination of this Agreement.
10. We shall not accept from you any conditional orders for
shares. Delivery of certificates, if any, for shares purchased
shall be made by the Fund only against receipt of the purchase
price, subject to deduction for sales charge or discount reallowed
to you and our portion of the sales charge on such sale, if any.
If payment for the shares purchased is not received within the time
customary for such payments, the sale may be canceled forthwith
without any responsibility or liability on our part or on the part
of the Funds (in which case you will be responsible for any loss,
including loss of profit, suffered by the Funds resulting from your
failure to make payments as aforesaid), or, at our option, we may
sell on your behalf the shares ordered back to the Funds (in which
case we may hold you responsible for any loss, including loss of
profit, suffered by us resulting from your failure to make payment
as aforesaid).
11. Shares of the Funds are qualified for sale or exempt from
qualification in the states and territories or districts listed in
Schedule B, which Schedule B may be amended from time to time.
Schedule B may be provided in written or electronic format.
Qualification of shares of the Funds in the various states,
including the filing in any state of further notices respecting
such shares, is our responsibility or the responsibility of the
Funds.
12. You will not offer or sell any of the shares except under
circumstances that will result in compliance with the applicable
Federal and state securities laws (subject to our obligations set
forth in Section 11) and in connection with sales and offers to
sell shares you will furnish to each person to whom any such sale
or offer is made a copy of the applicable then current prospectus.
All out-of-pocket expenses incurred in connection with your
activities under this Agreement will be borne by you.
13. We shall be under no obligation to each other except for
obligations expressly assumed by us herein. Nothing herein
contained, however, shall be deemed to be a condition, stipulation
or provision binding any persons acquiring any security to waive
compliance with any provision of the Securities Act of 1933, or of
6
<PAGE>
the Rules and Regulations of the SEC or to relieve the parties
hereto from any liability arising under the Securities Act of 1933.
14. Notwithstanding anything to the contrary contained
herein, from time to time during the term of this Agreement PSI may
(but is not hereby obliged to) make payments to you, in
consideration of your furnishing personal service and/or
maintenance services for shareholder accounts with respect to the
Funds. Any such payments made pursuant to this Section 14 shall be
subject to the following terms and conditions:
(a) Any such payments shall be in such amounts as we
may from time to time advise you in writing but in
any event not in excess of the amounts permitted,
if any, by each Fund's Plan of Distribution in
effect. Any such payments shall be in addition to
the selling concession, if any, allowed to you
pursuant to this Agreement.
(b) The provisions of this Section 14 relate to each
Plan of Distribution adopted by the Fund pursuant
to Rule 12b-1 under the INVESTMENT COMPANY ACT OF
1940 (THE "ACT").
(c) The provisions of this Section 14 and any other
related provisions applicable to a Fund shall
remain in effect for not more than a year and
thereafter for successive annual periods only so
long as such continuance is specifically approved
at least annually in conformity with Rule 12b-1
under the INVESTMENT COMPANY ACT ("ACT"). The
provisions of this Section 14 shall automatically
terminate with respect to a particular Plan in the
event of the assignment (as defined by the Act) of
this Agreement or in the event such Plan terminates
or is not continued or in the event this Agreement
terminates or ceases to remain in effect. In
addition, the provisions of this Section 14 may be
terminated at any time, without penalty, by either
party with respect to any particular Plan on not
more than 60 days' nor less than 30 days' written
notice delivered or mailed by registered mail,
postage prepaid, to the other party.
7
<PAGE>
15. You and your agents and employees are not authorized to
make any written or oral representations concerning the Funds or
their shares except those contained in or consistent with the
prospectus and such other written materials we provide relating to
the Funds. We shall supply prospectuses, reasonable quantities of
supplemental sales literature, sales bulletins, and additional
information as issued and/or requested by you. You agree not to
use other advertising or sales material relating to the Funds,
unless forwarded to PSI's Marketing Review Department for review
prior to use and approved in writing by us in advance of such use.
Any printed information furnished by us other than the then current
prospectuses and SAIs for the Funds, periodic reports and proxy
solicitation materials is our sole responsibility and not the
responsibility of the Funds, and you agree that the Funds shall
have no liability or responsibility to you in these respects unless
expressly assumed in connection therewith.
16. Either party to this Agreement may terminate the
Agreement by giving 30 days' written notice to the other. Such
notice shall be deemed to have been given on the date on which it
was either delivered personally to the other party or any officer
or partner thereof, or was mailed postpaid or delivered to a
telegraph office for transmission to the other party at his or its
address as shown below. This Agreement may be amended by us at any
time and your placing of an order after the effective date of any
such amendment shall constitute your acceptance thereof.
17. This Agreement shall be construed in accordance with the
laws of the State of New York and shall be binding upon both
parties hereto when signed by us and accepted by you in the space
provided below.
18. If a dispute arises between you and us with respect to
this Agreement which you and we are unable to resolve ourselves, it
shall be settled by arbitration in accordance with the then-
existing NASD Code of Arbitration Procedures ("NASD Code"). The
parties agree, that to the extent permitted by the NASD Code, the
arbitrator(s) shall be selected from the securities industry.
19. This Agreement is in full force and effect as of the date
hereof and supersedes any previous agreements relating to the
subject matter hereof.
8
<PAGE>
Very truly yours,
PRUDENTIAL SECURITIES INCORPORATED
By: ________________________
Title: ________________________
Firm Name: ___________________
Address: ___________________
City: _________________ State: ________ Zip Code: ________
ACCEPTED BY (signature)
Name (print) Title
Date 199 Phone #
Please return two signed copies of this Agreement
(one of which will be signed above by us and
thereafter returned to you) in the accompanying
return envelope to:
Prudential Securities Incorporated
Attention: Phyllis J. Berman
National Sales Division
Three Gateway Center
100 Mulberry Street, 8th Floor
Newark, NJ 07102-4077
9
PRUDENTIAL HIGH YIELD FUND, INC.
Distribution Agreement
Agreement made as of May 8, 1996, between Prudential High
Yield Fund, Inc., a Maryland corporation (the Fund), and Prudential
Securities Incorporated, a Delaware corporation (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment
Company Act of 1940, as amended (the Investment Company Act), as a
diversified, open-end, management investment company and it is in
the interest of the Fund to offer its shares for sale continuously;
WHEREAS, the shares of the Fund may be divided into
classes and/or series (all such shares being referred to herein as
Shares) and the Fund currently is authorized to offer Class A,
Class B, Class C and Class Z Shares;
WHEREAS, the Distributor is a broker-dealer registered
under the Securities Exchange Act of 1934, as amended, and is
engaged in the business of selling shares of registered investment
companies either directly or through other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into
an agreement with each other, with respect to the continuous
offering of the Fund's Shares from and after the date hereof in
order to promote the growth of the Fund and facilitate the
distribution of its Shares; and
WHEREAS, upon approval by the holders of the respective
classes and/or series of Shares of the Fund it is contemplated that
the Fund will adopt a plan (or plans) of distribution pursuant to
Rule 12b-1 under the Investment Company Act with respect to certain
of its classes and/or series of Shares (the Plans) authorizing
payments by the Fund to the Distributor with respect to the
distribution of such classes and/or series of Shares and the
maintenance of related shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. Appointment of the Distributor
The Fund hereby appoints the Distributor as the principal
underwriter and distributor of the Shares of the Fund to sell
Shares to the public on behalf of the Fund and the Distributor
hereby accepts such appointment and agrees to act hereunder. The
Fund hereby agrees during the term of this Agreement to sell Shares
of the Fund through the Distributor on the terms and conditions set
forth below.
1
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Section 2. Exclusive Nature of Duties
The Distributor shall be the exclusive representative of
the Fund to act as principal underwriter and distributor of the
Fund's Shares, except that:
2.1 The exclusive rights granted to the Distributor to
sell Shares of the Fund shall not apply to Shares of the Fund
issued in connection with the merger or consolidation of any other
investment company or personal holding company with the Fund or the
acquisition by purchase or otherwise of all (or substantially all)
the assets or the outstanding shares of any such company by the
Fund.
2.2 Such exclusive rights shall not apply to Shares
issued by the Fund pursuant to reinvestment of dividends or capital
gains distributions or through the exercise of any conversion
feature or exchange privilege.
2.3 Such exclusive rights shall not apply to Shares
issued by the Fund pursuant to the reinstatement privilege afforded
redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases
made through the Fund's transfer and dividend disbursing agent in
the manner set forth in the currently effective Prospectus of the
Fund. The term "Prospectus" shall mean the Prospectus and
Statement of Additional Information included as part of the Fund's
Registration Statement, as such Prospectus and Statement of
Additional Information may be amended or supplemented from time to
time, and the term "Registration Statement" shall mean the
Registration Statement filed by the Fund with the Securities and
Exchange Commission and effective under the Securities Act of 1933,
as amended (Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. Purchase of Shares from the Fund
3.1 The Distributor shall have the right to buy from the
Fund on behalf of investors the Shares needed, but not more than
the Shares needed (except for clerical errors in transmission) to
fill unconditional orders for Shares placed with the Distributor by
investors or registered and qualified securities dealers and other
financial institutions (selected dealers).
3.2 The Shares shall be sold by the Distributor on
behalf of the Fund and delivered by the Distributor or selected
dealers, as described in Section 6.4 hereof, to investors at the
offering price as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of
any or all classes and/or series of its Shares at times when
2
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redemption is suspended pursuant to the conditions in Section 4.3
hereof or at such other times as may be determined by the Board of
Directors. The Fund shall also have the right to suspend the sale
of any or all classes and/or series of its Shares if a banking
moratorium shall have been declared by federal or New York
authorities.
3.4 The Fund, or any agent of the Fund designated in
writing by the Fund, shall be promptly advised of all purchase
orders for Shares received by the Distributor. Any order may be
rejected by the Fund; provided, however, that the Fund will not
arbitrarily or without reasonable cause refuse to accept or confirm
orders for the purchase of Shares. The Fund (or its agent) will
confirm orders upon their receipt, will make appropriate book
entries and upon receipt by the Fund (or its agent) of payment
therefor, will deliver deposit receipts for such Shares pursuant to
the instructions of the Distributor. Payment shall be made to the
Fund in New York Clearing House funds or federal funds. The
Distributor agrees to cause such payment and such instructions to
be delivered promptly to the Fund (or its agent).
Section 4. Repurchase or Redemption of Shares by the Fund
4.1 Any of the outstanding Shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem
the Shares so tendered in accordance with its Articles of
Incorporation as amended from time to time, and in accordance with
the applicable provisions of the Prospectus. The price to be paid
to redeem or repurchase the Shares shall be equal to the net asset
value determined as set forth in the Prospectus. All payments by
the Fund hereunder shall be made in the manner set forth in Section
4.2 below.
4.2 The Fund shall pay the total amount of the
redemption price as defined in the above paragraph pursuant to the
instructions of the Distributor on or before the seventh day
subsequent to its having received the notice of redemption in
proper form. The proceeds of any redemption of Shares shall be
paid by the Fund as follows: (i) in the case of Shares subject to
a contingent deferred sales charge, any applicable contingent
deferred sales charge shall be paid to the Distributor, and the
balance shall be paid to or for the account of the redeeming
shareholder, in each case in accordance with applicable provisions
of the Prospectus; and (ii) in the case of all other Shares,
proceeds shall be paid to or for the account of the redeeming
shareholder, in each case in accordance with applicable provisions
of the Prospectus.
4.3 Redemption of any class and/or series of Shares or
payment may be suspended at times when the New York Stock Exchange
is closed for other than customary weekends and holidays, when
trading on said Exchange is restricted, when an emergency exists as
3
<PAGE>
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 during
any other period when the Securities and Exchange Commission, by
order, so permits.
Section 5. Duties of the Fund
5.1 Subject to the possible suspension of the sale of
Shares as provided herein, the Fund agrees to sell its Shares so
long as it has Shares of the respective class and/or series
available.
5.2 The Fund shall furnish the Distributor copies of all
information, financial statements and other papers which the
Distributor may reasonably request for use in connection with the
distribution of Shares, and this shall include one certified copy,
upon request by the Distributor, of all financial statements
prepared for the Fund by independent public accountants. The Fund
shall make available to the Distributor such number of copies of
its Prospectus and annual and interim reports as the Distributor
shall reasonably request.
5.3 The Fund shall take, from time to time, but subject
to the necessary approval of the Board of Directors and the
shareholders, all necessary action to fix the number of authorized
Shares and such steps as may be necessary to register the same
under the Securities Act, to the end that there will be available
for sale such number of Shares as the Distributor reasonably may
expect to sell. The Fund agrees to file from time to time such
amendments, reports and other documents as may be necessary in
order that there will be no untrue statement of a material fact in
the Registration Statement, or necessary in order that there will
be no omission to state a material fact in the Registration
Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and
maintain the qualification of any appropriate number of its Shares
for sales under the securities laws of such states as the
Distributor and the Fund may approve; provided that the Fund shall
not be required to amend its Articles of Incorporation or By-Laws
to comply with the laws of any state, to maintain an office in any
state, to change the terms of the offering of its Shares in any
state from the terms set forth in its Registration Statement, to
qualify as a foreign corporation in any state or to consent to
service of process in any state other than with respect to claims
arising out of the offering of its Shares. Any such qualification
may be withheld, terminated or withdrawn by the Fund at any time in
its discretion. As provided in Section 9 hereof, the expense of
qualification and maintenance of qualification shall be borne by
the Fund. The Distributor shall furnish such information and other
4
<PAGE>
material relating to its affairs and activities as may be required
by the Fund in connection with such qualifications.
Section 6. Duties of the Distributor
6.1 The Distributor shall devote reasonable time and
effort to effect sales of Shares, but shall not be obligated to
sell any specific number of Shares. Sales of the Shares shall be
on the terms described in the Prospectus. The Distributor may
enter into like arrangements with other investment companies. The
Distributor shall compensate the selected dealers as set forth in
the Prospectus.
6.2 In selling the Shares, the Distributor shall use its
best efforts in all respects duly to conform with the requirements
of all federal and state laws relating to the sale of such
securities. Neither the Distributor nor any selected dealer nor
any other person is authorized by the Fund to give any information
or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature
approved by appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures
for the confirmation of sales to investors and selected dealers,
the collection of amounts payable by investors and selected dealers
on such sales and the cancellation of unsettled transactions, as
may be necessary to comply with the requirements of the National
Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into
selected dealer agreements with registered and qualified securities
dealers and other financial institutions of its choice for the sale
of Shares, provided that the Fund shall approve the forms of such
agreements. Within the United States, the Distributor shall offer
and sell Shares only to such selected dealers as are members in
good standing of the NASD. Shares sold to selected dealers shall
be for resale by such dealers only at the offering price determined
as set forth in the Prospectus.
Section 7. Payments to the Distributor
7.1 With respect to classes and/or series of Shares
which impose a front-end sales charge, the Distributor shall
receive and may retain any portion of any front-end sales charge
which is imposed on such sales and not reallocated to selected
dealers as set forth in the Prospectus, subject to the limitations
of Article III, Section 26 of the NASD Rules of Fair Practice.
Payment of these amounts to the Distributor is not contingent upon
the adoption or continuation of any applicable Plans.
7.2 With respect to classes and/or series of Shares
which impose a contingent deferred sales charge, the Distributor
5
<PAGE>
shall receive and may retain any contingent deferred sales charge
which is imposed on such sales as set forth in the Prospectus,
subject to the limitations of Article III, Section 26 of the NASD
Rules of Fair Practice. Payment of these amounts to the
Distributor is not contingent upon the adoption or continuation of
any Plan.
Section 8. Payment of the Distributor under the Plan
8.1 The Fund shall pay to the Distributor as
compensation for services under any Plans adopted by the Fund and
this Agreement a distribution and service fee with respect to the
Fund's classes and/or series of Shares as described in each of the
Fund's respective Plans and this Agreement.
8.2 So long as a Plan or any amendment thereto is in
effect, the Distributor shall inform the Board of Directors of the
commissions and account servicing fees with respect to the relevant
class and/or series of Shares to be paid by the Distributor to
account executives of the Distributor and to broker-dealers and
financial institutions which have dealer agreements with the
Distributor. So long as a Plan (or any amendment thereto) is in
effect, at the request of the Board of Directors or any agent or
representative of the Fund, the Distributor shall provide such
additional information as may reasonably be requested concerning
the activities of the Distributor hereunder and the costs incurred
in performing such activities with respect to the relevant class
and/or series of Shares.
Section 9. Allocation of Expenses
The Fund shall bear all costs and expenses of the
continuous offering of its Shares (except for those costs and
expenses borne by the Distributor pursuant to a Plan and subject to
the requirements of Rule 12b-1 under the Investment Company Act),
including fees and disbursements of its counsel and auditors, in
connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment
Company Act or the Securities Act, and all amendments and
supplements thereto, and preparing and mailing annual and periodic
reports and proxy materials to shareholders (including but not
limited to the expense of setting in type any such Registration
Statements, Prospectuses, annual or periodic reports or proxy
materials). The Fund shall also bear the cost of expenses of
qualification of the Shares for sale, and, if necessary or
advisable in connection therewith, of qualifying the Fund as a
broker or dealer, in such states of the United States or other
jurisdictions as shall be selected by the Fund and the Distributor
pursuant to Section 5.4 hereof and the cost and expense payable to
each such state for continuing qualification therein until the Fund
decides to discontinue such qualification pursuant to Section 5.4
hereof. As set forth in Section 8 above, the Fund shall also bear
6
<PAGE>
the expenses it assumes pursuant to any Plan, so long as such Plan
is in effect.
Section 10. Indemnification
10.1 The Fund agrees to indemnify, defend and hold the
Distributor, its officers and directors and any person who controls
the Distributor within the meaning of Section 15 of the Securities
Act, free and harmless from and against any and all claims,
demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and
any reasonable counsel fees incurred in connection therewith) which
the Distributor, its officers, directors or any such controlling
person may incur under the Securities Act, or under common law or
otherwise, arising out of or based upon any untrue statement of a
material fact contained in the Registration Statement or Prospectus
or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary
to make the statements in either thereof not misleading, except
insofar as such claims, demands, liabilities or expenses arise out
of or are based upon any such untrue statement or omission or
alleged untrue statement or omission made in reliance upon and in
conformity with information furnished in writing by the Distributor
to the Fund for use in the Registration Statement or Prospectus;
provided, however, that this indemnity agreement shall not inure to
the benefit of any such officer, director, trustee or controlling
person unless a court of competent jurisdiction shall determine in
a final decision on the merits, that the person to be indemnified
was not liable by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of its
reckless disregard of its obligations under this Agreement
(disabling conduct), or, in the absence of such a decision, a
reasonable determination, based upon a review of the facts, that
the indemnified person was not liable by reason of disabling
conduct, by (a) a vote of a majority of a quorum of directors or
trustees who are neither "interested persons" of the Fund as
defined in Section 2(a)(19) of the Investment Company Act nor
parties to the proceeding, or (b) an independent legal counsel in
a written opinion. The Fund's agreement to indemnify the
Distributor, its officers and directors or trustees and any such
controlling person as aforesaid is expressly conditioned upon the
Fund's being promptly notified of any action brought against the
Distributor, its officers or directors or trustees, or any such
controlling person, such notification to be given by letter or
telegram addressed to the Fund at its principal business office.
The Fund agrees promptly to notify the Distributor of the
commencement of any litigation or proceedings against it or any of
its officers or directors in connection with the issue and sale of
any Shares.
10.2 The Distributor agrees to indemnify, defend and hold
the Fund, its officers and Directors and any person who controls
7
<PAGE>
the Fund, if any, within the meaning of Section 15 of the
Securities Act, free and harmless from and against any and all
claims, demands, liabilities and expenses (including the cost of
investigating or defending against such claims, demands or
liabilities and any reasonable counsel fees incurred in connection
therewith) which the Fund, its officers and Directors or any such
controlling person may incur under the Securities Act or under
common law or otherwise, but only to the extent that such liability
or expense incurred by the Fund, its Directors or officers or such
controlling person resulting from such claims or demands shall
arise out of or be based upon any alleged untrue statement of a
material fact contained in information furnished in writing by the
Distributor to the Fund for use in the Registration Statement or
Prospectus or shall arise out of or be based upon any alleged
omission to state a material fact in connection with such
information required to be stated in the Registration Statement or
Prospectus or necessary to make such information not misleading.
The Distributor's agreement to indemnify the Fund, its officers and
Directors and any such controlling person as aforesaid, is
expressly conditioned upon the Distributor's being promptly
notified of any action brought against the Fund, its officers and
Directors or any such controlling person, such notification being
given to the Distributor at its principal business office.
Section 11. Duration and Termination of this Agreement
11.1 This Agreement shall become effective as of the date
first above written and shall remain in force for two years from
the date hereof and thereafter, but only so long as such
continuance is specifically approved at least annually by (a) the
Board of Directors of the Fund, or by the vote of a majority of the
outstanding voting securities of the applicable class and/or series
of the Fund, and (b) by the vote of a majority of those Directors
who are not parties to this Agreement or interested persons of any
such parties and who have no direct or indirect financial interest
in this Agreement or in the operation of any of the Fund's Plans or
in any agreement related thereto (Independent Directors), cast in
person at a meeting called for the purpose of voting upon such
approval.
11.2 This Agreement may be terminated at any time,
without the payment of any penalty, by a majority of the
Independent Directors or by vote of a majority of the outstanding
voting securities of the applicable class and/or series of the
Fund, or by the Distributor, on sixty (60) days' written notice to
the other party. This Agreement shall automatically terminate in
the event of its assignment.
11.3 The terms "affiliated person," "assignment,"
"interested person" and "vote of a majority of the outstanding
voting securities", when used in this Agreement, shall have the
respective meanings specified in the Investment Company Act.
8
<PAGE>
Section 12. Amendments to this Agreement
This Agreement may be amended by the parties only if such
amendment is specifically approved by (a) the Board of Directors of
the Fund, or by the vote of a majority of the outstanding voting
securities of the applicable class and/or series of the Fund, and
(b) by the vote of a majority of the Independent Directors cast in
person at a meeting called for the purpose of voting on such
amendment.
Section 13. Separate Agreement as to Classes and/or Series
The amendment or termination of this Agreement with
respect to any class and/or series shall not result in the
amendment or termination of this Agreement with respect to any
other class and/or series unless explicitly so provided.
Section 14. Governing Law
The provisions of this Agreement shall be construed and
interpreted in accordance with the laws of the State of New York as
at the time in effect and the applicable provisions of the
Investment Company Act. To the extent that the applicable law of
the State of New York, or any of the provisions herein, conflict
with the applicable provisions of the Investment Company Act, the
latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year above written.
PRUDENTIAL SECURITIES INCORPORATED
By: /s/ Robert F. Gunia
Robert F. Gunia
Senior Vice President
PRUDENTIAL HIGH YIELD FUND, INC.
By: /s/ Richard A. Redeker
Richard A. Redeker
President
9
CUSTODIAN CONTRACT
Between
EACH OF THE PARTIES INDICATED ON APPENDIX A
and
STATE STREET BANK AND TRUST COMPANY
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
1. Employment of Custodian and Property to be Held by It..................................................-1-
2. Duties of the Custodian with Respect to Property of The Fund Held By the Custodian
in the United States...................................................................................-2-
2.1 Holding Securities............................................................................-2-
2.2 Delivery of Securities........................................................................-2-
2.3 Registration of Securities....................................................................-6-
2.4 Bank Accounts.................................................................................-7-
2.5 Availability of Federal Funds.................................................................-7-
2.6 Collection of Income..........................................................................-8-
2.7 Payment of Fund Monies........................................................................-8-
2.8 Liability for Payment in Advance of Receipt of Securities Purchased..........................-11-
2.9 Appointment of Agents........................................................................-11-
2.10 Deposit of Securities in Securities Systems..................................................-11-
2.10A Fund Assets Held in the Custodian's Direct Paper System.............................-13-
2.11 Segregated Account...........................................................................-14-
2.12 Ownership Certificates for Tax Purposes......................................................-15-
2.13 Proxies......................................................................................-16-
2.14 Communications Relating to Fund Portfolio Securities.........................................-16-
2.15 Reports to Fund by Independent Public Accountants............................................-16-
3. Duties of the Custodian with Respect to Property of the Fund Held Outside of the
United States.........................................................................................-17-
3.1 Appointment of Foreign Sub-Custodians........................................................-17-
3.2 Assets to be Held............................................................................-17-
3.3 Foreign Securities Depositories..............................................................-18-
3.4 Segregation of Securities....................................................................-18-
3.5 Agreements with Foreign Banking Institutions.................................................-18-
3.6 Access of Independent Accountants of the Fund................................................-19-
3.7 Reports by Custodian.........................................................................-19-
3.9 Liability of Foreign Sub-Custodians..........................................................-20-
3.10 Liability of Custodian.......................................................................-21-
3.11 Reimbursements for Advances..................................................................-21-
3.12 Monitoring Responsibilities..................................................................-22-
3.13 Branches of U.S. Banks.......................................................................-22-
4. Payments for Repurchases or Redemptions and Sales of Shares of the Fund...............................-23-
</TABLE>
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<TABLE>
<CAPTION>
Page
<S> <C>
5. Proper Instructions...................................................................................-24-
6. Actions Permitted without Express Authority...........................................................-24-
7. Evidence of Authority.................................................................................-25-
8. Duties of Custodian with Respect to the Books of Account and Calculation of Net Asset
Value and Net Income..................................................................................-26-
9. Records...............................................................................................-26-
10. Opinion of Fund's Independent Accountant..............................................................-27-
11. Compensation of Custodian.............................................................................-27-
12. Responsibility of Custodian...........................................................................-27-
13. Effective Period, Termination and Amendment...........................................................-29-
14. Successor Custodian...................................................................................-30-
15. Interpretative and Additional Provisions..............................................................-32-
16. Massachusetts Law to Apply............................................................................-32-
17. Prior Contracts.......................................................................................-32-
18. The Parties...........................................................................................-32-
19. Limitation of Liability...............................................................................-33-
</TABLE>
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<PAGE>
CUSTODIAN CONTRACT
This Contract between State Street Bank and Trust Company, a Massachusetts
trust company, having its principal place of business at 225 Franklin Street,
Boston, Massachusetts, 02110, hereinafter called the "Custodian", and each Fund
listed on Appendix A which evidences its agreement to be bound hereby by
executing a copy of this Contract (each such Fund individually hereinafter
referred to as the "Fund").
WITNESSETH: That in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its assets,
including securities it desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Articles of
Incorporation/Declaration of Trust. The Fund agrees to deliver to the Custodian
all securities and cash owned by it, and all payments of income, payments of
principal or capital distributions received by it with respect to all securities
owned by the Fund from time to time, and the cash consideration received by it
for such new or treasury shares of capital stock, ("Shares") of the Fund as may
be issued or sold from time to time. The Custodian shall not be responsible for
any property of the Fund held or received by the Fund and not delivered to the
Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 5), the
Custodian shall from time to time employ one or more sub-custodians located in
the United States, but only in accordance with an applicable vote by the Board
of Directors/Trustees of the Fund, and provided
-1-
<PAGE>
that the Custodian shall have the same responsibility or liability to the Fund
on account of any actions or omissions of any sub-custodian so employed as any
such sub-custodian has to the Custodian, provided that the Custodian agreement
with any such domestic sub-custodian shall impose on such sub-custodian
responsibilities and liabilities similar in nature and scope to those imposed by
this Agreement with respect to the functions to be performed by such
sub-custodian. The Custodian may employ as sub-custodians for the Fund's
securities and other assets the foreign banking institutions and foreign
securities depositories designated in Schedule "A" hereto but only in accordance
with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of The Fund Held By the
Custodian in the United States.
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of the Fund all non-cash property, to be held by it in the
United States, including all domestic securities owned by the Fund, other than
(a) securities which are maintained pursuant to Section 2.10 in a clearing
agency which acts as a securities depository or in a book-entry system
authorized by the U.S. Department of Treasury, collectively referred to herein
as "Securities System" and (b) commercial paper of an issuer for which State
Street Bank and Trust Company acts as issuing and paying agent ("Direct Paper")
which is deposited and/or maintained in the Direct Paper System of the Custodian
pursuant to Section 2.10A.
2.2 Delivery of Securities. The Custodian shall release and deliver domestic
securities owned by the Fund held by the Custodian or in a Securities System
account of the Custodian or in the Custodian's Direct Paper book-entry system
account ("Direct Paper System") only upon receipt
-2-
<PAGE>
of Proper Instructions, which may be continuing instructions when deemed
appropriate by the parties, and only in the following cases:
(1) Upon sale of such securities for the account of the Fund and receipt
of payment therefor;
(2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
(3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
(4) To the depository agent in connection with tender or other similar
offers for portfolio securities of the Fund;
(5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
(6) To the issuer thereof, or its agent, for transfer into the name of
the Fund or into the name of any nominee or nominees of the
Custodian or into the name or nominee name of any agent appointed
pursuant to Section 2.9 or into the name or nominee name of any
sub-custodian appointed pursuant to Article 1; or for exchange for a
different number of bonds, certificates or other evidence
representing the same aggregate face amount or number of units;
provided that, in any such case, the new securities are to be
delivered to the Custodian;
(7) Upon the sale of such securities for the account of the Fund, to the
broker or its clearing agent, against a receipt, for examination in
accordance with "street
-3-
<PAGE>
delivery" custom; provided that in any such case, the Custodian
shall have no responsibility or liability for any loss arising
from the delivery of such securities prior to receiving payment
for such securities except as may arise from the Custodian's own
negligence or willful misconduct;
(8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of
the securities of the issuer of such securities, or pursuant to
provisions for conversion contained in such securities, or pursuant
to any deposit agreement; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;
(9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar
securities or the surrender of interim receipts or temporary
securities for definitive securities; provided that, in any such
case, the new securities and cash, if any, are to be delivered to
the Custodian;
(10) For delivery in connection with any loans of securities made by the
Fund, but only against receipt of adequate collateral as agreed upon
from time to time by the Custodian and the Fund, which may be in the
form of cash or obligations issued by the United States government,
its agencies or instrumentalities, except that in connection with
any loans for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S. Department
of the Treasury, the Custodian will not be
-4-
<PAGE>
held liable or responsible for the delivery of securities owned by
the Fund prior to the receipt of such collateral;
(11) For delivery as security in connection with any borrowings by the
Fund requiring a pledge of assets by the Fund, but only against
receipt of amounts borrowed;
(12) For delivery in accordance with the provisions of any agreement
among the Fund, the Custodian and a broker-dealer registered under
the Securities Exchange Act of 1934 (the "Exchange Act") and a
member of The National Association of Securities Dealers, Inc.
("NASD"), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national securities
exchange, or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Fund;
(13) For delivery in accordance with the provisions of any agreement
among the Fund, the Custodian, and a Futures Commission Merchant
registered under the Commodity Exchange Act, relating to compliance
with the rules of the Commodity Futures Trading Commission and/or
any Contract Market, or any similar organization or organizations,
regarding account deposits in connection with transactions by the
Fund;
(14) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the Fund, for delivery to such Transfer Agent or to the
holders of shares in connection with distributions in kind, as may
be described from time to time in the Fund's currently effective
prospectus and statement of additional
-5-
<PAGE>
information ("prospectus"), in satisfaction of requests by holders
of Shares for repurchase or redemption; and
(15) For any other proper business purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a resolution of
the Board of Directors/Trustees or of the Executive Committee signed
by an officer of the Fund and certified by the Secretary or an
Assistant Secretary, specifying the securities to be delivered,
setting forth the purpose for which such delivery is to be made,
declaring such purpose to be a proper business purpose, and naming
the person or persons to whom delivery of such securities shall be
made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the Fund or in
the name of any nominees of the Fund or of any nominee of the Custodian which
nominee shall be assigned exclusively to the Fund, unless the Fund has
authorized in writing the appointment of a nominee to be used in common with
other registered investment companies having the same investment adviser as the
Fund, or in the name or nominee name of any agent appointed pursuant to Section
2.9 or in the name or nominee name of any sub-custodian appointed pursuant to
Article 1. All securities accepted by the Custodian on behalf of the Fund under
the terms of this Contract shall be in "street name" or other good delivery
form. If, however, the Fund directs the Custodian to maintain securities in
"street name", the Custodian shall utilize its best efforts to timely collect
income due the Fund on such securities and to notify the Fund on a best efforts
basis of relevant corporate actions including, without limitation, pendency of
calls, maturities, tender or exchange offers.
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2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of the Fund, subject only
to draft or order by the Custodian acting pursuant to the terms of this
Contract, and shall hold in such account or accounts, subject to the provisions
hereof, all cash received by it from or for the account of the Fund, other than
cash maintained by the Fund, in a bank account established and used in
accordance with Rule 17f-3 under the Investment Company Act of 1940. Funds held
by the Custodian for the Fund may be deposited by it to its credit as Custodian
in the Banking Department of the Custodian or in such other banks or trust
companies as it may in its discretion deem necessary or desirable; provided,
however, that every such bank or trust company shall be qualified to act as a
custodian under the Investment Company Act of 1940 and that each such bank or
trust company and the funds be approved by vote of a majority of the Board of
Directors/Trustees of the Fund. Such funds shall be deposited by the Custodian
in its capacity as Custodian and shall be withdrawable by the Custodian only in
that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund
and the Custodian, the Custodian shall, upon the receipt of Proper Instructions,
make federal funds available to the Fund as of specified times agreed upon from
time to time by the Fund and the Custodian in the amount of checks received in
payment for Shares of the Fund which are deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments with
respect to registered securities held hereunder to which the Fund shall be
entitled either by law or pursuant to custom in the securities business, and
shall collect on a timely basis all income and other payments with respect to
bearer
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securities if, on the date of payment by the issuer, such securities are held by
the Custodian or its agent thereof and shall credit such income, as collected,
to the Fund's custodian account. Without limiting the generality of the
foregoing, the Custodian shall detach and present for payment all coupons and
other income items requiring presentation as and when they become due and shall
collect interest when due on securities held hereunder. Income due the Fund on
securities loaned pursuant to the provisions of Section 2.2 (10) shall be the
responsibility of the Fund. The Custodian will have no duty or responsibility in
connection therewith, other than to provide the Fund with such information or
data as may be necessary to assist the Fund in arranging for the timely delivery
to the Custodian of the income to which the Fund is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions, which may
be continuing instructions when deemed appropriate by the parties, the Custodian
shall pay out monies of the Fund in the following cases only:
(1) Upon the purchase of securities held domestically, options, futures
contracts or options on futures contracts for the account of the
Fund but only (a) against the delivery of such securities, or
evidence of title to such options, futures contracts or options on
futures contracts, to the Custodian (or any bank, banking firm or
trust company doing business in the United States or abroad which is
qualified under the Investment Company Act of 1940, as amended, to
act as a custodian and has been designated by the Custodian as its
agent for this purpose) registered in the name of the Fund or in the
name of a nominee of the Custodian referred to in Section 2.3 hereof
or in proper form for transfer; (b) in the case of a purchase
effected through a Securities
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System, in accordance with the conditions set forth in Section 2.10
hereof; (c) in the case of a purchase involving the Direct Paper
System, in accordance with the conditions set forth in Section
2.10A; (d) in the case of repurchase agreements entered into between
the Fund and the Custodian, or another bank, or a broker-dealer
which is a member of NASD, (i) against delivery of the securities
either in certificate form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with such securities
or (ii) against delivery of the receipt evidencing purchase by the
Fund of securities owned by the Custodian along with written
evidence of the agreement by the Custodian to repurchase such
securities from the Fund or (e) for transfer to a time deposit
account of the Fund in any bank, whether domestic or foreign; such
transfer may be effected prior to receipt of a confirmation from a
broker and/or the applicable bank pursuant to Proper Instructions
from the Fund as defined in Article 5;
(2) In connection with conversion, exchange or surrender of securities
owned by the Fund as set forth in Section 2.2 hereof;
(3) For the redemption or repurchase of Shares issued by the Fund as set
forth in Article 4 hereof;
(4) For the payment of any expense or liability incurred by the Fund,
including but not limited to the following payments for the account
of the Fund: interest, taxes, management, accounting, transfer agent
and legal fees, and operating
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expenses of the Fund whether or not such expenses are to be in whole
or part capitalized or treated as deferred expenses;
(5) For the payment of any dividends declared pursuant to the governing
documents of the Fund;
(6) For payment of the amount of dividends received in respect of
securities sold short;
(7) For any other proper purpose, but only upon receipt of, in addition
to Proper Instructions, a certified copy of a resolution of Board of
Directors/Trustees or of the Executive Committee of the Fund signed
by an officer of the Fund and certified by its Secretary or an
Assistant Secretary, specifying the amount of such payment, setting
forth the purpose for which such payment is to be made, declaring
such purpose to be a proper purpose, and naming the person or
persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and every case
where payment for purchase of securities for the account of the Fund is made by
the Custodian in advance of receipt of the securities purchased in the absence
of specific written instructions from the Fund to so pay in advance, the
Custodian shall be absolutely liable to the Fund for such securities to the same
extent as if the securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust company
which is itself qualified under the Investment Company Act of 1940, as amended,
to act as a custodian, as its agent to carry out
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such of the provisions of this Article 2 as the Custodian may from time to time
direct; provided, however, that the appointment of any agent shall not relieve
the Custodian of its responsibilities or liabilities hereunder.
2.10 Deposit of Securities in Securities Systems. The Custodian may deposit
and/or maintain domestic securities owned by the Fund in a clearing agency
registered with the Securities and Exchange Commission under Section 17A of the
Securities Exchange Act of 1934, which acts as a securities depository, or in
the book-entry system authorized by the U.S. Department of the Treasury and
certain federal agencies, collectively referred to herein as "Securities System"
in accordance with applicable Federal Reserve Board and Securities and Exchange
Commission rules and regulations, if any, and subject to the following
provisions:
(1) The Custodian may keep domestic securities of the Fund in a
Securities System provided that such securities are represented in
an account ("Account") of the Custodian in the Securities System
which shall not include any assets of the Custodian other than
assets held as a fiduciary, custodian or otherwise for customers;
(2) The records of the Custodian with respect to domestic securities of
the Fund which are maintained in a Securities System shall identify
by book-entry those securities belonging to the Fund;
(3) The Custodian shall pay for domestic securities purchased for the
account of the Fund upon (i) receipt of advice from the Securities
System that such securities have been transferred to the Account,
and (i.) the making of an entry on the records of the Custodian to
reflect such payment and transfer for
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the account of the Fund. The Custodian shall transfer domestic
securities sold for the account of the Fund upon (i) receipt of
advice from the Securities System that payment for such securities
has been transferred to the Account, and (ii) the making of an entry
on the records of the Custodian to reflect such transfer and payment
for the account of the Fund. Copies of all advices from the
Securities System of transfers of domestic securities for the
account of the Fund shall identify the Fund, be maintained for the
Fund by the Custodian and be provided to the Fund at its request.
Upon request, the Custodian shall furnish the Fund confirmation of
each transfer to or from the account of the Fund in the form of a
written advice or notice and shall furnish promptly to the Fund
copies of daily transaction sheets reflecting each day's
transactions in the Securities System for the account of the Fund.
(4) The Custodian shall provide the Fund with any report obtained by the
Custodian on the Securities System's accounting system, internal
accounting control and procedures for safeguarding securities
deposited in the Securities System;
(5) The Custodian shall have received the initial or annual certificate,
as the case may be, required by Article 13 hereof;
(6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to the
Fund resulting from use of the Securities System by reason of any
negligence, misfeasance or misconduct of the Custodian or any of its
agents or of any of its or their employees or
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<PAGE>
from failure of the Custodian or any such agent to enforce
effectively such rights as it may have against the Securities
System; at the election of the Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claim
against the Securities System or any other person which the
Custodian may have as a consequence of any such loss or damage if
and to the extent that the Fund has not been made whole for any such
loss or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System. The Custodian
may deposit and/or maintain securities owned by the Fund in the Direct Paper
System of the Custodian subject to the following provisions:
(1) No transaction relating to securities in the Direct Paper System
will be effected in the absence of Proper Instructions;
(2) The Custodian may keep securities of the Fund in the Direct Paper
System only if such securities are represented in an account
("Account") of the Custodian in the Direct Paper System which shall
not include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
(3) The records of the Custodian with respect to securities of the Fund
which are maintained in the Direct Paper System shall identify by
book-entry those securities belonging to the Fund;
(4) The Custodian shall pay for securities purchased for the account of
the Fund upon the making of an entry on the records of the Custodian
to reflect such payment and transfer of securities to the account of
the Fund. The Custodian
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<PAGE>
shall transfer securities sold for the account of the Fund upon the
making of an entry on the records of the Custodian to reflect such
transfer and receipt of payment for the account of the Fund;
(5) The Custodian shall furnish the Fund confirmation of each transfer
to or from the account of the Fund, in the form of a written advice
or notice, of Direct Paper on the next business day following such
transfer and shall furnish to the Fund copies of daily transaction
sheets reflecting each day's transaction in the Direct Paper System
for the account of the Fund;
(6) The Custodian shall provide the Fund with any report on its system
of internal accounting control as the Fund may reasonably request
from time to time;
2.11 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for and on
behalf of the Fund, into which account or accounts may be transferred cash
and/or securities, including securities maintained in an account by the
Custodian pursuant to Section 2.10 hereof, (i) in accordance with the provisions
of any agreement among the Fund, the Custodian and a broker-dealer registered
under the Exchange Act and a member of the NASD (or any futures commission
merchant registered under the Commodity Exchange Act), relating to compliance
with the rules of The Options Clearing Corporation and of any registered
national securities exchange (or the Commodity Futures Trading Commission or any
registered contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by the
Fund, (ii) for purposes of segregating cash, government securities or liquid,
high-grade debt obligations in connection with options purchased, sold or
written by the Fund or commodity futures contracts or options thereon
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<PAGE>
purchased or sold by the Fund, (iii) for the purposes of compliance by the Fund
with the procedures required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange Commission
relating to the maintenance of segregated accounts by registered investment
companies and (iv) for other proper corporate purposes, but only, in the case of
clause (iv), upon receipt of, in addition to Proper Instructions, a certified
copy of a resolution of the Board of Directors/Trustees or of the Executive
Committee signed by an officer of the Fund and certified by the Secretary or an
Assistant Secretary, setting forth the purpose or purposes of such segregated
account and declaring such purposes to be proper corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state tax
purposes in connection with receipt of income or other payments with respect to
domestic securities of the Fund held by it and in connection with transfers of
such securities.
2.13 Proxies. The Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of the
Fund or a nominee of the Fund, all proxies, without indication of the manner in
which such proxies are to be voted, and shall promptly deliver to the Fund such
proxies, all proxy soliciting materials and all notices relating to such
securities.
2.14 Communications Relating to Fund Portfolio Securities. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to the Fund all
written information (including, without limitation, pendency of calls and
maturities of securities held domestically and expirations of rights in
connection therewith and notices of exercise of call and put options written by
the Fund and the maturity of futures contracts purchased or sold by the Fund)
received by the Custodian from
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issuers of the securities being held for the Fund. With respect to tender or
exchange offers, the Custodian shall transmit promptly to the Fund all written
information received by the Custodian from issuers of the securities whose
tender or exchange is sought and from the party (or his agents) making the
tender or exchange offer. If the Fund desires to take action with respect to any
tender offer, exchange offer or any other similar transaction, the Fund shall
notify the Custodian at least three business days prior to the date of which the
Custodian is to take such action.
2.15 Reports to Fund by Independent Public Accountants. The Custodian shall
provide the Fund, at such times as the Fund may reasonably require, with reports
by independent public accountants on the accounting system, internal accounting
control and procedures for safeguarding securities, futures contracts and
options on futures contracts, including securities deposited and/or maintained
in a Securities System, relating to the services provided by the Custodian under
this Contract; such reports shall be of sufficient scope and in sufficient
detail, as may reasonably be required by the Fund to provide reasonable
assurance that any material inadequacies would be disclosed by such examination,
and, if there are no such inadequacies, the reports shall so state.
3. Duties of the Custodian with Respect to Property of the Fund Held Outside of
the United States
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the Fund's securities
and other assets maintained outside the United States the foreign banking
institutions and foreign securities depositories designated on Schedule A hereto
("foreign sub-custodians"). Upon receipt of "Proper Instructions", as defined in
Section 5 of this Contract, together with a certified resolution of the Fund's
Board of Directors/Trustees, the Custodian and the Fund may agree to amend
Schedule A hereto from time
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to time to designate additional foreign banking institutions and foreign
securities depositories to act as sub-custodian. Upon receipt of Proper
Instructions, the Fund may instruct the Custodian to cease the employment of any
one or more such sub-custodians for maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a) "foreign
securities", as defined in paragraph (c)(1) of Rule 17f-5 under the Investment
Company Act of 1940, and (b) cash and cash equivalents in such amounts as the
Custodian or the Fund may determine to be reasonably necessary to effect the
Fund's foreign securities transactions.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon
in writing by the Custodian and the Fund, assets of the Fund shall be maintained
in foreign securities depositories only through arrangements implemented by the
foreign banking institutions serving as sub-custodians pursuant to the terms
hereof. Where possible, such arrangements shall include entry into agreements
containing the provisions set forth in Section 3.5 hereof.
3.4 Segregation of Securities. The Custodian shall identify on its books as
belonging to the Fund, the foreign securities of the Fund held by each foreign
sub-custodian. Each agreement pursuant to which the Custodian employs a foreign
banking institution shall require that such institution establish a custody
account for the Custodian on behalf of the Fund and physically segregate in that
account, securities and other assets of the Fund, and, in the event that such
institution deposits the Fund's securities in a foreign securities depository,
that it shall identify on its books as belonging to the Custodian, as agent for
the Fund, the securities so deposited.
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall be substantially in the form set forth in
Exhibit I hereto and shall provide that
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(a) the Fund's assets will not be subject to any right, charge, security
interest, lien or claim of any kind in favor of the foreign banking institution
or its creditors or agent, except a claim of payment for their safe custody or
administration; (b) beneficial ownership of the Fund's assets will be freely
transferable without the payment of money or value other than for custody or
administration; (c) adequate records will be maintained identifying the assets
as belonging to the Fund; (d) officers of or auditors employed by, or other
representatives of the Custodian, including to the extent permitted under
applicable law the independent public accountants for the Fund, will be given
access to the books and records of the foreign banking institution relating to
its actions under its agreement with the Custodian; and (e) assets of the Fund
held by the foreign sub-custodian will be subject only to the instructions of
the Custodian or its agents.
3.6 Access of Independent Accountants of the Fund. Upon request of the Fund,
the Custodian will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of any
foreign banking institution employed as a foreign sub-custodian insofar as such
books and records relate to the performance of such foreign banking institution
under its agreement with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from time to
time, as mutually agreed upon, statements in respect of the securities and other
assets of the Fund held by foreign sub-custodians, including but not limited to
an identification of entities having possession of the Fund's securities and
other assets and advices or notifications of any transfers of securities to or
from each custodial account maintained by a foreign banking institution for the
Custodian on behalf of the Fund indicating, as to securities acquired for the
Fund, the identity of the entity having physical possession of such securities.
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3.8 Transactions in Foreign Custody Account
(a) Except as otherwise provided in paragraph (b) of this Section 3.8, the
provisions of Sections 2.2 and 2.7 of this Contract shall apply, in their
entirety, to the foreign securities of the Fund held outside the United States
by foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of the Fund and
delivery of securities maintained for the account of the Fund may be effected in
accordance with the customary established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivering securities to the
purchaser thereof or to a dealer therefor (or an agent for such purchaser or
dealer) against a receipt with the expectation of receiving later payment for
such securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may be
maintained in the name of such entity's nominee to the same extent as set forth
in Section 2.3 of this Contract, and the Fund agrees to hold any such nominee
harmless from any liability as a holder of record of such securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which
the Custodian employs a foreign banking institution as a foreign sub-custodian
shall require the institution to exercise reasonable care in the performance of
its duties and to indemnify, and hold harmless, the Custodian and each Fund from
and against any loss, damage, cost, expense, liability or claim arising out of
or in connection with the institution's performance of such obligations. At the
election of the Fund, it shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a foreign banking institution as a
consequence of any such loss, damage, cost, expense,
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liability or claim if and to the extent that the Fund has not been made whole
for any such loss, damage, cost, expense, liability or claim.
3.10 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set forth with
respect to sub-custodians generally in this Contract and, regardless of whether
assets are maintained in the custody of a foreign banking institution, a foreign
securities depository or a branch of a U.S. bank as contemplated by paragraph
3.13 hereof, the Custodian shall not be liable for any loss, damage, cost,
expense, liability or claim resulting from nationalization, expropriation,
currency restrictions, or acts of war or terrorism or any loss where the
sub-custodian has otherwise exercised reasonable care. Notwithstanding the
foregoing provisions of this paragraph 3.10, in delegating custody duties to
State Street London Ltd., the Custodian shall not be relieved of any
responsibility to the Fund for any loss due to such delegation, except such loss
as may result from (a) political risk (including, but not limited to, exchange
control restrictions, confiscation, expropriation, nationalization,
insurrection, civil strife or armed hostilities) or (b) other losses (excluding
a bankruptcy or insolvency of State Street London Ltd. not caused by political
risk) due to Acts of God, nuclear incident or other losses under circumstances
where the Custodian and State Street London Ltd. have exercised reasonable care.
3.11 Reimbursement for Advances. If the Fund requires the Custodian to
advance cash or securities for any purpose including the purchase or sale of
foreign exchange or of contracts for foreign exchange, or in the event that the
Custodian or its nominees shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the performance
of this Contract, except such as amy arise from its or its nominee's own
negligent action, negligent failure to act or wilful misconduct, any property at
any time held for the account of the Fund shall be security
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therefor and should the Fund fail to repay the Custodian promptly, the Custodian
shall be entitled to utilize available cash and to dispose of the Fund assets to
the extent necessary to obtain reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually to
the Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be similar in
kind and scope to that furnished to the Fund in connection with the initial
approval of this Contract. In addition, the Custodian will promptly inform the
Fund in the event that the Custodian learns of a material adverse change in the
financial condition of a foreign sub-custodian or any material loss of the
assets of the Fund or in the case of any foreign sub-custodian not the subject
of an exemptive order from the Securities and Exchange Commission is notified by
such foreign sub-custodian that there appears to be a substantial likelihood
that its shareholders equity will decline below $200 million (U.S. dollars or
the equivalent thereof) or that its shareholders equity has declined below $200
million (in each case computed in accordance with generally accepted U.S.
accounting principles).
3.13 Branches of U.S. Banks
(a) Except as otherwise set forth in this Contract, the provisions of
Article 3 shall not apply where the custody of the Fund assets are maintained in
a foreign branch of a banking institution which is a "bank" as defined by
Section 2(a)(5) of the Investment Company Act of 1940 meeting the qualification
set forth in Section 26(a) of said Act. The appointment of any such branch as a
sub-custodian shall be governed by paragraph 1 of this Contract.
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(b) Cash held for the Fund in the United Kingdom shall be maintained in an
interest bearing account established for the Fund with the Custodian's London
branch, which account shall be subject to the direction of the Custodian, State
Street London Ltd., or both.
4. Payments for Repurchases or Redemptions and Sales of Shares of the Fund.
From such funds as may be available for the purpose but subject to the
limitations of the Articles of Incorporation/Declaration of Trust and any
applicable votes of the Board of Directors/Trustees of the Fund pursuant
thereto, the Custodian shall, upon receipt of instructions from the Transfer
Agent, make funds available for payment to holders of Shares who have delivered
to the Transfer Agent a request for redemption or repurchase of their Shares. In
connection with the redemption or repurchase of Shares of the Fund, the
Custodian is authorized upon receipt of instructions from the Transfer Agent to
wire funds to or through a commercial bank designated by the redeeming
shareholders. In connection with the redemption or repurchase of Shares of the
Fund, the Custodian shall honor checks drawn on the Custodian by a holder of
Shares, which checks have been furnished by the Fund to the holder of Shares,
when presented to the Custodian in accordance with such procedures and controls
as are mutually agreed upon from time to time between the Fund and the
Custodian.
The Custodian shall receive from the distributor for the Fund's Shares or
from the Transfer Agent of the Fund and deposit into the Fund's account such
payments as are received for Shares of the Fund issued or sold from time to time
by the Fund. The Custodian will provide timely notification to the Fund and the
Transfer Agent of any receipt by it of payments for Shares of the Fund.
5. Proper Instructions.
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Proper Instructions as used herein means a writing signed or initialled by
one or more person or persons as the officers of the Fund shall have from time
to time authorized. Each such writing shall set forth the specific transaction
or type of transaction involved, including a specific statement of the purpose
for which such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in writing.
It is understood and agreed that the Board of Directors/Directors/Trustees has
authorized (i) Prudential Mutual Fund Management, Inc., as Manager of the Fund,
and (ii) The Prudential Investment Corporation (or Prudential-Bache Securities
Inc.), as Subadviser to the Fund, to deliver proper instructions with respect to
all matters for which proper instructions are required by this Article 5. The
Custodian may rely upon the certificate of an officer of the Manager or
Subadviser, as the case may be, with respect to the person or persons authorized
on behalf of the Manager and Subadviser, respectively, to sign, initial or give
Proper Instructions for the purpose of this Article 5. Proper Instructions may
include Communications effected directly between electro- mechanical or
electronic devices provided that the Fund and the Custodian are satisfied that
such procedures afford adequate safeguards for the Fund's assets. For purposes
of this Section, Proper Instructions shall include instructions received by the
Custodian pursuant to any three-party agreement which requires a segregated
asset account in accordance with Section 2.11.
6. Actions Permitted without Express Authority. The Custodian may in its
discretion, without express authority from the Fund:
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(1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Contract, provided that all such payments shall be accounted for to
the Fund;
(2) surrender securities in temporary form for securities in definitive
form;
(3) endorse for collection, in the name of the Fund, checks, drafts and
other negotiable instruments; and
(4) in general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Fund except as
otherwise directed by the Board of Directors/Trustees of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a certified copy of a vote of the Board of
Directors/Trustees of the Fund as conclusive evidence (a) of the authority of
any person to act in accordance with such vote or (b) of any determination or of
any action by the Board of Directors/ Trustees pursuant to the Articles of
Incorporation/Declaration of Trust as described in such vote, and such vote may
be considered as in full force and effect until receipt by the Custodian of
written notice to the contrary.
-24-
<PAGE>
8. Duties of Custodian with Respect to the Books of Account and Calculation of
Net Asset Value and Net Income.
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Directors/Trustees of the Fund to
keep the books of account of the Fund and/or compute the net asset value per
share of the outstanding shares of the Fund or, if directed in writing to do so
by the Fund, shall itself keep such books of account and/or compute such net
asset value per share. If so directed, the Custodian shall also calculate daily
the net income of the Fund as described in the Fund's currently effective
prospectus and shall advise the Fund and the Transfer Agent daily of the total
amounts of such net income and, if instructed in writing by an office of the
Fund to do so, shall advise the Transfer Agent periodically of the division of
such net income among its various components. The calculations of the net asset
value per share and the daily income of the Fund shall be made at the time or
times described from time to time in the Fund's currently effective prospectus.
9. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder.
All such records shall be the property of the Fund and shall at all times during
the regular business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents of the Fund and employees and agents of
the Securities and Exchange Commission. The Custodian shall, at the Fund's
request, supply the Fund with a tabulation of securities owned by the Fund and
held by the Custodian and shall, when requested to do so by the Fund and for
such
-25-
<PAGE>
compensation as shall be agreed upon between the Fund and the Custodian, include
certificate numbers in such tabulations.
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund may from time to
time request, to obtain from year to year favorable opinions from the Fund's
independent accountants with respect to its activities hereunder in connection
with the preparation of the Fund's Form N-1A, Form N-2 (in the case of a closed
end Fund) and Form N-SAR or other periodic reports to the Securities and
Exchange Commission and with respect to any other requirements of such
Commission.
11. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as agreed upon from time to time between the Fund and
the Custodian.
12. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Contract and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties, including any
futures commission merchant acting pursuant to the terms of a three-party
futures or options agreement. The Custodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Contract but shall be
kept indemnified by and shall be without liability to the Fund for any action
taken or omitted by it in good faith without negligence. It shall be entitled to
rely on and may act upon advice of counsel (who may be counsel for the Fund) on
all matters, and shall be without liability for any action reasonably taken
-26-
<PAGE>
or omitted pursuant to such advice. Notwithstanding the foregoing, the
responsibility of the Custodian with respect to redemptions effected by check
shall be in accordance with a separate Agreement entered into between the
Custodian and the Fund.
The Custodian shall be liable for the acts or omissions of a foreign banking
institution appointed pursuant to the provisions of Article 3 to the same extent
as set forth in Article 1 hereof with respect to sub-custodians located in the
United States and, regardless of whether assets are maintained in the custody of
a foreign banking institution, a foreign securities depository or a branch of a
U.S. bank as contemplated by paragraph 3.11 hereof, the Custodian shall not be
liable for any loss, damage, cost, expense, liability or claim resulting from,
or caused by, the direction of or authorization by the Fund to maintain custody
or any securities or cash of the Fund in a foreign country including, but not
limited to, losses resulting from nationalization, expropriation, currency
restrictions, or acts of war or terrorism.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian to advance cash or securities for any
purpose or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or wilful
misconduct, any property at any time held for the account of the Fund shall be
security therefor and should the
-27-
<PAGE>
Fund fail to repay the Custodian promptly, the Custodian shall be entitled to
utilize available cash and to dispose of the Fund assets to the extent necessary
to obtain reimbursement, provided, however, that, prior to disposing of Fund
assets hereunder, the Custodian shall give the Fund notice of its intention to
dispose of assets identifying such assets and the Fund shall have one business
day from receipt of such notice to notify the Custodian if the Fund wishes the
Custodian to dispose of Fund assets of equal value other than those identified
in such notice.
13. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than sixty (60) days
after the date of such delivery or mailing; provided, however that the Custodian
shall not act under Section 2.10 hereof in the absence of receipt of an initial
certificate of the Secretary or an Assistant Secretary that the Board of
Directors/Trustees of the Fund has approved the initial use of a particular
Securities System and the receipt of an annual certificate of the Secretary or
an Assistant Secretary that the Board of Directors/Trustees has reviewed the use
by the Fund of such Securities System, as required in each case by Rule 17f-4
under the Investment Company Act of 1940, as amended, and that the Custodian
shall not act under Section 2.10A hereof in the absence of receipt of an initial
certificate of the Secretary or an Assistant Secretary that the Board of
Directors/Trustees has approved the initial use of the Direct Paper System and
the receipt of an annual certificate of the Secretary or an Assistant Secretary
that the Board of Directors/Trustees has reviewed the use by the Fund of the
Direct Paper System; provided further, however, that the Fund shall not amend or
-28-
<PAGE>
terminate this Contract in contravention of any applicable federal or state
regulations, or any provision of the Articles of Incorporation/Declaration of
Trust; and further, provided, that the Fund may at any time by action of its
Board of Directors/Trustees (i) substitute another bank or trust company for the
Custodian by giving notice as described above to the Custodian, or (ii)
immediately terminate this Contract in the event of the appointment of a
conservator or receiver for the Custodian by the Comptroller of the Currency or
upon the happening of a like event at the direction of an appropriate regulatory
agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall likewise
reimburse the Custodian for its costs, expenses and disbursements.
14. Successor Custodian
If a successor custodian shall be appointed by the Board of
Directors/Trustees of the Fund, the Custodian shall, upon termination, deliver
to such successor custodian at the office of the Custodian, duly endorsed and in
the form for transfer, all securities then held by it hereunder and shall
transfer to an account of the successor custodian all of the Fund's securities
held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of
Directors/Trustees of the Fund, deliver at the office of the Custodian and
transfer such securities, funds and other properties in accordance with such
vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors/Trustees shall have been
delivered to the Custodian on or before the date
-29-
<PAGE>
when such termination shall become effective, then the Custodian shall have the
right to deliver to a bank or trust company, which is a "bank" as defined in the
Investment Company Act of 1940, doing business in Boston, Massachusetts, of its
own selection, having an aggregate capital, surplus, and undivided profits, as
shown by its last published report, of not less than $25,000,000, all
securities, funds and other properties held by the Custodian and all instruments
held by the Custodian relative thereto and all other property held by it under
this Contract and to transfer to an account of such successor custodian all of
the Fund's securities held in any Securities System. Thereafter, such bank or
trust company shall be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors/Trustees to appoint a successor custodian, the Custodian
shall be entitled to fair compensation for its services during such period as
the Custodian retains possession of such securities, funds and other properties
and the provisions of this Contract relating to the duties and obligations of
the Custodian shall remain in full force and effect.
15. Interpretative and Additional Provisions
In connection with the operation of this Contract, the Custodian and the
Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretative or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation/Declaration of Trust of the
-30-
<PAGE>
Fund. No interpretative or additional provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this Contract.
16. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of the Commonwealth of Massachusetts.
17. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund and the Custodian relating to the custody of the
Fund's assets.
18. The Parties
All references herein to the "Fund" are to each of the Funds listed on
Appendix A individually, as if this Contract were between such individual Fund
and the Custodian. With respect to any Fund listed on Appendix A which is
organized as a Massachusetts Business Trust, references to Board of Directors
and Articles of Incorporation shall be deemed a reference to Board of
Directors/Trustees and Articles of Incorporation/Declaration of Trust
respectively and reference to shares of capital stock shall be deemed a
reference to shares of beneficial interest.
19. Limitation of Liability
Each Fund listed on Appendix A that is referenced as a Massachusetts
Business Trust is the designation of the Directors/Trustees under a Articles of
Incorporation/Declaration of Trust, dated (see Appendix A) and all persons
dealing with the Fund must look solely to the property of the Fund for the
enforcement of any claims against the Fund as neither the Directors/Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
-31-
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the dates set forth on Appendix A.
ATTEST
/s/ Illegible
Assistant Secretary
ATTEST
/s/ S. Jane Rose
Secretary
STATE STREET BANK AND TRUST COMPANY
By /s/Al O'Neal
Vice President
EACH OF THE FUNDS LISTED ON APPENDIX A
By /s/ Robert F. Gunia
Vice President
APPENDIX A
Execution Date of
Fund Name Date Declaration of Trust
- --------- --------- --------------------
(if applicable)
Command Government Fund July 1, 1990 August 19, 1981
Command Money Fund July 1, 1990 June 5, 1981
Command Tax-Free Fund July 1, 1990 June 5, 1981
The Global Yield Fund, Inc.
Prudential-Bache California Municipal Fund May 18, 1984
Prudential-Bache Equity Fund, Inc.
Prudential-Bache Global Fund, Inc.
Prudential-Bache GNMA Fund, Inc.
Prudential-Bache Government Plus Fund, Inc.
Prudential-Bache Government Securities Trust September 22, 1981
Prudential-Bache Growth Opportunity Fund, Inc.
Prudential-Bache High Yield Fund, Inc.
Prudential-Bache IncomeVertible Plus Fund, Inc June 6, 1990
Prudential-Bache MoneyMart Assets, Inc.
Prudential-Bache Multi-Sector Fund, Inc.
Prudential-Bache Municipal Series Fund May 18, 1984
Prudential-Bache National Municipals Fund, Inc.
Prudential-Bache Option Growth Fund, Inc.
Prudential-Bache Research Fund, Inc.
Prudential-Bache Special Money Market Fund, Inc. January 12, 1990
Prudential-Bache Structured Maturity Fund, Inc. July 25, 1989
Prudential-Bache Tax-Free Money Fund, Inc.
Prudential-Bache U.S. Government Fund September 22, 1986
Prudential-Bache Utility Fund, Inc. June 6, 1990
-32-
<PAGE>
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Directors of each of the parties
indicated on Appendix A for use as sub-custodians for the Fund's securities and
other assets:
Prudential Equity Fund, Inc.
SECURITY DEPOSITORY
OR
COUNTRY BANK CLEARING AGENCY
- ------- ---- --------------------
Argentina Citibank, N.A. Caja de Valores, CDV
Australia Westpac Banking Austraclear Limited
Corporation
Austria GiroCredit Bank Oesterreichishe
Aktiengesellschaft der Kontrollbank AG
Sparkassen
Belgium Generale Bank Caisse
Interprofessionnelle de
Depots et de Virements de
Titres S.A. (C.I.K.)
Brazil Citibank, N.A. Bolsa de Valores de Sao
Paolo (Bovespa); Banco
Central do Brasil,
Systema Especial de
Liquidacao E Custodia
(SELIC)
Canada Canada Trustco Mortgage The Canadian Depository
Company for Securities Limited
Chile Citibank, N.A. None
China The Hong Kong and Shanghai Securities
Shanghai Banking Central Clearing and
Corporation Limited Registration Corporation
Shenzhen Securities
Registrars Co., Limited
-33-
<PAGE>
SECURITY DEPOSITORY
OR
COUNTRY BANK CLEARING AGENCY
- ------- ---- --------------------
Colombia Cititrust Colombia, S.A. None
Sociedad Fiduciaria
The Czech Republic Ceckoslovenska Obchodni Stredisko Cennych Papiru
Banka A.S. (SCP)
Denmark Den Danske Bank Vaerdipapircentralen
The Danish Securities
Center (VP)
Finland Merita Bank Limited Central Share Register of
Finland
France Banque Paribas Societe
Interprofessionnelle pour
la Compensation des
Valeurs Mobilieres
(SICOVAM)
Germany BHF-Bank The Deutscher
Aktiengellschaft Kassenverein AG
Greece National Bank of The Central Securities
Greece S.A. Depository (Apothetirio
Titlon A.E.)
Hong Kong Standard Chartered Bank The Central Clearing and
Settlement System (CCASS)
Securities Depository
Hungary Citibank Budapest Rt. The Central Depository
and Clearing House
India The Hong Kong and None
Shanghai Banking
Corporation Limited
Indonesia Standard Chartered Bank None
Ireland Bank of Ireland The Central Bank of
Ireland, The Gilt
Settlement Office (GSO)
-34-
<PAGE>
SECURITY DEPOSITORY
OR
COUNTRY BANK CLEARING AGENCY
- ------- ---- --------------------
Israel Bank Hapoalin B.M. The Clearing House of the
Tel Aviv Stock Exchange
Italy Morgan Guaranty Trust Monte Titoli, S.P.A.
Company Banca d'Italia
Japan The Daiwa Bank, Ltd Japan Securities
Depository Center
Sunitomo Trust & (JASDEC); Bank of Japan
Banking Co., Ltd. Net System
Korea SEOULBANK Kore Securities
Depository
Luxembourg -- Cedel
Malaysia Standard Chartered Bank Malaysian Central
Malaysia Berhad Depository Sdn. Bhd.
Mexico Citibank, N.A. S.D. INDEVAL, S.A. De
C.V. (Instituto para el
Deposito de Valores);
Banco de Mexico
Netherlands MeesPierson N.V. Nederlands Centraal
Instituut voor Giraal
Effectenverkeer B.V.
(NECIGEF)
New Zealand ANZ Banking Group (New Nederlands Centraal
Zealand) Limited Instituut voor Giraal
Effectenverkeer B.V.
Norway Christiania Bank og Verdipapirsentralen
Kreditkasse The Norwegian Registry of
Securities
Pakistan Deutch Bank AG None
Peru Citibank, N.A. Caja de Valores
Philippines Standard Chartered Bank None
Poland Citibank Poland, S.A. The National Depository
of Securities
-35-
<PAGE>
SECURITY DEPOSITORY
OR
COUNTRY BANK CLEARING AGENCY
- ------- ---- --------------------
Portugal Banco Comercial Central de Valores
Portugues (Lisbon) Mobiliarios (Central)
Singapore The Development Bank of The Central Depository
Singapore Ltd. (Pte) Limited (CDP)
Slovak Republic Cekoslovenska Obchodna Stredisko cennych
Bank A.S. papierov (SCP);
National Bank of Slovakia
South Africa Standard Bank of South None
Africa Ltd.
Spain Banco Santandar, S.A. Servicio de Compensacion
y Liquidacion de Valores
(SCLV); Banco de Espana,
Anotaciones en Cuenta
Sweden Skandinaviska Enskilda Vardepapperscentralen,
Banken VPC, AB, The Swedish
Securities Depository
Switzerland Union Bank of Schweizerische Effekten-
Switzerland Giro AG (SEGA)
Taiwan Central Trust of China The Taiwan Securities
Central Depository
Company, Ltd., (TSCD)
Thailand Standard Chartered Bank Thailand Securities
Central Depository
Company, Ltd.
Turkey Citibank, N.A. Istanbul Stock Exchange
Settlement and Custody
Co., Inc.
United Kingdom State Street Bank and The Bank of England, The
Trust Company London Central Gilts Office
Branch, and State Street (CGO); The Central London
London Limited; Moneymarkets Office (CMO)
subsidiary of State
Street Bank & Trust
Company
-36-
<PAGE>
SECURITY DEPOSITORY
OR
COUNTRY BANK CLEARING AGENCY
- ------- ---- --------------------
Uruguay Citibank, N.A. None
Venezuela Citibank, N.A. None
Transnational The Euroclear System
Cedel
Certified:
/s/
.........................
Fund's Authorized Officer
Date: August 23, 1995
...................
-37-
TRANSFER AGENCY AND SERVICE AGREEMENT
between
PRUDENTIAL-BACHE HIGH YIELD FUND, INC.
and
PRUDENTIAL MUTUAL FUND SERVICES, INC.
<PAGE>
TABLE OF CONTENTS
Article 1 Terms of Appointment; Duties of the Agent...... 1
Article 2 Fees and Expenses.............................. 4
Article 3 Representations and Warranties of the Agent.... 5
Article 4 Representations of Warranties of the Fund...... 5
Article 5 Duty of Care and Indemnification............... 6
Article 6 Documents and Covenants of the Fund and the
Agent.......................................... 9
Article 7 Termination of Agreement.......................10
Article 8 Assignment.....................................11
Article 9 Affiliations...................................11
Article 10 Amendment......................................12
Article 11 Applicable Law.................................12
Article 12 Miscellaneous..................................12
Article 13 Merger of Agreement............................13
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 1st day of January, 1988 by and
between PRUDENTIAL-BACHE HIGH YIELD FUND, INC., a Maryland
corporation, having its principal office and place of business at
One Seaport Plaza, New York, New York 10292 (the Fund), and
PRUDENTIAL MUTUAL FUND SERVICES, INC., a New Jersey corporation,
having its principal office and place of business at Raritan Plaza
One, Edison, New Jersey 08837 (the Agent or PMFS).
WHEREAS, the Fund desires to appoint PMFS as its transfer
agent, dividend disbursing agent and shareholder servicing agent in
connection with certain other activities, and PMFS desires to
accept such appointment;
NOW THEREFORE, in consideration of the mutual covenants
herein contained, the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of PMFS
1.01 Subject to the terms and conditions set forth
in this Agreement, the Fund hereby employs and appoints PMFS to act
as, and PMFS agrees to act as, the transfer agent for the
authorized and issued shares of the common stock of each series of
the Fund, $.01 par value (Shares), dividend disbursing agent and
shareholder servicing agent in connection with any accumulation,
open-account or similar plans provided to the shareholders of the
Fund or any series thereof (Shareholders) and set out in the
currently effective prospectus and statement of additional
<PAGE>
information (prospectus) of the Fund, including without limitation
any periodic investment plan or periodic withdrawal program.
1.02 PMFS agrees that it will perform the following
services:
(a) In accordance with procedures established from time to
time by agreement between the Fund and PMFS, PMFS shall:
(i) Receive for acceptance, orders for the purchase of
Shares, and promptly deliver payment and appropriate documentation
therefor to the Custodian of the Fund authorized pursuant to the
Articles of Incorporation of the Fund (the Custodian);
(ii) Pursuant to purchase orders, issue the appropriate
number of Shares and hold such Shares in the appropriate
Shareholder account;
(iii) Receive for acceptance redemption requests and
redemption directions and deliver the appropriate documentation
therefor to the Custodian;
(iv) At the appropriate time as and when it receives monies
paid to it by the Custodian with respect to any redemption, pay
over or cause to be paid over in the appropriate manner such monies
as instructed by the redeeming Shareholders;
(v) Effect transfers of Shares by the registered owners
thereof upon receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and
distributions declared by the Fund;
(vii) Calculate any sales charges payable by a Shareholder on
purchases and/or redemptions of Shares of the Fund as such charges
may be reflected in the prospectus;
<PAGE>
(viii) Maintain records of account for and advise the Fund and
its Shareholders as to the foregoing; and
(ix) Record the issuance of Shares of the Fund and maintain
pursuant to Rule 17Ad-10(e) under the Securities Exchange Act of
1934 (1934 Act) a record of the total number of Shares of the Fund
which are authorized, based upon data provided to it by the Fund,
and issued and outstanding. PMFS shall also provide to the Fund on
a regular basis the total number of Shares which are authorized,
issued and outstanding and shall notify the Fund in case any
proposed issue of Shares by the Fund would result in an overissue.
In case any issue of Shares would result in an overissue, PMFS
shall refuse to issue such Shares and shall not countersign and
issue any certificates requested for such Shares. When recording
the issuance of Shares, PMFS shall have no obligation to take
cognizance of any Blue Sky laws relating to the issue or sale of
such Shares, which functions shall be the sole responsibility of
the Fund.
(b) In addition to and not in lieu of the services set forth
in the above paragraph (a), PMFS shall: (i) perform all of the
customary services of a transfer agent, dividend disbursing agent
and, as relevant, shareholder servicing agent in connection with
accumulation, open-account or similar plans (including without
limitation any periodic investment plan or periodic withdrawal
program), including, but not limited to maintaining all
Shareholder accounts, preparing Shareholder meeting lists, mailing
proxies, receiving and tabulating proxies, mailing Shareholder
reports and prospectuses to current Shareholders, withholding taxes
<PAGE>
on non-resident alien accounts, preparing and filing appropriate
forms required with respect to dividends and distributions by
federal tax authorities for all Shareholders, preparing and mailing
confirmation forms and statements of account to Shareholders for
all purchases and redemptions of Shares and other confirmable
transactions in Shareholder accounts, preparing and mailing
activity statements for Shareholders and providing Shareholder
account information and (ii) provide a system which will enable
the Fund to monitor the total number of Shares sold in each State
or other jurisdiction.
(c) In addition, the Fund shall (i) identify to PMFS in
writing those transactions and assets to be treated as exempt from
Blue Sky reporting for each State and (ii) verify the establishment
of transactions for each State on the system prior to activation
and thereafter monitor the daily activity for each State. The
responsibility of PMFS for the Fund's registration status under the
Blue Sky or securities laws of any State or other jurisdiction is
solely limited to the initial establishment of transactions subject
to Blue Sky compliance by the Fund and the reporting of such
transactions to the Fund as provided above and as agreed from time
to time by the Fund and PMFS.
PMFS may also provide such additional services and functions
not specifically described herein as may be mutually agreed between
PMFS and the Fund and set forth in Schedule B hereto.
Procedures applicable to certain of these services may be
established from time to time by agreement between the Fund and
PMFS.
<PAGE>
Article 2 Fees and Expenses
2.01 For performance by PMFS pursuant to this Agreement,
the Fund agrees to pay PMFS an annual maintenance fee for each
Shareholder account and certain transactional fees as set out in
the fee schedule attached hereto as Schedule A. Such fees and
out-of-pocket expenses and advances identified under Section 2.02
below may be changed from time to time subject to mutual written
agreement between the Fund and PMFS.
2.02 In addition to the fees paid under Section 2.01
above, the Fund agrees to reimburse PMFS for out-of-pocket expenses
or advances incurred by PMFS for the items set out in Schedule A
attached hereto. In addition, any other expenses incurred by PMFS
at the request or with the consent of the Fund will be reimbursed
by the Fund.
2.03 The Fund agrees to pay all fees and reimbursable
expenses within a reasonable period of time following the mailing
of the respective billing notice. Postage for mailing of
dividends, proxies, Fund reports and other mailings to all
Shareholder accounts shall be advanced to PMFS by the Fund upon
request prior to the mailing date of such materials.
Article 3 Representations and Warranties of PMFS
PMFS represents and warrants to the Fund that:
3.01 It is a corporation duly organized and existing
and in good standing under the laws of New Jersey and it is duly
qualified to carry on its business in New Jersey.
3.02 It is and will remain registered with the U.S.
Securities and Exchange Commission (SEC) as a Transfer Agent
<PAGE>
pursuant to the requirements of Section 17A of the 1934 Act.
3.03 It is empowered under applicable laws and by its
charter and By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken
to authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the
necessary facilities, equipment and personnel to perform its duties
and obligations under this Agreement.
Article 4 Representations and Warranties of the Fund
The Fund represents and warrants to PMFS that:
4.01 It is a corporation duly organized and existing and
in good standing under the laws of Maryland.
4.02 It is empowered under applicable laws and by its
Articles of Incorporation and By-Laws to enter into and perform
this Agreement.
4.03 All corporate proceedings required by said
Articles of Incorporation and By-Laws have been taken to authorize
it to enter into and perform this Agreement.
4.04 It is an investment company registered with the
SEC under the Investment Company Act of 1940, as amended (the 1940
Act).
4.05 A registration statement under the Securities Act
of 1933 (the 1933 Act) is currently effective and will remain
effective, and appropriate state securities law filings have been
made and will continue to be made, with respect to all Shares of
the Fund being offered for sale.
<PAGE>
Article 5 Duty of Care and Indemnification
5.01 PMFS shall not be responsible for, and the Fund
shall indemnify and hold PMFS harmless from and against, any and
all losses, damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or attributable to:
(a) All actions of PMFS or its agents or subcontractors
required to be taken pursuant to this Agreement, provided that such
actions are taken in good faith and without negligence or willful
misconduct.
(b) The Fund's refusal or failure to comply with the terms
of this Agreement, or which arise out of the Fund's lack of good
faith, negligence or willful misconduct or which arise out of the
breach of any representation or warranty of the Fund hereunder.
(c) The reliance on or use by PMFS or its agents or
subcontractors of information, records and documents which (i) are
received by PMFS or its agents or subcontractors and furnished to
it by or on behalf of the Fund, and (ii) have been prepared and/or
maintained by the Fund or any other person or firm on behalf of the
Fund.
(d) The reliance on, or the carrying out by PMFS or its
agents or subcontractors of, any instructions or requests of the
Fund.
(e) The offer or sale of Shares in violation of any
requirement under the federal securities laws or regulations or the
securities or Blue Sky laws of any State or other jurisdiction that
such Shares be registered in such State or other jurisdiction or in
violation of any stop order or other determination or ruling by any
<PAGE>
federal agency or any State or other jurisdiction with respect to
the offer or sale of such Shares in such State or other
jurisdiction.
5.02 PMFS shall indemnify and hold the Fund harmless from
and against any and all losses, damages, costs, charges, counsel
fees, payments, expenses and liability arising out of or
attributable to any action or failure or omission to act by PMFS as
a result of PMFS' lack of good faith, negligence or willful
misconduct.
5.03 At any time PMFS may apply to any officer of the Fund
for instructions, and may consult with legal counsel, with respect
to any matter arising in connection with the services to be
performed by PMFS under this Agreement, and PMFS and its agents or
subcontractors shall not be liable and shall be indemnified by the
Fund for any action taken or omitted by it in reliance upon such
instructions or upon the opinion of such counsel. PMFS, its agents
and subcontractors shall be protected and indemnified in acting
upon any paper or document furnished by or on behalf of the Fund,
reasonably believed to be genuine and to have been signed by the
proper person or persons, or upon any instruction, information,
data, records or documents provided to PMFS or its agents or
subcontractors by machine readable input, telex, CRT data entry or
other similar means authorized by the Fund, and shall not be held
to have notice of any change of authority of any person, until
receipt of written notice thereof from the Fund. PMFS, its agents
and subcontractors shall also be protected and indemnified in
recognizing stock certificates which are reasonably believed to
<PAGE>
bear the proper manual or facsimile signature of the officers of
the Fund, and the proper countersignature of any former transfer
agent or registrar, or of a co-transfer agent or co-registrar.
5.04 In the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of
God, strikes, equipment or transmission failure or damage
reasonably beyond its control, or other causes reasonably beyond
its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or
otherwise from such causes.
5.05 Neither party to this Agreement shall be liable to the
other party for consequential damages under any provision of this
Agreement or for any act or failure to act hereunder.
5.06 In order that the indemnification provisions contained
in this Article 5 shall apply, upon the assertion of a claim for
which either party may be required to indemnify the other, the
party seeking indemnification shall promptly notify the other party
of such assertion, and shall keep the other party advised with
respect to all developments concerning such claim. The party who
may be required to indemnify shall have the option to participate
with the party seeking indemnification in the defense of such
claim. The party seeking indemnification shall in no case confess
any claim or make any compromise in any case in which the other
party may be required to indemnify it except with the other party's
prior written consent.
Article 6 Documents and Covenants of the Fund and PMFS
6.01 The Fund shall promptly furnish to PMFS the following:
<PAGE>
(a) A certified copy of the resolution of the Board of
Directors of the Fund authorizing the appointment of PMFS and the
execution and delivery of this Agreement;
(b) A certified copy of the Articles of Incorporation and
By-Laws of the Fund and all amendments thereto;
(c) The current registration statements and any amendments
and supplements thereto filed with the SEC pursuant to the
requirements of the 1933 Act and the 1940 Act;
(d) A specimen of the certificate for Shares of the Fund
in the form approved by the Board of Directors, with a certificate
of the Secretary of the Fund as to such approval;
(e) All account application forms or other documents
relating to Shareholder accounts and/or relating to any plan
program or service offered or to be offered by the Fund; and
(f) Such other certificates, documents or opinions as the
Agent deems to be appropriate or necessary for the proper
performance of its duties.
6.02 PMFS hereby agrees to establish and maintain
facilities and procedures reasonably acceptable to the Fund for
safekeeping of stock certificates, check forms and facsimile
signature imprinting devices, if any; and for the preparation or
use, and for keeping account of, such certificates, forms and
devices.
6.03 PMFS shall prepare and keep records relating to the
services to be performed hereunder, in the form and manner as it
may deem advisable. To the extent required by Section 31 of the
1940 Act, and the Rules and Regulations thereunder, PMFS agrees
<PAGE>
that all such records prepared or maintained by PMFS relating to
the services to be performed by PMFS hereunder are the property of
the Fund and will be preserved, maintained and made available in
accordance with such Section 31 of the 1940 Act, and the Rules and
Regulations thereunder, and will be surrendered promptly to the
Fund on and in accordance with its request.
6.04 PMFS and the Fund agree that all books, records,
information and data pertaining to the business of the other party
which are exchanged or received pursuant to the negotiation or the
carrying out of this Agreement shall remain confidential and shall
not be voluntarily disclosed to any other person except as may be
required by law or with the prior consent of PMFS and the Fund.
6.05 In case of any requests or demands for the inspection
of the Shareholder records of the Fund, PMFS will endeavor to
notify the Fund and to secure instructions from an authorized
officer of the Fund as to such inspection. PMFS reserves the
right, however, to exhibit the Shareholder records to any person
whenever it is advised by its counsel that it may be held liable
for the failure to exhibit the Shareholder records to such person.
Article 7 Termination of Agreement
7.01 This Agreement may be terminated by either party upon
one hundred twenty (120) days written notice to the other.
7.02 Should the Fund exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and
other materials will be borne by the Fund. Additionally, PMFS
reserves the right to charge for any other reasonable fees and
expenses associated with such termination.
<PAGE>
Article 8 Assignment
8.01 Except as provided in Section 8.03 below, neither
this Agreement nor any rights or obligations hereunder may be
assigned by either party without the written consent of the other
party.
8.02 This Agreement shall inure to the benefit of and
be binding upon the parties and their respective permitted
successors and assigns.
8.03 PMFS may, in its sole discretion and without
further consent by the Fund, subcontract, in whole or in part, for
the performance of its obligations and duties hereunder with any
person or entity including but not limited to: (i) Prudential
Securities Incorporated (Prudential Securities), a registered
broker-dealer, (ii) The Prudential Insurance Company of America
(Prudential), (iii) Pruco Securities Corporation, a registered
broker-dealer, (iv) any Prudential Securities or Prudential
subsidiary or affiliate duly registered as a broker-dealer and/or
a transfer agent pursuant to the 1934 Act or (vi) any other
Prudential Securities or Prudential affiliate or subsidiary;
provided, however, that PMFS shall be as fully responsible to the
Fund for the acts and omissions of any agent or subcontractor as it
is for its own acts and omissions.
Article 9 Affiliations
9.01 PMFS may now or hereafter, without the consent of
or notice to the Fund, function as Transfer Agent and/or
Shareholder Servicing Agent for any other investment company
registered with the SEC under the 1940 Act, including without
<PAGE>
limitation any investment company whose adviser, administrator,
sponsor or principal underwriter is or may become affiliated with
Prudential Securities and/or Prudential or any of its or their
direct or indirect subsidiaries or affiliates.
9.02 It is understood and agreed that the directors,
officers, employees, agents and Shareholders of the Fund, and the
directors, officers, employees, agents and shareholders of the
Fund's investment adviser and/or distributor, are or may be
interested in the Agent as directors, officers, employees, agents,
shareholders or otherwise, and that the directors, officers,
employees, agents or shareholders of the Agent may be interested in
the Fund as directors, officers, employees, agents, Shareholders or
otherwise, or in the investment adviser and/or distributor as
officers, directors, employees, agents, shareholders or otherwise.
<PAGE>
Article 10 Amendment
10.01 This Agreement may be amended or modified by a
written agreement executed by both parties and authorized or
approved by a resolution of the Board of Directors of the Fund.
Article 11 Applicable Law
11.01 This Agreement shall be construed and the
provisions thereof interpreted under and in accordance with the
laws of the State of New Jersey.
Article 12 Miscellaneous
12.01 In the event of an alleged loss or destruction
of any Share certificate, no new certificate shall be issued in
lieu thereof, unless there shall first be furnished to PMFS an
affidavit of loss or non-receipt by the holder of Shares with
respect to which a certificate has been lost or destroyed,
supported by an appropriate bond satisfactory to PMFS and the Fund
issued by a surety company satisfactory to PMFS, except that PMFS
may accept an affidavit of loss and indemnity agreement executed by
the registered holder (or legal representative) without surety in
such form as PMFS deems appropriate indemnifying PMFS and the Fund
for the issuance of a replacement certificate, in cases where the
alleged loss is in the amount of $1000 or less.
12.02 In the event that any check or other order for
payment of money on the account of any Shareholder or new investor
is returned unpaid for any reason, PMFS will (a) give prompt
notification to the Fund's distributor (Distributor) of such
non-payment; and (b) take such other action, including imposition
of a reasonable processing or handling fee, as PMFS may, in its
<PAGE>
sole discretion, deem appropriate or as the Fund and the
Distributor may instruct PMFS.
12.03 Any notice or other instrument authorized or
required by this Agreement to be given in writing to the Fund or to
PMFS shall be sufficiently given if addressed to that party and
received by it at its office set forth below or at such other place
as it may from time to time designate in writing.
To the Fund:
Prudential-Bache High Yield Fund, Inc.
One Seaport Plaza
New York, NY 10292
Attention: President
To PMFS:
Prudential Mutual Fund Services, Inc.
Raritan Plaza One
Edison, NJ 08837
Attention: President
Article 13 Merger of Agreement
13.01 This Agreement constitutes the entire agreement
between the parties hereto and supersedes any prior agreement with
respect to the subject matter hereof whether oral or written.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in their names and on their behalf under
their seals by and through their duly authorized officers, as of
the day and year first above written.
PRUDENTIAL-BACHE HIGH
YIELD FUND, INC.
BY: /s/ Robert F. Gunia
ATTEST:
/s/ S. Jane Rose
PRUDENTIAL MUTUAL FUND
SERVICES, INC.
BY: /s/ Fredenck Fiandalo
ATTEST: /s/ Lynda M. Pugkesi
17
Consent of Independent Accountants
We hereby consent to the use in the statement of Additional Information
constituting part of this Post-Effective Anmendment No. 29 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
February 25, 1997, relating to the financial statements and financial highlights
of Prudential High Yield Fund, Inc., which appears in such statement of
Additional Information, and to the incorporation by reference of our report into
the Prospectus which constitutes part of this Registration Statement. We also
consent to the reference to us under the heading "Custodian, Transfer and
Dividend Disbursing Agent and Independent Accountants" in such Statement of
Additional Information and to the reference to us under the heading "Financial
Highlights" in such Prospectus.
PRICE WATERHOUSE LLP
New York, New York
February 25, 1997
PRUDENTIAL-BACHE HIGH YIELD FUND, INC.
EXHIBIT
YIELD CALCULATION
AS OF 12/31/88
YIELD = 2 * [([(a - b)/(c * d)] + 1)^6 - 1]
a = dividends & interest earned during the period
b = expenses accrued for the period
c = average daily number of shares o/s during the
period entitled to receive dividends
d = maximum offering price per share
Base period = 30 days
- --------------------------------------------------------------------------------
a = $27,026,526.57
b = $2,693,461.41
c = 262,112,984.597
YIELD = 11.76%
PRUDENTIAL-BACHE HIGH YIELD FUND, INC.
EXHIBIT
AVERAGE ANNUAL TOTAL RETURN
CALCULATION
n
ERV = P * (1 + t)^
P = hypothetical initial payment of $1,000.00
T = average annual total return
n = number of years
ERV = ending redeemable value
===============================================================================
1 Year 5 Year Inception
P = $1,000.00 $1,000.00 $1,000.00
n = 1 5 9.77
ERV = $1,067.59 $1,724.41 $2,778.22
T = 6.76% 11.51% 11.03%
PRUDENTIAL-BACHE HIGH YIELD FUND, INC.
CLASS "A"
EXHIBIT
AVERAGE ANNUAL TOTAL RETURN
CALCULATION
n
ERV = P * (1 + T)^
P = hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value
================================================================================
1 Year Inception
[Annualized]
P = $1,000.00 $1,000.00
n = 1.00 0.94
ERV = $849.30 $865.88
T = -15.07% -14.17%
[ARTICLE] 6
[CIK] 0000278187
[NAME] PRUDENTIAL HIGH YIELD FUND
[SERIES]
[NUMBER] 001
[NAME] PRUDENTIAL HIGH YIELD FUND (CLASS A)
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-END] DEC-31-1996
[INVESTMENTS-AT-COST] 4,021,478,846
[INVESTMENTS-AT-VALUE] 4,177,118,217
[RECEIVABLES] 72,244,082
[ASSETS-OTHER] 2,238,199
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 4,251,600,498
[PAYABLE-FOR-SECURITIES] 2,041,453
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 13,801,494
[TOTAL-LIABILITIES] 15,842,947
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 4,770,606,462
[SHARES-COMMON-STOCK] 505,367,202
[SHARES-COMMON-PRIOR] 499,999,898
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (1,034,399)
[ACCUMULATED-NET-GAINS] (689,453,883)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 155,639,371
[NET-ASSETS] 4,235,757,551
[DIVIDEND-INCOME] 4,681,278
[INTEREST-INCOME] 401,639,265
[OTHER-INCOME] 0
[EXPENSES-NET] 45,466,978
[NET-INVESTMENT-INCOME] 360,853,565
[REALIZED-GAINS-CURRENT] 33,923,042
[APPREC-INCREASE-CURRENT] 75,350,872
[NET-CHANGE-FROM-OPS] 470,127,479
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (360,853,565)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] (10,033,358)
[NUMBER-OF-SHARES-SOLD] 2,157,396,910
[NUMBER-OF-SHARES-REDEEMED] (2,293,331,143)
[SHARES-REINVESTED] 181,172,994
[NET-CHANGE-IN-ASSETS] 144,479,317
[ACCUMULATED-NII-PRIOR] 3,971,195
[ACCUMULATED-GAINS-PRIOR] (717,970,324)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 16,817,042
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 45,466,978
[AVERAGE-NET-ASSETS] 1,385,143,000
[PER-SHARE-NAV-BEGIN] 8.19
[PER-SHARE-NII] 0.75
[PER-SHARE-GAIN-APPREC] 0.22
[PER-SHARE-DIVIDEND] (0.75)
[PER-SHARE-DISTRIBUTIONS] (0.02)
[RETURNS-OF-CAPITAL] 0.00
[PER-SHARE-NAV-END] 8.39
[EXPENSE-RATIO] 0.72
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0.00
</TABLE>
<PAGE>
[ARTICLE] 6
[CIK] 0000278187
[NAME] PRUDENTIAL HIGH YIELD FUND
[SERIES]
[NUMBER] 002
[NAME] PRUDENTIAL HIGH YIELD FUND (CLASS B)
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-END] DEC-31-1996
[INVESTMENTS-AT-COST] 4,021,478,846
[INVESTMENTS-AT-VALUE] 4,177,118,217
[RECEIVABLES] 72,244,082
[ASSETS-OTHER] 2,238,199
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 4,251,600,498
[PAYABLE-FOR-SECURITIES] 2,041,453
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 13,801,494
[TOTAL-LIABILITIES] 15,842,947
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 4,770,606,462
[SHARES-COMMON-STOCK] 505,367,202
[SHARES-COMMON-PRIOR] 499,999,898
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (1,034,399)
[ACCUMULATED-NET-GAINS] (689,453,883)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 155,639,371
[NET-ASSETS] 4,235,757,551
[DIVIDEND-INCOME] 4,681,278
[INTEREST-INCOME] 401,639,265
[OTHER-INCOME] 0
[EXPENSES-NET] 45,466,978
[NET-INVESTMENT-INCOME] 360,853,565
[REALIZED-GAINS-CURRENT] 33,923,042
[APPREC-INCREASE-CURRENT] 75,350,872
[NET-CHANGE-FROM-OPS] 470,127,479
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (360,853,565)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] (10,033,358)
[NUMBER-OF-SHARES-SOLD] 2,157,396,910
[NUMBER-OF-SHARES-REDEEMED] (2,293,331,143)
[SHARES-REINVESTED] 181,172,994
[NET-CHANGE-IN-ASSETS] 144,479,317
[ACCUMULATED-NII-PRIOR] 3,971,195
[ACCUMULATED-GAINS-PRIOR] (717,970,324)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 16,817,042
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 45,466,978
[AVERAGE-NET-ASSETS] 2,652,883,000
[PER-SHARE-NAV-BEGIN] 8.18
[PER-SHARE-NII] 0.71
[PER-SHARE-GAIN-APPREC] 0.22
[PER-SHARE-DIVIDEND] (0.71)
[PER-SHARE-DISTRIBUTIONS] (0.02)
[RETURNS-OF-CAPITAL] 0.00
[PER-SHARE-NAV-END] 8.38
[EXPENSE-RATIO] 1.32
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0.00
</TABLE>
<PAGE>
[ARTICLE] 6
[CIK] 0000278187
[NAME] PRUDENTIAL HIGH YIELD FUND
[SERIES]
[NUMBER] 003
[NAME] PRUDENTIAL HIGH YIELD FUND (CLASS C)
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-END] DEC-31-1996
[INVESTMENTS-AT-COST] 4,021,478,846
[INVESTMENTS-AT-VALUE] 4,177,118,217
[RECEIVABLES] 72,244,082
[ASSETS-OTHER] 2,238,199
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 4,251,600,498
[PAYABLE-FOR-SECURITIES] 2,041,453
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 13,801,494
[TOTAL-LIABILITIES] 15,842,947
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 4,770,606,462
[SHARES-COMMON-STOCK] 505,367,202
[SHARES-COMMON-PRIOR] 499,999,898
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (1,034,399)
[ACCUMULATED-NET-GAINS] (689,453,883)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 155,639,371
[NET-ASSETS] 4,235,757,551
[DIVIDEND-INCOME] 4,681,278
[INTEREST-INCOME] 401,639,265
[OTHER-INCOME] 0
[EXPENSES-NET] 45,466,978
[NET-INVESTMENT-INCOME] 360,853,565
[REALIZED-GAINS-CURRENT] 33,923,042
[APPREC-INCREASE-CURRENT] 75,350,872
[NET-CHANGE-FROM-OPS] 470,127,479
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (360,853,565)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] (10,033,358)
[NUMBER-OF-SHARES-SOLD] 2,157,396,910
[NUMBER-OF-SHARES-REDEEMED] (2,293,331,143)
[SHARES-REINVESTED] 181,172,994
[NET-CHANGE-IN-ASSETS] 144,479,317
[ACCUMULATED-NII-PRIOR] 3,971,195
[ACCUMULATED-GAINS-PRIOR] (717,970,324)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 16,817,042
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 45,466,978
[AVERAGE-NET-ASSETS] 28,647,000
[PER-SHARE-NAV-BEGIN] 8.18
[PER-SHARE-NII] 0.71
[PER-SHARE-GAIN-APPREC] 0.22
[PER-SHARE-DIVIDEND] (0.71)
[PER-SHARE-DISTRIBUTIONS] (0.02)
[RETURNS-OF-CAPITAL] 0.00
[PER-SHARE-NAV-END] 8.38
[EXPENSE-RATIO] 1.32
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0.00
</TABLE>
<PAGE>
[ARTICLE] 6
[CIK] 0000278187
[NAME] PRUDENTIAL HIGH YIELD FUND
[SERIES]
[NUMBER] 004
[NAME] PRUDENTIAL HIGH YIELD FUND (CLASS Z)
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-END] DEC-31-1996
[INVESTMENTS-AT-COST] 4,021,478,846
[INVESTMENTS-AT-VALUE] 4,177,118,217
[RECEIVABLES] 72,244,082
[ASSETS-OTHER] 2,238,199
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 4,251,600,498
[PAYABLE-FOR-SECURITIES] 2,041,453
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 13,801,494
[TOTAL-LIABILITIES] 15,842,947
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 4,770,606,462
[SHARES-COMMON-STOCK] 505,367,202
[SHARES-COMMON-PRIOR] 499,999,898
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (1,034,399)
[ACCUMULATED-NET-GAINS] (689,453,883)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 155,639,371
[NET-ASSETS] 4,235,757,551
[DIVIDEND-INCOME] 4,681,278
[INTEREST-INCOME] 401,639,265
[OTHER-INCOME] 0
[EXPENSES-NET] 45,466,978
[NET-INVESTMENT-INCOME] 360,853,565
[REALIZED-GAINS-CURRENT] 33,923,042
[APPREC-INCREASE-CURRENT] 75,350,872
[NET-CHANGE-FROM-OPS] 470,127,479
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (360,853,565)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] (10,033,358)
[NUMBER-OF-SHARES-SOLD] 2,157,396,910
[NUMBER-OF-SHARES-REDEEMED] (2,293,331,143)
[SHARES-REINVESTED] 181,172,994
[NET-CHANGE-IN-ASSETS] 144,479,317
[ACCUMULATED-NII-PRIOR] 3,971,195
[ACCUMULATED-GAINS-PRIOR] (717,970,324)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 16,817,042
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 45,466,978
[AVERAGE-NET-ASSETS] 28,978,000
[PER-SHARE-NAV-BEGIN] 8.34
[PER-SHARE-NII] 0.63
[PER-SHARE-GAIN-APPREC] 0.07
[PER-SHARE-DIVIDEND] (0.63)
[PER-SHARE-DISTRIBUTIONS] (0.02)
[RETURNS-OF-CAPITAL] 0.00
[PER-SHARE-NAV-END] 8.39
[EXPENSE-RATIO] 0.57
[AVG-DEBT-OUTSTANDING] 0.00
[AVG-DEBT-PER-SHARE] 0.00
</TABLE>
