As filed with the Securities and Exchange Commission on March 1, 1999
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
-----------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
PRE-EFFECTIVE
AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 32 [X]
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 31 [X]
(Check appropriate box or boxes)
-----------
PRUDENTIAL HIGH YIELD FUND, INC.
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7521
DEBORAH A. DOCS, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
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):
<TABLE>
<S> <C>
[X] immediately upon filing pursuant to paragraph (b)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485.
[ ] 60 days after filing pursuant to paragraph (a)(1) If appropriate, check the following box:
[ ] on (date) pursuant to paragraph (a)(1) [ ] this post-effective amendment designates a new effective date
for a previously filed post-effective amendment
</TABLE>
TITLE OF SECURITIES BEING REGISTERED SHARES OF COMMON STOCK (PAR VALUE $.01
PER SHARE)
================================================================================
<PAGE>
FUND TYPE:
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Junk bond
INVESTMENT OBJECTIVE:
- - --------------------------------------------------------------------------------
Current income and
capital appreciation
(as a secondary objective)
Prudential
High Yield
Fund, Inc.
- - --------------------------------------------------------------------------------
PROSPECTUS DATED MARCH 1, 1999
As with all mutual funds, the
Securities and Exchange Commission
has not approved or disapproved
the Fund's shares, nor has the
SEC determined that this prospectus [PRUDENTIAL LOGO]
is complete or accurate. It is a
criminal offense to state otherwise.
<PAGE>
Table of Contents
1 Risk/Return Summary
1 Investment Objectives and Principal Strategies
1 Principal Risks
2 Evaluating Performance
3 Fees and Expenses
6 How the Fund Invests
6 Investment Objectives and Policies
8 Other Investments
9 Derivative Strategies
10 Additional Strategies
11 Investment Risks
14 How the Fund is Managed
14 Fund Manager
14 Investment Adviser
14 Portfolio Managers
15 Distributor
15 Year 2000 Readiness Disclosure
17 Fund Distributions and Tax Issues
17 Distributions
18 Tax Issues
19 If You Sell or Exchange Your Shares
21 How to Buy, Sell and Exchange Shares of the Fund
21 How to Buy Shares
30 How to Sell Your Shares
34 How to Exchange Your Shares
36 Financial Highlights
36 Class A Shares
37 Class B Shares
38 Class C Shares
39 Class Z Shares
40 The Prudential Mutual Fund Family
For More Information (Back Cover)
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[LOGO] (800) 225-1852
<PAGE>
Risk/Return Summary
This section highlights key information about the PRUDENTIAL HIGH YIELD FUND,
INC., which we refer to as "the Fund." Additional information follows this
summary.
INVESTMENT OBJECTIVES AND PRINCIPAL STRATEGIES
Our primary investment objective is to MAXIMIZE CURRENT INCOME. To achieve our
income objective, we invest in a diversified portfolio of high yield
fixed-income securities rated Ba or lower by Moody's Investors Service
(Moody's), or BB or lower by Standard &Poor's Ratings Group (Standard &Poor's)
and securities either rated by another major rating service or unrated
securities of comparable quality, that is, junk bonds. As a secondary investment
objective, we will SEEK CAPITAL APPRECIATION, but only when consistent with our
primary investment objective of current income. While we make every effort to
achieve our objectives, we can't guarantee success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. The securities
in which the Fund invests are generally subject to the risk that the issuer may
be unable to make principal and interest payments when they are due, as well as
the risk that the securities may lose value because interest rates change or
because there is a lack of confidence in the borrower. Since the Fund invests in
lower-rated bonds, commonly known as junk bonds, there is a greater risk of
default of payment of principal and interest and, therefore, an investment in
the Fund may not be appropriate for short-term investing.
Some of our investment strategies involve additional risk. Like any mutual
fund, an investment in the Fund could lose value, and you could lose money. For
more detailed information about the risks associated with the Fund, see "How the
Fund Invests--Investment Risks."
An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
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1
<PAGE>
Risk/Return Summary
EVALUATING PERFORMANCE
A number of factors--including risk--affect how the Fund performs. The following
bar chart and table show the Fund's performance for each full calendar year of
operation for the last 10 years. They demonstrate some of the risks of investing
in the Fund by showing how returns can change from year to year and by showing
how the Fund's average annual returns compare with those of a broad measure of
market performance. Past performance does not mean that the Fund will achieve
similar results in the future.
ANNUAL RETURNS1 (CLASS B SHARES) (AS PERCENTAGE)
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[The following data represents a chart]
1989 -1.27%
1990 -9.52%
1991 33.47%
1992 15.45%
1993 16.54%
1994 -2.92%
1995 17.49%
1996 11.97%
1997 12.07%
1998 -0.70%
Best quarter: 13.67% (1st quarter of 1991) WORST quarter: (7.54)% (3rd quarter
of 1998)
1 THESE ANNUAL RETURNS DO NOT INCLUDE SALES CHARGES. IF THE SALES CHARGES WERE
INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN.
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2 [LOGO] (800) 225-1852
<PAGE>
Risk/Return Summary
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURNS1 (AS OF 12-31-98)
1 YR 5 YRS 10 YRS/SINCE INCEPTION2
<S> <C> <C> <C> <C>
Class A shares (4.13)% 7.04% 9.94% (since 1-22-90)
Class B shares (5.70)% 7.13% 8.59%
Class C shares (2.70)% N/A 8.57% (since 8-1-94)
Class Z shares 0.00% N/A 7.54% (since 3-1-96)
High Yield Bond Index3 1.60% 8.52% 10.52%
Lipper High Current Yield Average4 (0.43)% 7.37% 9.34%
</TABLE>
1 THE FUND'S RETURNS ARE AFTER DEDUCTION OF SALES CHARGES AND EXPENSES.
2 RETURNS ARE FOR TEN YEAR PERIOD ENDED 12-31-98 UNLESS SPECIFIED OTHERWISE.
3 THE LEHMAN BROS. HIGH YIELD BOND INDEX (HIGH YIELD BOND INDEX) -- AN
UNMANAGED INDEX OF FIXED RATE NONINVESTMENT-GRADe DEBT SECURITIES WITH AT
LEAST ONE YEAR REMAINING TO MATURITY -- GIVES A BROAD LOOK AT HOW HIGH YIELD
(JUNK) BONDS HAVE PERFORMED. THE RETURNS DO NOT INCLUDE THE EFFECT OF ANY
SALES CHARGES. THESE RETURNS WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF
SALES CHARGES. HIGH YIELD BOND INDEX RETURNS SINCE INCEPTION OF CLASS A,
CLASS C AND CLASS Z WERE 12.07%, 10.11% AND 8.36%, RESPECTIVELY. SOURCE:
LEHMAN BROS.
4 THE LIPPER HIGH CURRENT YIELD AVERAGE IS BASED ON THE AVERAGE RETURN OF ALL
MUTUAL FUNDS IN THE LIPPER HIGH YIELD CATEGORY. THESE RETURNS DO NOT INCLUDE
THE EFFECT OF ANY SALES CHARGES. THESE RETURNS WOULD BE LOWER IF THEY
INCLUDED THE EFFECT OF SALES CHARGES. LIPPER RETURNS SINCE INCEPTION OF CLASS
A, CLASS C AND CLASS Z WERE 11.03%, 8.94% AND 7.55%, RESPECTIVELY.
SOURCE: LIPPER INC.
FEES AND EXPENSES
These tables show the sales charges, fees and expenses for each share class of
the Fund--Class A, B, C and Z. Each share class has different sales
charges--known as loads--and expenses, but represents an investment in the same
fund. Class Z shares are available only to a limited group of investors. For
more information about which share class may be right for you, see "How to Buy,
Sell and Exchange Shares of the Fund."
<TABLE>
<CAPTION>
SHAREHOLDER FEES1 (PAID DIRECTLY FROM YOUR INVESTMENT)
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CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) 4% None 1% None
Maximum deferred sales charge (load)
(as a percentage of the lower of original
purchase price or sale proceeds) None 5%2 1%3 None
Maximum sales charge (load) imposed
on reinvested dividends and other distributionsNone None None None
Redemption fees None None None None
Exchange fee None None None None
</TABLE>
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3
<PAGE>
Risk/Return Summary
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Management fees .41% .41% .41% .41%
+ Distribution and service (12b-1) fees .30% .75% 1.00% None
+ Other expenses .11% .11% .11% .11%
= Total annual Fund operating expenses .82% 1.27% 1.52% .52%
- Fee waivers and/or expense reimbursements4 .05% 0% .25% 0%
= Net annual Fund operating expenses .77% 1.27% 1.27% .52%
</TABLE>
1 YOUR BROKER MAY CHARGE YOU A SEPARATE OR ADDITIONAL FEE FOR PURCHASES AND
SALES OF SHARES.
2 THE CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B SHARES IS 5% AND
DECREASES BY 1% ANNUALLY TO 1% IN THE FIFTH AND SIXTH YEARS AND 0% IN THE
SEVENTH YEAR. CLASS B SHARES CONVERT TO CLASS A SHARES APPROXIMATELY SEVEN
YEARS AFTER PURCHASE.
3 THE CDSC FOR CLASS C SHARES IS 1% FOR SHARES REDEEMED WITHIN 18 MONTHS OF
PURCHASE.
4 FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999, THE DISTRIBUTOR OF THE FUND HAS
CONTRACTUALLY AGREED TO REDUCE ITS DISTRIBUTION AND SERVICE FEES FOR CLASS A
AND CLASS C SHARES TO .25 OF 1% AND .75 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF CLASS A AND CLASS C SHARES, RESPECTIVELY. THE FUND'S DISTRIBUTION AND
SERVICE FEES HAVE BEEN RESTATED TO REFLECT CURRENT FEE LEVELS FOR CLASS A
SHARES.
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4 [LOGO] (800) 225-1852
<PAGE>
Risk/Return Summary
EXAMPLE
This example will help you compare the fees and expenses of the Fund's different
share classes and compare the cost of investing in the Fund with the cost of
investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time
periods indicated and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and that
the Fund's operating expenses remain the same. After the first year, the example
does not take into consideration the Distributor's agreement to reduce expenses.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
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1 YR 3 YRS 5 YRS 10 YRS
Class A shares $466 $627 $801 $1307
Class B shares $629 $703 $797 $1331
Class C shares $328 $551 $897 $1873
Class Z shares $53 $167 $291 $653
You would pay the following expenses on the same investment if you did not sell
your shares:
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1 YR 3 YRS 5 YRS 10 YRS
Class A shares $466 $627 $801 $1307
Class B shares $129 $403 $697 $1331
Class C shares $228 $551 $897 $1873
Class Z shares $53 $167 $291 $653
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5
<PAGE>
How the Fund Invests
INVESTMENT OBJECTIVES AND POLICIES
The Fund's primary investment objective is to MAXIMIZE CURRENT INCOME. As a
secondary investment objective, the Fund will SEEK CAPITAL APPRECIATION, but
only when consistent with its primary investment objective of current income.
This means we seek primarily investments that pay dividends and other income and
secondarily investments the price of which will increase. While we make every
effort to achieve our objectives, we can't guarantee success.
In determining which securities to buy and sell, the investment adviser
will consider, among other things, the financial history and condition, earnings
trends, analysts' recommendations, and the prospects and the management of an
issuer. The investment adviser generally will employ fundamental analysis in
making such determinations. Fundamental analysis involves review of financial
statements and other data to attempt to predict an issuer's prospects and
whether the price of the issuer's security is undervalued or overvalued.
The Fund may invest in corporate and other debt ("fixed-income") securities
of companies or governments. Bonds and other debt securities are used by issuers
to borrow money from investors. The borrower pays the investor a fixed or
variable rate of interest and must repay the amount borrowed. Consistent with
its primary investment objective, under normal conditions the Fund will invest
at least 80% of the value of the Fund's total assets in medium to lower-rated
fixed-income securities, including at least 65% of the value of the Fund's total
assets in lower-rated fixed-income securities. However, the Fund may invest up
to 100% of its assets in lower-rated fixed-income securities. A rating is an
assessment of the likelihood of the timely repayment of interest and principal
and can be useful when comparing different debt obligations. A description of
bond ratings is contained in Appendix A to this prospectus.
MEDIUM TO LOWER-RATED FIXED-INCOME SECURITIES are securities rated Baa or
lower by Moody's or BBB or lower by Standard & Poor's, or comparably rated by
another major rating service. Bonds rated Baa by Moody's or BBB by Standard &
Poor's are regarded as investment-grade bonds, but have speculative
characteristics and are riskier than higher-rated securities. Bonds rated lower
than Baa or BBB are considered lower-rated or HIGH YIELD or "JUNK" BONDS. The
Fund will normally invest in securities rated below B by both Moody's and
Standard & Poor's or comparable unrated
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6 [LOGO] (800) 225-1852
<PAGE>
How the Fund Invests
securities only if we believe that the rating underestimates the quality of the
securities.
Lower-rated securities tend to offer higher yields, but also offer greater
risks, than higher-rated securities. Under certain economic conditions, however,
lower or medium-rated securities might not yield significantly more than
higher-rated securities, or comparable unrated securities. If that happens, the
Fund may invest in higher-rated fixed-income securities that offer similar
yields but have less risk. Furthermore, if issuers redeem their high yield
securities at a higher than expected rate, which might happen during periods of
declining interest rates, the Fund could be forced to buy higher-rated,
lower-yielding securities, which would decrease the Fund's return.
During the fiscal year ended December 31, 1998, 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:
RATINGS PERCENTAGE OF TOTAL INVESTMENTS
------- -----------------------------
BBB/Baa 1%
BB/Ba 19%
B/B 60%
CCC/Caa 6%
Unrated/Other 14%
These ratings are not a guarantee of quality. The opinions of the rating
agencies do not reflect market risk and they may, at times, lag behind the
current financial condition of a company. Although the investment adviser will
consider ratings assigned to a security, it will perform its own investment
analysis, taking into account various factors, including the company's financial
history and condition, prospects and management. In addition to investing in
rated securities, the Fund may invest in unrated securities that we determine
are of comparable quality to the rated securities that are permissible
investments. These unrated securities will be taken into account when we
calculate the percentage of the Fund's portfolio that consists of medium and
lower-rated securities.
Generally, the Fund's average weighted maturity will range from 7 to 12
years. As of December 31, 1998, the Fund's average weighted maturity was 8
years.
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7
<PAGE>
How the Fund Invests
The types of fixed-income securities in which the Fund may invest include
both CONVERTIBLE and NONCONVERTIBLE DEBT SECURITIES. Convertible debt securities
are exchangeable for a set number of other types of equity securities, typically
common stock, at a preset price. They typically offer greater appreciation
potential than regular bonds.
For more information, see "Investment Risks" and the Statement of
Additional Information, "Description of the Fund, Its Investments and Risks."
The Statement of Additional Information -- which we refer to as the SAI --
contains additional information about the Fund. To obtain a copy, see the back
cover page of this prospectus.
The Fund's investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board of the Fund can change
investment policies that are not fundamental.
OTHER INVESTMENTS
In addition to the above principal strategies, we may also use the following
other investments to increase the Fund's returns or protect its assets if market
conditions warrant.
FOREIGN GOVERNMENT FIXED-INCOME SECURITIES
The Fund may invest up to 20% of its assets in U.S. currency-denominated
fixed-income securities of foreign governments and other foreign issuers, such
as Brady Bonds, which are long-term bonds issued by developing nations, and
preferred stock. The Fund may also invest up to 10% of its total assets in
foreign currency-denominated fixed-income securities issued by foreign or
domestic issuers. FOREIGN GOVERNMENT FIXED-INCOME SECURITIES include securities
issued by quasi-governmental entities, governmental agencies, supranational
entities and other governmental entities.
ZERO COUPON BONDS, PAY-IN-KIND (PIK) AND DEFERRED PAYMENT SECURITIES
The Fund may also invest in ZERO COUPON BONDS, PAY-IN-KIND (PIK) or DEFERRED
PAYMENT SECURITIES. Zero coupon bonds do not pay interest during the life of the
security. An investor makes money by purchasing the security at a price that is
less than the money the investor will receive when the borrower repays the
amount borrowed (face value). PIK securities pay interest in the form of
additional securities. Deferred payment securities pay regular interest after a
predetermined date.
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8 [LOGO] (800) 225-1852
<PAGE>
The Fund records the amount these securities rise in price each year
("phantom income") for accounting and federal income tax purposes, but does not
receive income currently. Because the Fund is required under federal tax laws to
distribute income to its shareholders, in certain circumstances the Fund may
have to dispose of its portfolio securities under disadvantageous conditions or
borrow to generate enough cash to distribute phantom income and the value of the
paid-in-kind interest.
DISTRESSED SECURITIES
The Fund may also invest up to 10% of its assets in DISTRESSED SECURITIES, that
is, equity securities of companies which are financially troubled and which we
believe are currently valued at less than their long-term potential. Distressed
securities include common stocks, convertible and nonconvertible preferred
stocks and warrants. Preferred stock of a company does not generally grant
voting rights to the investor, but it pays dividends at a specified rate.
Convertible preferred stock may be exchanged for common stock and is less stable
than nonconvertible preferred stock, which is more similar to a fixed-income
security.
TEMPORARY DEFENSIVE INVESTMENTS
In response to adverse market, economic or political conditions the Fund may
take a temporary defensive position and invest without limit in short-term
obligations of, or securities guaranteed by, the U.S. Government, its agencies
or instrumentalities or in high quality obligations of banks and corporations.
Investing heavily in these securities limits our ability to achieve a high level
of income, but may help to preserve the Fund's assets.
REPURCHASE AGREEMENTS
The Fund may also use REPURCHASE AGREEMENTS where a party agrees to sell a
security to the Fund and then repurchase it at an agreed-upon price at a stated
time. A repurchase agreement is like a loan by the Fund to the other party which
creates a fixed return for the Fund.
DERIVATIVE STRATEGIES
We may use DERIVATIVES to try to improve the Fund's returns or protect its
assets, although we cannot guarantee they will work, that the instruments
necessary to implement these strategies will be available or that the Fund will
not lose money. Derivatives--such as financial futures contracts, includ-
- - --------------------------------------------------------------------------------
9
<PAGE>
ing interest rate futures contracts, options, and options on futures--involve
costs and can be volatile. A futures contract is an agreement to buy or sell a
set quantity of an underlying product at a future date, or to make or receive a
cash payment based on the value of some underlying investment. An option is the
right to buy or sell a security, or in the case of an option on a future, the
right to buy or sell a futures contract, in exchange for a premium. With
derivatives, the investment adviser tries to predict if the underlying
investment, a security, market index, currency, interest rate, or some other
benchmark, will go up or down at some future date. We may use derivatives to try
to reduce risk or to increase return consistent with the Fund's overall
investment objective. The investment adviser will consider other factors (such
as cost) in deciding whether to employ any particular strategy or use any
particular instrument. Any derivatives we use may not match the Fund's
underlying holdings. For more information about these strategies, see the SAI,
"Description of the Fund, Its Investments and Risks--Hedging and Return
Enhancement Strategies."
ADDITIONAL STRATEGIES
The Fund may also purchase securities on a "WHEN-ISSUED" or "DELAYED- DELIVERY"
basis. When the Fund makes this type of purchase, the price and interest rate
are fixed at the time of purchase, but delivery and payment for the obligations
take place at a later time. The Fund does not earn interest income until the
date the obligations are delivered.
The Fund may also invest in bank loans, with either fixed or floating
rates, that have been arranged through private negotiations between a corporate
borrower and one or more financial institutions (lenders). The Fund's investment
may be in the form of participations in loans (LOAN PARTICIPATIONS) or of
assignments of all or a portion of loans from third parties (LOAN ASSIGNMENTS).
In loan participations, if the borrower does not pay back the loan or otherwise
comply with the loan agreement, the Fund generally does not have the right to
make it do so, nor will the Fund have any claim on the collateral supporting the
loan. In loan assignments, on the other hand, the Fund does have direct rights
against the borrower, although under certain circumstances, these rights may be
more limited than those held by the lender.
The Fund also follows certain policies when it BORROWS MONEY (the Fund can
borrow up to 20% of the value of its total assets); PURCHASES SHARES OF OTHER
INVESTMENT COMPANIES (the Fund may hold up to 10% of its total as-
- - --------------------------------------------------------------------------------
10 [LOGO] (800) 225-1852
<PAGE>
sets in such securities, which entail duplicate management and advisory fees to
shareholders); LENDS ITS SECURITIES to others (the Fund can 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); and HOLDS ILLIQUID SECURITIES
(the Fund may hold up to 15% of its net assets in illiquid securities, including
securities with legal or contractual restrictions, those without a readily
available market and repurchase agreements with maturities longer than seven
days). The Fund is subject to certain investment restrictions that are
fundamental policies, which means they cannot be changed without shareholder
approval. For more information about these restrictions, see the SAI.
INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Fund is no
exception.
Since the Fund's holdings can vary significantly from broad market indices,
performance of the Fund can deviate from performance of the indices.This chart
outlines the key risks and potential rewards of the Fund's principal and other
investments. See, too, "Description of the Fund, Its Investments and Risks" in
the SAI.
INVESTMENT TYPE
% OF FUND'S TOTAL ASSETS RISKS
HIGH YIELD DEBT
SECURITIES
(JUNK BONDS)
UP TO 100%
[GRAPHIC OMITTED] High credit risk--the risk that the borrower can't pay back
the money borrowed or make interest payments (particularly
high for junk bonds)
[GRAPHIC OMITTED] High market risk--the risk that the obligations may lose value
because interest rates change or there is a lack of confidence
in the borrower
[GRAPHIC OMITTED] May be more illiquid (harder to value and sell), in which case
valuation would depend more on investment adviser's judgment
than is generally the case with higher-rated securities
POTENTIAL REWARDS
[GRAPHIC OMITTED] May offer higher interest income than higher-quality debt
securities
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11
<PAGE>
How The Fund Invests
<TABLE>
<CAPTION>
INVESTMENT TYPE (CONT'D)
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
<S> <C> <C>
FOREIGN SECURITIES [GRAPHIC OMITTED] Foreign markets, economies and political [GRAPHIC OMITTED] Investors can participate in
UP TO 20% systems may not be as stable as those the growth of foreign markets
in the U.S., particularly those in and companies operating in
developing countries those markets
[GRAPHIC OMITTED] Currency risk -- changing values of [GRAPHIC OMITTED] Opportunities for
foreign currencies diversification
[GRAPHIC OMITTED] May be less liquid than U.S. stocks
and bonds
[GRAPHIC OMITTED] Differences in foreign laws, accounting
standards, public information, custody
and settlement practices
[GRAPHIC OMITTED] Euro conversion risk -- If European
countries' conversion to "euro"
currency is difficult or has adverse
tax or accounting consequences, the
Fund may be negatively impacted
[GRAPHIC OMITTED] Year 2000 conversion may be more of a
problem for some foreign issuers
- - ------------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT [GRAPHIC OMITTED] Limits potential for capital [GRAPHIC OMITTED] Regular interest income
SECURITIES OR appreciation
HIGH-QUALITY [GRAPHIC OMITTED] Generally more secure than
BANK OR CORPORATE Credit risk lower-quality debt securities
OBLIGATIONS and stock and equity securities
UP TO 20%; UP TO 100% Market Risk
ON A TEMPORARY BASIS
-----------------------------------------------------------------------------------------------------------------------------------
ILLIQUID [GRAPHIC OMITTED] May be difficult to value precisely [GRAPHIC OMITTED] May offer a more attractive
SECURITIES [GRAPHIC OMITTED May be difficult to sell at the time or yield or potential for growth
price desired than more widely traded
UP TO 15% securities
OF NET ASSETS
-----------------------------------------------------------------------------------------------------------------------------------
DISTRESSED [GRAPHIC OMITTED] Equity securities could lose value [GRAPHIC OMITTED] May offer greater capital
SECURITIES appreciation and a higher rate
of return if companies fulfill
UP TO 10% [GRAPHIC OMITTED] High credit risk their anticipated potential
[GRAPHIC OMITTED] High market risk
[GRAPHIC OMITTED] More likely to default, especially
during economic downturns
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12 [LOGO] (800) 225-1852
<PAGE>
How The Fund Invests
<TABLE>
<CAPTION>
INVESTMENT TYPE (CONT'D)
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
<S> <C> <C>
DISTRESSED [GRAPHIC OMITTED] Illiquidity
SECURITIES
(CONT'D) [GRAPHIC OMITTED] Subject to greater volatility than
securities of more stable companies
[GRAPHIC OMITTED] To the extent Fund invests in bankrupt
companies, may subject Fund to litigation
risks and costs
- - -----------------------------------------------------------------------------------------------------------------------------------
DERIVATIVES [GRAPHIC OMITTED] Derivatives such as futures and options may [GRAPHIC OMITTED] The Fund could make money and
not fully offset the underlying positions protect against losses if the
PERCENTAGE and this could result in losses to the investment analysis proves
VARIES Fund that would not have otherwise occurred correct
[GRAPHIC OMITTED] Derivatives used for risk management may not [GRAPHIC OMITTED] Derivatives that involve
have the intended effects and may result in leverage could generate
losses or missed opportunities substantial gains at low
cost
[GRAPHIC OMITTED] The other party to a derivatives contract [GRAPHIC OMITTED] One way to manage the Fund's
could default risk/return balance is to
lock in the value of an
investment ahead of time
[GRAPHIC OMITTED] Derivatives that involve leverage (borrowing
for investment) could magnify losses
[GRAPHIC OMITTED] Certain types of derivatives involve costs
to the Fund that can reduce returns
- - -----------------------------------------------------------------------------------------------------------------------------------
ZERO COUPON BONDS, [GRAPHIC OMITTED] Typically subject to greater volatility [GRAPHIC OMITTED] Value rises when interest
PIK AND DEFERRED and less liquidity in adverse markets than rates fall
PAYMENT SECURITIES other debt securities
PERCENTAGE VARIES [GRAPHIC OMITTED] See credit risk
[GRAPHIC OMITTED] See market risk
- - -----------------------------------------------------------------------------------------------------------------------------------
LOAN PARTICIPATIONS [GRAPHIC OMITTED] See credit risk [GRAPHIC OMITTED] May offer the right to
AND ASSIGNMENTS [GRAPHIC OMITTED] See market risk receive principal, interest
and fees without as much risk
as a lender
PERCENTAGE VARIES [GRAPHIC OMITTED] In participations, the Fund has no rights
against borrower in the event borrower does
not repay the loan
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
How The Fund Is Managed
FUND MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NJ 07102-4077
Under a management agreement with the Fund, PIFM manages the Fund's
investment operations and administers its business affairs. For the fiscal year
ended December 31, 1998, the Fund paid PIFM management fees of .41% of the
Fund's average net assets.
As of January 31, 1999, PIFM served as the Manager to all 49 of the
Prudential mutual funds, and as Manager or administrator to 22 closed-end
investment companies, with aggregate assets of approximately $71.7 billion.
INVESTMENT ADVISER
The Prudential Investment Corporation, called Prudential Investments, is the
Fund's investment adviser. Its address is Prudential Plaza, 751 Broad Street,
Newark, NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and reimburses Prudential Investments for its
reasonable costs and expenses.
PORTFOLIO MANAGERS
Prudential Investments' fixed-income group is organized by teams that specialize
by sector. The Fixed Income Investment Policy Committee, which is comprised of
senior investment staff from each sector team, provides guidance to the teams
regarding duration risk, asset allocations and general risk parameters.
Portfolio managers, GEORGE EDWARDS, CFA, and KENDALL C. PETERSON, CFA,
contribute bottom-up securities selection within those guidelines and are
responsible for the day-to-day management of the Fund.
George Edwards, a Managing Director of Prudential Investments, heads up
Prudential's High Yield group. He has served as a portfolio manager since 1985
and has co-managed the Fund since March 1998. George earned a B.A. from Hamilton
College and an M.B.A. from Temple University. He was awarded the Chartered
Financial Analyst (CFA) designation.
Ken Peterson, a Vice President of Prudential Investments, has been a member
of the High Yield team since 1994. He joined Prudential in 1985, has served as a
portfolio manager since 1995 and has co-managed the
- - --------------------------------------------------------------------------------
14 [LOGO] (800) 225-1852
<PAGE>
How The Fund Is Managed
Fund since March 1998. Ken earned a B.S. from USMA at West Point and a Masters
in Management from Northwestern University. He was awarded the Chartered
Financial Analyst (CFA) designation.
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Fund's
shares under a Distribution Agreement with the Fund. The Fund has Distribution
and Service Plans under Rule 12b-1 under the Investment Company Act. Under the
Plans and the Distribution Agreement, PIMS pays the expenses of distributing the
Fund's Class A, B, C and Z shares and provides certain shareholder support
services. The Fund pays distribution and other fees to PIMS as compensation for
its services for each class of shares other than Class Z. These fees--known as
12b-1 fees--are shown in the "Fees and Expenses" tables.
YEAR 2000 READINESS DISCLOSURE
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. Although, at this time,
there can be no assurance that there will be no adverse impact on the Fund, the
Manager, the Distributor, the Transfer Agent and the Custodian have advised the
Fund that they have been actively working on necessary changes to their computer
systems to prepare for the year 2000. The Fund and its Directors receive and
have received since early 1998 satisfactory quarterly reports from the principal
service providers as to their preparations for year 2000 readiness, although
there can be no assurance that the service providers (or other securities market
participants) will successfully complete the necessary changes in a timely
manner. Moreover, the Fund at this time has not considered retaining alternative
service providers or directly undertaken efforts to achieve year 2000 readiness,
the latter of which would involve substantial expenses without an assurance of
success.
- - --------------------------------------------------------------------------------
15
<PAGE>
How The Fund Is Managed
Additionally, issuers of securities generally, as well as those purchased by
the Fund, may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/or a specific
issuer's performance and result in a decline in the value of the securities held
by the Fund.
- - --------------------------------------------------------------------------------
16 [LOGO] (800) 225-1852
<PAGE>
Fund Distributions and Tax Issues
Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the Fund pays DIVIDENDS of ordinary income and distributes
LONG-TERM CAPITAL GAINS, if any, to shareholders. These distributions are
subject to federal income taxes, unless you hold your shares in a 401(k) plan,
an Individual Retirement Account (IRA) or some other qualified tax-deferred plan
or account. Dividends and distributions from, and gain from the sale of stock
of, the Fund may also be subject to state income tax in the state in which you
reside.
Also, if you sell shares of the Fund for a profit, you may have to pay
capital gains taxes on the amount of your profit, again unless you hold your
shares in a qualified tax-deferred plan or account.
The following briefly discusses some of the important federal tax issues
you should be aware of, but is not meant to be tax advice. For tax advice,
please speak with your tax adviser.
DISTRIBUTIONS
The Fund pays DIVIDENDS out of any net investment income plus short-term capital
gains to shareholders, every month. For example, if the Fund owns an ACME Corp.
bond and the bond pays interest, the Fund will pay out a portion of this
interest as a dividend to its shareholders, assuming the Fund's income is more
than its costs and expenses. The dividends you receive from the Fund will be
taxed as ordinary income, whether they are reinvested in the Fund or not.
The Fund also distributes LONG-TERM CAPITAL GAINS to shareholders
(typically once a year). Long-term capital gains are generated when the Fund
sells assets that it held for more than 12 months, for a profit. For an
individual, the maximum long-term capital gains rate is 20%.
For your convenience, dividends and distributions of capital gains are
AUTOMATICALLY REINVESTED in the Fund without any sales charge. If you ask us to
pay the distributions in cash, we will send you a check instead of purchasing
more shares of the Fund. Otherwise, if your account is with a broker, you will
receive a credit to your account. Either way, the distributions may be subject
to taxes, unless your shares are held in a qualified tax-deferred plan or
account. For more information about automatic reinvestment and other shareholder
services, see "Step 4: Additional Shareholder Services" in the next section.
- - --------------------------------------------------------------------------------
17
<PAGE>
Fund Distributions and Tax Issues
TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and long-term capital gains we distributed to you during the prior year. If you
own shares of the Fund as part of a qualified tax-deferred plan or account, your
taxes are deferred, so you will not receive a Form 1099. However, you will
receive a Form 1099 when you take any distributions from your qualified
tax-deferred plan or account.
Fund distributions are generally taxable to you in the year they are
received, except when we declare certain dividends in the fourth quarter and
actually pay them in January of the following year. In such cases, the dividends
are treated as if they were paid on December 31 of the prior year.
WITHHOLDING TAXES
If federal tax law requires you to provide the Fund with your tax identification
number and certifications as to your tax status, and you fail to do this, we
will withhold and pay to the U.S. Treasury 31% of your taxable distributions and
gross sale proceeds. If you are subject to backup withholding, we will withhold
and pay to the U.S. Treasury 31% of your taxable distributions and gross sale
proceeds. Dividends of net investment income and short-term capital gains paid
to a nonresident foreign shareholder generally will be subject to a U.S.
withholding tax of 30%. This rate may be lower, depending on any tax treaty the
U.S. may have with the shareholder's country.
- - --------------------------------------------------------------------------------
18 [LOGO] (800) 225-1852
<PAGE>
Fund Distributions and Tax Issues
IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of the Fund just before the record date (the date that
determines who receives the distribution), that distribution will be paid to
you. As explained above, the distribution may be subject to income or capital
gains taxes. You may think you've done well, since you bought shares one day and
soon after received a distribution. That is not so because when dividends are
paid out, the value of each share of the Fund decreases by the amount of the
dividend and the market changes (if any) to reflect the payout. The distribution
you receive makes up for the decrease in share value. However, the timing of
your purchase does mean that part of your investment came back to you as taxable
income.
QUALIFIED RETIREMENT PLANS
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts--available to certain taxpayers beginning in
1998--contributions are not tax deductible, but distributions from the plan may
be tax-free. Please contact your financial adviser for information on a variety
of Prudential mutual funds that are suitable for retirement plans offered by
Prudential.
- - --------------------------------------------------------------------------------
CAPITAL GAIN
(taxes owed)
RECEIPTS
OR
FROM
SALE CAPITAL LOSS
(offset against gain)
- - --------------------------------------------------------------------------------
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of the Fund for a profit, you have REALIZED A CAPITAL
GAIN, which is subject to tax, unless you hold shares in a qualified
tax-deferred plan or account. For individuals, the maximum capital gains tax
rate is 20% for shares held for more than twelve months. If you sell shares of
the Fund for a loss, you may have a capital loss, which you may use to offset
certain capital gains you have.
Exchanging your shares of the Fund for the shares of another Prudential
mutual fund is considered a sale for tax purposes. In other words, it's a
"tax-
- - --------------------------------------------------------------------------------
19
<PAGE>
Fund Distributions and Tax Issues
able event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains which are subject to the taxes
described above.
Any gain or loss you may have from selling or exchanging Fund shares will
not be reported on the Form 1099; however, proceeds from the sale or exchange
will be reported on Form 1099-B. Therefore, unless you hold your shares in a
qualified tax-deferred plan or account, you or your financial adviser should
keep track of the dates on which you buy and sell--or exchange--Fund shares, as
well as the amount of any gain or loss on each transaction. For tax advice,
please see your tax adviser.
AUTOMATIC CONVERSION OF CLASS B SHARES
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares--which happens automatically approximately seven years after
purchase--is not a "taxable event" because it does not involve an actual sale of
your Class B shares. This opinion, however, is not binding on the IRS. For more
information about the automatic conversion of Class B shares, see "Class B
Shares Convert to Class A Shares After Approximately Seven Years" in the next
section.
- - --------------------------------------------------------------------------------
20 [LOGO] (800) 225-1852
<PAGE>
How to Buy, Sell and
Exchange Shares of the Fund
HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Fund for you, call Prudential Mutual Fund Services LLC
(PMFS) at (800) 225-1852 or contact:
PRUDENTIAL MUTUAL FUNDS SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 15020
NEW BRUNSWICK, NJ 08906-5020
To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, you will receive an account number.
For additional information about purchasing shares of the Fund, see the back
cover page of this prospectus. We have the right to reject any purchase order
(including an exchange into the Fund) or suspend or modify the Fund's sale of
its shares.
STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C and Class Z
shares of the Fund, although Class Z shares are available only to a limited
group of investors.
Multiple share classes let you choose a cost structure that meets your
needs. With Class A shares, you pay the sales charge at the time of purchase,
but the operating expenses each year are lower than the expenses of Class B and
Class C shares. With Class B shares, you only pay a sales charge if you sell
your shares within six years (that is why it is called a Contingent Deferred
Sales Charge, or CDSC), but the operating expenses each year are higher than the
Class A share expenses. With Class C shares, you pay a 1% front-end sales charge
and a 1% CDSC if you sell within 18 months of purchase, but the operating
expenses are also higher than the expenses for Class A shares.
- - --------------------------------------------------------------------------------
21
<PAGE>
How to Buy, Sell and
Exchange Shares of the Fund
When choosing a share class, you should consider the following:
[GRAPHIC OMITTED] The amount of your investment;
[GRAPHIC OMITTED] The length of time you expect to hold the shares and the
impact of the varying distribution fees;
[GRAPHIC OMITTED] The different sales charges that apply to each share
class -- Class A's front-end sales charge vs. Class B's
CDSC vs. Class C's lower front-end sales charge and low
CDSC;
[GRAPHIC OMITTED] Whether you qualify for any reduction or waiver of sales
charges;
[GRAPHIC OMITTED] The fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase;
and
[GRAPHIC OMITTED] Whether you qualify to purchase Class Z shares. See "How
to Sell Your Shares" for a description of the impact of
CDSCs.
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22 [LOGO] (800) 225-1852
<PAGE>
How to Buy , Sell and
Exchange Shares of the Fund
SHARE CLASS COMPARISON. Use this chart to help you compare the Fund's different
share classes. The discussion following this chart will tell you whether you are
entitled to a reduction or waiver of any sales charges.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Minimum purchase amount1 $1,000 $1,000 $5,000 None
Minimum amount for
subsequent purchases1 $100 $100 $100 None
Maximum initial sales charge 4% of None 1% of None
the public the public
offering price offering price
Contingent Deferred Sales
Charge (CDSC)2 None If sold during: 1% on None
Year 1 5% sales made
Year 2 4% within 18
Year 3 3% months of
Year 4 2% purchase
Year 5/6 1%
Year 7 0%
Annual distribution and .30 of 1% .75 of 1% 1% None
service fees (12b-1) (shown (.25 of 1% (.75 of 1%
as a percentage of average currently) currently)
net assets)3
</TABLE>
1 THE MINIMUM INVESTMENT REQUIREMENTS DO NOT APPLY TO CERTAIN RETIREMENT AND
EMPLOYEE SAVINGS PLANS AND CUSTODIAL ACCOUNTS FOR MINORS. THE MINIMUM INITIAL
AND SUBSEQUENT INVESTMENT FOR PURCHASES MADE THROUGH THE AUTOMATIC INVESTMENT
PLAN IS $50. FOR MORE INFORMATION, SEE "STEP 4: ADDITIONAL SHAREHOLDER
SERVICES--AUTOMATIC INVESTMENT PLAN."
2 FOR MORE INFORMATION ABOUT THE CDSC AND HOW IT IS CALCULATED, SEE "HOW TO
SELL YOUR SHARES--CONTINGENT DEFERRED SALEs CHARGES (CDSC)." CLASS C SHARES
BOUGHT BEFORE NOVEMBER 2, 1998 HAVE A 1% CDSC IF SOLD WITHIN ONE YEAR.
3 THESE DISTRIBUTION FEES ARE PAID FROM THE FUND'S ASSETS ON A CONTINUOUS
BASIS. OVER TIME, THE FEES WILL INCREASE THE COST OF YOUR INVESTMENT AND MAY
COST YOU MORE THAN PAYING OTHER TYPES OF SALES CHARGES. THE SERVICE FEE FOR
CLASS A, CLASS B AND CLASS C SHARES IS .25 OF 1%. THE DISTRIBUTION FEE FOR
CLASS A SHARES IS LIMITED TO .25 OF 1% (INCLUDING THE .25 OF 1% SERVICE FEE)
AND IS .75 OF 1% FOR CLASS B AND 1% FOR CLASS C SHARES.
REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid paying
Class A's initial sales charge.
- - -------------------------------------------------------------------------------
23
<PAGE>
How to Buy , Sell and
Exchange Shares of the Fund
INCREASE THE AMOUNT OF YOUR INVESTMENT. You can reduce Class A's initial
sales charge by increasing the amount of your investment. This table shows you
how the sales charge decreases as the amount of your investment increases.
SALES CHARGE SALES CHARGE
AS % OF AS % OF DEALER
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED REALLOWANCE
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 million and above* None None None
* IF YOU INVEST $1 MILLION OR MORE, YOU CAN BUY ONLY CLASS A SHARES, UNLESS YOU
QUALIFY TO BUY CLASS Z SHARES.
To satisfy the purchase amounts above, you can:
[GRAPHIC OMITTED] Invest with an eligible group of related investors;
[GRAPHIC OMITTED] Buy the Class A shares of two or more Prudential mutual
funds at the same time;
[GRAPHIC OMITTED] Use your RIGHTS OF ACCUMULATION, which allow you to
combine the value of Prudential mutual fund shares you
already own with the value of the shares you are
purchasing for purposes of determining the applicable
sales charge (note: you must notify the Transfer Agent
if you qualify for Rights of Accumulation); or
[GRAPHIC OMITTED] Sign a LETTER OF INTENT, stating in writing that you or
an eligible group of related investors will purchase a
certain amount of shares in the Fund and other Prudential
mutual funds within 13 months.
BENEFIT PLANS. Benefit Plans can avoid Class A's initial sales charge if the
Benefit Plan has existing assets of at least $1 million invested in shares of
Prudential mutual funds (excluding money market funds other than those acquired
under the exchange privilege) or 250 eligible employees or participants. For
these purposes, a Benefit Plan is a pension, profit-sharing or other employee
benefit plan qualified under Section 401 of the Internal Revenue Code, a
deferred compensation or annuity plan, under Sections 457 and 403(b)(7) of the
Internal Revenue Code, a "rabbi" trust or a nonqualified deferred compensation
plan sponsored by an employer that has a tax-quali-
- - --------------------------------------------------------------------------------
24 [LOGO] (800) 225-1852
<PAGE>
How to Buy , Sell and
Exchange Shares of the Fund
fied benefit plan with Prudential. Class A shares may also be purchased without
a sales charge by participants who are repaying loans from Benefit Plans where
Prudential (or its affiliates) provides administrative or recordkeeping
services, sponsors the product or provides account services.
Certain Prudential retirement programs and investment-only programs--such
as PruArray Association Benefit Plans and PruArray Savings Programs--may also be
exempt from Class A's sales charge. For more information, see the SAI or contact
your financial adviser. In addition, waivers are also available to investors in
certain programs sponsored by brokers, investment advisers and financial
planners who have agreements with Prudential Investments Advisory Group relating
to:
[GRAPHIC OMITTED] Mutual fund "wrap" or asset allocation programs, where
the sponsor places Fund trades and charges its clients
a management consulting or other fee for its services;
and
[GRAPHIC OMITTED] Mutual fund "supermarket" programs, where the sponsor
links its customers' accounts to a master account in the
sponsor's name and the sponsor charges a fee for its
services.
OTHER TYPES OF INVESTORS. Other investors may pay no sales charges, including
certain officers, employees or agents of Prudential and its affiliates,
Prudential Mutual Funds, the subadvisers of the Prudential Mutual Funds and
clients of brokers that have entered into a selected dealer agreement with the
Distributor. To qualify for a reduction or waiver of the sales charge, you must
notify the Transfer Agent or your broker at the time of purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares."
WAIVING CLASS C'S INITIAL SALES CHARGE
BENEFIT PLANS. Benefit Plans (as defined above) may purchase Class C shares
without paying an initial sales charge. Class C shares may also be purchased
without an initial sales charge by participants who are repaying loans from
Benefit Plans where Prudential (or its affiliates) provides administrative or
recordkeeping services, sponsors the product or provides account services.
PRUDENTIAL RETIREMENT PLANS. The initial sales charge will be waived for
purchases of Class C shares by both qualified and nonqualified retirement and
- - --------------------------------------------------------------------------------
25
<PAGE>
How to Buy , Sell and
Exchange Shares of the Fund
deferred compensation plans participating in a PruArray Plan and other plans if
Prudential also provides administrative or recordkeeping services.
INVESTMENTS OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential
Securities Incorporated or one of its affiliates. These purchases must be made
within 60 days of the redemption. To qualify for this waiver, you must:
[GRAPHIC OMITTED] Purchase your shares through an account at Prudential
Securities;
[GRAPHIC OMITTED] Purchase your shares through an ADVANTAGE Account or an
Investor Account with Pruco Securities Corporation; or
[GRAPHIC OMITTED] Purchase your shares through other brokers.
This waiver is not available to investors who purchase shares directly from
the Transfer Agent. If you are entitled to the waiver, you must notify either
the Transfer Agent or your broker. The Transfer Agent may require any supporting
documents it considers to be appropriate.
QUALIFYING FOR CLASS Z SHARES
Class Z shares of the Fund can be purchased by any of the following:
[GRAPHIC OMITTED] Any Benefit Plan as defined above, and certain
nonqualified plans, provided the Benefit Plan--in
combination with other plans sponsored by the same
employer or group of related employers--has at least $50
million in defined contribution assets;
[GRAPHIC OMITTED] Participants in any fee-based program or trust program
sponsored by Prudential or an affiliate which includes
mutual funds as investment options and the Fund as an
available option;
[GRAPHIC OMITTED] Certain participants in the MEDLEY Program (group
variable annuity contracts) sponsored by Prudential for
whom Class Z shares of the Prudential Mutual Funds are an
available option;
[GRAPHIC OMITTED] Benefit Plans for which an affiliate of the Distributor
provides administrative or recordkeeping services, and,
as of September 20, 1996, were either Class Z
shareholders of the Prudential Mutual Funds or executed
a letter of intent to purchase Class Z shares of the
Prudential Mutual Funds;
- - --------------------------------------------------------------------------------
26 [LOGO] (800) 225-1852
<PAGE>
How to Buy , Sell and
Exchange Shares of the Fund
[GRAPHIC OMITTED] The Prudential Securities Cash Balance Pension Plan, an
employee- defined benefit plan sponsored by Prudential
Securities;
[GRAPHIC OMITTED] Current and former Directors/Trustees of the Prudential
Mutual Funds (including the Fund);
[GRAPHIC OMITTED] Employees of Prudential or Prudential Securities who
participate in a Prudential-sponsored employee savings
plan; and
[GRAPHIC OMITTED] Prudential and its affiliates with an investment of
$10 million or more.
In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates may pay brokers, financial advisers and other persons a
commission of up to 4% of the purchase price for Class B shares, up to 2% of the
purchase price for Class C shares and a finder's fee for Class Z shares from
their own resources based on a percentage of the net asset value of shares sold
or otherwise.
CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you purchased with reinvested
dividends and other distributions. Since the 12b-1 fees for Class A shares are
lower than for Class B shares, converting to Class A shares lowers your Fund
expenses.
When we do the conversion, you will get fewer Class A shares than the
number of Class B shares converted if the price of the Class A shares is higher
than the price of Class B shares. The total dollar value will be the same, so
you will not have lost any money by getting fewer Class A shares. We do the
conversions quarterly, not on the anniversary date of your purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Class B Shares."
STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of the Fund is based on the share value. The
share value of a mutual fund--known as the NET ASSET VALUE or NAV is determined
by a simple calculation--it's the total value of the Fund (assets minus
liabilities) divided by the total number of shares outstanding. For example, if
the value of the investments held by Fund XYZ (minus its liabilities)
- - --------------------------------------------------------------------------------
27
<PAGE>
How to Buy , Sell and
Exchange Shares of the Fund
is $1,000 and there are 100 shares of Fund XYZ owned by shareholders, the price
of one share of the fund--or the NAV--is $10 ($1,000 divided by 100). Portfolio
securities are valued based upon market quotations or, if not readily available,
at fair value as determined in good faith under procedures established by the
Fund's Board. Most national newspapers report the NAVs of most mutual funds,
which allows investors to check the price of mutual funds daily.
We determine the NAV of our shares once each business day at 4:15 p.m. New
York Time on days that the New York Stock Exchange is open for trading. We do
not determine NAV on days when we have not received any orders to purchase, sell
or exchange Fund shares, or when changes in the value of the Fund's portfolio do
not materially affect the NAV.
- - --------------------------------------------------------------------------------
MUTUAL FUND SHARES
The NAV of mutual fund shares changes every day because the value of a fund's
portfolio changes constantly. For example, if Fund XYZ holds ACME Corp. bonds in
its portfolio and the price of ACME bonds goes up, while the value of the fund's
other holdings remains the same and expenses don't change, the NAV of Fund XYZ
will increase.
- - --------------------------------------------------------------------------------
WHAT PRICE WILL YOU PAY FOR SHARES OF THE FUND?
For Class A and Class C shares, you'll pay the public offering price, which is
the NAV next determined after we receive your order to purchase, plus an initial
sales charge (unless you're entitled to a waiver). For Class B and Class Z
shares, you will pay the NAV next determined after we receive your order to
purchase (remember, there are no up-front sales charges for these share
classes). Your broker may charge you a separate or additional fee for purchases
of shares.
STEP 4: ADDITIONAL SHAREHOLDER SERVICES
As a Fund shareholder, you can take advantage of the following services and
privileges:
AUTOMATIC REINVESTMENT. As we explained in the "Fund Distributions and Tax
Issues" section, the Fund pays out--or distributes--its net investment income
and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Fund at NAV, without any
- - --------------------------------------------------------------------------------
28 [LOGO] (800) 225-1852
<PAGE>
How to Buy , Sell and
Exchange Shares of the Fund
sales charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker or notify the Transfer Agent
in writing (at the address below) at least five business days before the date we
determine who receives dividends:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: ACCOUNT MAINTENANCE
P.O. BOX 15015
NEW BRUNSWICK, NJ 08906-5015
AUTOMATIC INVESTMENT PLAN. You can make regular purchases of the Fund for as
little as $50 by having the money automatically withdrawn from your bank or
brokerage account at specified intervals.
RETIREMENT PLAN SERVICES. Prudential offers a wide variety of retirement plans
for individuals and institutions, including large and small businesses. For
information on IRAs, including Roth IRAs or SEP-IRAs for a one-person business,
please contact your financial adviser. If you are interested in opening a 401(k)
or other company-sponsored retirement plan (SIMPLES, SEP plans, Keoghs,
403(b)(7) plans, pension and profit-sharing plans), your financial adviser will
help you determine which retirement plan best meets your needs. Complete
instructions about how to establish and maintain your plan and how to open
accounts for you and your employees will be included in the retirement plan kit
you receive in the mail.
THE PRUTECTOR PROGRAM. Optional group term life insurance--which protects the
value of your Prudential mutual fund investment for your beneficiaries against
market declines--is available to investors who purchase their shares through
Prudential. This insurance is subject to various restrictions and charges and is
not available in all states.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available that will
provide you with monthly or quarterly checks. Remember, the sale of Class B and
Class C shares may be subject to a CDSC.
REPORTS TO SHAREHOLDERS. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain im-
- - --------------------------------------------------------------------------------
29
<PAGE>
How to Buy , Sell and
Exchange Shares of the Fund
portant financial information about the Fund. To reduce Fund expenses, we will
send one annual shareholder report, one semi-annual shareholder report and one
annual prospectus per household, unless you instruct us or your broker
otherwise.
HOW TO SELL YOUR SHARES
You can sell your shares of the Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Fund--also known as redeeming your shares--the
price you will receive will be the NAV next determined after the Transfer Agent,
the Distributor or your broker receives your order to sell (less any applicable
CDSC). If your broker holds your shares, he must receive your order to sell by
4:15 p.m. New York time to process the sale on that day.
Otherwise, contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: REDEMPTION SERVICES
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent, the Distributor or your broker receives your sell
order. If you hold shares through a broker, payment will be credited to your
account. If you are selling shares you recently purchased with a check, we may
delay sending you the proceeds until your check clears, which can take up to 10
days from the purchase date. You can avoid the delay if you purchase shares by
wire, certified check, or cashier's check. Your broker may charge you a separate
or additional fee for sales of shares.
RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of the Fund, or
when we may delay paying you the proceeds from a sale. This may happen during
unusual market conditions or emergencies when the Fund can't determine the value
of its assets or sell its holdings. For more information, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares--Sale of Shares."
- - --------------------------------------------------------------------------------
30 [LOGO] (800) 225-1852
<PAGE>
How to Buy , Sell and
Exchange Shares of the Fund
If you are selling more than $50,000 of shares, you want the check sent to
someone or some place that is not in our records or you are a business or a
trust and if you hold your shares directly with the Transfer Agent, you may have
to have the signature on your sell order guaranteed by a financial institution.
For more information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Sale of Shares--Signature Guarantee."
CONTINGENT DEFERRED SALES CHARGES (CDSC)
If you sell Class B shares within six years of purchase or Class C shares within
18 months of purchase (one year for Class C shares purchased before November 2,
1998), you will have to pay a CDSC. To keep the CDSC as low as possible, we will
sell amounts representing shares in the following order:
[GRAPHIC OMITTED] Amounts representing shares you purchased with reinvested
dividends and distributions;
[GRAPHIC OMITTED] Amounts representing the increase in NAV above the total
amount of payments for shares made during the past six
years for Class B shares (five years for Class B shares
purchased before January 22, 1990) and 18 months for
Class C shares (one year for Class C shares purchased
before November 2, 1998); and
[GRAPHIC OMITTED] Amounts representing the cost of shares held beyond the
CDSC period (six years for Class B shares and 18 months
for Class C shares).
Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid--or at least
minimize--the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts representing the cost
of shares held for the longest period of time within the applicable CDSC period.
As we noted before in the "Share Class Comparison" chart, the CDSC for
Class B shares is 5% in the first year, 4% in the second, 3% in the third, 2% in
the fourth, and 1% in the fifth and sixth years. The rate decreases on the first
day of the month following the anniversary date of your purchase, not on the
anniversary date itself. The CDSC is 1% for Class C shares--which is applied to
shares sold within 18 months of purchase (or one year for Class C shares
purchased before November 2, 1998). For both Class B and Class C shares, the
CDSC is calculated based on the lesser of the original
- - --------------------------------------------------------------------------------
31
<PAGE>
How to Buy , Sell and
Exchange Shares of the Fund
purchase price or the redemption proceeds. For purposes of determining how long
you've held your shares, all purchases during the month are grouped together and
considered to have been made on the last day of the month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after initial purchase, excluding any
time shares were held in a money market fund.
WAIVER OF THE CDSC--CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
[GRAPHIC OMITTED] After a shareholder is deceased or disabled (or, in the
case of a trust account, the death or disability of the
grantor). This waiver applies to individual shareholders,
as well as shares owned in joint tenancy (with rights of
survivorship), provided the shares were purchased before
the death or disability;
[GRAPHIC OMITTED] To provide for certain distributions--made without IRS
penalty--from a tax-deferred retirement plan, IRA or
Section 403(b) custodial account; or
[GRAPHIC OMITTED] On certain sales from a Systematic Withdrawal Plan.
For more information on the above and other waivers, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares--Waiver of Contingent Deferred
Sales Charges--Class B Shares."
WAIVER OF THE CDSC--CLASS C SHARES
PRUDENTIAL RETIREMENT PLANS. The CDSC will be waived for purchases of Class C
shares by both qualified and nonqualified retirement and deferred compensation
plans participating in the PruArray Plan and other plans if Prudential also
provides administrative or recordkeeping services. The CDSC will also be waived
on redemptions sponsored by Prudential and its affiliates to the extent that the
redemption proceeds are invested in The Guaranteed Investment Account (a group
annuity insurance product sponsored by Prudential), The Guaranteed Insulated
Separate Account (a separate account offered by Prudential), and shares of The
Stable Value Fund (an unaffiliated bank collective fund).
OTHER BENEFIT PLANS. The CDSC will be waived on redemptions from Benefit Plans
holding shares through a broker not affiliated with Prudential and for which the
broker provides administrative or recordkeeping services.
- - --------------------------------------------------------------------------------
32 [LOGO] (800) 225-1852
<PAGE>
How to Buy , Sell and
Exchange Shares of the Fund
REDEMPTION IN KIND
If the sales of Fund shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of the Fund's net assets, we can then give you
securities from the Fund's portfolio instead of cash. If you want to sell the
securities for cash, you would have to pay the costs charged by a broker.
SMALL ACCOUNTS
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your account.
We would do this to minimize the Fund's expenses paid by other shareholders. We
will give you 60 days' notice, during which time you can purchase additional
shares to avoid this action. This involuntary sale does not apply to
shareholders who own their shares as part of a 401(k) plan, an IRA or some other
tax-deferred plan or account.
90-DAY REPURCHASE PRIVILEGE
After you redeem your shares, you have a 90-day period during which you may
reinvest any of the redemption proceeds in shares of the same Fund without
paying an initial sales charge. Also, if you paid a CDSC when you redeemed your
shares, we will credit your new account with the appropriate number of shares to
reflect the amount of the CDSC you paid. In order to take advantage of this
one-time privilege, you must notify the Transfer Agent or your broker at the
time of the repurchase. See the SAI, "Purchase Redemption and Pricing of Fund
Shares--Sale of Shares."
RETIREMENT PLANS
To sell shares and receive a distribution from your retirement account, call
your broker or the Transfer Agent for a distribution request form. There are
special distribution and income tax withholding requirements for distributions
from retirement plans and you must submit a withholding form with your request
to avoid delay. If your retirement plan account is held for you by your employer
or plan trustee, you must arrange for the distribution request to be signed and
sent by the plan administrator or trustee. For additional information, see the
SAI.
- - --------------------------------------------------------------------------------
33
<PAGE>
How to Buy , Sell and
Exchange Shares of the Fund
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Fund for shares of the same class in certain
other Prudential mutual funds--including certain money market funds--if you
satisfy the minimum investment requirements. For example, you can exchange Class
A shares of the Fund for Class A shares of another Prudential mutual fund, but
you can't exchange Class A shares for Class B, Class C or Class Z shares. Class
B and Class C shares may not be exchanged into money market funds other than
Prudential Special Money Market Fund, Inc. After an exchange, at redemption the
CDSC will be calculated from the first day of the month after initial purchase,
excluding any time shares were held in a money market fund. We may change the
terms of the exchange privilege after giving you 60 days' notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
There is no sales charge for exchanges. If, however, you exchange--and then
sell--Class B shares within approximately six years of your original purchase or
Class C shares within 18 months of your original purchase, you must still pay
the applicable CDSC. If you have exchanged Class B or Class C shares into a
money market fund, the time you hold the shares in the money market account will
not be counted in calculating the required holding periods for CDSC liability.
Remember, as we explained in the section entitled "Fund Distributions and
Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange are
worth more than you paid for them, you may have to pay capital gains tax. For
additional information about exchanging shares, see the SAI, "Shareholder
Investment Account--Exchange Privilege."
If you own Class B or Class C shares and qualify to purchase Class A shares
without paying an initial sales charge or Class Z shares, we will automatically
exchange your Class B or Class C shares that are not subject to a CDSC for Class
A or Class Z shares, as appropriate. We make such
- - --------------------------------------------------------------------------------
34 [LOGO] (800) 225-1852
<PAGE>
How to Buy , Sell and
Exchange Shares of the Fund
exchanges on a quarterly basis, if you qualify for this exchange privilege. We
have obtained a legal opinion that this exchange is not a "taxable event" for
federal income tax purposes, but the opinion is not binding on the IRS.
FREQUENT TRADING
Frequent trading of Fund shares in response to short-term fluctuations in the
market--also known as "market timing"--may make it very difficult to manage the
Fund's investments. When market timing occurs, the Fund may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Fund's performance may be hurt. When large dollar amounts are
involved, market timing can also make it difficult to use long-term investment
strategies because we cannot predict how much cash the Fund will have to invest.
When, in our opinion, such activity would have a disruptive effect on portfolio
management, the Fund reserves the right to refuse purchase orders and exchanges
into the Fund by any person, group or commonly controlled accounts. The Fund may
notify a market timer of rejection of an exchange or purchase order subsequent
to the day the order is placed. If the Fund allows a market timer to trade Fund
shares, it may require the market timer to enter into a written agreement to
follow certain procedures and limitations.
- - --------------------------------------------------------------------------------
35
<PAGE>
Financial Highlights
The financial highlights will help you evaluate the Fund's financial
performance. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Fund, assuming
reinvestment of all dividends and other distributions. The information is for
each share class for the periods indicated.
Review each chart with the financial statements and auditor's report, which
appear in the annual report and the SAI and are available upon request.
Additional performance information for each share class is contained in the
annual report, which you can receive at no charge.
CLASS A SHARES
The financial highlights for the five years ended December 31, 1998 were audited
by PricewaterhouseCoopers LLP, independent accountants, whose reports were
unqualified.
<TABLE>
<CAPTION>
CLASS A SHARES (FISCAL YEARS ENDED 12-31)
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995 1994
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $8.65 $8.39 $8.19 $7.68 $8.70
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .76 .73 .75 .81 .80
Net realized and unrealized gain (loss) on
investment and foreign currency transactions (.76) .30 .22 .53 (1.00)
TOTAL FROM INVESTMENT OPERATIONS -- 1.03 .97 1.34 (.20)
- - ------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.76) (.73) (.75) (.81) (.80)
Distributions in excess of
net investment income (.01) (.04) (.02) (.02) (.02)
TOTAL DISTRIBUTIONS (.77) (.77) (.77) (.83) (.82)
NET ASSET VALUE, END OF YEAR $7.88 $8.65 $8.39 $8.19 $7.68
TOTAL RETURN1 (0.13%) 12.81% 12.60% 18.17% (2.35%)
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
NET ASSETS, END OF YEAR (000) $1,677,605 $1,730,473 $1,564,429 $1,336,354 $161,435
Average net assets (000) $1,712,531 $1,635,480 $1,385,143 $1,056,555 $165,517
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 0.67% .69% .72% .75% .78%
Expenses, excluding distribution fees 0.52% .54% .57% .60% .63%
Net investment income 9.04% 8.59% 9.20% 10.13% 9.86%
Portfolio turnover rate 103% 113% 89% 78% 74%
</TABLE>
1 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH PERIOD
REPORTED.
- - --------------------------------------------------------------------------------
36 [LOGO] (800) 225-1852
<PAGE>
Financial Highlights
CLASS B SHARES
The financial highlights for the five years ended December 31, 1998 were audited
by PricewaterhouseCoopers LLP, independent accountants, whose reports were
unqualified.
<TABLE>
<CAPTION>
CLASS B SHARES (FISCAL YEARS ENDED 12-31)
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $8.63 $8.38 $8.18 $7.67 $8.69
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .71 .68 .71 .76 .76
Net realized and unrealized gain (loss) on
investment and foreign currency transactions (.76) .29 .22 .53 (1.00)
TOTAL FROM INVESTMENT OPERATIONS (.05) .97 .93 1.29 (.24)
- - --------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.71) (.68) (.71) (.76) (.76)
Distributions in excess of
net investment income (.01) (.04) (.02) (.02) (.02)
TOTAL DISTRIBUTIONS (.72) (.72) (.73) (.78) (.78)
NET ASSET VALUE, END OF YEAR $7.86 $8.63 $8.38 $8.18 $7.67
TOTAL RETURN1 (0.70%) 12.07% 11.97% 17.49% (2.92%)
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
NET ASSETS, END OF YEAR (000) $2,381,793 $2,640,491 $2,596,207 $2,730,903 $3,311,323
Average net assets (000) $2,557,252 $2,589,122 $2,652,883 $2,725,385 $3,566,709
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 1.27% 1.29% 1.32% 1.35% 1.38%
Expenses, excluding distribution fees 0.52% .54% .57% .60% .63%
Net investment income 8.41% 7.99% 8.62% 9.56% 9.28%
Portfolio turnover rate 103% 113% 89% 78% 74%
</TABLE>
1 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH PERIOD
REPORTED.
- - --------------------------------------------------------------------------------
37
<PAGE>
Financial Highlights
CLASS C SHARES
The financial highlights for the four years ended December 31, 1998, and the
period from August 1, 1994 through December 31, 1994, were audited by
PricewaterhouseCoopers LLP, independent accountants, whose reports were
unqualified.
<TABLE>
<CAPTION>
CLASS C SHARES (FISCAL YEARS ENDED 12-31)
PER SHARE OPERATING PERFORMANCE 1998 1997 1996 1995 1994 1
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $8.63 $8.38 $8.18 $7.67 $8.05
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .71 .68 .71 .76 .32
Net realized and unrealized gain (loss) on
investment and foreign currency transactions (.76) .29 .22 .53 (.37)
TOTAL FROM INVESTMENT OPERATIONS (.05) .97 .93 1.29 (.05)
- - ---------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income (.71) (.68) (.71) (.76) (.32)
Distributions in excess of
net investment income (.01) (.04) (.02) (.02) (.01)
TOTAL DISTRIBUTIONS (.72) (.72) (.73) (.78) (.33)
NET ASSET VALUE, END OF YEAR $7.86 $8.63 $8.38 $8.18 $7.67
TOTAL RETURN2 (0.70%) 12.07% 11.97% 17.49% (0.79%)
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996 1995 1994
NET ASSETS, END OF PERIOD (000) $83,687 $55,879 $43,374 $24,021 $4,860
Average net assets (000) $67,296 $45,032 $28,647 $12,063 $2,840
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 1.27% 1.29% 1.32% 1.35% 1.48% 3
Expenses, excluding distribution fees 0.52% .54% .57% .60% .73% 3
Net investment income 8.49% 7.99% 8.60% 9.49% 9.80% 3
Portfolio turnover rate 103% 113% 89% 78% 74%
</TABLE>
1 FOR THE PERIOD FROM AUGUST 1, 1994 (WHEN CLASS C SHARES WERE FIRST OFFERED)
THROUGH DECEMBER 31, 1994.
2 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH PERIOD
REPORTED. TOTAL RETURN FOR PERIODS OF LESS THAN A FULL YEAR IS NOT ANNUALIZED.
3 ANNUALIZED.
- - --------------------------------------------------------------------------------
38 [LOGO] (800) 225-1852
<PAGE>
Financial Highlights
CLASS Z SHARES
The financial highlights for the two years ended December 31, 1998, and for the
period from March 1, 1996 through December 31, 1996, were audited by
PricewaterhouseCoopers LLP, independent accountants, whose report was
unqualified.
<TABLE>
<CAPTION>
CLASS Z SHARES (FISCAL YEARS ENDED 12-31)
PER SHARE OPERATING PERFORMANCE 1998 1997 19961
- - --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $8.65 $8.39 $8.34
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .76 .74 .63
Net realized and unrealized gain (loss) on
investment and foreign currency transactions (.75) .30 .07
TOTAL FROM INVESTMENT OPERATIONS .01 1.04 .70
- - ---------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income .76) (.74) (.63)
Distributions in excess of
net investment income (.02) (.04) (.02)
TOTAL DISTRIBUTIONS (.78) (.78) (.65)
NET ASSET VALUE, END OF YEAR $7.88 $8.65 $8.39
TOTAL RETURN2 0% 12.96% 8.77%
RATIOS/SUPPLEMENTAL DATA 1998 1997 1996
NET ASSETS, END OF PERIOD (000) $65,068 $41,625 $31,748
Average net assets (000) $57,453 $35,808 $28,978
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees 0.52% .54% .57% 3
Expenses, excluding distribution fees 0.52% .54% .57% 3
Net investment income 9.23% 8.74% 9.31% 3
Portfolio turnover 103% 113% 89%
</TABLE>
1 INFORMATION SHOWN IS FOR THE PERIOD FROM MARCH 1, 1996 (WHEN CLASS Z SHARES
WERE FIRST OFFERED) THROUGH DECEMBER 31, 1996.
2 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS.
IT IS CALCULATED ASSUMING SHARES ARE PURCHASED ON THE FIRST DAY AND SOLD ON
THE LAST DAY OF EACH PERIOD REPORTED. TOTAL RETURN FOR PERIODS OF LESS THAN
A FULL YEAR IS NOT ANNUALIZED.
3 ANNUALIZED.
- - --------------------------------------------------------------------------------
39
<PAGE>
The Prudential Mutual Fund Family
Prudential offers a broad range of mutual funds designed to meet your individual
needs. For information about these funds, contact your financial adviser or call
us at (800) 225-1852. Read the prospectus carefully before you invest or send
money.
STOCK FUNDS
Prudential Distressed Securities
Fund, Inc.
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
PRUDENTIAL SMALL-CAP INDEX FUND
PRUDENTIAL STOCK INDEX FUND
The Prudential Investment
Portfolios, Inc.
PRUDENTIAL JENNISON GROWTH FUND
PRUDENTIAL JENNISON GROWTH
& INCOME FUND
Prudential Mid-Cap Value Fund
Prudential Real Estate Securities Fund
Prudential Small-Cap Quantum
Fund, Inc.
Prudential Small Company Value
Fund, Inc.
Prudential Tax-Managed Equity Fund
Prudential 20/20 Focus Fund
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
NICHOLAS-APPLEGATE GROWTH
EQUITY FUND
ASSET ALLOCATION/BALANCED FUNDS
Prudential Balanced Fund
Prudential Diversified Funds
CONSERVATIVE GROWTH FUND
MODERATE GROWTH FUND
HIGH GROWTH FUND
The Prudential Investment
Portfolios, Inc.
PRUDENTIAL ACTIVE BALANCED FUND
GLOBAL FUNDS
GLOBAL STOCK FUNDS
Prudential Developing Markets Fund
PRUDENTIAL DEVELOPING MARKETS
EQUITY FUND
PRUDENTIAL LATIN AMERICA EQUITY FUND
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Index Series Fund
PRUDENTIAL EUROPE INDEX FUND
PRUDENTIAL PACIFIC INDEX FUND
Prudential Natural Resources
Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
GLOBAL SERIES
INTERNATIONAL STOCK SERIES
Global Utility Fund, Inc.
GLOBAL BOND FUNDS
Prudential Global Limited Maturity
Fund, Inc.
LIMITED MATURITY PORTFOLIO
Prudential Intermediate Global
Income Fund, Inc.
Prudential International Bond
Fund, Inc.
The Global Total Return Fund, Inc.
- - --------------------------------------------------------------------------------
40 [LOGO] (800) 225-1852
<PAGE>
BOND FUNDS
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 High Yield Total Return
Fund, Inc.
Prudential Index Series Fund
PRUDENTIAL BOND MARKET INDEX
Prudential Structured Maturity
Fund, Inc.
INCOME PORTFOLIO
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
CALIFORNIA SERIES
CALIFORNIA INCOME SERIES
Prudential Municipal Bond Fund
HIGH INCOME SERIES
INSURED SERIES
Prudential Municipal Series Fund
FLORIDA SERIES
MASSACHUSETTS SERIES
NEW JERSEY SERIES
NEW YORK SERIES
NORTH CAROLINA SERIES
OHIO SERIES
PENNSYLVANIA SERIES
Prudential National Municipals
Fund, Inc.
MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
Cash Accumulation Trust
LIQUID ASSETS FUND
NATIONAL MONEY MARKET FUND
Prudential Government Securities Trust
MONEY MARKET SERIES
U.S. TREASURY MONEY MARKET SERIES
Prudential Special Money Market
Fund, Inc.
MONEY MARKET SERIES
Prudential MoneyMart Assets, Inc.
TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
CALIFORNIA MONEY MARKET SERIES
Prudential Municipal Series Fund
CONNECTICUT MONEY MARKET SERIES
MASSACHUSETTS MONEY MARKET SERIES
NEW JERSEY MONEY MARKET SERIES
NEW YORK MONEY MARKET SERIES
COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity
Portfolio, Inc.
INSTITUTIONAL MONEY MARKET SERIES
- - --------------------------------------------------------------------------------
41
<PAGE>
Appendix A
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or the fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than the Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
BAA: Bonds which are rated Baa are to be 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.
- - --------------------------------------------------------------------------------
A-1 [LOGO] (800) 225-1852
<PAGE>
Appendix A
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
PRIME-L: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
[GRAPHIC OMITTED] Leading market positions in well-established industries.
[GRAPHIC OMITTED] High rates of return on funds employed.
[GRAPHIC OMITTED] Conservative capitalization structure with moderate
reliance on debt and ample asset protection.
[GRAPHIC OMITTED] Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
[GRAPHIC OMITTED] Well-established access to a range of financial markets
and assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This normally will
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
- - --------------------------------------------------------------------------------
A-2
<PAGE>
Appendix A
STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB, B, CCC AND CC: Obligations rated BB, B, CCC and CC are regarded as
having significant speculative characteristics, BB indicates the least degree of
speculation and CC the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-L: This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-l.
DUFF & PHELPS CREDIT RATING CO.
LONG-TERM DEBT AND PREFERRED STOCK RATINGS
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
- - --------------------------------------------------------------------------------
A-3 [LOGO] (800) 225-1852
<PAGE>
Appendix A
AA: High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.
A: Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB: Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB: Below investment-grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B: Below investment-grade and possessing risk that obligations will not be
met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade.
Duff & Phelps refines each generic rating classification from AA through
B with a "+" or a "-".
CCC: Well below investment-grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, or with unfavorable company developments.
SHORT-TERM DEBT RATINGS
DUFF 1+: Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors are
minor.
DUFF 1-: High certainty of timely payment, Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
DUFF 2: Good certainty of timely payment. Liquidity factors and Company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk favors are
small.
- - --------------------------------------------------------------------------------
A-4
<PAGE>
FOR MORE INFORMATION:
Please read this prospectus before you invest in the Fund and keep it for future
reference. For information or shareholder questions contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 15005
NEW BRUNSWICK, NJ 08906-5005
(800) 225-1852
(732) 417-7555
(if calling collect from outside the U.S.)
- - --------------------------------------------------------------------------------
Outside Brokers Should Contact:
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 778-8769
- - --------------------------------------------------------------------------------
Visit Prudential's Web Site At:
HTTP://WWW.PRUDENTIAL.COM
- - --------------------------------------------------------------------------------
Additional information about the Fund can be obtained without charge and can be
found in the following documents:
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
(incorporated by reference into
this prospectus)
ANNUAL REPORT (contains a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance)
SEMI-ANNUAL REPORT
You can also obtain copies of Fund
documents from the Securities and
Exchange Commission as follows:
By Mail:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
(The SEC charges a fee to copy
documents.)
In Person:
Public Reference Room in
Washington, DC
(For hours of operation, call
1(800) SEC-0330)
Via the Internet:
http://www.sec.gov
- - --------------------------------------------------------------------------------
CUSIP Numbers:
Class A: [74435F-10-6]
Class B: [74435F-20-5]
Class C: [74435F-30-4]
Class Z: [74435F-40-3]
Investment Company Act File No:
811-2896
MF110A [Logo] Printed on Recycled Paper
<PAGE>
PRUDENTIAL HIGH YIELD FUND, INC.
Statement of Additional Information
March 1, 1999
Prudential High Yield Fund, Inc. (the Fund), is an open-end diversified
management investment company whose primary investment objective is to maximize
current income. The Fund seeks to achieve its primary objective 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 securities sought by the
Fund will generally be 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 "Description of the Fund, its Investments and
Risks."
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark,
New Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus, dated March 1, 1999, a copy of
which may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Fund History ................................................ B-2
Description of the Fund, its Investments and Risks .......... B-2
Investment Restrictions ..................................... B-13
Management of the Fund ...................................... B-14
Control Persons and Principal Holders of Securities ......... B-17
Investment Advisory and Other Services ...................... B-18
Brokerage Allocation and Other Practices .................... B-21
Capital Shares, Other Securities and Organization ........... B-22
Purchase, Redemption and Pricing of Fund Shares ............. B-23
Shareholder Investment Account .............................. B-32
Net Asset Value ............................................. B-36
Taxes, Dividends and Distributions .......................... B-37
Performance Information ..................................... B-39
Financial Statements ........................................ B-41
Report of Independent Accountants ........................... B-67
Appendix I-General Investment Information ................... I-1
Appendix II-Historical Performance Data ..................... II-1
Appendix III-Information Relating to Prudential ............. III-1
</TABLE>
================================================================================
MF110B
<PAGE>
FUND HISTORY
The Fund was incorporated in Maryland on January 5, 1979.
DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS
(A) CLASSIFICATION. The Fund is a diversified, open-end management investment
company.
(B) AND (C) INVESTMENT STRATEGIES, POLICIES AND RISKS The 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 and you could lose money.
FIXED-INCOME SECURITIES
The higher yields sought by the Fund are generally obtainable from
fixed-income securities rated in the lower categories by recognized rating
services. Accordingly, consistent with its primary objective, under normal
conditions, the Fund will invest at least 80% of the value of the Fund's total
assets in medium to lower rated fixed-income securities, including at least 65%
in lower rated fixed-income securities. 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. In addition, the Fund may be
forced to buy higher rated, lower yielding securities, which would decrease the
Fund's return, if issuers redeem their high yield securities at a higher than
expected rate.
Medium to lower rated fixed-income securities are securities rated Baa or
lower by Moody's Investors Service (Moody's) or BBB or lower by Standard &
Poor's Rating Group (Standard & Poor's), or comparably rated by any other
Nationally Recognized Statistical Rating Organization (NRSRO). Changes in
economic or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments in bonds rated Baa or lower or BBB or
lower than is the case with higher grade bonds. 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. Such
high yield securities are commonly known as junk bonds. The Fund will invest in
securities rated below B by both Moody's and Standard & Poor's only if the
investment adviser determines that 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. 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 the
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 that carry medium to lower ratings and in comparable non-rated
securities. See "Risk Related to Investing in High Yield Securities" below.
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. A description of
corporate bond ratings is contained in Appendix A to the Prospectus. Ratings of
fixed-income securities represent the rating agencies' opinions regarding their
credit quality and are not a guarantee of quality. Rating agencies attempt to
evaluate the safety of principal and interest payments and do not evaluate the
risks of fluctuations in market value. Also, rating agencies may fail to make
timely changes in credit ratings in response to subsequent events, so that an
issuer's current financial condition may be better or worse than a rating
indicates. Therefore, the investment adviser will also consider, among other
things, the financial history and condition, the prospectus and the management
of an issuer in selecting securities for the Fund's portfolio. Since some
issuers do not seek ratings for their securities, non-rated securities will also
be considered for investment by the Fund only when the investment adviser
believes that the financial condition of the issuers of such securities and/or
the protection afforded by the terms of the securities themselves limit the risk
to the Fund to a degree comparable to that of rated securities that are
consistent with the Fund's objectives and policies.
Certain of the high yield fixed-income securities in which the Fund may
invest may be purchased at a market discount. The Fund does not intend to hold
such securities until maturity unless current yields on these securities remain
attractive. Capital losses may be recognized when securities purchased at a
premium are held to maturity or are called or redeemed at a price lower than
B-2
<PAGE>
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.
RISK 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 similar 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. The achievement of its investment objective may be more dependent on
the investment adviser's own credit analysis than is the case for higher quality
bonds. Investors should carefully consider the relative risks of investing in
high yield securities and understand that such securities are not generally
meant for short-term investing.
Under adverse economic conditions, there is a risk that highly leveraged
issuers may be unable to service their debt obligations or to repay their
obligations upon maturity. During an economic downturn or recession, securities
of highly leveraged issuers are more likely to default than securities of higher
rated issuers. In addition, the secondary market for high yield securities,
which is concentrated in relatively few market makers, may not be as liquid as
the secondary market for more highly rated securities. Under adverse market or
economic conditions, the secondary market for high yield securities could
contract further, independent of any specific adverse changes in the condition
of a particular issuer. As a result, the investment adviser could find it more
difficult to sell these securities or may be able to sell the securities only at
prices lower than if such securities were widely traded. Prices realized upon
the sale of such lower rated or unrated securities, under these circumstances,
may be less than the prices used in calculating the Fund's net asset value
(NAV). Under circumstances where the Fund owns the majority of an issue, market
and credit risks may be greater.
In addition to the risk of default, there are the related costs of recovery
on defaulted issues. The investment adviser will attempt to reduce these risks
through diversification of the portfolio and by analysis of each issuer and its
ability to make timely payments of income and principal, as well as broad
economic trends in corporate developments.
Since investors generally perceive that there are greater risks associated
with the 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
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.
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, and 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.
Foreign securities involve certain risks, which should be considered
carefully by an investor in the Fund. Foreign countries may impose taxes on
income on foreign investments. 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 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 that 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
B-3
<PAGE>
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.
RISK FACTORS AND SPECIAL CONSIDERATION OF INVESTING IN EURO-DENOMINATED
SECURITIES
Effective January 1, 1999, the 11 member states of the European Union
introduced the "euro" as a common currency. During a three year transitional
period, the euro will coexist with each member state's currency. Beginning
January 1, 2002, the euro is expected to become the sole currency of the member
states. During the transition period, the Fund will treat the euro as a separate
currency from that of any member state.
The conversion may impact the trading in securities of issuers located in,
or denominated in the currencies of, the member states, as well as foreign
exchanges, payments, the settlement process, custody of assets and accounting.
In addition, the transition of member states' currency into the euro will
eliminate the currency risk among the member states and will likely affect the
investment process and considerations of the Fund's investment adviser. To the
extent the Fund holds non-U.S. dollar-denominated securities, including those
denominated in the euro, the Fund will still be subject to currency risk due to
fluctuations in those currencies as compared to the U.S. dollar.
The introduction of the euro is expected to affect derivative and other
financial contracts in which the Fund may invest insofar as price sources based
upon current currencies of the member states will be replaced, and market
conventions, such as day-count fractions or settlement dates, applicable to
underlying instruments may be changed to conform to the conventions applicable
to the euro currency.
The overall impact of the transition of member states' currencies to the
euro cannot be determined with certainty at this time. In addition to the
effects described above, it is likely that more general short and long-term
ramifications can be expected, such as changes in the economic environment and
change in the behavior of investors, all of which will impact the Fund's
investments.
The Fund's Manager is taking steps: (a) that it believes will reasonably
address euro-related changes to enable the Fund to process transactions
accurately and completely with minimal disruption to business activities and (b)
to obtain reasonable assurances that appropriate steps are being taken by each
of the Fund's other service providers.
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. 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. Holders of these types of
securities are deemed to have received income annually, notwithstanding that
cash may not be received currently.
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.
DISTRESSED SECURITIES
The Fund may invest in non-fixed-income equity securities, such as
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 with financially troubled issuers referred to as
distressed securities). Equity securities include common stocks, preferred
stocks and warrants. The Fund 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.
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 that in the
B-4
<PAGE>
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 are
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 and costs
or prevent the Fund from disposing of securities.
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
there can be no assurance that any of these strategies will succeed. New
financial products and risk management techniques continue to be developed and
the Fund may use these new investments and techniques to the extent consistent
with its investment 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 or other
liquid assets with a futures commission merchant or in a segregated account
representing between approximately 11|M/2% to 5% of the contract amount, called
initial margin. Thereafter, the futures contract will be valued daily and the
payment in cash of maintenance or variation margin may be required, resulting in
the Fund paying or receiving cash that reflects any decline or increase in the
contract's value, a process known as marking-to-market.
Some futures contracts by their terms may call for the actual delivery or
acquisition of the underlying assets and other futures contracts must be cash
settled. In most cases the contractual obligation is extinguished before the
expiration of the contract by buying (to offset an earlier sale) or selling (to
offset an earlier purchase) an identical futures contract calling for delivery
or acquisition in the same month. The purchase (or sale) of an offsetting
futures contract is referred to as a closing transaction.
Although futures prices themselves have the potential to be extremely
volatile, in the case of any strategy involving interest rate futures contracts
and options thereon when the 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 counterparty 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
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
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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.
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 Commission to maintain a segregated asset
account sufficient to cover the Fund's obligations with respect to such futures
contracts, which will consist of cash or other liquid assets in an amount equal
to the difference between the fluctuating market value of such futures contracts
and the aggregate value of the initial margin deposited by the Fund with respect
to such futures contracts. Offsetting the contract by another identical contract
eliminates the segregation requirement.
With respect to options on futures, there are no segregation requirements
for options that are purchased and owned by the Fund. However, written options,
since they involve potential obligations of the Fund, may require segregation of
Fund assets if the options are not covered as described below under "Options on
Futures Contracts." If the Fund writes a call option that is not covered, it
must segregate for the term of the options cash or other liquid assets 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 segregated by
the Fund 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 that would be expected to
decrease the value of debt securities that 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 NAV of the Fund from declining as much as it
otherwise would have. The Fund could accomplish similar results by selling debt
securities with longer maturities and investing in debt securities with shorter
maturities when interest rates are expected to increase. However, since the
futures market may be more liquid than the cash market, the use of futures
contracts as a hedging technique would allow the Fund to maintain a defensive
position without having to sell portfolio securities. If in fact interest rates
decline rather than rise, the value of the futures contract will fall but the
value of the bonds should rise and should offset all or part of the loss. If
futures contracts are used to hedge 100% of the bond position and correlate
precisely with the bond 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.
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RISK MANAGEMENT AND RETURN ENHANCEMENT. The Fund might sell interest rate
futures contracts covering bonds. This has the same effect as selling bonds in
the portfolio and holding cash and reduces the duration of the portfolio.
(Duration measures the price sensitivity of the portfolio to interest rates. The
longer the duration, the greater the impact of interest rate changes on the
portfolio's price.) This should lessen the risks associated with a rise in
interest rates. In some circumstances, this may serve as a hedge against a loss
of principal, but is usually referred to as an aspect of risk management.
The Fund might buy interest rate futures contracts covering bonds with a
longer maturity than its portfolio average. This would tend to increase the
duration and should increase the gain in the overall portfolio if interest rates
fall. This is often referred to as risk management rather than hedging but, if
it works as intended, has the effect of increasing principal value. If it does
not work as intended because interest rates rise instead of fall, the loss will
be greater than would otherwise have been the case. Futures contracts used for
these purposes are not considered bona fide hedges and, therefore, are subject
to the 5% CFTC limit.
OPTIONS ON FUTURES CONTRACTS
The Fund may enter into options on futures contracts for certain bona fide
hedging, risk management and return enhancement purposes. This includes the
ability to purchase put and call options and write (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 for the term of the option, cash or other
liquid assets as described above under "Limitations on the Purchase and Sale of
Futures Contracts and Related Options-Segregation Requirements."
USES OF OPTIONS ON FUTURES CONTRACTS
Options on 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 that 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 retain the full amount
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of the option premium, thus 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 that 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.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
Participation in the options or futures markets involves investment risks
and transaction costs to which the Fund would not be subject absent the use of
these strategies. The Fund, and thus its investors, may lose money through the
unsuccessful use of these strategies. If the investment adviser's predictions of
movements in the direction of the securities and interest rate markets are
inaccurate, the adverse consequences to the Fund may leave the Fund in a worse
position than if such strategies were not used. Risks inherent in the use of
options and futures contracts and options on futures contracts include (1)
dependence on the investment adviser's ability to predict correctly movements in
the direction of interest rates and securities prices; (2) imperfect correlation
between the price of options and futures contracts and options thereon and
movements in the prices of the securities or currencies being hedged; (3) the
fact that skills needed to use these strategies are different from those needed
to select portfolio securities; (4) the possible absence of a liquid secondary
market for any particular instrument at any time, and (5) the possible inability
of the Fund to purchase or sell a portfolio security at a time that otherwise
would be favorable for it to do so, or the possible need for the Fund to sell a
portfolio security at a disadvantageous time, due to the need for the Fund to
maintain cover or to segregate securities in connection with hedging
transactions.
The Fund may sell a futures contract to protect against the decline in the
value of securities held by the Fund. However, it is possible that the futures
market may advance and the value of securities held in the Fund's portfolio may
decline. If this were to occur, the Fund would lose money on the futures
contracts and also experience a decline in value in its portfolio securities.
However, while this could occur for a very brief period or to a very small
degree, over time the market prices of the securities of a diversified portfolio
will tend to move in the same direction as the prices of futures contracts.
If the Fund purchases a futures contract to hedge against the increase in
value of securities it intends to buy, and the value of such securities
decreases, then the Fund may determine not to invest in the securities as
planned and will realize a loss on the futures contract that is not offset by a
reduction in the price of the securities.
There is a risk that the prices of securities subject to futures contracts
(and thereby the futures contract prices) may correlate imperfectly with the
behavior of the cash prices of the Fund's portfolio securities. Another such
risk is that prices of futures contracts may not move in tandem with the changes
in prevailing interest rates against which the Fund seeks a hedge. A correlation
may also be distorted by the fact that the futures market is dominated by
short-term traders seeking to profit from the difference between a contract or
security price objective and their cost of borrowed funds. Such distortions are
generally minor and would diminish as the contract approached maturity.
There may exist an imperfect correlation between the price movements of
futures contracts purchased by the Fund and the movements in the prices of the
securities (or currencies) which are the subject of the hedge. If participants
in the futures market elect to close out their contracts through offsetting
transactions rather than meet margin deposit requirements, distortions in the
normal relationships between the debt securities (or currencies) and futures
market could result. Price distortions could also result if investors in futures
contracts elect to make or take delivery of underlying securities (or
currencies) rather than engage in closing transactions due to the resultant
reduction in the liquidity of the futures market. In addition, due to the fact
that, from the point of view of speculators, the deposit requirements in the
futures markets are less onerous than margin requirements in the cash market,
increased participation by speculators in the futures markets could cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and because of the imperfect correlation between movements in the
prices of securities (or currencies) and movements in the prices of futures
contracts, a correct forecast of interest rate trends by the investment adviser
may still not result in a successful transaction.
The risk of imperfect correlation increases as the composition of the
Fund's securities portfolio diverges from the securities that are the subject of
the futures contract, for example, those included in the municipal index.
Because the change in the price of the futures contract may be more or less than
the change in prices of the underlying securities, even a correct forecast of
interest rate changes may not result In a successful hedging transaction.
Pursuant to the requirements of the Commodity Exchange Act, all futures
contracts and options thereon must be traded on an exchange. The Fund intends to
purchase and sell futures contracts only on exchanges where there appears to be
a market in such futures sufficiently active to accommodate the volume of its
trading activity. The Fund's ability to establish and close out positions in
futures contracts and options on futures contracts would be impacted by the
liquidity of these exchanges. Although the Fund generally would purchase or sell
only those futures contracts and options thereon for which there appeared to be
a liquid market, there is no assurance that a liquid market on an exchange will
exist for any particular futures contract or option at any
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particular time. In the event no liquid market exists for a particular futures
contract or option thereon in which the Fund maintains a position, it would not
be possible to effect a closing transaction in that contract or to do so at a
satisfactory price and the Fund would have to either make or take delivery under
the futures contract or, in the case of a written call option, wait to sell the
underlying securities until the option expired or was exercised, or, in the case
of a purchased option, exercise the option and comply with the margin
requirements for the underlying futures contract to realize any profit. In the
case of a futures contract or an option on a futures contract which the Fund had
written and which the Fund was unable to close, the Fund would be required to
maintain margin deposits on the futures contract or option and to make variation
margin payments until the contract Is closed. In the event futures contracts
have been sold to hedge portfolio securities, such securities will not be sold
until the offsetting futures contracts can be executed. Similarly, in the event
futures have been bought to hedge anticipated securities purchases, such
purchases will not be executed until the offsetting futures contracts can be
sold.
Exchanges on which futures and related options trade may impose limits on
the positions that the Fund may take in certain circumstances. In addition, the
hours of trading of financial futures contracts and options thereon may not
conform to the hours during which the Fund may trade the underlying securities.
To the extent the futures markets close before the securities markets,
significant price and rate movements can take place in the securities markets
that cannot be reflected in the futures markets.
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act are exempt from the definition of
commodity pool operator, subject to compliance with certain conditions. The Fund
may enter into futures or related options contracts for return enhancement
purposes if the aggregate initial margin and option premiums do not exceed 5% of
the liquidation value of the Fund's total assets, after taking into account
unrealized profits and unrealized losses on any such contracts, provided,
however, that in the case of an option that is in-the-money, the in-the-money
amount may be excluded in computing such 5%. The above restriction does not
apply to the purchase and sale of futures and related options contracts for BONE
FIDE hedging purchases within the meaning of the regulations of the CFTC.
In order to determine that the Fund is entering into transactions in
futures contracts for hedging purposes as such term is defined by the CFTC,
either: (1) a substantial majority (that is, approximately 75%) of all
anticipatory hedge transactions (transactions in which the Fund does not own at
the time of the transaction, but expects to acquire, the securities underlying
the relevant futures contract) involving the purchase of futures contracts will
be completed by the purchase of securities which are the subject of the hedge,
or (2) the underlying value of all long positions in futures contracts will not
exceed the total value of (a) all short-term debt obligations held by the Fund;
(b) cash held by the Fund; (c) cash proceeds due to the Fund on investments
within thirty days; (d) the margin deposited on the contracts; and (e) any
unrealized appreciation in the value of the contracts.
If the Fund maintains a short position in a futures contract, it will cover
this position by holding, in a segregated account, cash or liquid assets equal
In value (when added to any Initial or variation margin on deposit) to the
market value of the securities underlying the futures contract. Such a position
may also be covered by owning the securities underlying the futures contract, or
by holding a call option permitting the Fund to purchase the same contract at a
price no higher than the price at which the short position was established.
In addition, if the Fund holds a long position in a futures contract, it
will hold cash or liquid assets equal to the purchase price of the contract
(less the amount of initial or variation margin on deposit) in a segregated
account. Alternatively, the Fund could cover its long position by purchasing a
put option on the same futures contract with an exercise price as high or higher
than the price of the contract held by the Fund.
Exchanges limit the amount by which the price of a futures contract may
move on any day. If the price moves equal the daily limit on successive days,
then it may prove impossible to liquidate a futures position until the daily
limit moves have ceased. In the event of adverse price movements, the Fund would
continue to be required to make daily cash payments of variation margin on open
futures portions. In such situations, if the Fund has insufficient cash, it may
be disadvantageous to do so. In addition, the fund may be required to take or
make delivery of the instruments underlying futures contracts it holds at a time
when it is disadvantageous to do so. The ability to close out options and
futures positions could also have an adverse impact on the Fund's ability to
hedge effectively its portfolio.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in futures or options thereon, the fund could experience delays
and/or losses in liquidating open positions purchased or sold through the broker
and/or incur a loss of all or part of its margin deposits with the broker.
Transactions are entered into by the Fund only with brokers or financial
institutions deemed creditworthy by the investment adviser.
RISK OF TRANSACTIONS IN OPTIONS ON FINANCIAL FUTURES. Compared to the
purchase or sale of futures contracts, the purchase and sale of call or put
options on futures contracts involves less potential risk to the Fund because
the maximum amount at risk is the premium paid for the options (plus transaction
costs). However, there may be circumstances when the purchase of a call or put
option on a futures contract would result in a loss to the Fund notwithstanding
that the purchase or sale of a futures contract would not result in a loss, as
in the instance where there is no movement in the prices of the futures
contracts or underlying securities.
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An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. As described above, although
the Fund generally will purchase only those options for which there appears to
be an active secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option, or at any particular
time, and for some options, no secondary market on an exchange may exist. In
such event, it might not be possible to effect closing transactions in
particular options, with the result that the Fund would have to exercise its
options in order to realize any profit and would incur transaction costs upon
the sale of underlying securities pursuant to the exercise of put options.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (4) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (5) the facilities of an exchange or
the Options Clearing Corporation may not at all times be adequate to handle
current trading volume; or (6) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by the Options Clearing Corporation as a result of trades on that
exchange could continue to be exercisable in accordance with their terms.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Options Clearing Corporation inadequate, and thereby result in the
institution by an exchange of special procedures which may interfere with the
timely execution of customers' orders.
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.
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 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. The
Fund's repurchase agreements will at all times be fully collateralized by U.S.
Government obligations in an amount at least equal to the resale price. In the
event of a default or bankruptcy by a seller, the Fund will promptly seek to
liquidate the collateral. To the extent that the proceeds from any sale of such
collateral upon a default in the obligation to repurchase are less than the
repurchase price, the Fund will suffer the loss.
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The Fund participates in a joint repurchase agreement account with other
investment companies managed by Prudential Investments Fund Management LLC
(PIFM) pursuant to an order of the Securities and Exchange Commission
(Commission). On a daily basis, any uninvested cash balances of the Fund may be
aggregated with those of such 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. During the
time portfolio securities are on loan, the borrower will pay the Fund an amount
equivalent to any dividend or interest paid on such securities and the Fund may
invest the cash collateral and earn additional income, or it may receive an
agreed-upon amount of interest income from the borrower. As with any extensions
of credit, there are risks of delay in recovery and in some cases loss of rights
in the collateral should the borrower of the securities fail financially. The
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-that is, delivery
and payment can take place in the future 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 will segregate 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.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities,
including repurchase agreements that have a maturity of longer than seven days,
certain securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable either within or
outside of the United States. Repurchase agreements subject to demand are deemed
to have a maturity equal to the applicable notice period.
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 that 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 (Direct Placement Securities). 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
B-11
<PAGE>
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a safe harbor from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc. (NASD)
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.
Restricted securities, including securities eligible for resale pursuant to
Rule 144A under the Securities Act, and commercial paper that have a readily
available market are treated as liquid only when deemed liquid under procedures
established by the Directors. The investment adviser will monitor the liquidity
of such restricted securities subject to the supervision of the Board of
Directors. In reaching liquidity decisions, the investment adviser will
consider, inter alia, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security and (4) the nature of the security
and the nature of the marketplace trades (for example, the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer). In addition, in order for commercial paper that is issued in
reliance on Section 4(2) of the Securities Act to be considered liquid, (i) it
must be rated in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations (NRSRO), or if only one
NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable
quality in the view of the investment adviser; and (ii) it must not be traded
flat (that is, without accrued interest) or in default as to principal or
interest. Repurchase agreements subject to demand are deemed to have a maturity
equal to the notice period.
The staff of the Commission has taken the position, 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-Additional Strategies-Illiquid Securities" in the Prospectus.
BORROWING
The Fund will not purchase securities when borrowings exceed 5% of the
value of the Fund's total assets.
SEGREGATED ASSETS
When the Fund is required to segregate assets in connection with certain
transactions, it will segregate cash or liquid assets. "Liquid assets" means
cash, U.S. Government securities, equity securities (including foreign
securities), debt obligations or other liquid, unencumbered assets,
marked-to-market daily, including foreign securities, high yield fixed-income
securities and distressed securities.
(D) TEMPORARY DEFENSIVE STRATEGIES AND SHORT-TERM INVESTMENTS
When market conditions dictate a more defensive investment strategy, the
Fund may invest temporarily without limit in 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. 14 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.
(E) PORTFOLIO TURNOVER
Although the Fund does not intend to engage in substantial short-term
trading, it may sell portfolio securities without regard to the length of time
that they have been held in order to take advantage of new investment
opportunities or yield differentials, or
B-12
<PAGE>
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, 1997, and 1998, the
Fund's portfolio turnover rate was 113% and 103%, 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.
(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
B-13
<PAGE>
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 "Description of the Fund, its Investments and Risks -Investment
Strategies, Policies and Risks-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.
MANAGEMENT OF THE FUND
<TABLE>
<CAPTION>
NAME, ADDRESS** POSITION(S) HELD PRINCIPAL OCCUPATIONS
AND AGE WITH THE FUND DURING PAST 5 YEARS
- - --------------------------- ------------------ ----------------------------------------------------------
<S> <C> <C>
Edward D. Beach (74) Director President and Director of BMC Fund, Inc., a closed-end
investment company; previously Vice Chairman of
Broyhill Furniture Industries, Inc.; Certified Public
Accountant; Secretary and Treasurer of Broyhill Family
Foundation, Inc.; Member of the Board of Trustees of
Mars Hill College; Director of The High Yield Income
Fund, Inc.
Eugene C. Dorsey (72) Director Retired President, Chief Executive Officer and Trustee of
the Gannett Foundation (now Freedom Forum); former
Publisher of four Gannett newspapers and Vice
President of Gannett Company; past Chairman of
Independent Sector (national coalition of philanthropic
organizations); former Chairman of the American
Council for the Arts; Director of the Advisory Board of
Chase Manhattan Bank of Rochester, The High Yield
Income Fund, Inc. and First Financial Fund, Inc.
Delayne Dedrick Gold (60) Director Marketing and Management Consultant. Director of The
High Yield Income Fund, Inc.
*Robert F. Gunia (52) Director and Vice President, The Prudential Insurance Company of
Vice President America (Prudential) (since September 1997); Executive
Vice President and Treasurer, Prudential Investments
Fund Management LLC (PIFM) (since December 1996);
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-December 1996) of Prudential
Mutual Fund Management, Inc.; Vice President and
Director of The Asia Pacific Fund, Inc. (since May 1989);
Director of The High Yield Income Fund, Inc.
</TABLE>
B-14
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS** POSITION(S) HELD PRINCIPAL OCCUPATIONS
AND AGE WITH THE FUND DURING PAST 5 YEARS
- - ----------------------------- ------------------ ------------------------------------------------------------
<S> <C> <C>
*Mendel A. Melzer, CFA (38) Director Chief Investment Officer (since October 1996) of Prudential
751 Broad Street Investments; formerly Chief Financial Officer of
Newark, NJ Prudential Investments (November 1995-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);
Chairman and Director of Prudential Series Fund,
Inc.; Director of The High Yield Income Fund, Inc.
Thomas T. Mooney (57) Director President of the Greater Rochester Metro Chamber of
Commerce; formerly Rochester City Manager; Trustee of
Center for Governmental Research, Inc.; Director of
Monroe County Water Authority, Rochester Jobs, Inc.,
Blue Cross of Rochester, The Business Council of New
York State, Executive Service Corps of Rochester,
Monroe County Industrial Development Corporation,
Northeast Midwest Institute and The High Yield Income
Fund, Inc., President, Director and Treasurer of First
Financial Fund, Inc. and The High Yield Plus Fund, Inc.
Thomas H. O'Brien (74) Director President of O'Brien Associates (Financial and
Management Consultants) (since April 1984); formerly
President of Jamaica Water Securities Corp. (holding
company) (February 1989-August 1990); Chairman of
the Board and Chief Executive Officer (September
1987-February 1989) of Jamaica Water Supply Company
and Director (September 1987-August 1990); Director
and President of Winthrop Regional Health Systems,
Inc, and United Presbyterian Homes; Director of
Ridgewood Savings Bank and The High Yield Income
Fund, Inc; Trustee of Hofstra University.
Richard A. Redeker (55) Director Formerly President, Chief Executive Officer and Director
(October 1993-September 1996), Prudential Mutual
Fund Management, Inc., Executive Vice President,
Director and Member of the Operating Committee
(October 1993-September 1996) of Prudential
Securities, Director (October 1993-September 1996) of
Prudential Securities Group, Inc. (PSG), Executive Vice
President, The Prudential Investment Corporation
(January 1994-September 1996); Director (January
1994-September 1996) of Prudential Mutual Fund
Distributors, Inc. and Prudential Mutual Fund Services
Inc., and Senior Executive Vice President and Director of
Kemper Financial Services, Inc. (September 1978-
September 1993); Director of The High Yield Income
Fund, Inc.
</TABLE>
B-15
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS** POSITION(S) HELD PRINCIPAL OCCUPATIONS
AND AGE WITH THE FUND DURING PAST 5 YEARS
- - -------------------------- ------------------ -----------------------------------------------------------
<S> <C> <C>
*Brian M. Storms (44) President and President (since October 1998) of Prudential Investments;
Director President (September 1996-October 1998) of Prudential
Mutual Funds. Annuities and Investment Management
Services; Managing Director (July 1991-September
1996) of Fidelity Investment Institutional Services
Company, Inc.; President (October 1989-September
1991) of J.K. Schofield; Senior Vice President
(September 1982-October 1989) of INVEST Financial
Corporation.
Nancy H. Teeters (68) Director Economist; formerly Vice President and Chief Economist of
International Business Machines Corporation (March
1986-June 1990); Director of Inland Steel Industries
(since July 1991), and The High Yield Income Fund, Inc.
Louis A. Weil, III (57) Director Chairman (since January 1999), President and Chief
Executive Officer (since January 1996) and Director
(since September 1991) of Central Newspapers, Inc.;
Chairman of The Board (since January 1996), Publisher
and Chief Executive Officer of Phoenix Newspapers, Inc.
(August 1991-December 1995); Director of Central
Newspapers, Inc. (since September 1991); formerly,
Publisher of Time Magazine (May 1989-March 1991),
President, Publisher and Chief Executive Officer of The
Detroit News (February 1986-August 1989) and member
of the Advisory Board, Chase Manhattan
Bank-Westchester; Director of The High Yield Income
Fund, Inc.
Grace C. Torres (39) Treasurer and First Vice President (since December 1996) of PIFM; First
Principal Vice President (since March 1994) of Prudential
Financial and Securities, formerly First Vice President (March
Accounting 1994-September 1996) of Prudential Mutual Fund
Officer Management, Inc. and Vice President (July 1989-March
1994) of Bankers Trust Corporation.
Stephen M. Ungerman (45) Assistant Tax Director of Prudential Investments and the Private
Treasurer Asset Group of Prudential (since March 1996); formerly,
First Vice President of Prudential Mutual Fund
Management, Inc. (February 1993-September 1996) and
Senior Tax Manager of Price Waterhouse (1981-January
1993).
Deborah A. Docs (41) Secretary Vice President (since December 1996) of PIFM; Vice
President and Associate General Counsel (June 1991-
September 1996) of PMF; Vice President and Associate
General Counsel of Prudential Securities (since
December 1996).
</TABLE>
- - -----------
* "Interested" director, as defined in the Investment Company Act by reason of
his affiliation with Prudential Securities, Prudential or PIFM.
** Unless otherwise indicated, the address of the Directors and Officers is c/o
Prudential Investments Fund Management, LLC, Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077
Directors and officers of the Fund are also trustees, directors and
officers of some or all of the other investment companies distributed by
Prudential Investment Management Services, LLC.
The officers conduct and supervise the daily business operations of the
Fund, while the directors, in addition to their functions set forth under
"Investment Advisory and Other Services-Manager and Investment Adviser" and
"-Principal Underwriter, Distributor and Rule 12b-1 Plans," review such actions
and decide on general policy.
B-16
<PAGE>
The Fund currently pays each of its directors who is not an affiliated
person of PIFM 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 on whose Boards the Director may 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 a Commission
exemptive order, at the daily rate of return of the Fund. 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. Beach,
Dorsey and O'Brien are scheduled to retire on December 31, 1999.
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, 1998 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
PIFM (Fund Complex) for the calendar year ended December 31, 1998.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
AGGREGATE BENEFITS ACCRUED
COMPENSATION AS PART OF FUND
NAME AND POSITION FROM FUND EXPENSES
- - ------------------------------------------------ -------------- ------------------
<S> <C> <C>
Edward D. Beach-Director $4,500 None
Eugene C. Dorsey-Director** $4,500 None
Delayne Dedrick Gold-Director $4,500 None
Robert F. Gunia-Director and Vice President(1) - -
Mendel A. Melzer, CFA-Director(1) - -
Thomas T. Mooney-Director** $4,500 None
Thomas H. O'Brien-Director $4,500 None
Richard A. Redeker-Director - None
Brian M. Storms-Director and President(1) -
Nancy H. Teeters-Director $4,500 None
Louis A. Weil, III-Director $4,500 -
<CAPTION>
TOTAL
COMPENSATION
FROM FUND
ESTIMATED ANNUAL AND FUND
BENEFITS UPON COMPLEX PAID
NAME AND POSITION RETIREMENT TO DIRECTORS
- - ------------------------------------------------ ------------------ ----------------------------
<S> <C> <C>
Edward D. Beach-Director N/A $ 135,000(44/71)*
Eugene C. Dorsey-Director** N/A 70,000(17/46)*
Delayne Dedrick Gold-Director N/A 135,000(44/71)*
Robert F. Gunia-Director and Vice President(1) - -
Mendel A. Melzer, CFA-Director(1) - -
Thomas T. Mooney-Director** N/A 115,000(35/70)*
Thomas H. O'Brien-Director N/A 45,000(12/30)*
Richard A. Redeker-Director N/A -
Brian M. Storms-Director and President(1) -
Nancy H. Teeters-Director N/A 90,000(26/47)*
Louis A. Weil, III-Director - 90,000(30/54)*
</TABLE>
- - -----------
* Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
(1) Directors who are "interested" do not receive compensation from the Fund
complex (including the Fund).
** Total compensation from all of the funds in the Fund complex for the calendar
year ended December 31, 1998, includes amounts deferred at the election of
Directors under the Fund's deferred compensation plans. Including accrued
interest, total compensation amounted to $85,445 and $119,740 for Messrs.
Dorsey and Mooney, respectively.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Directors of the Fund are eligible to purchase Class Z shares of the Fund,
which are sold without either an initial sales charge or CDSC to a limited group
of investors.
As of February 5, 1999, the directors and officers of the Fund, as a group,
owned less than 1% of each Class of the outstanding common stock of the Fund.
As of February 5, 1999, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of beneficial interest were:
Independent Trust Corp. Trustee, FBO Cooper Linse Acct. A, Attn: Gary Bertacchi,
15255 S 94th Ave, Suite 303, Orland Park, IL 60462, who held 13,454,594 Class A
shares of the Fund (5.8% of the outstanding Class A shares); Pru Defined
Contributions SVCS, FBO Pru-Non-Trust Accounts, Attn: John Surdy, 30 Scranton
Office Park, Moosic, PA 18507, who held
B-17
<PAGE>
495,984 Class Z shares of the Fund (6.0% of the outstanding Class Z shares); and
Prudential Trust Company, FBO Pru-DC Trust Accounts, Attn: John Surdy, 30
Scranton Office Park, Moosic, PA 18507, who held 440,161 Class Z shares of the
Fund (5.3% of the outstanding Class Z shares).
As of February 5, 1999, Prudential Securities was the record holder for
other beneficial owners of 86,750,327 Class A shares (or 37.6% of the
outstanding Class A shares), 157,411,175 Class B shares (or 51.4% of the
outstanding Class B shares) 5,954,910 Class C shares (or 51.9% of the
outstanding Class C shares) and 1,427,844 Class Z shares (or 17.3% of the
outstanding Class Z shares) of the Fund. In the event of any meetings of
shareholders, Prudential Securities will forward, or cause the forwarding of,
proxy materials to the beneficial owners for which it is the record holder.
INVESTMENT ADVISORY AND OTHER SERVICES
(A) MANAGER AND INVESTMENT ADVISER
The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. PIFM serves as manager to 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, 1999, PIFM
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $71.7 billion. According to the
Investment Company Institute, as of November 30, 1998, Prudential Mutual Funds
were the 18th 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.
PIFM is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). Prudential Mutual Fund Services LLC (PMFS or
the Transfer Agent) a wholly owned subsidiary of Prudential serves as the
transfer agent for the Prudential Mutual Funds and, in addition, provides
customer service, recordkeeping and management and administration services to
qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PIFM, subject to the supervision of the Fund's Board of Directors
and in conformity with the stated policies of the Fund, manages both the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention, disposition and loan of securities. In
connection therewith, PIFM is obligated to keep certain books and records of the
Fund. PIFM also administers the Fund's corporate affairs and, in connection
therewith, furnishes the Fund with office facilities, together with those
ordinary clerical and bookkeeping services which are not being furnished by
State Street Bank and Trust Company, the Fund's custodian, and Prudential Mutual
Fund Services LLC (PMFS or the Transfer Agent), the Fund's transfer and dividend
disbursing agent. The management services of PIFM for the Fund are not exclusive
under the terms of the Management Agreement and PIFM is free to, and does,
render management services to others.
For its services, PIFM receives, pursuant to the Management Agreement, a
fee at an annual rate of .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.
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. Fee waivers
and subsidies will increase the Fund's total return.
In connection with its management of the corporate affairs of the Fund,
PIFM bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Directors who are not affiliated persons of PIFM or the
Fund's investment adviser;
(b) all expenses incurred by PIFM or by the Fund in connection with
managing the ordinary course of the Fund's business, other than those assumed by
the Fund as described below; and
(c) the costs and expenses payable to The Prudential Investment
Corporation, doing business as Prudential Investments (PI, the Subadviser or the
investment adviser), pursuant to the subadvisory agreement between PIFM and the
Subadviser (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for
the payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Directors who are not affiliated persons of the Manager
or the Fund's 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
B-18
<PAGE>
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
Commission, and paying the fees and expenses of notice filings made in
accordance with 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 PIFM will not be liable for any
error of judgment or for any loss suffered by the Fund in connection with the
matters to which the Management Agreement relates, except a loss resulting from
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
The Management Agreement provides that it will terminate automatically if
assigned, and that it may be terminated without penalty by either party upon not
more than 60 days' nor less than 30 days' written notice. The Management
Agreement will continue in effect for a period of more than two years from the
date of execution only so long as such continuance is specifically approved at
least annually in conformity with the Investment Company Act.
For the fiscal years ended December 31, 1996, 1997 and 1998 the Fund paid
PIFM a management fee of $16,817,042, $17,569,047 and $17,880,859, respectively.
PIFM has entered into the Subadvisory Agreement with PI, a wholly-owned
subsidiary of Prudential. The Subadvisory Agreement provides that the Subadviser
will furnish investment advisory services in connection with the management of
the Fund. In connection therewith, the Subadviser is obligated to keep certain
books and records of the Fund. PIFM continues to have responsibility for all
investment advisory services pursuant to the Management Agreement and supervises
the Subadviser's performance of such services. The Subadviser is reimbursed by
PIFM for the reasonable costs and expenses incurred by the Subadviser in
furnishing those services. Investment advisory services are provided to the Fund
by a business group of the Subadviser, known as Prudential Investments.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PIFM or the Subadviser upon not more than 60 days', nor
less than 30 days', written notice. The Subadvisory Agreement provides that it
will continue in effect for a period of more than two years from its execution
only so long as such continuance is specifically approved at least annually in
accordance with the requirements of the Investment Company Act.
(B) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12B-1 PLANS
Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077 acts as
the distributor of the shares of the Fund. Prior to June 1, 1998, Prudential
Securities Incorporated (Prudential Securities), was the Fund's distributor.
PIMS and Prudential Securities are subsidiaries of Prudential.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and a distribution agreement
(the Distribution Agreement), the Distributor incurs the expenses of
distributing the Fund's Class A, B and C shares. The Distributor also incurs the
expenses of distributing the Fund's Class Z shares under a Distribution
Agreement. None of the Class Z distribution expenses are reimbursed or paid for
by the Fund. See "How the Fund is Managed-Distributor" in the Prospectus.
The expenses incurred under the Plans include commissions and account
servicing fees paid to or on account of brokers or financial institutions that
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of the Distributor associated with the sale of Fund shares
including lease, utility, communications and sales promotion expenses. The
distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis brokers in consideration for the distribution,
marketing, administrative and other services and activities provided by brokers
with respect to the promotion of the sale of the Fund's shares and the
maintenance of related shareholder accounts.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis Dealers in consideration for the distribution,
marketing, administrative and other services and activities provided by brokers
with respect to the promotion of the sale of the Fund's shares and the
maintenance of related shareholder accounts.
B-19
<PAGE>
CLASS A PLAN. Under the Class A Plan, the Fund may pay the Distributor for
its distribution-related activities with respect to Class A shares at an annual
rate of up to .30 of 1% of the average daily net assets of the Class A shares.
The Class A Plan provides that (1) up to .25 of 1% of the average daily net
assets of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (2) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1%, The
Distributor has contractually limited its distribution-related fees payable
under the Class A Plan to .25 of 1% of the average daily net assets of the Class
A shares for the fiscal year ending December 31, 1999.
For the fiscal year ended December 31, 1998, the Distributor and Prudential
Securities received payments of approximately $1,472,221 and $1,096,575,
respectively, under the Class A Plan. This amount was primarily expended for
payments of account servicing fees to financial advisers and other persons who
sell Class A shares. For the fiscal year ended December 31, 1998, the
Distributor and Prudential Securities also received approximately $926,100 and
$732,800, respectively, in initial sales charges.
CLASS B AND CLASS C PLANS. Under the Class B and Class C Plans, the Fund
pays the Distributor for its distribution-related activities with respect to
Class B and Class C shares at an annual rate of up to 1% of the average daily
net assets of each of the Class B and Class C shares. The Class B Plan provides
that (1) up to .25 of 1% of the average daily net assets of the Class B shares
may be paid as a service fee and (2) up to .75 of 1% (not including the service
fee) of the average daily net assets of the Class B shares (asset-based sales
charge) may be paid for distribution-related expenses with respect to the Class
B shares. The Class C Plan provides that (1) up to .25 of 1% of the average
daily net assets of the Class C shares may be paid as a service fee for
providing personal service and/or maintaining shareholder accounts and (2) up to
.75 of 1% of the average daily net assets of the Class C shares may be paid for
distribution-related expenses with respect to Class C shares. The service fee
(.25 of 1% of average daily net assets) is used to pay for personal service
and/or the maintenance of shareholder accounts. The Distributor also receives
contingent deferred sales charges from certain redeeming shareholders and, with
respect to Class C shares, an initial sales charge. The Distributor has
contractually limited its distribution-related fees payable with respect to the
Class C shares of the Fund to no more than .75 of 1% of the average daily net
assets of the Class C shares for the fiscal year ending December 31, 1999.
CLASS B PLAN. For the fiscal year ended December 31, 1998, the Distributor
and Prudential Securities received $10,796,181 and $8,383,206, respectively,
from the Fund under the Class B Plan and spent approximately $11,641,947 and
$9,165,553, respectively, in distributing the Fund's Class B shares. It is
estimated that of the amount spent, approximately 0%, 0% ($0, $746) was spent on
printing and mailing of prospectuses to other than current shareholders; 20.6%,
24.0% ($2,401,232, $2,201,421) was spent on compensation to broker-dealers for
commissions to representatives and other expenses, including an allocation of
overhead and other branch office distribution-related expenses, incurred for
distribution of Fund shares; and 44.4%, 33.5% ($9,240,715, $6,963,386) on the
aggregate of (1) payments of commissions and account servicing fees to financial
advisers (23.9%, 17.9% or $4,977,850, $3,729,748) and (2) an allocation of
overhead and other branch office distribution-related expenses for payments of
related expenses (20.5%, 86.7% or $4,262,865, $3,233,638). The term "overhead
and other branch office distribution-related expenses" represents (a) the
expenses of operating Prudential Securities' branch offices in connection with
the sale of Fund shares, including lease costs, the salaries and employee
benefits of operations and sales support personnel, utility costs,
communications costs and the costs of stationery and supplies, (b) the costs of
client sales seminars, (c) expenses of mutual fund sales coordinators to promote
the sale of Fund shares and (d) other incidental expenses relating to branch
promotion of Fund sales.
The Distributor (and Prudential Securities as its predecessor) also
receives the proceeds of contingent deferred sales charges paid by holders of
Class B shares upon certain redemptions of Class B shares. See "Shareholder
Guide-How to Sell Your Shares-Contingent Deferred Sales Charges (CDSC)" in the
Prospectus. For the fiscal year ended December 31, 1998, the Distributor and
Prudential Securities received approximately $2,275,400 and $1,375,800,
respectively, in contingent deferred sales charges attributable to Class B
shares.
CLASS C PLAN. For the fiscal year ended December 31, 1998, the Distributor
and Prudential Securities received $312,245 and $192,474, respectively, under
the Class C Plan and spent approximately $528,254 and $225,703, respectively, in
distributing Class C shares. It is estimated that of the amount spent,
approximately 0%, 0% ($0, $72) was spent on printing and mailing of prospectuses
to other than current shareholders: 2.0%, 3.4% ($10,528, $7,673) on compensation
to broker-dealers for commissions to representatives and other expenses,
including an allocation of overhead and other branch office distribution-related
expenses, incurred for distribution of Fund shares; and 68.7%, 28.9% ($517,726,
$217,958) on the aggregate of (1) payments of commissions and account servicing
fees to financial advisers (40.3%, 20.6% or $304,076, $155,203) and (2) an
allocation of overhead and other branch office distribution-related expenses for
payments of related expenses (28.3%, 8.3% or $213,650, $62,755).
The Distributor (and Prudential Securities as its predecessor also receives
the proceeds of contingent deferred sales charges paid by investors upon certain
redemptions of Class C shares. See "How to Buy, Sell and Exchange Shares of the
Fund-How to Sell Your Shares-Contingent Deferred Sales Charges (CDSC)" in the
Prospectus. For the year ended December 31, 1998, the Distributor and Prudential
Securities received approximately $46,900 and $0, respectively, in contingent
deferred sales charges and $43,800 and $0, respectively, in initial sales
charges with respect to sales of Class C shares.
B-20
<PAGE>
Distribution expenses attributable to the sale of Class A, Class B and
Class C shares of the Fund are allocated to each such class based upon the ratio
of each such class to the sales of Class A, Class B and Class C shares of the
Fund other than expenses allocable to a particular class. The distribution fee
and sales charge of one class will not be used to subsidize the sale of another
class.
* * *
The Class A, Class B and Class C Plans continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority vote of the Directors who
are not interested persons of the Fund and who have no direct or indirect
financial interest in the Class A, Class B or Class C Plan or on any agreement
related to the Plans (Rule 12b-1 Directors) cast in person at a meeting called
for the purpose of voting on such continuance. A Plan may be terminated at any
time, without penalty, by the vote of a majority of the Rule 12b-1 Directors or
by the vote of the holders of a majority of the outstanding shares of the
applicable class on not more than 30 days' written notice to any other party to
the Plan. The Plans may not be amended to increase materially the amounts to be
spent for the services described therein without approval by the shareholders of
the applicable class (by both Class A and Class B shareholders, voting
separately, in the case of material amendments to the Class A Plan), and all
material amendments are required to be approved by the Board of Directors in the
manner described above. Each Plan will automatically terminate in the event of
its assignment. The Fund will not be contractually obligated to pay expenses
incurred under any Plan if it is terminated or not continued.
Pursuant to each Plan, the Board of Directors will review at least
quarterly a written report of the distribution expenses incurred on behalf of
each class of shares of the Fund by the Distributor. The report will include an
itemization of the distribution expenses and the purposes of such expenditures.
In addition, as long as the Plans remain in effect, the selection and nomination
of the Rule 12b-1 Directors shall be committed to the Rule 12b-1 Directors.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify
the Distributor to the extent permitted by applicable law against certain
liabilities under federal securities law.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons which distribute shares of the Fund (including
Class Z shares). Such payments may be calculated by reference to the net asset
value of shares sold by such persons or otherwise.
(C) OTHER SERVICE PROVIDERS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Subcustodians provide custodial
services for the Fund's foreign assets held outside the United States.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the transfer and dividend disbursing agent of the Fund.
PMFS is a wholly-owned subsidiary of PIFM. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions and
related functions. For these services, PMFS receives an annual fee of $13.00 per
shareholder account, a new account set-up fee of $2.00 for each manually
established shareholder account and a Monthly inactive zero balance account fee
of $.20 per shareholder account. PMFS is also reimbursed for its out-of-pocket
expenses, including but not limited to postage stationary, printing, allocable
communication expenses and other costs.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Fund's independent accountants and in that capacity audits
the Fund's annual financial statements.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Manager is responsible for decisions to buy and sell securities 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
B-21
<PAGE>
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.
The securities purchased by the Fund are generally traded on a "net" basis
with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments and U.S. Government agency securities may be purchased
directly from the issuer, in which case no commissions or discounts are paid.
The Fund will not deal with the Distributor or any affiliate in any transaction
in which the Distributor or any affiliate acts as principal. Thus, it will not
deal with the Distributor acting as market maker, and it will not execute a
negotiated trade with the Distributor if execution involves Prudential
Securities' acting as principal with respect to any part of the Fund's order.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities (or any affiliate), during the
existence of the syndicate, is a principal underwriter, except in accordance
with rules of the Commission. 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 Commission. 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 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, as amended, Prudential Securities may not retain
compensation for effecting transactions on a national securities exchange for
the Fund unless the Fund has expressly authorized the retention of such
compensation. Prudential Securities must furnish to the Fund at least annually a
statement setting forth the total amount of all compensation retained by
Prudential Securities from transactions effected for the Fund during the
applicable period. Brokerage 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, 1996, 1997, and 1998.
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
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. Of the authorized shares of common stock of the Fund,
750 million shares consist of Class A common stock. 750 million shares consist
of Class B common stock 750 million shares consist of Class C common stock and
750 million shares consist of Class Z common stock. Each class of common stock
of the Fund represents
B-22
<PAGE>
an interest in the same assets of the Fund and is identical in all respects
except that (1) each class is subject to different sales charges and
distribution and/or service fees (except Class Z shares, which are not subject
to any sales charges and distribution and/or service fees), which may affect
performance, (2) each class has exclusive voting rights on any matter submitted
to shareholders that relates solely to its distribution arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests on any other class. (3) each
class has a different exchange privilege, (4) only Class B shares have a
conversion feature, and Class Z shares are not currently offered for sale to
investors. In accordance with the Fund's Articles of Incorporation, the Board of
Directors may authorize the creation of additional series of common stock and
classes within such series, with such preferences privileges, limitations and
voting and dividend rights as the Board may determine.
The Board of Directors may increase or decrease the number of authorized
shares without the approval of 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. Each share of each class of common stock is equal as to
earnings, assets and voting privileges, except as noted above and each class
bears the expenses related to the distribution of its shares (with the exception
of Class Z shares, which are not subject to any distribution and/or service
fees). Except for the conversion feature applicable to the Class B shares, there
are no conversion preemptive or other subscription rights. In the event of
liquidation, each share of common stock of the Fund is entitled to its portion
of all of the Fund's assets after all debts and expenses of the Fund have been
paid. Since Class B and Class C shares generally bear higher distribution
expenses than Class A shares, the liquidation proceeds to shareholders of those
classes are likely to be lower than to Class A shareholders and to Class Z
shareholders, whose shares are not subject to any distribution and/or service
fees. The Fund's shares do not have cumulative voting rights for the election of
Directors.
The Fund does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Fund will not be required to hold meetings of
shareholders unless, for example, the election of Directors is required to be
acted on by shareholders under the investment Company Act. Shareholders have
certain rights, including the right to call a meeting upon a vote of 10% or more
of the Fund's outstanding shares for the purpose of voting on the removal of one
or more Directors or to transact any other business.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value (NAV) 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 or
Class C 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 NAV. See "How to
Buy, Sell and Exchange Shares of the Fund-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 (1) each class is subject to different
sales charges and distribution and/or service fees (except for Class Z shares,
which are not subject to any sales charges and distribution and/or service
fees), which may affect performance, (2) 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, (3) each class has a different exchange privilege, (4) only
Class B shares have a conversion feature and (5) Class Z shares are offered
exclusively for sale to a limited group of investors. See "Investment Advisory
and Other Services-Principal Underwriter, Distributor and Rule 12b-1 Plans." and
"Shareholder Investment Account-Exchange Privilege."
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire,
you must complete an application and telephone PMFS at (800) 225-1852
(toll-free) to receive an account number. The following information will be
requested: your name, address, tax identification number, class election,
dividend distribution election, amount being wired and wiring bank. Instructions
should then be given by you to your bank to transfer funds by wire to State
Street Bank and Trust Company (State Street), Boston, Massachusetts, Custody and
Shareholder Services Division. Attention: Prudential High Yield Fund, Inc.,
specifying on the wire the account number assigned by PMFS and your name and
identifying the class in which you are eligible to invest (Class A, Class B,
Class C or Class Z shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential High Yield Fund,
Inc. Class A, Class B, Class C or Class Z shares and your name and individual
account number. It is not necessary to call PMFS to make subsequent purchase
orders utilizing Federal Funds. The minimum amount which may be invested by wire
is $1,000.
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (1) reorganizations, (2) statutory mergers, or (3)
other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund,
B-23
<PAGE>
(b) are liquid and not subject to restrictions on resale, (c) have a value that
is readily ascertainable via listing on or trading in a recognized United States
or international exchange or market, and (d) are approved by the Fund's
investment adviser.
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 4%, and Class
C* shares are sold with a 1% sales charge, and Class B* and Class Z shares of
the Fund are sold at NAV. Using the Fund's NAV at December 31, 1998, the maximum
offering price of the Fund's shares is as follows:
<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share ................. $ 7.88
------
Maximum sales charge (4% of offering price) ............................ .33
------
Offering price to public ............................................... $ 8.21
======
CLASS B
Net asset value, offering price and redemption price per Class B share* $ 7.86
======
CLASS C
Net asset value and redemption price per Class C share* ................ $ 7.86
------
Maximum sales charge (1% of offering price) ............................ $ .08
------
Offering Price to Public ............................................... $ 7.94
======
CLASS Z
Net asset value, offering price and redemption price per Class Z share . $ 7.88
======
</TABLE>
- - -----------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "How to Buy, Sell and Exchange Shares of the
Fund-How to Sell Your Shares" in the Prospectus.
SELECTING A PURCHASE ALTERNATIVE
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 4 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 4% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6-year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for more than 4 years, but less than
5 years, and do not qualify for a reduced sales charge on Class A shares, the
sales charges and cumulative annual distribution-related fees would be
approximately the same for Class A, Class B and Class C shares. However, you
should consider purchasing Class B shares over Class A shares or Class C shares
because all of your money would be invested initially in the case of Class B
shares.
If you intend to hold your investment for longer than 5 years, you should
consider purchasing Class A shares over either Class B or Class C shares. This
is because the maximum sales charge plus the cumulative annual
distribution-related fee on Class A shares would be less than those of the Class
B or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B shares, you would not have all of your money invested initially
because the sales charge on Class A shares is deducted at the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and for more than 5 years in the
case of Class C shares for the higher cumulative annual distribution-related fee
on those shares plus, in the case of Class C shares, the 1% initial sales charge
to exceed the initial sales charge plus cumulative annual distribution-related
fees on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class B or Class C
distribution-related fee on the investment, fluctuations in NAV, the effect of
the return on the investment over this period of time or redemptions when the
CDSC is applicable.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES-CLASS A SHARES
BENEFIT PLAN. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code, deferred compensation
and annuity plans
B-24
<PAGE>
under Sections 403 (b) and 457 of the Internal Revenue Code, "rabbi" trusts and
non-qualified deferred compensation plans that are sponsored by any employer
that has a tax qualified plan with Prudential (collectively, Benefits Plans),
provided that the Benefit Plan has existing assets of at least $1 million
invested in shares of Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) of 250 eligible
employees or participants. In the case of Benefit Plans whose accounts are held
directly with the Transfer Agent or Prudential Securities and for which the
Transfer Agent or Prudential Securities does individual account recordkeeping
(Direct Account Benefit Plans) and Benefit Plans sponsored by Prudential or its
subsidiaries (Prudential Securities or Subsidiary Prototype Benefit Plans),
Class A shares may be purchased at NAV by participants who are repaying loans
made from such plans to the participant.
PRUDENTIAL RETIREMENT PROGRAMS. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or
non-qualified under the Internal Revenue Code, for which Prudential provides
administrative or recordkeeping services provided that (1) the plan has at least
$1 million in existing assets or 250 eligible employees and (2) the Fund is an
available investment option. These plans include pension, profit-sharing,
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code, deferred compensation and annuity plans under Sections 457 and
403(b)(7) of the Internal Revenue Code and plans that participate in the
PruArray Program (benefit plan recordkeeping service) (hereafter referred to as
a PruArray Plan). All Benefit Plans of a company (or affiliated companies under
common control) for which Prudential serves as plan administrator or
recordkeeper are aggregated in meeting the $1 million threshold, provided that
Prudential has been notified in advance of the entitlement to the waiver of the
sales charge based on the aggregated assets. The term "existing assets" as used
herein includes stock issued by a plan sponsor, shares of Prudential Mutual
Funds and shares of certain unaffiliated mutual funds that participate in the
PruArray Plan (Participating Fund). "Existing assets" also include monies
invested in The Guaranteed Investment Account (GIA) a group annuity insurance
product issued by Prudential, the Guaranteed Insulated Separate Account, a
separate account offered by Prudential and units of The Stable Value Fund (SVF),
an unaffiliated bank collective fund. Class A shares may also be purchased at
NAV by plans that have monies invested in GIA and SVF, provided (1) the purchase
is made with the proceeds of a redemption from either GIA or SVF and (2) Class A
shares are an investment option of the plan.
PRUARRAY ASSOCIATION BENEFIT PLANS. Class A shares are also offered at NAV
to Benefit Plans or non-qualified plans sponsored by employers which are members
of a common trade, professional or membership association (Association) that
participate in the PruArray Plan provided that the Association enters into a
written agreement with Prudential. Such Benefit Plans or non-qualified plans may
purchase Class A shares at NAV without regard to the assets or number of
participants in the individual employer's qualified Plan(s) or non-qualified
plans so long as the employers in the Association (1) have retirement plan
assets in the aggregate of at least $1 million or 250 participants in the
aggregate and (2) maintain their accounts with the Transfer Agent.
PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at NAV to
employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
at NAV by Individual Retirement Accounts and Savings Accumulation Plans of the
company's employees. The Program is available only to (1) employees who open an
IRA or Savings Accumulation Plan account with the Transfer Agent and (2) spouses
of employees who open an IRA account with the Transfer Agent. The program is
offered to companies that have at least 250 eligible employees.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a Benefit Plan or
PruArray Plan qualifies to purchase Class A shares at NAV all subsequent
purchases will be made at NAV.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV through
the Distribution or the Transfer Agent, by:
o officers of the Prudential Mutual Funds (including the Fund).
o employees of the Distributor, Prudential Securities. PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer
Agent.
o employees of subadvisers of the Prudential Mutual Funds provided that
purchases at NAV are permitted by such person's employer.
o Prudential, employees and special agents of Prudential and its
subsidiaries and all persons who have retired directly from active
service with Prudential or one of its subsidiaries.
o registered representatives and employees of brokers who have entered
into a selected dealer agreement with the Distributor provided that
purchases at NAV are permitted by such person's employer.
o investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities or within one
year in the case of Benefit Plans. (2) the purchase is made with
proceeds of a redemption of shares of any open-end non-money market fund
sponsored by the financial adviser's previous employer (other than a
fund which imposes a distribution or service fee of .25 of 1% or less)
and (3) the financial adviser served as the client's broker on the
previous purchase.
B-25
<PAGE>
o investors in Individual Retirement Accounts, provided the purchase is
made in a direct rollover to such Individual Retirement Account or with
the proceeds of a tax-free rollover of assets from a Benefit Plan for
which Prudential provides administrative or recordkeeping services and
further provided that such purchase is made within 60 days of receipt of
the Benefit Plan distribution.
o orders placed by broker-dealers, investment advisers or financial
planners who have entered into an agreement with the Distributor, who
place trades for their own accounts or the accounts of their clients and
who charge a management, consulting or other fee for their services
(e.g., mutual fund "wrap" or asset allocation programs), and
o orders placed by clients of broker dealers, investment advisers or
financial planners who place trades for customer accounts if the
accounts are linked to the master account of such broker-dealer,
investment adviser or financial planner and the broker dealer,
investment adviser or financial planner charges its clients a separate
fee for its services (for example, mutual fund "supermarket programs").
For an investor to obtain any reduction or waiver of the initial sales
charges at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the broker
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions.
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See "How to Buy, Sell and Exchange Shares of the Fund-How to
Buy Shares-Reducing or Waiving Class A's Initial Sales Charge" in the
Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
o an individual;
o the individual's spouse, their children and their parents;
o the individual's and spouse's Individual Retirement Account (IRA);
o any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a company will
be deemed to control the company, and a partnership will be deemed to be
controlled by each of its general partners);
o a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
o a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
o one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund Investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Transfer Agent, Distributor or your broker must be notified at the time
of purchase that the investor is entitled to a reduced sales charge. The reduced
sales charge will be granted subject to confirmation of the investor's holdings.
The Combined Purchase and Cumulative Purchase Privilege does not apply to
individual participants in any retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through your broker will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the Transfer
Agent or through your broker. The value of existing holdings for purposes of
determining the reduced sales charge is calculated using the maximum offering
price (NAV plus maximum sales charge) as of the previous business day. The
Distributor or the Transfer Agent must be notified at the time of purchase that
the investor is entitled to a reduced sales charge. The reduced sales charges
will be granted subject to confirmation of the investor's holdings. Rights of
accumulation are not available to individual participants in any retirement or
group plans.
LETTERS OF INTENT. Reduced sales charges 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).
B-26
<PAGE>
For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through Prudential Securities or its affiliates, and through your broker
will not be aggregated to determine the reduced sales charge.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant
enrollment goal over a thirteen month period. Each investment made during the
period, in the case of an Investment Letter of Intent will receive the reduced
sales charge applicable to the amount represented by the goal, as if it were a
single investment. In the case of a Participant Letter of Intent, each
investment made during the period will be made at NAV. Escrowed Class A shares
totaling 5% of the dollar amount of the Letter of Intent will be held by the
Transfer Agent in the name of the purchaser, except in the case of retirement
and group plans where the employer or plan sponsor will be responsible for
paying any applicable sales charge. The effective date of an Investment Letter
of Intent (except in the case of retirement and group plans) may be back-dated
up to 90 days, in order that any investments made during this 90-day period,
valued at the purchaser's cost, can be applied to the fulfillment of the Letter
of Intent goal, 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.
CLASS B SHARES
The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following receipt
of an order in proper form by the Transfer Agent, your Dealer of the
Distributor. Although there is no sales charge imposed at the time of purchase,
redemptions of Class B shares may be subject to a CDSC. See "Contingent Deferred
Sales Charges" below.
The Distributor will pay, from its own resources, sales commissions of up
to 4% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell Class B shares at the time of sale. This facilitates the
ability of the Fund to sell the Class B shares without an initial sales charge
being deducted at the time of purchase. The Distributor anticipates that it will
recoup its advancement of sales commissions from the combination of the CDSC and
the distribution fee.
CLASS C SHARES
The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, brokers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 2% of the purchase
price at the time of the sale.
WAIVER OF INITIAL SALES CHARGE-CLASS C SHARES
BENEFIT PLANS. Class C shares may be purchased at NAV, without payment of
an initial sales charge, by Benefit Plans (as defined above). In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential Securities
does individual account recordkeeping (Direct Account Benefit Plans) and Benefit
Plans sponsored by Prudential. Prudential Securities or its subsidiaries
(Prudential Securities or Subsidiary Prototype Benefit Plans). Class C shares
may be purchased at NAV by participants at NAV by participants who are repaying
the loans made from such plans to the participant.
PRUDENTIAL RETIREMENT PLANS. The initial sales charge will be waived with
respect to purchase of Class C shares by qualified and non-qualified retirement
and deferred compensation plans participating in the PruArray Plan and other
plans for which Prudential provides administrative or recordkeeping services.
INVESTMENTS OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES.
Investors may purchase Class C shares at NAV, without the initial sales charge,
with the proceeds from the redemption of shares of any unaffiliated registered
investment company
B-27
<PAGE>
which were not held through an account with any Prudential affiliate. Such
purchases must be made within 60 days of the redemption. Investors eligible for
this waiver include: (1) investors purchasing shares through an account at
Prudential Securities; (ii) investors purchasing shares through an ADVANTAGE
Account or an Investor Account with Pruco Securities Corporation (Prusec); and
(iii) investors purchasing shares though other Dealers. This waiver is not
available to investors who purchase shares directly from the Transfer Agent. You
must notify the Transfer Agent directly or through your Dealer if you are
entitled to this waiver and provide the Transfer Agent with such supporting
documents as it may deem appropriate.
CLASS Z SHARES
Class Z shares of the Fund currently are available for purchase by the
following categories of investors:
o pension, profit-sharing or other employee benefit plans qualified under
Section 401 of the Internal Revenue Code, deferred compensation plans
and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code and non-qualified plans for which the Fund is an available
option (collectively, Benefit Plans), provided such Benefit Plans (in
combination with other plans sponsored by the same employer or group of
related employers) have at least $50 million in defined contribution
assets;
o participants in any fee-based program sponsored by an affiliate which
includes mutual funds as investment options and for which the Fund is an
available option;
o certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by affiliate for whom Class Z shares of the
Prudential Mutual Funds are an available option;
o Benefit Plans for which an affiliate provides administrative or
recordkeeping services and as of September 20, 1996, (a) were Class Z
shareholders of the Prudential Mutual Funds of (b) executed a letter of
intent to purchase Class Z shares of the Prudential Mutual Funds;
o current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund);
o employees of Prudential and/or Prudential Securities who participate in
a Prudential-sponsored employee savings plan; and
o Prudential with an investment of $10 million or more.
After a Benefit Plan qualifies to purchase Class Z shares, all subsequent
purchases will be for Class Z shares.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay dealers, financial advisers and other persons
which distribute shares a finders' fee from its own resources based on a
percentage of the net asset value of shares sold by such persons.
SALE OF SHARES
You can redeem your shares at any time for cash at NAV next determined
after the redemption request is received in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent the Distributor or your broker. In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable CDSC, as described below. See "Contingent Deferred Sales Charges"
below. If you are redeeming your shares through a broker, your broker must
receive your sell order before the Fund computes its NAV for that day (that is,
4:15 P.M., New York time) in order to receive that day's NAV. Your broker will
be responsible for furnishing all necessary documentation to the Distributor and
may charge you for its services in connection with redeeming shares of the Fund.
If you hold shares of the Fund through Prudential Securities, you must
redeem your shares through Prudential Securities. Please contact your Prudential
Securities financial adviser.
If you hold shares in non-certificate form, a written request for
redemption signed by you exactly as the account is registered is required. If
you hold certificates, the certificates, signed in the name(s) shown on the face
of the certificates, must be received by the Transfer Agent, the Distributor or
your broker in order for the redemption request to be processed. If redemption
is requested by a corporation, partnership, trust or fiduciary, written evidence
of authority acceptable to the Transfer Agent must be submitted before such
request will be accepted. All correspondence and documents concerning
redemptions should be sent to the Fund in care of its Transfer Agent, Prudential
Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box 15010, New
Brunswick, New Jersey 08906-5010, the Distributor or to your broker.
SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $50,000,
(2) are to be paid to a person other than the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or (4) are
to be paid to a corporation, partnership, trust or fiduciary, 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
B-28
<PAGE>
credit union. The Transfer Agent reserves the right to request additional
information from, and make reasonable inquiries of, any eligible guarantor
institution. For clients of Prusec, a signature guarantee may be obtained from
the agency or office manager of most Prudential Insurance and Financial Services
or Preferred Services offices. In the case of redemptions from a PruArray Plan,
if the proceeds of the redemption are invested in another investment option of
the plan in the name of the record holder and at the same address as reflected
in the Transfer Agent's records, a signature guarantee is not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the certificate and/or written request, except as indicated below. If you
hold shares through Prudential Securities, payment for shares presented for
redemption will be credited to your account at your broker, unless you indicate
otherwise. Such payment may be postponed or the right of redemption suspended at
times (1) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (2) when trading on such Exchange is restricted, (3) when
an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or (4) during any
other period when the Commission, by order, so permits; provided that applicable
rules and regulations of the Commission shall govern as to whether the
conditions prescribed in (2), (3) or (4) exist.
Payment for redemption of recently purchased shares will be delayed until
the Fund or its Transfer Agent has been advised that the purchase check has been
honored, which may take up to 10 calendar days from the time of receipt of the
purchase check by the Transfer Agent. Such delay may be avoided by purchasing
shares by wire or by certified or cashier's check.
REDEMPTION IN KIND. If the Directors determine that it would be detrimental
to the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Fund, in lieu of cash, in conformity with applicable rules of the
Commission. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. If your shares are redeemed in kind, you
would incur transaction costs in converting the assets into cash. The Fund,
however, has elected to be governed by Rule 18f-1 under the Investment Company
Act, under which the Fund is obligated to redeem shares solely in cash up to the
lesser of $250,000 or 1% of the NAV of the Fund during any 90-day period for any
one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the
Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any such
involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. (If less than a full repurchase is made,
the credit will be on a PRO RATA basis.) You must notify the Transfer Agent,
either directly or through The Distributor of your broker, at the time the
repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption . See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege may affect the federal tax
treatment of the redemption.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred
sales charge of CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within 18 months of purchase (or one year in the case of shares
purchase prior to November 21, 1998) will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and 18 months, in the case of Class C shares (one year for Class
C shares purchased before November 2, 1998). A CDSC will be applied on the
lesser of the original purchase price or the current value of the shares being
redeemed. Increases in the value of your shares or shares acquired through
reinvestment of dividends or distributions are not subject to a CDSC. The amount
of any CDSC will be paid to and retained by the Distributor.
For federal income tax purposes, the amount of the CDSC will reduce the
gain or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See
"Shareholder Investment Account-Exchange Privilege."
B-29
<PAGE>
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- - ------------------------- --------------------------
First ................. 5.0%
Second ................ 4.0%
Third ................. 3.0%
Fourth ................ 2.0%
Fifth ................. 1.0%
Sixth ................. 1.0%
Seventh ............... None
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions:
then of amounts representing the increase in NAV above the total amount of
payments for the purchase of 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;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES-CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholders or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability.
The CDSC will also be waived in the case of a total or partial redemption
in connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions are:
(1) in the case of a tax-deferred retirement plan, a lump-sum or other
distribution after retirement:
(2) in the case of an IRA (including a Roth IRA), a lump-sum or other
distribution after attaining age 591|M/2, or a periodic distribution based on
life expectancy:
(3) in the case of a Section 403(b) custodial account, a lump-sum or other
distribution after attaining age 591|M/2:
(4) a tax-free return of an excess contribution or plan distribution
following the death or disability of the shareholder, provided that the shares
were purchased prior to death or disability; and
(5) Finally, the CDSC will be waived to the extent that the proceeds from
shares redeemed are invested in Prudential Mutual Funds, The Guaranteed
Investment Account, and the Guaranteed Insulated Separate Account or units of
the Stable Value Fund.
The waiver does not apply in the case of a tax-free rollover or transfer of
assets, other than one following a separation from service (that is, following
voluntary or involuntary termination of employment or following retirement).
Under no circumstances will the CDSC be waived on redemptions resulting from the
termination of a tax-deferred retirement plan, unless such redemptions otherwise
qualify for a waiver as described above. In the case of Direct Account and
Prudential Securities or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.
In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Fund.
B-30
<PAGE>
You must notify the Fund's Transfer Agent either directly or through your
broker, at the time of redemption, that you are entitled to waiver of the CDSC
and provide the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement.
In connection with these waivers, the Transfer Agent will require you to
submit the supporting documentation set forth below.
<TABLE>
<S> <C>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death certificate or,
in the case of a trust, a copy of thegrantor's death
certificate, plus a copy of the trust agreement identifying
the grantor.
Disability-An individual will be considered disabled if he or A copy of the Social Security Administration award letter
she is unable to engage in any substantial gainful activity by or a letter from a physician on the physician's letterhead
reason of any medically determinable physical or mental stating that the shareholder (or, in the case of a trust, the
impairment which can be expected to result in death or to be grantor) is permanently disabled. The letter must also
of long-continued and indefinite duration. indicate the date of disability.
Distribution from an IRA or 403(b) Custodial Account A copy of the distribution form from the custodial firm
indicating (i) the date of birth of the shareholder and (ii)
that the shareholder is over age 591|M/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.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of our purchase or, for shares purchased prior
to March 1, 1998, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% is reached.
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:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS INVEST
OR REDEMPTION PROCEEDS
-------------------------------------------
YEAR SINCE PURCHASE
PAYMENT MADE $500,000 TO $1 MILLION OVER $1 MILLION
- - ----------------------------------------- ------------------------ ----------------
<S> <C> <C>
First ................................. 3.0% 2.0%
Second ................................ 2.0% 1.0%
Third ................................. 1.0% 0%
Fourth and thereafter ................. 0% 0%
</TABLE>
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.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE-CLASS C SHARES
PRUDENTIAL RETIREMENT PLANS. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in the PruArray Plan and other plans for which Prudential provides
administrative or
B-31
<PAGE>
recordkeeping services. The CDSC will also be waived on redemptions from Benefit
Plans sponsored by Prudential and its affiliates to the extent that the
redemption proceeds are invested in The Guaranteed Investment Account, the
Guaranteed insulated Separate Account and units of the Stable Value Fund.
OTHER BENEFIT PLANS. The CDSC will be waived on redemptions from Benefit
Plans holding shares through a Dealer not affiliated with Prudential and for
whom the Dealer provides administrative or recordkeeping services.
Finally, the CDSC will be waived to the extent that the proceeds from
shares redeemed are invested in Prudential Mutual Funds, The Guaranteed
Investment Account, The Guaranteed Maturated Separate Account or units of The
Stable Value Fund.
CONVERSION FEATURE-CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and hen held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (that is, $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equal 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than that
of the Class B shares at the time of conversion. Thus, although the aggregate
dollar value will be the same, you may receive fewer Class A shares than Class B
shares converted.
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during the month will be deemed to have been
made on the last day of the month, or for Class B shares acquired through
exchange, or a series of exchanges, on the last day of the month in which the
original payment for purchases of such Class B shares was made. For Class B
shares previously exchanged for shares of a money market fund, the time period
during which such shares were held in the money market fund will be excluded.
For example, Class B shares held in a money market fund for one year would not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a shares
until approximately eight years from purchase. For purpose of measuring the time
period during which shares are held in a money market fund, exchanges will be
deemed to have been made on the last day of the month. Class B shares acquired
through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (1) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (2) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class B shares into Class A shares may be
suspended if such opinions or rulings are no longer available. If conversions
are suspended, Class B shares of the Fund will continue to be subject, possibly
indefinitely, to their higher annual distribution and service fee.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which 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 NAV. 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
B-32
<PAGE>
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 NAV by returning the check or the proceeds to the Transfer Agent
within 30 days after the payment date. Such investment will be made at the NAV
per share next determined after receipt of the check or proceeds by the Transfer
Agent.
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 the relative
NAV next determined after receipt of an order in proper form. An exchange will
be treated as a redemption and purchase for tax purposes. Shares may be
exchanged for shares of another fund only if shares of such fund may legally be
sold under applicable state laws. For retirement and group plans having a
limited menu of Prudential Mutual Funds, the exchange privilege is available for
those funds eligible for investment in the particular program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the Transfer
Agent and hold shares in non-certificate form. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares on weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. Neither
the Fund nor its agents will be liable for any loss, liability or cost which
results from acting upon instructions reasonably believed to be genuine under
the foregoing procedures. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order.
If you hold shares through Prudential Securities, you must exchange your
shares by contacting your Prudential Securities financial adviser.
If you hold certificates, the certificates, signed in the name(s) show on
the face of the certificates, must be returned in order for the shares to be
exchanged.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010
In periods of severe market or economic conditions the telephone exchange
of shares may be difficult to implement and you should make exchanges by mail by
writing to Prudential Mutual Fund Services LLC, at the address noted above.
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.
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) (Class A Shares)
(U.S. Treasury Money Market Series) (Class A Shares)
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. (Class A Shares)
Prudential Tax-Free Money Fund
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B
and Class C shares of the Fund for Class B and Class C shares, respectively, of
certain other Prudential Mutual Funds and shares of Prudential Special Money
Market Fund, a money
B-33
<PAGE>
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.
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 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.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for shareholders
who qualify to purchase Class Z shares. Under this exchange privilege, amounts
representing any Class B and Class C shares which are not subject to a CDSC,
held in such a shareholder's account will automatically exchanged for Class A
shares for shareholders who qualify to purchase Class A shares at NAV on a
quarterly basis unless the shareholder elects otherwise. 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 distributions, (2)
amounts representing the increase in the net asset value above the total amount
of payments for the purchase of Class B or Class C shares and (3) amounts
representing Class B or Class C shares held beyond the applicable CDSC period.
Class B and Class C shareholders must notify the Transfer Agent either directly
or through Prudential Securities, Prusec or another broker that they are
eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and to
the extent provided for in the program. Class Z shares required through
participation in the program) will be exchanged for Class A shares at net asset
value.
Additional details about the exchange privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Fund's Transfer Agent, the
Distributor or your broker. The exchange privilege may be modified, terminated
or suspended on sixty days' notice, and any fund including the Fund or the
Distributor, has the right to reject any exchange application relating to such
fund's shares.
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
B-34
<PAGE>
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.2
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- - -------------------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
25 years ............... $ 110 $ 165 $ 220 $ 275
20 years ............... 176 264 352 440
15 years ............... 296 444 592 740
10 years ............... 555 833 1,110 1,388
5 years ................ 1,371 2,057 2,742 3,428
</TABLE>
- - -----------
1 Source information concerning the costs of education at public and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition,
fees, room and board.
2 The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the
Fund. The investment return and principal value of an investment will
fluctuate so that an investor's shares when redeemed may be worth more or
less than their original cost.
AUTOMATIC INVESTMENT PLAN (AIP)
Under AIP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account or
brokerage account (including a Command Account) to be debited to invest
specified dollar amounts in shares of the Fund. The investor's bank must be a
member of the Automatic Clearing House System. Stock certificates are not issued
to AIP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your broker.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through
Prudential Securities or the Transfer Agent. Such withdrawal plan provides for
monthly or quarterly checks in any amount, except as provided below, up to the
value of the shares in the shareholder's account. Withdrawals of Class B or
Class C shares may be subject to a CDSC. See "How to Buy, Sell and Exchange
Shares of the Fund-How to Sell Your Shares-Contingent Deferred Sales Charges
(CDSC)" in the Prospectus.
In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account value applies, (2) withdrawals may not be for less than $100 and (3) the
shareholder must elect to have all dividends and/or distributions automatically
reinvested in additional full and fractional shares at NAV on shares held under
this plan.
The Transfer Agent, the Distributor or your broker act as 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.
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 and Class C shares and (2) the redemption 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 the Distributor or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
B-35
<PAGE>
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
<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER SAVINGS IRA
- - --------------- ----------- -----------
<S> <C> <C>
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
</TABLE>
- - -----------
1 The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable
versus tax-deferred compounding for the periods and on the terms
indicated. Earnings in a traditional IRA account will be subject to tax
when withdrawn from the account. Distributions from a Roth IRA which meet
the conditions required under the Internal Revenue Code will not be
subject to tax upon withdrawal from the account.
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, E.G., to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event 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 financial
advisor concerning the appropriate blend of portfolios for them. If investors
elect to purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
The price an investor pays for each share is based on the share value. The
Fund's Share value-known as the net asset value per share or NAV-is determined
by subtracting its liabilities from the value of its assets and dividing the
remainder by the number of outstanding shares. NAV is calculated separately for
each class. The Directors have fixed the specific time of day for the
computation of the Fund's net asset value to be as of 4:15 P.M., New York time.
Under the Investment Company Act, the Board of Directors are responsible
for determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of
investments listed on a securities exchange and NASDAQ National Market System
securities (other than options on stock and stock indices) are valued at the
last sale price on the day of valuation or, if there was no sale on such day,
the mean between the last bid and asked prices on such day, as provided by a
pricing service or principal market marker. Corporate bonds (other than
convertible debt securities) and U.S. Government securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued on the basis of
valuations provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, agency ratings, market
transactions in comparable securities and various relationships between
securities in determining value. Convertible debt securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued at the mean
between the last reported bid and asked prices provided by principal market
makers. Options on stock and stock indices traded on an exchange are valued at
the mean between the most recently quoted bid and asked prices on the respective
exchange and futures contracts and options thereon are valued at their last sale
prices as of the close of trading on the applicable commodities exchange.
Quotations of foreign securities in a foreign currency are converted to U.S.
dollar equivalents at the current rate obtained from a recognized bank or
dealer, and forward currency exchange contracts are valued at the current cost
of covering or offsetting such contacts. Should an extraordinary event, which is
likely to affect the value of the
B-36
<PAGE>
security, occur after the close of an exchange on which a portfolio security is
traded, such security will be valued at fair value considering factors
determined in good faith by the investment adviser under procedures established
by and under the general supervision of the Fund's Board of Directors.
Securities or other assets for which reliable market quotations are not
readily available or for which the pricing agent or principal market maker does
not provide a valuation or methodology or provides a valuation or methodology
that, in the judgment of the Manager or Subadviser (or Valuation Committee or
Board of Directors) does not represent fair value, are valued by the Valuation
Committee or Board of Directors in consultation with the Manager or Subadviser.
Short-term debt securities are valued at cost, with interest accrued or discount
amortized to the date of maturity, if their original maturity was 60 days or
less, unless this is determined by the Trustees not to represent fair value.
Short-term securities with remaining maturities of more than 60 days, for which
market quotations are readily available, are valued at their current market
quotations as supplied by an independent pricing agent or principal market
maker. The Fund will compute its NAV at 4:15 P.M., New York time, on each day
the New York Stock Exchange is open for trading except on days on which no
orders to purchase, sell or redeem Fund shares have been received or days on
which changes in the value of the Fund's portfolio securities do not affect NAV.
In the event the New York Stock Exchange closes early on any business day, the
NAV of the Fund's shares shall be determined at the time between such closing
and 4:15 P.M., New York time. The New York Stock Exchange is closed on the
following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
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,
1998 of approximately $350,586,300, of which $77,895,200 expires in 1999,
$110,441,500 expires in 2000 and $162,249,600 expires in 2003. Such carryforward
is after utilization of approximately $47,342,200 of the net taxable gain
realized and recognized during the year ended December 31, 1998. Approximately
$155,097,000 of the Fund's capital loss carryforward expired as of December 31,
1998. In addition, the Fund will elect to treat net capital losses of
approximately $20,477,600 incurred in the two month period ended December 31,
1998 as having been incurred in the following fiscal year. Accordingly, no
capital gains distribution or distribution out of short-term capital gains is
expected to be paid to shareholders until net capital gains have been realized
in excess of the aggregate of such amounts. Distributions, if any, will be paid
in additional Fund shares based on the NAV 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; and (b) 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 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 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. Debt
securities acquired by the Fund also may be subject to the market discount
rules.
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
B-37
<PAGE>
capital gains (that is, the excess of capital gains from the sale of assets held
for more than 12 months 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. The maximum long-term capital gains rate for individuals is 20%.
The maximum capital gains rate for corporate shareholders currently is the same
as the maximum tax rate for ordinary income. 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.
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 character
of the capital gain or loss on the sale of the futures contract depends 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
would be capital gain or loss, the character of which would depend on the
holding period of the put. If a put expires unexercised, the Fund would realize
capital loss, the character of which would depend 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.
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 dividends on Class A will be lower than the per share
dividends on Class Z as a result of the distribution related fees applicable to
Class A 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 capital
gain or loss. Any such capital gain or loss will be treated as long-term capital
loss if the shares were held for more than 12 months. In the case of an
individual, the maximum long-term capital gains rate is 20%. However, any loss
realized by a shareholder upon the sale of shares of the Fund held by the
shareholder for six months or less will be treated as long-term capital loss to
the extent of any capital gains distributions received by the shareholder.
Any loss realized on a sale, redemption or exchange of shares of the Fund
by a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend or distribution will
constitute a replacement of shares.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which the Fund will be subject, since the amount of the Fund's
assets to be invested in various countries will vary.
Under the Internal Revenue Code, gains or losses attributable to
fluctuations in exchange rates which occur between the time the Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the
B-38
<PAGE>
time the Fund actually collects such receivables or pays such liabilities are
treated as ordinary income or ordinary loss. Similarly, gains or losses on
forward foreign currency exchange contracts or dispositions of debt securities
denominated in a foreign currency attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security and the
date of disposition also are treated as ordinary gain or loss. These gains,
referred to under the Internal Revenue Code as "Section 988" gains or losses,
increase or decrease the amount of the Fund's investment company taxable income
available to be distributed to its shareholders as ordinary income, rather than
increasing or decreasing the amount of the Fund's net capital gain. If Section
988 losses exceed other investment company taxable income during a taxable year,
the Fund would not be able to make any ordinary dividend distributions, or
distributions made before the losses were realized would be recharacterized as a
return of capital to shareholders, rather than as an ordinary dividend, reducing
each shareholder's basis in his or her Fund shares.
Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends or distributions. Furthermore,
such dividends or distributions, although in effect a return of capital, are
subject to federal income taxes. Therefore, prior to purchasing shares of the
Fund, the investor should carefully consider the impact of dividends or capital
gains distributions which are expected to be or have been announced.
Distributions from the Fund and gains on sale or exchange of Fund shares may be
subject to state and local taxation. Dividends from net investment income and
short-term capital gains paid to a foreign shareholder will generally be subject
to U.S. withholding tax of 30% (or lower treaty rate).
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.
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 NAV 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, 1998 for the Fund's
Class A, Class B, Class C and Class Z shares was 9.81%, 9.61%, 9.52% and 10.39%,
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 Commission regulations. Under
those procedures, limitations may be placed on yield to maturity calculations of
particular securities.
AVERAGE ANNUAL TOTAL RETURN. The Fund may also 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 "Risk/Return
Summary-Evaluating Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P(1 + T)n = ERV
B-39
<PAGE>
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 assumes reinvestment of all dividends and
distributions, 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, 1998 was (4.13)%, 7.04% and 9.94%, 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, 1998 was (5.70)%, 7.13% and 8.59%, respectively.
The average annual total return for Class C shares for the one year and since
inception (August 1, 1994) periods ended December 31, 1998 was (2.70)% and
8.57%, respectively. The average annual total return for Class Z shares for the
one year and since inception (March 1, 1996) periods ended December 31, 1998 was
0.00% and 7.54%, respectively.
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 "Risk/Return
Summary-Evaluating 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 (January 22, 1990) periods ended December
31, 1998 was (0.13)%, 46.39% and 142.96%, 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, 1998 was (0.70)%, 42.12% and 127.96%,
respectively. The aggregate total return for Class C shares for the one year and
since inception (August 1, 1994) periods ended December 31, 1998 was (0.70)% and
45.24%, respectively. The aggregate total return for the Class Z shares for the
one year and since inception (March 1, 1996) periods ended December 31, 1998
were 0.00% and 22.88%.
B-40
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS AS OF DECEMBER 31, 1998 PRUDENTIAL HIGH YIELD FUND, INC.
====================================================================================================================================
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LONG-TERM INVESTMENTS--96.6%
CORPORATE BONDS--91.3%
- - ------------------------------------------------------------------------------------------------------------------------------------
AEROSPACE--1.2%
BE Aerospace, Inc., Sr. Sub. Notes B1 9.50% 11/01/08 $ 6,000 $ 6,330,000
Compass Aerospace Corp., Sr. Sub. Notes B-(a) 10.125 4/15/05 5,750 5,548,750
Sequa Corp., Sr. Sub. Notes B1 9.375 12/15/03 34,450 35,655,750
Transdigm, Inc., Sr. Sub. Notes B3 10.375 12/01/08 3,500 3,508,750
--------------
51,043,250
- - ------------------------------------------------------------------------------------------------------------------------------------
AUTOMOTIVE PARTS--2.4%
Foamex JPS Automotive LLC., Sr. Notes B1 11.125 6/15/01 21,700 (d) 22,785,000
Hayes Wheels Int'l., Inc.,
Sr. Sub. Notes B3 11.00 7/15/06 32,000 35,520,000
Sr. Sub. Notes B3 9.125 7/15/07 4,875 5,089,688
Paragon Corporate Holdings, Inc., Sr. Notes B3 9.625 4/01/08 7,500 6,300,000
Standyne Automotive Corp., Sr. Sub. Notes B(a) 10.25 12/15/07 10,550 10,550,000
Venture Holdings, Sr. Notes B2 9.50 7/01/05 19,500 19,402,500
--------------
99,647,188
- - ------------------------------------------------------------------------------------------------------------------------------------
BROADCASTING & OTHER MEDIA--7.0%
American Lawyer Media, Inc.,
Sr. Disc. Notes, Zero Coupon (until 12/15/02) B3 12.25 12/15/08 10,500 6,510,000
Sr. Sub. Notes B1 9.75 12/15/07 8,350 8,704,875
AMSC Acquisition, Inc., Sr. Notes NR 12.25 4/01/08 9,750 6,045,000
Capstar Radio Broadcasting,
Sr. Disc. Notes, Zero Coupon (until 2/1/02) B-(a) 12.75 2/01/09 16,675 13,673,500
Sr. Sub. Notes B2 9.25 7/01/07 12,000 12,480,000
Chancellor Media Corp.,
Sr. Notes B+(a) 8.00 11/01/08 19,000 19,142,500
Sr. Sub. Notes B(a) 9.00 10/01/08 19,250 20,332,812
Globo Communicacoes, Sr. Notes (Brazil) B2 10.50 12/20/06 6,000 (i) 3,840,000
Grupo Televisa S.A., Sr. Disc. Notes (Mexico)
Zero Coupon (until 5/15/01) Ba2 13.25 5/15/08 17,500 (i) 12,993,750
Lamar Advertising Co., Sr. Sub. Notes B1 9.625 12/01/06 8,500 9,222,500
Liberty Group Publishing, Inc.,
Sr. Disc. Deb., Zero Coupon (until 2/1/03) CCC+(a) 11.625 2/01/09 12,150 6,682,500
Sr. Sub. Notes B3 9.375 2/01/08 8,650 8,477,000
Lin Holdings Corp., Sr. Disc. Notes, Zero Coupon
(until 3/1/03) B3 10.00 3/01/08 21,000 14,752,500
Mail-Well Corp., Sr. Sub. Notes B1 8.75 12/15/08 8,000 8,080,000
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. B-41
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS AS OF DECEMBER 31, 1998 PRUDENTIAL HIGH YIELD FUND, INC.
====================================================================================================================================
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BROADCASTING & OTHER MEDIA (CONT'D.)
NTL, Inc.,
Sr. Notes, Zero Coupon (until 10/1/03) B3 12.375% 10/01/08 $ 5,750 $ 3,593,750
Sr. Notes, Zero Coupon (until 4/1/03) B3 9.75 4/01/08 25,500 15,746,250
Outdoor Systems, Inc., Sr. Sub. Notes B1 9.375 10/15/06 18,000 19,440,000
Production Resource LLC., Sr. Sub. Notes B-(a) 11.50 1/15/08 15,000 14,700,000
Renaissance Media LLC., Sr. Disc. Notes,
Zero Coupon (until 4/15/03) B3 10.00 4/15/08 5,500 3,712,500
SFX Broadcasting, Inc.,
Sr. Sub. Notes B3 10.75 5/15/06 21,588 23,962,680
Sr. Sub. Notes B3 9.125 2/01/08 24,000 23,760,000
Shop At Home, Inc., Sr. Sec'd. Notes B1 11.00 4/01/05 6,500 6,630,000
Sun Media Corp., Sr. Sub. Notes (Canada) B2 9.50 5/15/07 9,522 (i) 10,569,420
Transwestern Publishing Co., L.P., Sr. Sub. Notes B-(a) 9.625 11/15/07 5,250 5,460,000
World Color Press, Inc., Sr. Sub. Notes B1 8.375 11/15/08 10,000 10,050,000
Young America Corp., Sr. Sub. Notes B3 11.625 2/15/06 11,400 4,902,000
--------------
293,463,537
- - ------------------------------------------------------------------------------------------------------------------------------------
BUILDING & RELATED INDUSTRIES--4.3%
Ainsworth Lumber Ltd., Sr. Notes B3 12.50 7/15/07 8,000 7,920,000
American Builders, Sr. Sub. Notes B3 10.625 5/15/07 5,000 4,650,000
Beazer Homes USA, Inc., Sr. Notes B1 8.875 4/01/08 6,000 5,745,000
Building Materials Corp., Sr. Notes Ba3 8.00 12/01/08 8,000 8,030,000
Congoleum Corp., Sr. Notes B1 8.625 8/01/08 6,000 5,910,000
D.R. Horton, Inc., Sr. Notes Ba2 8.375 6/15/04 10,170 10,119,150
Del Webb Corp., Sr. Sub. Deb. B2 9.375 5/01/09 14,500 (g) 13,920,000
Falcon Building Prod., Inc.,
Sr. Sub. Disc. Notes, Zero Coupon (until 6/15/02) B3 10.50 6/15/07 24,100 13,857,500
Sr. Sub. Notes B3 9.50 6/15/07 20,150 17,631,250
Falcon Holdings Group, L.P.,
Sr. Disc. Notes, Zero Coupon (until 4/15/03) B2 9.285 4/15/10 11,500 7,762,500
Sr. Notes B2 8.375 4/15/10 5,000 5,100,000
Kaufman & Broad Home Corp., Sr. Sub. Notes Ba3 9.625 11/15/06 28,000 29,120,000
Kevco, Inc., Sr. Sub. Notes B3 10.375 12/01/07 11,000 9,900,000
Koppers Industries, Inc., Sr. Sub. Notes B2 9.875 12/01/07 8,550 8,379,000
Nortek, Inc.,
Sr. Notes B1 9.25 3/15/07 15,875 16,390,937
Sr. Notes B1 9.125 9/01/07 17,000 17,382,500
--------------
181,817,837
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. B-42
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS AS OF DECEMBER 31, 1998 PRUDENTIAL HIGH YIELD FUND, INC.
====================================================================================================================================
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CABLE--7.9%
Adelphia Communications Corp.,
Sr. Notes B2 9.50% 2/15/04 $ 2,000 $ 2,125,000
Sr. Notes B2 10.50 7/15/04 11,300 12,373,500
Coaxial Communications, Inc., Sr. Notes B3 10.00 8/15/06 5,750 5,922,500
Comcast UK Cable Corp., Sr. Disc. Deb.,
Zero Coupon (until 11/15/00) B2 11.20 11/15/07 19,900 16,716,000
CSC Holdings, Inc., Sr. Sub. Notes B1 9.25 11/01/05 14,835 15,947,625
Diamond Cable Co., Sr. Disc. Notes (United Kingdom) B3 13.25 9/30/04 30,860 (i) 29,625,600
Diva Systems Corp., Sr. Disc. Notes, Zero Coupon
(until 3/1/03) NR 12.625 3/01/08 15,900 5,914,800
Echostar Satellite, Sr. Disc. Notes, Zero Coupon
(until 3/15/00) B3 13.125 3/15/04 1,500 1,496,250
International Cabletel, Inc., Sr. Disc. Notes,
Zero Coupon (until 4/15/00) B3 12.75 4/15/05 25,950 23,614,500
Lenfest Communications, Inc., Sr. Notes Ba3 8.375 11/01/05 5,050 5,454,000
Rogers Cablesystems, Inc. (Canada),
Sr. Sec'd. Deb. Ba3 10.00 12/01/07 10,500 (i) 11,812,500
Sr. Sec'd. Deb. Ba3 10.125 9/01/12 24,575 (i) 27,155,375
Sr. Sec'd. Notes Ba3 10.00 3/15/05 58,575 (i) 65,604,000
Rogers Cantel, Inc. (Canada),
Deb. Ba3 9.375 6/01/08 38,400 (i) 40,512,000
Sr. Sub. Notes BB-(a) 8.80 10/01/07 12,600 (i) 12,694,500
Telewest plc, Sr. Disc. Deb. (United Kingdom),
Zero Coupon (until 10/1/00) B1 11.00 10/01/07 15,000 (i) 12,487,500
TVN Entertainment Corp., Sr. Notes NR 14.00 8/01/08 15,000 12,750,000
United Int'l. Holdings, Inc., Sr. Disc. Notes,
Zero Coupon (until 2/15/03) B3 10.75 2/15/08 56,500 30,227,500
--------------
332,433,150
- - ------------------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--1.1%
Allied Waste North America,
Sr. Notes Ba2 7.625 1/01/06 9,000 9,112,500
Sr. Notes Ba2 7.875 1/01/09 26,000 26,325,000
ICF Kaiser Int'l., Inc., Sr. Sub. Notes B3 13.00 12/31/03 3,000 1,500,000
Interlake Corp., Sr. Sub. Deb. B3 12.125 3/01/02 6,500 6,565,000
Neenah Corp., Sr. Sub. Notes B3 11.125 5/01/07 4,000 4,110,000
Thermadyne Holdings, Sr. Disc. Notes, Zero Coupon
(until 6/1/03) CCC+(a) 12.50 6/01/08 2,000 880,000
--------------
48,492,500
- - ------------------------------------------------------------------------------------------------------------------------------------
CASINOS--3.8%
Aladdin Gaming, Sr. Disc. Notes, Zero Coupon (until
3/1/03) CCC+(a) 13.50 3/01/10 38,500 10,010,000
Alliance Gaming Corp., Sr. Sub. Notes B3 10.00 8/01/07 4,350 (g) 3,980,250
Boyd Gaming Corp., Sr. Sub. Notes B1 9.50 7/15/07 17,875 (g) 17,785,625
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. B-43
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS AS OF DECEMBER 31, 1998 PRUDENTIAL HIGH YIELD FUND, INC.
====================================================================================================================================
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASINOS (CONT'D.)
Casino America Corp., Sr. Notes B1 12.50% 8/01/03 $ 3,890 $ 4,298,450
Casino Magic Corp., First Mtge. Notes B3 13.00 8/15/03 1,250 1,412,500
Fitzgeralds Gaming Corp., Sr. Notes B3 12.25 12/15/04 14,000 7,560,000
Grand Casinos, Inc., Sr. Notes B2 9.00 10/15/04 13,750 15,468,750
Harrahs Operating, Inc., Gtd. Sr. Sub. Notes Ba2 7.875 12/15/05 12,250 12,280,625
Horseshoe Gaming LLC., Sr. Sub. Notes B3 9.375 6/15/07 22,100 22,928,750
Lady Luck Gaming Corp., First Mtge. Notes B2 11.875 3/01/01 2,000 (g) 2,020,000
Majestic Star Casino LLC., Sr. Notes B(a) 12.75 5/15/03 1,250 1,312,500
MGM Grand, Inc., Sr. Notes Ba1 6.875 2/06/08 12,550 12,204,875
Trump Atlantic City Assocs.,
First Mtge. Notes B2 11.25 5/01/06 35,850 31,548,000
First Mtge. Notes, Ser. B B2 11.25 5/01/06 5,000 4,250,000
Trumps Castle Funding, Inc., First Mtge. Notes Caa 11.75 11/15/03 5,000 (g) 4,000,000
Venetian Casino Resort LLC., First Mtge. Notes NR 12.25 11/15/04 9,000 8,415,000
--------------
159,475,325
- - ------------------------------------------------------------------------------------------------------------------------------------
CHEMICALS--1.9%
Huntsman Corp., Sr. Sub. Notes B2 9.50 7/01/07 28,000 28,070,000
Polymer Group, Inc., Sr. Sub. Notes B2 8.75 3/01/08 14,000 (g) 13,755,000
Sterling Chemical Holdings, Inc.,
Sr. Disc. Notes, Zero Coupon (until 8/15/01) Caa 13.50 8/15/08 17,250 6,555,000
Sr. Sub. Notes B3 11.75 8/15/06 10,000 8,500,000
Terra Industries, Inc., Sr. Notes Ba3 10.50 6/15/05 24,100 24,702,500
--------------
81,582,500
- - ------------------------------------------------------------------------------------------------------------------------------------
COMPUTER SERVICES--0.7%
Viasystems, Inc., Sr. Sub. Notes B3 9.75 6/01/07 29,750 29,601,250
- - ------------------------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS--3.1%
Borden, Inc., Notes Ba1 9.20 3/15/21 13,500 13,195,170
Consumers Int'l., Inc., Sr. Sec'd. Notes Ba3 10.25 4/01/05 19,100 20,055,000
Corning Consumer Prod. Co., Sr. Sub. Notes B3 9.625 5/01/08 16,000 11,200,000
Desa Int'l., Inc., Sr. Sub. Notes B3 9.875 12/15/07 11,500 8,625,000
Doskocil, Inc., Sr. Sub. Notes B3 10.125 9/15/07 8,000 7,520,000
Holmes Prod. Corp., Sr. Sub. Notes B3 9.875 11/15/07 9,825 9,235,500
Loewen Group Int'l., Inc., Sr. Gtd. Notes Ba3 8.25 10/15/03 7,000 5,932,500
Pierce Leahy Command Co., Sr. Notes B3 8.125 5/15/08 4,250 4,218,125
Revlon Consumer Prod. Corp.,
Sr. Notes B2 9.00 11/01/06 12,500 12,375,000
Sr. Sub. Notes B3 8.625 2/01/08 15,000 13,650,000
Sealy Mattress Co., Sr. Sub. Disc. Notes,
Zero Coupon (until 12/15/02) NR 10.875 12/15/07 10,000 6,000,000
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. B-44
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS AS OF DECEMBER 31, 1998 PRUDENTIAL HIGH YIELD FUND, INC.
====================================================================================================================================
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSUMER PRODUCTS (CONT'D.)
United States Office Prod. Co., Sr. Sub. Notes B3 9.75% 6/15/08 $ 8,600 $ 5,418,000
Waste Systems Int'l., Inc., Sr. Sub. Notes CCC+(a) 7.00 5/13/05 6,000 5,790,000
Windmere Durable Holdings, Inc., Sr. Notes B3 10.00 7/31/08 5,500 5,142,500
--------------
128,356,795
- - ------------------------------------------------------------------------------------------------------------------------------------
DRUGS & HEALTH CARE--7.0%
Abbey Healthcare Group, Inc., Sr. Sub. Notes B3 9.50 11/01/02 1,500 (g) 1,455,000
Alaris Med. Systems, Inc., Sr. Sub. Notes B3 9.75 12/01/06 18,375 18,742,500
Alliance Imaging, Inc., Sr. Sub. Notes B3 9.625 12/15/05 10,000 9,350,000
Columbia / HCA Healthcare Corp., Notes Ba2 6.91 6/15/05 10,000 9,728,200
Dade Int'l., Inc., Sr. Sub. Notes B2 11.125 5/01/06 40,510 44,561,000
Fresenius Med. Care Capital Trust,
Gtd. Notes NR 9.00 12/01/06 56,340 58,593,600
Gtd. Notes NR 7.875 2/01/08 3,300 3,267,000
Grahm Field Health Prod., Inc., Sr. Sub Notes B3 9.75 8/15/07 11,890 7,847,400
Harborside Healthcare Corp., Sr. Sub. Disc. Notes,
Zero Coupon (until 8/1/03) B3 11.00 8/01/08 11,750 5,640,000
ICN Pharmaceuticals, Inc., Sr. Notes Ba3 8.75 11/15/08 13,000 13,065,000
Integrated Health Svcs., Inc.,
Sr. Sub. Notes B2 10.25 4/30/06 37,500 37,125,000
Sr. Sub. Notes B2 9.50 9/15/07 4,000 3,800,000
Magellan Health Svcs., Inc., Sr. Sub. Notes B3 9.00 2/15/08 37,000 32,560,000
Mariner Post Acute Network, Inc.,
Sr. Sub. Disc. Notes, Zero Coupon (until 11/1/02) B3 10.50 11/01/07 25,900 12,561,500
Sr. Sub. Notes B3 9.50 11/01/07 5,000 4,075,000
Medaphis Corp., Sr. Notes B2 9.50 2/15/05 4,150 3,195,500
Media, Inc., Sr. Sub. Notes B3 11.00 6/01/08 3,000 2,880,000
Tenet Healthcare Corp., Sr. Sub. Notes Ba3 8.625 1/15/07 23,500 24,557,500
--------------
293,004,200
- - ------------------------------------------------------------------------------------------------------------------------------------
ENERGY--9.1%
AES Corp.,
Sr. Sub. Exch. Ba1 8.375 8/15/07 10,000 10,075,000
Sr. Sub. Notes Ba1 10.25 7/15/06 26,000 28,080,000
Sr. Sub. Notes NR 8.50 11/01/07 20,000 20,250,000
Anker Coal Group, Inc., Sr. Notes B3 9.75 10/01/07 13,750 7,287,500
Bayard Drilling Technologies, Inc., Sr. Notes B2 11.00 6/30/05 7,500 8,250,000
Benton Oil & Gas Co., Sr. Notes B2 11.625 5/01/03 11,300 6,554,000
Chesapeake Energy Corp., Sr. Notes B3 9.625 5/01/05 14,000 10,500,000
Chiles Offshore Corp. LLC., Sr. Notes B3 10.00 5/01/08 5,000 4,000,000
Cliffs Drilling Co.,
Sr. Notes B1 10.25 5/15/03 12,800 13,068,000
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. B-45
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS AS OF DECEMBER 31, 1998 PRUDENTIAL HIGH YIELD FUND, INC.
====================================================================================================================================
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ENERGY (CONT'D.)
DI Industies, Inc., Sr. Notes B1 8.875% 7/01/07 $ 6,000 $ 4,350,000
Forcenergy, Inc., Sr. Sub. Notes B3 9.50 11/01/06 10,000 7,700,000
Gothic Prod. Corp., Sr. Sec'd. Notes B3 11.125 5/01/05 9,500 (g) 7,410,000
Grant Geophysical, Inc., Sr. Notes B3 9.75 2/15/08 10,000 6,800,000
Great Lakes Carbon Corp.,
Sr. Disc. Deb., Zero Coupon (until 5/15/03) B-(a) 13.125 5/15/09 7,200 3,672,000
Sr. Sub. Notes B3 10.25 5/15/08 5,000 5,037,500
Grey Wolf, Inc., Sr. Notes B1 8.875 7/01/07 3,450 2,501,250
Gulf Canada Resources Ltd.,
Sr. Sub. Deb. Ba2 9.25 1/15/04 5,000 5,123,400
Sr. Sub. Deb. Ba2 9.625 7/01/05 5,000 5,225,000
Houston Expl. Co., Sr. Sub. Notes B2 8.625 1/01/08 7,000 6,790,000
Key Energy Group, Inc., Sr. Sub. Notes NR 5.00 9/15/04 4,000 1,800,000
McDermott J. Ray, Sr. Sub. Notes B1 9.375 7/15/06 29,350 31,111,000
Ocean Rig, Gtd. Sr. Sec'd. Notes B3 10.25 6/01/08 16,000 12,800,000
P & L Coal Holdings Corp.,
Sr. Notes Ba3 8.875 5/15/08 22,500 22,950,000
Sr. Sub. Notes B2 9.625 5/15/08 12,250 12,464,375
Parker Drilling Co., Sr. Notes B1 9.75 11/15/06 15,000 13,425,000
Petroleos Mexicanos, Gtd. Notes Ba2 9.375 12/02/08 9,500 9,357,500
Plains Resources, Inc., Sr. Sub. Notes B2 10.25 3/15/06 11,000 11,000,000
Pogo Producing Co., Sr. Sub. Notes B1 8.75 5/15/07 15,600 14,430,000
R & B Falcon Corp., Sr. Notes Ba1 9.50 12/15/08 8,500 8,500,000
Snyder Oil Corp., Sr. Sub. Notes B2 8.75 6/15/07 10,000 9,600,000
Tesoro Petroleum Corp., Sr. Sub. Notes B1 9.00 7/01/08 16,000 15,520,000
Universal Compression Holdings,
Sr. Disc. Notes, Zero Coupon (until 2/15/03) B2 9.875 2/15/08 22,850 13,710,000
Sr. Disc. Notes, Zero Coupon (until 2/15/03) B3 11.375 2/15/09 7,300 4,161,000
Veritas DGC, Inc., Sr. Notes Ba3 9.75 10/15/03 6,300 6,394,500
Vintage Petroleum, Inc.,
Sr. Sub. Notes B1 9.00 12/15/05 10,000 9,800,000
Sr. Sub. Notes B1 8.625 2/01/09 16,185 (g) 15,375,750
York Power Funding, Sr. Sec'd. Notes (Cayman Islands) NR 12.00 10/30/07 10,000 (i) 9,800,000
--------------
384,872,775
- - ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--1.6%
Airplane Pass Through Trust, Sr. Sub. Notes Ba2 10.875 3/15/19 4,000 4,200,000
Americredit Corp., Gtd. Sr. Sub. Notes Ba1 9.25 2/01/04 14,450 13,908,125
Amresco Mtg., Inc., Sr. Sub. Notes (cost $4,900,000;
purchased 2/24/98) B2 9.875 3/15/05 4,900 (b) 3,430,000
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. B-46
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS AS OF DECEMBER 31, 1998 PRUDENTIAL HIGH YIELD FUND, INC.
====================================================================================================================================
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FINANCIAL SERVICES (CONT'D.)
Delta Financial Corp., Sr. Notes B3 9.50% 8/01/04 $ 10,450 (g) $ 8,778,000
Fugi JGB Investment, LLC., Pref'd. Notes Ba1 9.87 12/31/49 8,250 5,898,750
Nationwide, Inc., Sr. Notes B3 10.25 1/15/08 6,500 5,265,000
PX Escrow Corp., Sr. Sub. Disc. Notes, Zero Coupon
(until 2/1/02) B3 9.625 2/01/06 23,000 12,650,000
SB Treasury Co., Pref'd. Notes Baa1 9.40 12/29/49 12,500 11,625,000
--------------
65,754,875
- - ------------------------------------------------------------------------------------------------------------------------------------
FOOD & BEVERAGE--2.7%
Advantica Restaurant Group, Inc., Sr. Notes B2 11.25 1/15/08 9,375 9,492,188
Ameriserve Food Dist., Inc., Sr. Sub. Notes B3 10.125 7/15/07 37,945 33,960,775
Carrols Corp., Sr. Sub. Notes B2 9.50 12/01/08 13,000 13,097,500
Cott Corp., Sr. Notes Ba3 8.50 5/01/07 4,500 4,201,875
Envirodyne Industries, Inc., Sr. Notes B3 10.25 12/01/01 5,325 4,260,000
Favorite Brands Int'l., Inc., Sr. Notes B3 10.75 5/15/06 2,300 1,886,000
Fresh Foods, Inc., Sr. Sub. Notes B3 10.75 6/01/06 9,200 8,464,000
Grupo Azucarero S.A., Sr. Notes (Mexico) B3 11.50 1/15/05 10,000 (i) 3,500,000
Packaged Ice, Inc., Sr. Notes B3 9.75 2/01/05 8,500 8,500,000
PSF Holdings, LLC., Sr. Sec'd. Notes (cost
$11,050,490;
purchased 5/20/94 and 5/8/97) NR 11.00 9/17/03 11,050 (b) 11,603,014
Purina Mills, Inc., Sr. Sub. Notes B2 9.00 3/15/10 15,000 14,925,000
--------------
113,890,352
- - ------------------------------------------------------------------------------------------------------------------------------------
INDUSTRIALS--1.2%
Anchor Lamina, Inc., Sr. Sub. Notes B3 9.875 2/01/08 13,500 12,150,000
Eagle Picher Holdings, Inc., Sr. Sub. Notes B3 9.375 3/01/08 9,500 8,977,500
Thermadyne Mfg., Sr. Sub. Notes B3 9.875 6/01/08 9,000 8,190,000
Trench Electric S.A., Gtd. Sr. Sub. Notes
(Netherlands) B3 10.25 12/15/07 23,000 (i) 21,390,000
--------------
50,707,500
- - ------------------------------------------------------------------------------------------------------------------------------------
LEISURE & TOURISM--3.6%
Ballys Health & Tennis Corp.,
Sr. Sub. Notes B3 9.875 10/15/07 22,000 21,560,000
Extended Stay America, Inc., Sr. Sub. Notes B2 9.15 3/15/08 16,000 14,960,000
Felcor Suites L.P., Gtd. Sr. Notes NR 7.375 10/01/04 7,935 7,558,088
Hedstrom Corp., Sr. Sub. Notes B3 10.00 6/01/07 9,400 7,990,000
Hedstrom Holdings, Inc., Sr. Disc. Notes,
Zero Coupon (until 6/1/02) Caa 12.00 6/01/09 3,400 1,530,000
Hilton Hotels Corp., Sr. Notes Baa2 7.50 12/15/17 17,500 16,734,375
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. B-47
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS AS OF DECEMBER 31, 1998 PRUDENTIAL HIGH YIELD FUND, INC.
====================================================================================================================================
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LEISURE & TOURISM (CONT'D.)
HMH Properties, Inc.,
Sr. Notes Ba2 7.875% 8/01/08 $ 19,750 $ 19,157,500
Sr. Notes Ba2 8.45 12/01/08 3,500 3,500,000
Hollywood Theaters, Inc., Gtd. Sr. Sub. Notes B3 10.625 8/01/07 8,000 5,600,000
Host Marriott Travel Plazas, Inc., Sr. Notes Ba3 9.50 5/15/05 1,700 1,780,750
Imax Corp., Sr. Notes Ba2 7.875 12/01/05 6,000 6,030,000
Loews Ciniplex Entertainment Corp., Sr. Sub. Notes B3 8.875 8/01/08 2,000 2,065,000
Outboard Marine Corp., Sr. Notes B3 10.75 6/01/08 6,000 5,850,000
Premier Cruise Ltd., Sr. Notes B3 11.00 3/15/08 13,000 6,500,000
Premier Parks, Inc., Sr. Disc. Notes, Zero Coupon
(until 4/1/03) B3 10.00 4/01/08 12,250 8,330,000
Six Flags Entertainment Corp., Gtd. Sr. Notes B3 8.875 4/01/06 7,300 7,564,625
Town Sports Int'l., Inc., Sr. Notes B2 9.75 10/15/04 13,450 12,710,250
--------------
149,420,588
- - ------------------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS SERVICES--1.4%
Ball Corp., Sr. Sub. Notes B1 8.25 8/01/08 1,000 1,045,000
Coinstar, Inc., Sr. Disc. Notes, Zero Coupon (until
10/1/99) NR 13.00 10/01/06 10,050 8,542,500
Color Spot Nurseries, Sr. Sub. Notes CCC(a) 10.50 12/15/07 10,000 6,000,000
Continental Global Group, Inc., Sr. Notes B2 11.00 4/01/07 10,000 8,550,000
Kindercare Learning Center, Inc., Sr. Sub. Notes B3 9.50 2/15/09 14,125 14,054,375
La. Petite Academy, Inc., Sr. Notes B3 10.00 5/15/08 5,000 4,950,000
SF Holdings Group, Inc., Sr. Disc. Notes,
Zero Coupon (until 3/15/03) B-(a) 12.75 3/15/08 16,500 5,280,000
United Stationer Supply Co., Sr. Sub. Notes B1 12.75 5/01/05 8,600 9,589,000
--------------
58,010,875
- - ------------------------------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS--2.1%
Gaylord Container Corp., Sr. Sub. Notes CCC+(a) 9.875 2/15/08 2,700 (g) 1,971,000
Graham Packaging Holdings Co.,
Sr. Disc. Notes, Zero Coupon (until 1/15/03) B-(a) 10.75 1/15/09 15,925 10,988,250
Sr. Sub. Notes B3 8.75 1/15/08 7,150 7,221,500
Indah Kiat Fin Mauritius Ltd., Gtd. Sr. Notes
(Indonesia) B2 10.00 7/01/07 10,000 (i) 5,200,000
Millar Western Prod. Ltd., Sr. Notes B3 9.875 5/15/08 10,000 7,500,000
Moll Industries, Inc., Sr. Sub. Notes B3 10.50 7/01/08 4,250 4,122,500
Repap New Brunswick, Inc., Sr. Sec'd. Notes Caa 10.625 4/15/05 9,000 (g) 6,030,000
S.D. Warren Co., Sr. Sub. Notes B1 12.00 12/15/04 8,000 8,680,000
Stone Container Corp.,
Sr. Notes B2 12.58 8/01/16 200 211,500
Sr. Sub. Deb. B3 12.25 4/01/02 19,250 19,250,000
Tekni Plex, Inc., Sr. Sub. Notes B3 9.25 3/01/08 17,550 18,339,750
--------------
89,514,500
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. B-48
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS AS OF DECEMBER 31, 1998 PRUDENTIAL HIGH YIELD FUND, INC.
====================================================================================================================================
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REAL ESTATE--0.6%
CB Richards Ellis Svcs, Inc., Sr. Sub. Notes Ba3 8.875% 6/01/06 $ 13,500 $ 13,230,000
Saul B F Real Estate Investment Trust, Sr. Sec'd.
Notes B-(a) 9.75 4/01/08 13,000 11,960,000
--------------
25,190,000
- - ------------------------------------------------------------------------------------------------------------------------------------
RETAIL--2.5%
Big 5 Corp., Sr. Notes B2 10.875 11/15/07 14,900 15,049,000
Big 5 Holdings Corp., Sr. Disc. Notes,
Zero Coupon (until 11/30/02) NR 13.45 11/30/08 10,000 5,400,000
Cluett American Corp., Sr. Sub. Notes B3 10.125 5/15/08 10,750 10,158,750
Duane Reade, Inc., Sr. Sub. Notes B3 9.25 2/15/08 4,480 4,614,400
Franks Nursery & Crafts, Inc., Sr. Sub. Notes B3 10.25 3/01/08 17,400 17,226,000
French Fragrances, Inc.,
Sr. Notes, Series B B2 10.375 5/15/07 15,030 14,842,125
Sr. Notes, Series D B2 10.375 5/15/07 3,550 3,496,750
Pamida, Inc., Sr. Sub. Notes Caa 11.75 3/15/03 9,000 8,640,000
Phar-Mor, Inc., Sr. Notes B3 11.72 9/11/02 1,447 1,512,115
Saks, Inc., Gtd. Sr. Sub. Notes Baa3 8.25 11/15/08 13,500 14,310,000
Steel Heddle Manufacturing Co., Sr. Sub. Notes B3 10.625 6/01/08 4,500 3,150,000
Syratech Corp., Sr. Notes B3 11.00 4/15/07 8,475 6,864,750
--------------
105,263,890
- - ------------------------------------------------------------------------------------------------------------------------------------
STEEL & METALS--4.0%
AK Steel Corp., Sr. Notes Ba2 9.125 12/15/06 10,700 11,208,250
Doe Run Res. Corp., Sr. Notes B3 11.25 3/15/05 5,000 4,000,000
Great Central Mines Ltd., Sr. Notes Ba2 8.875 4/01/08 10,000 9,975,000
International Wire Group, Inc., Sr. Sub. Notes B3 11.75 6/01/05 18,500 19,471,250
Kaiser Aluminum & Chemical Corp., Sr. Sub. Notes B2 12.75 2/01/03 16,750 16,415,000
Lukens, Inc.,
Sr. Notes Ba3 7.625 8/01/04 3,500 3,351,250
Sr. Notes Ba3 6.50 2/01/06 5,000 4,300,000
Pohang Iron & Steel Ltd., Unsec'd. Notes (Korea) Ba1 7.125 7/15/04 14,000 (i) 12,070,800
Renco Steel Holdings, Inc., Sr. Sec'd. Notes B-(a) 10.875 2/01/05 7,450 6,407,000
Silgan Holdings, Inc., Sr. Sub. Deb. B1 9.00 6/01/09 13,000 13,162,500
UCAR Global Enterprises, Inc., Sr. Sub. Notes B2 12.00 1/15/05 5,750 6,037,500
WCI Steel, Inc., Sr. Sec'd. Notes B2 10.00 12/01/04 31,600 (g) 31,363,000
Wheeling Pittsburgh Corp., Sr. Notes B2 9.25 11/15/07 17,700 16,638,000
WHX Corp., Sr. Notes B3 10.50 4/15/05 14,750 13,422,500
--------------
167,822,050
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. B-49
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS AS OF DECEMBER 31, 1998 PRUDENTIAL HIGH YIELD FUND, INC.
====================================================================================================================================
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1)
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUPERMARKETS--1.1%
Pantry, Inc., Sr. Sub. Notes B3 10.25% 10/15/07 $ 20,250 $ 21,161,250
Pathmark Stores, Inc., Sr. Sub. Notes B3 9.625 5/01/03 8,348 8,181,040
Southland Corp., Sr. Sub. Deb. Ba3 5.00 12/15/03 19,500 17,160,000
--------------
46,502,290
- - ------------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--1.3%
Details Holding Corp., Sr. Disc. Notes,
Zero Coupon (until 11/15/02) NR 12.50 11/15/07 16,200 8,910,000
Details, Inc., Sr. Sub. Notes B3 10.00 11/15/05 11,375 10,806,250
DII Group, Inc., Sr. Sub. Notes B1 8.50 9/15/07 11,500 11,385,000
MCMS, Inc., Sr. Sub. Notes B3 9.75 3/01/08 14,000 11,760,000
Pioneer-Standard Electronics, Inc., Sr. Notes Baa3 8.50 8/01/06 6,000 6,025,800
Zilog, Inc., Sr. Sec'd. Notes B2 9.50 3/01/05 9,000 (g) 7,110,000
--------------
55,997,050
- - ------------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS--17.0%
21st Century Telecom Group, Inc., Sr. Disc. Notes,
Zero Coupon (until 2/15/03) NR 12.25 2/15/08 11,500 4,830,000
Allegiance Telecom, Inc.,
Sr. Disc. Notes, Zero Coupon (until 2/15/03) NR 11.75 2/15/08 14,200 6,532,000
Sr. Notes NR 12.875 5/15/08 10,000 9,750,000
Anacomp, Inc., Sr. Sub. Notes B3 10.875 4/01/04 12,000 12,360,000
Barak ITC Int'l. Telecom, Sr. Disc. Notes (Israel),
Zero Coupon (until 11/15/02) B3 12.50 11/15/07 36,500 (i) 18,250,000
Bestel S.A. De CV, Sr. Disc. Notes (Mexico),
Zero Coupon (until 5/15/01) NR 12.75 5/15/05 11,000 (i) 6,380,000
Birch Telecom, Inc., Sr. Notes NR 14.00 6/15/08 5,000 4,600,000
Call-Net Enterprises, Inc., Sr. Disc. Notes,
Zero Coupon (until 8/15/03) B1 8.94 8/15/08 20,000 11,400,000
Caprock Communications Corp., Sr. Notes B(a) 12.00 7/15/08 8,500 8,160,000
Cellnet Data Systems, Inc., Sr. Disc. Notes,
Zero Coupon (until 10/1/02) (cost $15,558,193;
purchased 9/24/97 and 10/13/97) NR 14.00 10/01/07 27,000 (b)(d) 5,940,000
Communication Cellular, S.A., Sr. Def'd. Bonds
(Columbia),
Zero Coupon (until 11/15/00) B3 13.125 11/15/03 34,750 (i) 24,672,500
Crown Castle Int'l. Corp., Sr. Disc. Notes,
Zero Coupon (until 11/15/02) B3 10.625 11/15/07 6,250 4,312,500
Dialog Corp., Sr. Sub. Notes (United Kingdom) B3 11.00 11/15/07 18,000 (i) 17,910,000
DTI Holdings, Inc., Sr. Disc. Notes, Zero Coupon
(until 3/1/03) NR 12.50 3/01/08 7,250 1,848,750
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. B-50
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS AS OF DECEMBER 31, 1998 PRUDENTIAL HIGH YIELD FUND, INC.
====================================================================================================================================
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1)
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELECOMMUNICATIONS (CONT'D.)
E Spire Communications, Inc., Sr. Disc. Notes,
Zero Coupon (until 7/1/03) NR 10.625% 7/01/08 $ 10,250 $ 4,100,000
Econophone, Inc., Sr. Disc. Notes, Zero Coupon (until
2/15/03) NR 11.00 2/15/08 16,000 7,600,000
Firstworld Communications, Inc., Sr. Notes,
Zero Coupon (until 4/15/03) NR 13.00 4/15/08 16,750 5,108,750
Focal Communications Corp., Sr. Disc. Notes,
Zero Coupon (until 2/15/03) NR 12.125 2/15/08 6,650 3,524,500
Geotek Communications, Inc., Sr. Conv. Notes, PIK C Zero 2/15/01 12,000 (e) 60,000
Global Telesystems Group, Inc., Sr. Notes B-(a) 9.875 2/15/05 10,300 9,785,000
Globix Corp., Sr. Notes NR 13.00 5/01/05 8,500 6,970,000
Grupo Iusacell S.A. De CV, Sr. Notes (Mexico) B2 10.00 7/15/04 13,000 (i) 11,310,000
GST Equipment, Inc., Sr. Sec'd. Notes NR 13.25 5/01/07 10,000 10,300,000
GST Network Funding, Inc., Sr. Disc. Notes,
Zero Coupon (until 5/1/03) NR 10.50 5/01/08 6,500 2,990,000
GST Telecommunications, Inc.,
Conv. Sr. Disc. Notes, Zero Coupon (until
12/15/00) NR 13.875 12/15/05 2,262 1,854,840
Sr. Sub. Notes NR 12.75 11/15/07 8,200 7,523,500
GST USA, Inc., Sr. Disc. Notes, Zero Coupon (until
12/15/00) NR 13.875 12/15/05 17,096 12,223,640
Hyperion Telecommunications, Inc., Sr. Disc. Notes,
Zero Coupon (until 4/15/01) (cost $2,160,984;
purchased 4/10/96 and 6/23/98) B3 13.00 4/15/03 2,800 (b) 2,016,000
ICG Holdings, Inc., Sr. Disc. Notes, Zero Coupon
(until 5/1/03) NR 9.875 5/01/08 14,500 7,467,500
ICO Global Communications, Sr. Notes B3 15.00 8/01/05 18,250 13,687,500
IDT Corp., Sr. Notes B+(a) 8.75 2/15/06 14,900 14,155,000
Impsat Corp.,
Sr. Notes B1 12.125 7/15/03 13,500 11,880,000
Sr. Notes B+(a) 12.375 6/15/08 12,000 9,720,000
Intermedia Cap. Partners, L.P., Sr. Notes B2 11.25 8/01/06 30,250 34,031,250
Intermedia Communications of Florida,
Sr. Disc. Notes, Zero Coupon (until 5/15/01) B2 12.50 5/15/06 22,500 17,550,000
Sr. Disc. Notes, Zero Coupon (until 7/15/02) B2 11.25 7/15/07 17,750 12,070,000
International Wireless Communications, Inc., Sr.
Disc. Notes,
(cost $5,398,604; purchased 8/9/96 and 9/13/96) NR Zero 8/15/01 8,000(b)(d)(e) 1,040,000
IPC Information Systems, Inc., Sr. Disc. Notes,
Zero Coupon (until 11/1/01) B3 10.875 5/01/08 16,000 10,000,000
Iridium Cap. Corp.,
Gtd. Notes B3 14.00 7/15/05 7,500 7,125,000
Sr. Notes NR 11.25 7/15/05 4,000 3,420,000
Jacor Communications Co., Sr. Sub. Notes B2 8.75 6/15/07 2,000 2,170,000
Jordan Telecommunication Prod., Sr. Sub. Notes B3 9.875 8/01/07 10,000 10,000,000
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. B-51
1
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS AS OF DECEMBER 31, 1998 PRUDENTIAL HIGH YIELD FUND, INC.
====================================================================================================================================
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELECOMMUNICATIONS (CONT'D.)
Level 3 Communications, Inc., Sr. Disc. Notes,
Zero Coupon (until 12/1/03) B3 10.50% 12/01/08 $ 31,000 $ 18,018,750
Long Distance Int'l., Inc., Sr. Notes NR 12.25 4/15/08 6,500 5,200,000
Mastec, Inc., Sr. Sub. Notes Ba3 7.75 2/01/08 19,500 18,817,500
McLeod, Inc., Sr. Notes B2 9.25 7/15/07 10,000 10,350,000
Metronet Communications Corp., Sr. Disc. Notes,
Zero Coupon (until 6/15/03) B3 9.95 6/15/08 27,000 16,537,500
Netia Holdings BV (Poland),
Gtd. Sr. Disc. Notes, Zero Coupon (until 11/1/01) B3 11.25 11/01/07 12,500 (i) 7,062,500
Gtd. Sr. Notes B3 10.25 11/01/07 9,150 (i) 7,823,250
Nextel Communications, Inc.,
Sr. Disc. Notes, Zero Coupon (until 8/15/99) B2 9.75 8/15/04 28,000 27,160,000
Sr. Disc. Notes, Zero Coupon (until 9/15/02) B2 10.65 9/15/07 3,250 2,088,125
Sr. Disc. Notes, Zero Coupon (until 10/31/02) B2 9.75 10/31/07 36,500 22,265,000
Sr. Disc. Notes, Zero Coupon (until 2/15/03) B2 9.95 2/15/08 29,025 17,415,000
Nextel International, Inc., Sr. Disc. Notes,
Zero Coupon (until 4/15/03) CCC+(a) 12.125 4/15/08 3,000 1,380,000
Northeast Optic Network, Inc., Sr. Notes NR 12.75 8/15/08 7,500 7,275,000
Omnipoint Corp.,
Sr. Notes B3 11.625 8/15/06 8,600 6,020,000
Pagemart Nationwide, Inc., Sr. Disc. Notes,
Zero Coupon (until 2/1/00) B3 15.00 2/01/05 23,000 20,240,000
Pagemart Wireless, Inc., Sr. Disc. Notes,
Zero Coupon (until 2/1/03) NR 11.25 2/01/08 36,000 16,560,000
Price Communications Wireless,
Sr. Sec'd. Notes Ba3 9.125 12/15/06 12,500 12,625,000
Sr. Sub. Notes B3 11.75 7/15/07 12,500 13,187,500
PTC Int'l. Fin BV, Gtd. Sr. Sub. Disc. Notes
(Poland),
Zero Coupon (until 7/1/02) B3 10.75 7/01/07 19,250 (i) 13,282,500
Qwest Communications Int'l., Inc., Sr. Notes BB+(a) 7.50 11/01/08 3,500 3,640,000
RCN Corp., Sr. Disc. Notes, Zero Coupon (until
10/15/02) B3 11.125 10/15/07 11,950 6,931,000
RSL Communications, Sr. Notes B-(a) 12.00 11/01/08 10,000 10,350,000
Rural Cellular Corp., Sr. Sub. Notes B3 9.625 5/15/08 11,000 11,055,000
Splitrock Svcs., Inc., Sr. Notes NR 11.75 7/15/08 8,000 6,960,000
Star Choice Communications, Sr. Sec'd. Notes B3 13.00 12/15/05 5,000 (g) 5,025,000
Time Warner Telecom LLC., Sr. Notes B2 9.75 7/15/08 10,000 (g) 10,450,000
U.S. Exchange LLC., Sr. Notes NR 15.00 7/01/08 7,000 7,140,000
Versatel Telecom BV, Sr. Notes NR 13.25 5/15/08 9,000 8,910,000
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. B-52
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS AS OF DECEMBER 31, 1998 PRUDENTIAL HIGH YIELD FUND, INC.
====================================================================================================================================
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (UNAUDITED) RATE DATE (000) (NOTE 1)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TELECOMMUNICATIONS (CONT'D.)
Viatel, Inc.,
Sr. Disc. Notes, Zero Coupon (until 4/15/03) NR 12.50% 4/15/08 $ 8,400 $ 4,788,000
Sr. Notes NR 11.25 4/15/08 5,050 5,075,250
WamNet, Inc., Sr. Disc. Notes, Zero Coupon (until
3/1/02) NR 13.25 3/01/05 7,500 4,125,000
Worldwide Fiber Inc., Sr. Notes B3 12.50 12/15/05 10,000 (g) 10,000,000
--------------
714,385,105
- - ------------------------------------------------------------------------------------------------------------------------------------
TEXTILES--0.8%
Foamex, L.P. Cap Corp., Sr. Sub. Notes B3 9.875 6/15/07 12,550 13,554,000
Phillips Van Heusen Corp., Sr. Sub. Notes B1 9.50 5/01/08 8,050 8,050,000
Worldtex, Inc., Sr. Notes B1 9.625 12/15/07 15,000 13,350,000
--------------
34,954,000
- - ------------------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION/TRUCKING/SHIPPING--1.9%
American Commercial Lines, Sr. Notes B1 10.25 6/30/08 17,000 17,340,000
Autopistas Del Sol S.A., Sr. Notes NR 10.25 8/01/09 3,500 2,660,000
Continental Airlines Inc., Sr. Notes Ba2 8.00 12/15/05 3,250 3,211,325
Holt Group, Inc., Sr. Notes B+(a) 9.75 1/15/06 8,320 5,740,800
Kitty Hawk, Inc., Gtd. Notes B1 9.95 11/15/04 22,505 22,167,425
MRS Logistica S.A., Sr. Notes (Brazil) B(a) 10.625 8/15/05 10,000 (i) 5,600,000
Stena AB (Sweden),
Sr. Notes Ba2 8.75 6/15/07 7,000 (i) 6,667,500
Sr. Notes B1 10.625 6/01/08 11,500 (i) 10,350,000
US Air, Inc., Pass-through Certs. Ba2 10.375 3/01/13 7,030 8,138,561
--------------
81,875,611
--------------
Total corporate bonds (cost $4,121,653,930) 3,843,078,993
--------------
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. B-53
3
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS AS OF DECEMBER 31, 1998 PRUDENTIAL HIGH YIELD FUND, INC.
=========================================================================================
VALUE
DESCRIPTION SHARES (NOTE 1)
- - -----------------------------------------------------------------------------------------
<S> <C> <C>
PREFERRED STOCKS--4.5%
Adelphia Communications Corp.,
$13.00 74,000 $ 8,621,000
California Fed. Corp., $9.125 1,822 46,125,577
Cendant Corp., $7.50 16,000 534,000
Chesapeake Energy Corp., $7.00 110,000 1,175,625
Concentric Network Corp., $13.50 6,821 5,831,955
CSC Holdings, Inc.,
Ser. 1995K-1, $11.125 113,429 12,647,289
Ser. 1995K-2, $11.125 3,632 40,496,800
Ser. 1995K-4, $11.75 135,996 15,503,530
Eagle Picher Holdings, Inc., 1,530
$11.75 7,726,500
GPA Group Plc, Conv., 7.00% 13,200 6,600,000
Harborside Healthcare Corp., 2,585
$13.50 2,262,149
Intermedia Communications of
Florida, $7.00 280,000 4,165,000
Paxon Communications Corp., Jr.,
$13.25 1,482 12,966,879
Primedia, Inc., $8.625 117,000 11,378,250
Rural Cellular Corp., $11.375 4,231 3,892,511
Texas Utilities Co., $9.25 80,000 4,510,000
Viasystems Group, Inc., 8.00% 162,365 2,435,472
Viatel, Inc., $10.00 6,898 758,807
--------------
Total preferred stocks
(cost $178,504,392) 187,631,344
--------------
COMMON STOCKS(c)--0.2%
Cellnet Data Systems, Inc.
(cost $1,080; purchased
6/25/97) 216,000 (b) $ 1,080,000
Coinstar, Inc. 65,100 699,825
Dr Pepper Bottling Co., Cl. B 72,580 2,322,560
Envirosource, Inc. 61,190 313,599
Gaylord Container Corp., Cl. A 82,735 506,752
Hedstrom Holdings, Inc. 206,223 206,223
Intermedia Communications of
Florida, 3,276 48,730
Nextel Communications, Inc. 85,298 2,015,165
Northeast Optic Network, Inc. 80,000 830,000
Pagemart Nationwide, Inc. 71,750 403,594
Peachtree Cable Assn., Ltd. 31,559 284,978
SF Holdings Group, Inc. 33,000 66,000
--------------
Total common stocks
(cost $8,357,048) 8,777,426
--------------
COMMON TRUST UNITS(c)--0.4% Units
---------
PSF Holdings, LLC.
(cost $15,959,021;
purchased 5/20/94) 951,717 (b)(f) 15,389,467
--------------
- - -----------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. B-54
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS AS OF DECEMBER 31, 1998 PRUDENTIAL HIGH YIELD FUND, INC.
====================================================================================================================================
EXPIRATION VALUE
DATE WARRANTS (NOTE 1)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
WARRANTS(c)--0.2%
Aladdin Gaming 3/1/10 385,000 $ 3,850
Allegiance Telecom, Inc. 2/15/08 14,200 113,600
American Banknote Corp. 12/1/07 3,750 469
American Mobile Satellite Corp. 4/1/08 9,750 37,830
Bell Technology Group Ltd. 5/1/05 8,500 85
Bestel S.A. De CV 5/15/05 11,000 22,000
Birch Telecom, Inc. 6/15/08 5,000 0
Cellnet Data Systems, Inc. 9/15/07 44,455 (d) 266,730
Clearnet Communications, Inc. 9/15/05 66,495 332,475
Comcel 11/15/03 29,000 2,175,000
Diva Systems Corp. 3/1/08 47,700 763,200
DTI Holdings, Inc. 3/1/08 36,250 1,812
Ermis Maritime Holdings Ltd. 3/15/06 9,818 9,818
Firstworld Communications, Inc. 4/15/08 16,750 0
Foamex JPS Automotive LLC. 7/1/99 20,250 425,250
Gaylord Container Corp. 11/1/02 417,518 2,087,590
ICO Global Communications 8/1/05 18,250 0
International Wireless Communications, Inc. 8/15/01 8,000 (d)(e) 0
Intelcom Group, Inc. 9/15/05 127,809 1,661,517
Intermedia Communications of Florida 6/1/00 11,250 480,825
Long Distance Int'l., Inc. 4/15/08 6,500 65
Nextel Communications, Inc. 4/25/99 7,000 0
President Riverboat Casinos, Inc. 9/30/99 44,150 0
Price Communications Wireless 8/1/07 17,200 754,650
Primus Telecommunications Group 8/1/04 12,250 153,125
Splitrock Svcs., Inc. 7/15/08 8,000 88,000
Star Choice Communications 12/15/05 115,800 196,860
Sterling Chemical Holdings, Inc. 8/15/08 5,450 81,750
TVN Entertainment Corp. 8/1/08 15,000 150
United Int'l. Holdings, Inc. 11/15/99 44,500 667,500
USN Communications, Inc. 10/15/06 92,500 19,425
Versatel Telecom BV 5/15/08 9,000 90,000
WamNet, Inc. 3/1/05 22,500 180,000
--------------
Total warrants (cost $752,509) 10,613,576
--------------
Total long-term investments (cost $4,325,226,900) $4,065,490,806
--------------
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. B-55
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS AS OF DECEMBER 31, 1998 PRUDENTIAL HIGH YIELD FUND, INC.
====================================================================================================================================
PRINCIPAL
INTEREST MATURITY AMOUNT VALUE
RATE DATE (000) (NOTE 1)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS--3.2%
- - ------------------------------------------------------------------------------------------------------------------------------------
Alltel Corp., loan participation 5.75% 1/04/99 $50,000(h) $ 50,000,000
Countrywide Home Loan, Inc., commercial paper 5.10 1/04/99 12,559 12,553,663
Countrywide Home Loan, Inc., commercial paper 5.40 1/04/99 50,000 49,977,500
First Chicago Corp., time deposit 4.875 1/04/99 10,962(h) 10,962,000
Xerox Capital, commercial paper 5.30 1/04/99 9,224 9,219,926
--------------
Total short-term investments (cost $132,713,089) 132,713,089
--------------
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--99.8%
(cost $4,457,939,989; Note 4) 4,198,203,895
Other assets in excess of liabilities--0.2% 9,948,340
--------------
Net Assets--100% $4,208,152,235
--------------
--------------
- - -------------------------
(a) Standard & Poor's Rating.
(b) Indicates a restricted security; the aggregate cost of such securities is ($55,028,372). The aggregate value ($40,498,481) is
approximately 1.0% of net assets.
(c) Non-income producing securities.
(d) Consists of more than one class of securities traded together as a unit; generally bonds with attached stock or warrants.
(e) Represents issuer in default on interest payments, non-income producing security.
(f) Fair valued security.
(g) Portion of securities on loan, see Note 4.
(h) Represents security, or portion thereof, purchased with cash collateral received for securities on loan.
(i) US$ Denominated foreign bonds.
NR--Not rated by Moody's or Standard & Poor's.
PIK--Payment in kind securities.
LLC--Limited Liability Company.
L.P.--Limited Partnership.
The Fund's current Prospectus contains a description of Moody's and Standard & Poor's ratings.
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. B-56
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES PRUDENTIAL HIGH YIELD FUND, INC.
====================================================================================================================================
ASSETS DECEMBER 31, 1998
<S> <C>
Investments, at value (cost $4,457,939,989)............................................................. $ 4,198,203,895
Cash.................................................................................................... 271,209
Interest receivable..................................................................................... 77,147,956
Receivable for Fund shares sold......................................................................... 10,738,075
Receivable for securities lending....................................................................... 9,471
Deferred expenses and other assets...................................................................... 94,623
----------------
Total assets......................................................................................... 4,286,465,229
----------------
LIABILITIES
Payable to broker for collateral for securities on loan................................................. 60,840,540
Payable for Fund shares reacquired...................................................................... 6,934,177
Payable for investments purchased....................................................................... 5,226,389
Distribution fee payable................................................................................ 1,800,692
Management fee payable.................................................................................. 1,470,887
Dividends payable....................................................................................... 1,065,622
Accrued expenses........................................................................................ 877,180
Securities lending rebate payable....................................................................... 97,507
----------------
Total liabilities.................................................................................... 78,312,994
----------------
NET ASSETS.............................................................................................. $ 4,208,152,235
================
Net assets were comprised of:
Common stock, at par................................................................................. $ 5,350,054
Paid-in capital in excess of par..................................................................... 4,833,462,936
----------------
4,838,812,990
Undistributed net investment income.................................................................. 349,779
Accumulated net realized loss on investments......................................................... (371,274,440)
Net unrealized depreciation on investments........................................................... (259,736,094)
----------------
Net assets, December 31, 1998........................................................................... $ 4,208,152,235
================
Class A:
Net asset value and redemption price per share
($1,677,604,599 / 212,980,494 shares of common stock issued and outstanding)...................... $7.88
Maximum sales charge (4.00% of offering price)....................................................... .33
-----
Maximum offering price to public..................................................................... $8.21
=====
Class B:
Net asset value, offering price and redemption price per share
($2,381,793,383 / 303,120,030 shares of common stock issued and outstanding)...................... $7.86
=====
Class C:
Net asset value and redemption price per share
($83,686,639 / 10,650,300 shares of common stock issued and outstanding).......................... $7.86
Sales charge (1.00% of offering price)............................................................... .08
-----
Offering price to public............................................................................. $7.94
=====
Class Z:
Net asset value, offering price and redemption price per share
($65,067,614 / 8,254,614 shares of common stock issued and outstanding)........................... $7.88
=====
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. B-57
<PAGE>
PRUDENTIAL HIGH YIELD FUND, INC.
STATEMENT OF OPERATIONS
- - --------------------------------------------------------------------------------
YEAR ENDED
NET INVESTMENT INCOME DECEMBER 31, 1998
-----------------
Income
Interest.............................. $ 420,464,366
Dividends............................. 5,581,356
Income from securities loaned, net.... 33,635
-------------
Total Income....................... 426,079,357
-------------
Expenses
Distribution fee--Class A............. 2,568,796
Distribution fee--Class B............. 19,179,387
Distribution fee--Class C............. 504,719
Management Fee........................ 17,880,859
Transfer agent's fees and expenses.... 4,366,000
Custodian's fees and expenses......... 330,000
Registration fees..................... 123,000
Insurance expense..................... 70,000
Reports to shareholders............... 56,000
Audit fee and expenses................ 48,000
Directors' fees and expenses.......... 33,000
Legal fees and expenses............... 20,000
Miscellaneous......................... 8,867
-------------
Total expenses..................... 45,188,628
-------------
Net investment income.................... 380,890,729
-------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain on investment
transactions.......................... 36,353,107
Net change in unrealized appreciation of
investments........................... (422,696,898)
-------------
Net loss on investments.................. (386,343,791)
-------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS................ $ (5,453,062)
=============
PRUDENTIAL HIGH YIELD FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
INCREASE (DECREASE) ------------------------
IN NET ASSETS 1998 1997
---- ----
Operations
Net investment income....... $ 380,890,729 $ 354,105,853
Net realized gain on
investment
transactions............. 36,353,107 146,274,171
Net change in unrealized
appreciation
(depreciation) of
investments.............. (422,696,898) 7,321,433
--------------- ---------------
Net increase (decrease) in
net assets resulting from
operations............... (5,453,062) 507,701,457
--------------- ---------------
Dividends and distributions
(Note 1)
Dividends from net
investment income
Class A.................. (154,810,882) (139,641,643)
Class B.................. (215,059,672) (207,750,363)
Class C.................. (5,714,430) (3,608,339)
Class Z.................. (5,305,745) (3,105,508)
--------------- ---------------
(380,890,729) (354,105,853)
--------------- ---------------
Dividends in excess of net
investment income
Class A.................. (3,143,618) (8,405,450)
Class B.................. (4,367,041) (12,505,119)
Class C.................. (116,038) (217,197)
Class Z.................. (107,739) (186,930)
--------------- ---------------
(7,734,436) (21,314,696)
--------------- ---------------
Fund share transactions (Net of
share conversions) (Note 5)
Net proceeds from shares
sold..................... 2,963,551,012 2,751,808,904
Net asset value of shares
issued in reinvestment of
dividends and
distributions............ 194,305,581 185,528,878
Cost of shares reacquired... (3,024,094,927) (2,836,907,445)
--------------- ---------------
Net increase in net assets
from Fund share
transactions............. 133,761,666 100,430,337
--------------- ---------------
Total increase (decrease)...... (260,316,561) 232,711,245
NET ASSETS
Beginning of year.............. 4,468,468,796 4,235,757,551
--------------- ---------------
End of year(a)................. $ 4,208,152,235 $ 4,468,468,796
=============== ===============
- - -------------------------
(a) Undistributed net
investment income.......... $ 349,779 $ --
---------------- ----------------
- - --------------------------------------------------------------------------------
See Notes to Financial Statements. B-58
<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, which may
include those which are restricted as to disposition under securities law
('restricted securities'). Certain issues of restricted securities held by the
Fund at December 31, 1998 include registration rights under which the Fund may
demand registration by the issuer, of which the Fund may bear the cost of such
registration. Restricted securities, sometimes referred to as private
placements, are valued pursuant to the valuation procedures noted above.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of portfolio
securities are calculated on an identified cost basis. Interest income is
recorded on an accrual basis and dividend income is recorded on the ex-dividend
date. The Fund accretes 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.
Securities Lending: The Fund may lend securities to broker-dealers. The loans
are secured by collateral at least equal at all times to the market value of the
securities loaned. Loans are subject to termination at the option of the
borrower or the Fund. Upon termination of the loan, the borrower will return to
the lender securities identical to the loaned securities. The Fund may bear the
risk of delay in recovery of, or even loss of rights in, the securities loaned
should the borrower of the securities fail financially. The
- - --------------------------------------------------------------------------------
B-59
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL HIGH YIELD FUND, INC.
================================================================================
Fund receives compensation, net of any rebate, for lending its securities in the
form of fees or it retains a portion of interest on the investment of any cash
received as collateral. The Fund also continues to receive interest, on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund. Prudential Securities Incorporated ('PSI') is the securities lending agent
for the Fund. For the fiscal year ended December 31, 1998, PSI has been
compensated approximately $8,400.
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 increase undistributed net investment
income by $9,125,958, decrease accumulated net realized loss on investments by
$145,971,221 and decrease paid in capital in excess of par by $155,097,179. This
was primarily due to the sale of securities purchased with market discount and
the expiration of a portion of the capital loss carryforward for the year ended
December 31, 1998. Net investment income, net realized gains and net assets were
not affected by this change.
- - --------------------------------------------------------------------------------
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement PIMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'); PIC furnishes investment advisory services in
connection with the management of the Fund. PIFM pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PIFM 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 had a distribution agreement with PSI, which acted as the distributor
of the Class A, B, C and Z shares of the Fund through May 31, 1998. Prudential
Investment Management Services LLC ('PIMS') became the distributor of the Fund
effective June 1, 1998 and is serving the Fund under the same terms and
conditions as under the arrangement with PSI. The Fund compensated PSI and PIMS
for distributing and servicing the Fund's Class A, Class B and Class C shares,
pursuant to plans of distribution (the 'Class A, B and C Plans'), regardless of
expenses actually incurred by them. The distribution fees are accrued daily and
payable monthly. No distribution or service fees were paid to PSI or PIMS as
distributor of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensated PSI and PIMS 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, 1998.
Effective January 1, 1999, the annual rate for Class A shares was increased to
.25 of 1%.
PSI and PIMS have advised the Fund that they have received approximately
$1,702,700 in front-end sales charges resulting from sales of Class A and Class
C shares (after November 1, 1998) during the year ended December 31, 1998. From
these fees, PSI and PIMS 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 and PIMS have advised the Fund that for the year ended December 31, 1998,
they have received approximately $3,651,200 and $46,900 in contingent deferred
sales charges imposed upon certain redemptions by Class B and Class C
shareholders, respectively.
PSI, PIFM, PIMS and PIC are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
'Funds'), has a credit agreement (the 'Agreement') with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement for the year ended
December 31, 1998. The Funds pay a commitment fee at an annual rate of .055 of
1% on the unused portion of the credit facility. The commitment fee is accrued
and paid quarterly on a pro-rata basis by the Funds. The Agreement expired on
December 29, 1998 and has been extended through February 28, 1999 under the same
terms.
- - --------------------------------------------------------------------------------
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC, ('PMFS'), a wholly owned subsidiary of
PIFM, serves as the Fund's transfer agent and during the year ended
- - --------------------------------------------------------------------------------
B-60
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL HIGH YIELD FUND, INC.
================================================================================
December 31, 1998, the Fund incurred fees of approximately $3,667,200 for the
services of PMFS. As of December 31, 1998, $310,800 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, 1998 were $4,418,253,943 and $4,356,824,541,
respectively.
The federal income tax basis of the Fund's investments, including short-term
investments, as of December 31, 1998 was $4,458,150,473; and accordingly, net
unrealized depreciation for federal income tax purposes was $259,946,578 (gross
unrealized appreciation--$103,910,119; gross unrealized
depreciation--$363,856,697).
For federal income tax purposes, the Fund has a capital loss carryforward as of
December 31, 1998 of approximately $350,586,300 of which $77,895,200 expires in
1999, $110,441,500 expires in 2000 and $162,249,600 expires in 2003. Such
carryforward is after utilization of approximately $47,342,200 of net taxable
gains realized and recognized during the year ended December 31, 1998.
Approximately $155,097,000 of the Fund's capital loss carryforward expired as of
December 31, 1998. In addition, the Fund will elect to treat net capital losses
of approximately $20,477,600 incurred in the two month period ended December 31,
1998 as having been incurred in the following fiscal year. 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.
As of December 31, 1998, the Fund has securities on loan with an aggregate
market value of $58,015,388. The Fund received $60,840,540 in cash, as
collateral for securities on loan with which it purchased highly liquid
short-term investments in accordance with the Fund's securities lending
procedures.
- - --------------------------------------------------------------------------------
NOTE 5. CAPITAL
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 4.00%. 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 were sold with a
contingent deferred sales charge of 1% during the first year. Effective November
2, 1998, Class C shares are sold with a front-end sales charge of 1% and a
contingent deferred sales charge of 1% during the first 18 months. Class B
shares will automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase. A special exchange privilege is also
available for shareholders who qualify to purchase Class A shares at net asset
value. 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:
CLASS A SHARES AMOUNT
- - ------- ------------ ---------------
Year ended December 31, 1998:
Shares sold................... 220,216,713 $ 1,859,190,071
Shares issued in reinvestment
of
dividends and
distributions............... 10,259,255 85,370,263
Shares reacquired............. (227,838,947) (1,934,064,082)
----------- ---------------
Net increase in shares
outstanding before
conversions................. 2,637,021 10,496,252
Shares issued upon conversion
from Class B................ 10,263,006 85,283,803
----------- ---------------
Net increase in shares
outstanding................. 12,900,027 $ 95,780,055
=========== ===============
Year ended December 31, 1997:
Shares sold................... 193,384,884 $ 1,647,640,589
Shares issued in reinvestment
of
dividends and
distributions............... 9,414,309 80,204,534
Shares reacquired............. (210,193,785) (1,791,846,142)
----------- ---------------
Net decrease in shares
outstanding before
conversions................. (7,394,592) (64,001,019)
Shares issued upon conversion
from Class B................ 20,996,980 178,917,604
----------- ---------------
Net increase in shares
outstanding................. 13,602,388 $ 114,916,585
=========== ===============
CLASS B
- - -------
Year ended December 31, 1998:
Shares sold................... 112,375,736 $ 940,884,702
Shares issued in reinvestment
of
dividends and
distributions............... 12,097,288 100,594,225
Shares reacquired............. (116,993,243) (981,481,666)
----------- ---------------
Net increase in shares
outstanding before
conversion.................. 7,479,781 59,997,261
Shares reacquired upon
conversion into Class A..... (10,287,840) (85,283,803)
----------- ---------------
Net decrease in shares
outstanding................. (2,808,059) $ (25,286,542)
=========== ===============
Year ended December 31, 1997:
Shares sold................... 118,393,095 $ 1,004,044,328
Shares issued in reinvestment
of
dividends and
distributions............... 11,760,615 99,976,935
Shares reacquired............. (113,114,191) (959,505,335)
----------- ---------------
- - --------------------------------------------------------------------------------
B-61
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL HIGH YIELD FUND, INC.
================================================================================
CLASS B SHARES AMOUNT
- - ------- ------------ ---------------
Net increase in shares
outstanding before
conversion.................. 17,039,519 144,515,928
Shares reacquired upon
conversion into Class A..... (21,040,398) (178,917,604)
------------ -------------
Net decrease in shares
outstanding................. (4,000,879) $ (34,401,676)
============ =============
CLASS C
- - -------
Year ended December 31, 1998:
Shares sold................... 8,376,997 $ 68,914,249
Shares issued in reinvestment
of dividends and
distributions............... 409,580 3,387,514
Shares reacquired............. (4,610,242) (38,222,404)
------------ -------------
Net increase in shares
outstanding................. 4,176,335 $ 34,079,359
============ =============
Year ended December 31, 1997:
Shares sold................... 5,931,868 $ 50,289,762
Shares issued in reinvestment
of dividends and
distributions............... 257,238 2,191,113
Shares reacquired............. (4,892,651) (41,327,251)
------------ -------------
Net increase in shares
outstanding................. 1,296,455 $ 11,153,624
============ =============
CLASS Z
- - -------
Year ended December 31, 1998:
Shares sold................... 11,385,751 $ 94,561,990
Shares issued in reinvestment
of dividends and
distributions............... 596,770 4,953,579
Shares reacquired............. (8,538,564) (70,326,775)
------------ -------------
Net increase in shares
outstanding................. 3,443,957 $ 29,188,794
============ =============
Year ended December 31, 1997:
Shares sold................... 5,863,890 $ 49,834,225
Shares issued in reinvestment
of dividends and
distributions............... 370,225 3,156,296
Shares reacquired............. (5,206,103) (44,228,717)
------------ -------------
Net increase in shares
outstanding................. 1,028,012 $ 8,761,804
============ =============
- - --------------------------------------------------------------------------------
B-62
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS PRUDENTIAL HIGH YIELD FUND, INC.
==========================================================================================================================
CLASS A
--------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............... $ 8.65 $ 8.39 $ 8.19 $ 7.68 $ 8.70
---------- ---------- ---------- ---------- --------
Income from investment operations
Net investment income............................ .76 .73 .75 .81 .80
Net realized and unrealized gain (loss) on
investments................................... (.76) .30 .22 .53 (1.00)
---------- ---------- ---------- ---------- --------
Total from investment operations.............. -- 1.03 .97 1.34 (.20)
---------- ---------- ---------- ---------- --------
Less distributions
Dividends from net investment income............. (.76) (.73) (.75) (.81) (.80)
Distributions in excess of net investment
income........................................ (.01) (.04) (.02) (.02) (.02)
---------- ---------- ---------- ---------- --------
Total distributions........................... (.77) (.77) (.77) (.83) (.82)
---------- ---------- ---------- ---------- --------
Net asset value, end of year..................... $ 7.88 $ 8.65 $ 8.39 $ 8.19 $ 7.68
========== ========== ========== ========== ========
TOTAL RETURN(a).................................. (0.13)% 12.81% 12.60% 18.17% (2.35)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).................... $1,677,605 $1,730,473 $1,564,429 $1,336,354 $161,435
Average net assets (000)......................... $1,712,531 $1,635,480 $1,385,143 $1,056,555 $165,517
Ratios to average net assets:
Expenses, including distribution fees......... .67% .69% .72% .75% .78%
Expenses, excluding distribution fees......... .52% .54% .57% .60% .63%
Net investment income......................... 9.04% 8.59% 9.20% 10.13% 9.86%
For Classes A, B, C and Z shares:
Portfolio turnover rate....................... 103% 113% 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 year reported and includes reinvestment of dividends and
distributions.
- - --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. B-63
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS PRUDENTIAL HIGH YIELD FUND, INC.
===========================================================================================================================
Class B
----------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............... $ 8.63 $ 8.38 $ 8.18 $ 7.67 $ 8.69
---------- ---------- ---------- ---------- ----------
Income from investment operations
Net investment income............................ .71 .68 .71 .76 .76
Net realized and unrealized gain (loss) on
investments................................... (.76) .29 .22 .53 (1.00)
---------- ---------- ---------- ---------- ----------
Total from investment operations.............. (.05) .97 .93 1.29 (.24)
---------- ---------- ---------- ---------- ----------
Less distributions
Dividends from net investment income............. (.71) (.68) (.71) (.76) (.76)
Distributions in excess of net investment
income........................................ (.01) (.04) (.02) (.02) (.02)
---------- ---------- ---------- ---------- ----------
Total distributions........................... (.72) (.72) (.73) (.78) (.78)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year..................... $ 7.86 $ 8.63 $ 8.38 $ 8.18 $ 7.67
========== ========== ========== ========== ==========
TOTAL RETURN(a).................................. (0.70)% 12.07% 11.97% 17.49% (2.92)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).................... $2,381,793 $2,640,491 $2,596,207 $2,730,903 $3,311,323
Average net assets (000)......................... $2,557,252 $2,589,122 $2,652,883 $2,725,385 $3,566,709
Ratios to average net assets:
Expenses, including distribution fees......... 1.27% 1.29% 1.32% 1.35% 1.38%
Expenses, excluding distribution fees......... .52% .54% .57% .60% .63%
Net investment income......................... 8.41% 7.99% 8.62% 9.56% 9.28%
- - -------------------------
(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.
- - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. B-64
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS PRUDENTIAL HIGH YIELD FUND, INC.
===================================================================================================================
CLASS C
------------------------------------------------------------
AUGUST 1,
1994(C)
YEAR ENDED DECEMBER 31, THROUGH
------------------------------------------- DECEMBER 31,
1998 1997 1996 1995 1994
------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............. $ 8.63 $ 8.38 $ 8.18 $ 7.67 $ 8.05
------- ------- ------- ------- ------
Income from investment operations
Net investment income............................ .71 .68 .71 .76 .32
Net realized and unrealized gain (loss) on
investments................................... (.76) .29 .22 .53 (.37)
------- ------- ------- ------- ------
Total from investment operations.............. (.05) .97 .93 1.29 (.05)
------- ------- ------- ------- ------
Less distributions
Dividends from net investment income............. (.71) (.68) (.71) (.76) (.32)
Distributions in excess of net investment
income........................................ (.01) (.04) (.02) (.02) (.01)
------- ------- ------- ------- ------
Total distributions........................... (.72) (.72) (.73) (.78) (.33)
------- ------- ------- ------- ------
Net asset value, end of period................... $ 7.86 $ 8.63 $ 8.38 $ 8.18 $ 7.67
======= ======= ======= ======= ======
TOTAL RETURN(a).................................. (0.70)% 12.07% 11.97% 17.49% (0.79)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................. $83,687 $55,879 $43,374 $24,021 $4,860
Average net assets (000)......................... $67,296 $45,032 $28,647 $12,063 $2,840
Ratios to average net assets:
Expenses, including distribution fees......... 1.27% 1.29% 1.32% 1.35% 1.48%(b)
Expenses, excluding distribution fees......... .52% .54% .57% .60% .73%(b)
Net investment income......................... 8.49% 7.99% 8.60% 9.49% 9.80%(b)
- - -------------------------
(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.
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. B-65
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS PRUDENTIAL HIGH YIELD FUND, INC.
===========================================================================================
CLASS Z
------------------------------------
MARCH 1,
YEAR ENDED DECEMBER 1996(C)
31, THROUGH
------------------- DECEMBER 31,
1998 1997 1996
------- ------- ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............. $ 8.65 $ 8.39 $ 8.34
------- ------- --------
Income from investment operations
Net investment income............................ .76 .74 .63
Net realized and unrealized gain (loss) on
investments................................... (.75) .30 .07
------- ------- --------
Total from investment operations.............. .01 1.04 .70
------- ------- --------
Less distributions
Dividends from net investment income............. (.76) (.74) (.63)
Distributions in excess of net investment
income........................................ (.02) (.04) (.02)
------- ------- --------
Total distributions........................... (.78) (.78) (.65)
------- ------- --------
Net asset value, end of period................... $ 7.88 $ 8.65 $ 8.39
======= ======= ========
TOTAL RETURN(a).................................. 0.00% 12.96% 8.77%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................. $65,068 $41,625 $ 31,748
Average net assets (000)......................... $57,453 $35,808 $ 28,978
Ratios to average net assets:
Expenses, including distribution fees......... .52% .54% .57%(b)
Expenses, excluding distribution fees......... .52% .54% .57%(b)
Net investment income......................... 9.23% 8.74% 9.31%(b)
- - -------------------------
(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 Z shares.
- - -------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. B-66
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS PRUDENTIAL HIGH YIELD FUND, INC.
================================================================================
To the Shareholders and Board of Directors of
Prudential High Yield Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential High Yield Fund, Inc.
(the 'Fund') at December 31, 1998, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
February 16, 1999
B-67
<PAGE>
APPENDIX I
GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk and providing balance.
Asset allocation among different types of securities within an overall
investment portfolio helps to reduce risk and to potentially provide stable
returns, while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, I.E., principal and interest
rate payments. Duration is expressed as a measure of time in years-the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing-buying securities when prices are low and selling them when
prices are relatively higher-may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.
I-1
<PAGE>
APPENDIX II-HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
The following chart shows the long-term performance of various asset
classes and the rate of inflation.
CAMERA READY COPY
- - -------
Source: Stocks, Bonds, Bills, and Inflation 1998 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 due to capital appreciation and the
reinvestment of any gains. Bond returns are due to reinvesting interest. 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 measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
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.
II-1
<PAGE>
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
[GRAPHIC OMITTED]
- - -----------
1 Source: Ibbotson Associates Stocks, Bonds, Bills and Inflation-1998 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.
II-2
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1988
through 1998. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Risk/Return Summary-Fees and 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
1988 1989 1990 1991 1992 1993 1994 1995 1996
--------- ---------- --------- ---------- --------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
Treasury Bonds1 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% -3.4% 18.4% %2.7
U.S. Government
Mortgage Securities2 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% -1.6% 16.8% 5.4%
U.S. Investment Grade
Corporate Bonds3 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% -3.9% 22.3% 3.3%
U.S. High Yield
Corporate Bonds4 12.5% 0.8% -9.6% 46.2% 15.8% 17.1% -1.0% 19.2% 11.4%
World Government
Bonds5 2.3% -3.4% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1%
Difference between highest
and lowest returns percent 10.2% 18.8% 24.9% 30.9% 11.0% 10.3% 9.9% 5.5% 8.7%
<CAPTION>
1997 1998
----------- ----------
<S> <C> <C>
U.S. Government
Treasury Bonds1 9.6% 10.0%
U.S. Government
Mortgage Securities2 9.5% 7.0%
U.S. Investment Grade
Corporate Bonds3 10.2% 8.6%
U.S. High Yield
Corporate Bonds4 12.8% 1.6%
World Government
Bonds5 (4.3%) 5.3%
Difference between highest
and lowest returns percent 17.1 8.4%
</TABLE>
- - -----------
1 LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over 150
public issues of the U.S. Treasury having maturities of at least one year.
2 LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation
(FHLMC).
3 LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
4 LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one
year. Data retrieved from Lipper, Inc.
5 SALOMON SMITH BARNEY WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
II-3
<PAGE>
The chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
CAMERA READY CHART TO COME
- - -----------
Source: STOCKS, BONDS, BILLS AND INFLATION 1998 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 1926-1996. 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.
II-4
<PAGE>
APPENDIX III-INFORMATION RELATING TO PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "How the Fund is Managed -Fund Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1997 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and 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,
1997. Principal products and services include life and health insurance, other
healthcare products, property and casualty insurance, securities brokerage,
asset management, investment advisory services and real estate brokerage.
Prudential (together with its subsidiaries) employs more than 79,000 persons
worldwide, and maintains a sales force of approximately 10,100 agents and 6,500
domestic and international financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.
INSURANCE. Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to nearly 40 million people
worldwide. Long one of the largest issuers of life insurance, Prudential has 25
million life insurance policies in force today with a face value of almost $1
trillion. Prudential has the largest capital base ($12.1 billion) of any life
insurance company in the United States. The Prudential provides auto insurance
for more than 1.5 million cars and insures more than 1.2 million homes.
MONEY MANAGEMENT. The Prudential is one of the largest pension fund
managers in the country, providing pension services to 1 in 3 Fortune 500 firms.
It manages $36 billion of individual retirement plan assets, such as 401(k)
plans. As of December 31, 1997, Prudential had more than $370 billion in assets
under management. Prudential Investments, a business group of Prudential (of
which Prudential Mutual Funds is a key part) manages over $211 billion in assets
of institutions and individuals. In Institutional Investor, July 1998,
Prudential was ranked eighth in terms of total assets under management as of
December 31, 1997.
REAL ESTATE. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 37,000 brokers and
agents and more than 1,400 offices throughout the United States.2
HEALTHCARE. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.9
million Americans receive healthcare from a Prudential managed care
membership.3
FINANCIAL SERVICES. The Prudential Savings Banks FSB, a wholly-owned
subsidiary of the Prudential, has nearly $1 billion in assets and serves nearly
1.5 million customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of November 30, 1998 Prudential Investments Fund Management is the
eighteenth largest mutual fund company in the country, with over 2.5 million
shareholders invested in more than 50 mutual fund portfolios and variable
annuities with more than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio manager have over 20 years of experience managing investment
portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
THE WALL STREET JOURNAL, THE NEW YORK TIMES, BARRON'S and USA TODAY.
- - -------
1 PIC serves as the Subadviser to substantially all of the Prudential Mutual
Funds. Wellington Management Company serves as the subadviser to Global Utility
Fund, Inc. Nicholas-Applegate Capital Management as the subadviser to
Nicholas-Applegate Fund, Inc. Jennison Associates Capital Corp. as one of the
subadvisers to The Prudential Investment Portfolios, Inc. and Mercator Asset
Management LP as the subadviser to International Stock Series, a portfolio of
Prudential World Fund, Inc. There are multiple subadvisers for The Target
Portfolio Trust.
2 As of December 31, 1997.
3 On December 10, 1998, Prudential announced its intention to sell Prudential
Health Care to Aetna, Inc. for $1 billion.
III-1
<PAGE>
EQUITY FUNDS. Prudential Equity Fund is managed with a "value" investment
style by PIC. In 1996, Prudential Securities introduced Prudential Jennison
Fund, a growth-style equity fund managed by Jennison Associates LLC, a premier
institutional equity manager and a subsidiary of Prudential.
HIGH YIELD FUNDS. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase.4 Non-investment grade bonds, also
known as junk bonds or high yield bonds, are subject to a greater risk of loss
of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets-from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers-from Pulp and Paper Forecaster to Women's Wear
Daily-to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential Mutual
Fund.
Prudential Mutual Funds trades billions 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.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
Annuities. As of December 31, 1997, assets held by Prudential Securities for its
clients approximated $268 billion. During 1998, over 31,000 new customer
accounts were opened each month at Prudential Securities.5
Prudential Securities has a two-year Financial Advisor training program
plus advanced education programs, including Prudential Securities "university,"
which provides advanced education in a wide array of investment and financial
planning areas.
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architects/Financial AdvisersSM, 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.
- - -----------
4 As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
5 As of December 31, 1997.
III-2
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
(a) (1) 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).
(2) 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).
(3) 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).
(4) 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).
(5) Articles Supplementary. Incorporated by reference to Exhibit (a)(5) to
Post-Effective Amendment No. 31 to the Registration Statement filed on
Form N-1A via EDGAR on December 31, 1998 (File No. 2-63394).
(b)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).
(c)Instruments defining rights of holders of the securities being offered.
Incorporated by reference to Exhibits Nos. 1 and 2 above.
(d) (1) Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc. Incorporated by reference to Exhibit 5(a) to
Post-Effective Amendment No. 29 to the Registration Statement filed on
Form N-1A via EDGAR on March 5, 1997 (File No. 2-63394).
(2) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation. Incorporated by
reference to Exhibit 5(b) to Post-Effective Amendment No. 29 to the
Registration Statement filed on Form N-1A via EDGAR on March 5, 1997
(File No. 2-63394).
(e) (1) Distribution Agreement with Prudential Investment Management
Services LLC. Incorporated by reference to Exhibit (e)(1) to
Post-Effective Amendment No. 31 to the Registration Statement filed on
Form N-1A via EDGAR on December 31, 1998 (File No. 2-63394).
(2) Form of Selected Dealer Agreement. Incorporated by reference to
Exhibit (e)(2) to Post-Effective Amendment No. 31 to the Registration
Statement filed on Form N-1A via EDGAR on December 31, 1998 (File No.
2-63394).
(f) Not Applicable.
(g)Custodian Agreement between the Registrant and State Street Bank & Trust
Company. Incorporated by reference to Exhibit 8 to Post-Effective
Amendment No. 29 to the Registration Statement filed on Form N-1A via
EDGAR on March 5, 1997 (File No. 2-63394).
(h)Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. Incorporated by reference to
Exhibit 9 to Post-Effective Amendment No. 29 to the Registration
Statement filed on Form N-1A via EDGAR on March 5, 1997 (File No.
2-63394).
(i)Opinion of Counsel. Incorporated by reference to Exhibit 10 to
Post-Effective Amendment No. 30 to the Registration Statement filed on
Form N-1A via Edgar on March 3, 1998 (File No. 2-63394).
(j) Consent of Independent Accountants.*
(k) Not applicable.
(l) Not applicable.
(m) (1) Distribution and Service Plan for Class A Shares. Incorporated by
reference to Exhibit (m)(1) to Post-Effective Amendment No. 31 to the
Registration Statement filed on Form N-1A via EDGAR on December 31,
1998 (File No. 2-63394).
(2) Distribution and Service Plan for Class B Shares. Incorporated by
reference to Exhibit (m)(2) to Post-Effective Amendment No. 31 to the
Registration Statement filed on Form N-1A via EDGAR on December 31,
1998 (File No. 2-63394).
C-1
<PAGE>
(3) Distribution and Service Plan for Class C Shares. Incorporated by
reference to Exhibit (m)(3) to Post-Effective Amendment No. 31 to the
Registration Statement filed on Form N-1A via EDGAR on December 31,
1998 (File No. 2-63394).
(n) Financial Data Schedule.*
(o)Amended Rule 18f-3 Plan. Incorporated by reference to Exhibit (o) to
Post-Effective Amendment No. 31 to the Registration Statement filed on
Form N-1A via EDGAR on December 31, 1998 (File No. 2-63394).
- - -------
* Filed herewith.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 25. INDEMNIFICATION.
As permitted by Sections 17(h) and (i) of the Investment Company Act of
1940, as amended, (the 1940 Act) and pursuant to Article VI of the Fund's
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 (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 Investments Fund
Management LLC (PIFM) 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 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.
Under Section 17(h) of the 1940 Act, it is the position of the Staff of the
Securities and Exchange Commission that if there is neither a court
determination on the merits that the defendant is not liable nor a court
determination that the defendant was not guilty of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of one's office, no indemnification will be permitted unless an
independent legal counsel (not including a counsel who does work for either the
Registrant, its investment adviser, its principal underwriter or persons
affiliated with these persons) determines, based upon a review of the facts,
that the person in question was not guilty of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his or her office.
C-2
<PAGE>
Under its Declaration of Trust, the Registrant may advance funds to provide
for indemnification. Pursuant to the Securities and Exchange Commission staff's
position on Section 17(h) advances will be limited in in the following respect:
(1) Any advances must be limited to amounts used, or to be used, for the
preparation and/or presentation of a defense to the action (including
cost connected with preparation of a settlement);
(2) Any advances must be accompanied by a written promise by, or on behalf
of, the recipient to repay that amount of the advance which exceeds the
amount to which it is ultimately determined that he is entitled to
receive from the Registrant by reason of indemnification;
(3) Such promise must be secured by a surety bond or other suitable
insurance; and
(4) Such surety bond or other insurance must be paid for by the recipient
of such advance.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Prudential Investments Fund Management LLC (PIFM).
See "How the Fund is Managed-Fund Manager" in the Prospectus constituting
Part A of this Registration Statement and "Investment Advisory and Other
Services" in the Statement of Additional Information constituting Part B of this
Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the 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 PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
- - -------------------- ---------------------------- ------------------------------------------------------------------------
<S> <C> <C>
Robert F. Gunia Executive Vice President Vice President, Prudential Investments; Executive Vice President and
and Treasurer Treasurer, PIFM; Senior Vice President, Prudential Securities
Neil A. McGuinness Executive Vice President Executive Vice President and Director of Marketing, PMF&A. Executive
Vice President, PIFM
Brian Storms Officer-in-Charge, President, PMF&A; Officer-in-Charge, President, Chief Executive Officer
President, Chief Executive and Chief Operating Officer, PIFM
Officer and Chief
Operating Officer
Robert J. Sullivan Executive Vice President Executive Vice President, PMF&A. Executive Vice President, PIFM
</TABLE>
(b) Prudential Investment Corporation (PIC)
See "How the Fund is Managed-Investment Adviser" in the Prospectus
constituting Part A of this Registration Statement and "Investment Advisory and
Other Services" 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 Prudential
President and Chief Insurance Company of America (Prudential)
Executive Officer and
Director
John R. Strangfeld Vice President and President of Private Asset Management Group of Prudential; Senior Vice
Director President, Prudential; Vice President and Director, PIC
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Prudential Investment Management Services LLC (PIMS)
PIMS is distributor for Cash Accumulation Trust, Command Government Fund,
Command Money Fund, Command Tax-Free
C-3
<PAGE>
Fund, The Global Total Return Fund, Inc., Global Utility Fund, Inc.,
Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund),
Prudential Balanced Fund, Prudential California Municipal Fund, Prudential
Distressed Securities Fund, Inc., Prudential Diversified Bond Fund, Inc.,
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 High Yield Total Return Fund, Inc., Prudential
Index Series Fund, Prudential Institutional Liquidity Portfolio, Inc.,
Prudential Intermediate Global Income Fund, Inc., Prudential International Bond
Fund, Inc.,, Prudential Mid-Cap Value Fund, Prudential MoneyMart Assets Inc.,
Prudential Mortgage Income 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 Real-Estate Securities Fund, Prudential Small-Cap Quantum Fund, Inc.,
Prudential Small Company Value Fund, Inc., Prudential Special Money Market Fund,
Inc., Prudential Structured Maturity Fund, Inc., Prudential Tax-Free Money Fund,
Inc., Prudential 20/20 Focus Fund, Prudential Utility Fund, Inc., and Prudential
World Fund, Inc., The Prudential Investment Portfolios, Inc. and The Target
Portfolio Trust.
(b) Information concerning the directors and officers of PIMS is set forth
below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER THE REGISTRANT
- - ----------------------- --------------------------------------------------- -----------------------
<S> <C> <C>
E. Michael Caulfield President None
Mark R. Fetting Executive Vice President None
Gateway Center Three
100 Mulberry Street
Newark, New Jersey
07102
Jean D. Hamilton Executive Vice President None
Ronald P. Joelson Executive Vice President None
Brian M. Storms Executive Vice President President and Director
Gateway Center Three
100 Mulberry Street
Newark, New Jersey
07102
John R. Strangfeld Executive Vice President None
Mario A. Mosse Senior Vice President and Chief Operating Officer None
Scott S. Wallner Vice President, Secretary and Chief Legal Officer None
Michael G. Williamson Vice President, Comptroller and Chief None
Financial Officer
C. Edward Chaplin Treasurer None
</TABLE>
- - -------
(1)The address of each person named is Prudential Plaza, 751 Broad Street,
Newark NJ 07102 unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules thereunder are maintained at the
offices of State Street Bank and Trust Company, One Heritage Drive, North
Quincy, Massachusetts 02171, The Prudential Investment Corporation, Prudential
Plaza, 751 Broad Street, Newark, New Jersey 07102, the Registrant, Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077 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) and Rules 31a-1(b)(4) and (11) and 31a-1(d) will be kept at Gateway
Center Three, Newark, New Jersey, 07102-4077 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 29. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund is Managed-Fund
Manager" and "How the Fund is Managed--
C-4
<PAGE>
Distributor" in the Prospectus and the captions "Investment Advisory and Other
Services-Manager and Investment Adviser" and "-Principal Underwriter,
Distributor and Rule 12b-1 Plans" in the Statement of Additional Information,
constituting Parts A and B, respectively, of this Post-Effective Amendment to
the Registration Statement, Registrant is not a party to any management-related
service contract.
ITEM 30. UNDERTAKINGS
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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Newark, and State of New Jersey, on the 1st day of March 1999.
PRUDENTIAL HIGH YIELD FUND, INC.
By /s/ Brian M. Storms
-------------------
(BRIAN M. STORMS, 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- - -------------------------------- -------------------------- --------------
<S> <C> <C>
/s/ Edward D. Beach Director March 1, 1999
- - ------------------------------
EDWARD D. BEACH
/s/ Eugene C. Dorsey Director March 1, 1999
- - ------------------------------
EUGENE C. DORSEY
/s/ Delayne D. Gold Director March 1, 1999
- - ------------------------------
DELAYNE D. GOLD
/s/ Robert F. Gunia Director March 1, 1999
- - ------------------------------
ROBERT F. GUNIA
/s/ Mendel A. Melzer Director March 1, 1999
- - ------------------------------
MENDEL A. MELZER
/s/ Thomas T. Mooney Director March 1, 1999
- - ------------------------------
THOMAS T. MOONEY
/s/ Thomas H. O'Brien Director March 1, 1999
- - ------------------------------
THOMAS H. O'BRIEN
/s/ Richard A. Redeker Director March 1, 1999
- - ------------------------------
RICHARD A. REDEKER
/s/ Brian M. Storms President and Director March 1, 1999
- - ------------------------------
BRIAN M. STORMS
/s/ Nancy H. Teeters Director March 1, 1999
- - ------------------------------
NANCY H. TEETERS
/s/ Louis A. Weil, III Director March 1, 1999
- - ------------------------------
LOUIS A. WEIL, III
/s/ Grace C. Torres Treasurer and Principal March 1, 1999
- - ------------------------------ Financial and Accounting
GRACE C. TORRES Officer
</TABLE>
C-6
<PAGE>
EXHIBIT INDEX
(a) (1) 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).
(2) 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).
(3) 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).
(4) 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).
(5) Articles Supplementary. Incorporated by reference to Exhibit (a)(5) to
Post-Effective Amendment No. 31 to the Registration Statement filed on
Form N-1A via EDGAR on December 31, 1998 (File No. 2-63394).
(b)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).
(c)Instruments defining rights of holders of the securities being offered.
Incorporated by reference to Exhibits Nos. 1 and 2 above.
(d) (1) Management Agreement between the Registrant and Prudential Mutual
Fund Management, Inc. Incorporated by reference to Exhibit 5(a) to
Post-Effective Amendment No. 29 to the Registration Statement filed on
Form N-1A via EDGAR on March 5, 1997 (File No. 2-63394).
(2) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation. Incorporated by
reference to Exhibit 5(b) to Post-Effective Amendment No. 29 to the
Registration Statement filed on Form N-1A via EDGAR on March 5, 1997
(File No. 2-63394).
(e) (1) Distribution Agreement with Prudential Investment Management
Services LLC. Incorporated by reference to Exhibit (e)(1) to
Post-Effective Amendment No. 31 to the Registration Statement filed on
Form N-1A via EDGAR on December 31, 1998 (File No. 2-63394).
(2) Form of Selected Dealer Agreement. Incorporated by reference to
Exhibit (e)(2) to Post-Effective Amendment No. 31 to the Registration
Statement filed on Form N-1A via EDGAR on December 31, 1998 (File No.
2-63394).
(f) Not Applicable.
(g)Custodian Agreement between the Registrant and State Street Bank & Trust
Company. Incorporated by reference to Exhibit 8 to Post-Effective
Amendment No. 29 to the Registration Statement filed on Form N-1A via
EDGAR on March 5, 1997 (File No. 2-63394).
(h)Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. Incorporated by reference to
Exhibit 9 to Post-Effective Amendment No. 29 to the Registration
Statement filed on Form N-1A via EDGAR on March 5, 1997 (File No.
2-63394).
(i)Opinion of Counsel. Incorporated by reference to Exhibit 10 to
Post-Effective Amendment No. 30 to the Registration Statement filed on
Form N-1A via Edgar on March 3, 1998 (File No. 2-63394).
(j) Consent of Independent Accountants.*
(k) Not applicable.
(l) Not applicable.
(m) (1) Distribution and Service Plan for Class A Shares. Incorporated by
reference to Exhibit (m)(1) to Post-Effective Amendment No. 31 to the
Registration Statement filed on Form N-1A via EDGAR on December 31,
1998 (File No. 2-63394).
(2) Distribution and Service Plan for Class B Shares. Incorporated by
reference to Exhibit (m)(2) to Post-Effective Amendment No. 31 to the
Registration Statement filed on Form N-1A via EDGAR on December 31,
1998 (File No. 2-63394).
(3) Distribution and Service Plan for Class C Shares. Incorporated by
reference to Exhibit (m)(3) to Post-Effective Amendment No. 31 to the
Registration Statement filed on Form N-1A via EDGAR on December 31,
1998 (File No. 2-63394).
C-7
<PAGE>
(n) Financial Data Schedule.*
(o)Amended Rule 18f-3 Plan. Incorporated by reference to Exhibit (o) to
Post-Effective Amendment No. 31 to the Registration Statement filed on
Form N-1A via EDGAR on December 31, 1998 (File No. 2-63394).
- - -------
* Filed herewith.
C-8
Exhibit 23J
CONSENT OF INDEPENDENT ACCOUNTANT
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 32 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
February 16, 1999, 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 "Investment Advisory and Other
Services" in such Statement of Additional Information and to the reference to us
under the heading "Financial Highlights" in such Prospectus.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 26, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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