<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 2000
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. 33 [X]
AND/OR REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 32 [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):
[X] immediately upon filing pursuant to paragraph(b)
[ ] on (date) pursuant to paragraph(b)
[ ] 60 days after filing pursuant to paragraph(a)(1)
[ ] on (date) pursuant to paragraph(a)(1)
[ ] 75 days after filing pursuant to paragraph(a)(2)
[ ] on (date) pursuant to paragraph(a)(2) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment
<TABLE>
<S> <C>
Title of Securities Being Registered.............. Shares of Common Stock (par value $.01 per share)
</TABLE>
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<PAGE> 2
[PRUDENTIAL LOGO] PROSPECTUS MARCH 3, 2000
PRUDENTIAL
HIGH YIELD FUND, INC.
FUND TYPE Junk bond
OBJECTIVE Current income and capital appreciation (as a secondary objective)
[BUILD ON THE ROCK GRAPHIC]
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the Fund's shares nor has the SEC determined that this
prospectus is complete or accurate. It is a criminal offense to state otherwise.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
1 RISK/RETURN SUMMARY
1 Investment Objectives and Principal Strategies
1 Principal Risks
2 Evaluating Performance
4 Fees and Expenses
6 HOW THE FUND INVESTS
6 Investment Objectives and Policies
8 Other Investments and Strategies
12 Investment Risks
16 HOW THE FUND IS MANAGED
16 Board of Directors
16 Manager
16 Investment Adviser
18 Distributor
19 FUND DISTRIBUTIONS AND TAX ISSUES
19 Distributions
20 Tax Issues
21 If You Sell or Exchange Your Shares
23 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE FUND
23 How to Buy Shares
32 How to Sell Your Shares
35 How to Exchange Your Shares
37 Telephone Redemptions and Exchanges
38 FINANCIAL HIGHLIGHTS
38 Class A Shares
39 Class B Shares
40 Class C Shares
41 Class Z Shares
42 THE PRUDENTIAL MUTUAL FUND FAMILY
A-1 DESCRIPTION OF SECURITY RATINGS
</TABLE>
FOR MORE INFORMATION (BACK COVER)
PRUDENTIAL HIGH YIELD FUND, INC. [PHONE GRAPHIC] (800) 225-1852
<PAGE> 4
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 fixed-income
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. Furthermore, junk bonds
tend to be less liquid than higher-rated securities. Therefore, an investment in
the Fund may not be appropriate for short-term investing.
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.
1
<PAGE> 5
RISK/RETURN SUMMARY
EVALUATING PERFORMANCE
A number of factors -- including risk -- can affect how the Fund performs. The
following bar chart shows the Fund's performance for each full calendar year of
operation for the last 10 years. The bar chart and table below demonstrate the
risk of investing in the Fund by showing how returns can change from year to
year and by showing how the Fund's average annual total returns compare with
those of a broad measure of market performance and a group of similar mutual
funds. Past performance does not mean that the Fund will achieve similar results
in the future.
<TABLE>
<CAPTION>
ANNUAL RETURN* (CLASS B SHARES) (AS PERCENTAGE)
<S> <C>
1990 -9.52
1991 33.47
1992 15.47
1993 16.54
1994 -2.92
1995 17.49
1996 11.97
1997 12.07
1998 -0.7
1999 2.86
</TABLE>
BEST QUARTER: 13.67% (1st quarter of 1991)
WORST QUARTER: (7.54%) (3rd quarter of 1998)
* These annual returns do not include sales charges. If the sales charges were
included, the annual returns would be lower than those shown.
2 PRUDENTIAL HIGH YIELD FUND, INC. [PHONE GRAPHIC] (800) 225-1852
<PAGE> 6
RISK/RETURN SUMMARY
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-99)
<TABLE>
<CAPTION>
1 YR 5 YRS 10 YRS/SINCE INCEPTION(2)
<S> <C> <C> <C>
Class A shares (0.76)% 8.27% 9.26% (since 1-22-90)
Class B shares (2.14)% 8.39% 9.04%
Class C shares 0.83% 8.31% 7.49% (since 8-1-94)
Class Z shares 3.79% N/A 6.55% (since 3-1-96)
High Yield Bond Index(3) 2.39% 9.31% 10.72%
Lipper High Current Yield Average(4) 4.53% 8.84% 10.03%
</TABLE>
(1) The Fund's returns are after deduction of sales charges and expenses.
Without the distribution and service (12b-1) fee waiver for Class A and Class C
shares, the returns would have been lower.
(2) Returns are for ten year period ended 12-31-99 unless specified otherwise.
(3) The Lehman Brothers 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. These returns do not include the effect of any sales
charges or operating expenses of a mutual fund. These returns would be lower if
they included the effect of sales charges and operating expenses. High Yield
Bond Index returns since the inception of Class A, Class C and Class Z were
11.05%, 8.64% and 6.77%, respectively. Source: Lehman Brothers.
(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 the inception of Class A, Class C
and Class Z were 168.23%, 52.08% and 27.49%, respectively. Source: Lipper Inc.
3
<PAGE> 7
RISK/RETURN SUMMARY
FEES AND EXPENSES
These tables show the sales charges, fees and expenses that you may pay if you
buy and hold shares of each class of the Fund -- Class A, B, C and Z. Each share
class has different sales charges -- known as loads -- and expenses, but
represents an investment in the same fund. Class Z shares are available only to
a limited group of investors. For more information about which share class may
be right for you, see "How to Buy, Sell and Exchange Shares of the Fund."
SHAREHOLDER FEES(1) (PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
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 distributions None None None None
Redemption fees None None None None
Exchange fee None None None None
</TABLE>
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(4) .30% .75% 1.00% None
+ Other expenses .14% .14% .14% .14%
= TOTAL ANNUAL FUND OPERATING EXPENSES .85% 1.30% 1.55% .55%
- Fee waiver and/or expense reimbursement(4) .05% None .25% None
= NET ANNUAL FUND OPERATING EXPENSES .80% 1.30% 1.30% .55%
</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 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, 2000, the Distributor of the Fund
has contractually agreed to reduce its distribution and service (12b-1)
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.
4 PRUDENTIAL HIGH YIELD FUND, INC. [PHONE GRAPHIC] (800) 225-1852
<PAGE> 8
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, except for the Distributor's
reduction of distribution and service (12b-1) fees for Class A and Class C
shares during the first year. Although your actual costs may be higher or lower,
based on these assumptions, your costs would be:
<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $478 $656 $848 $1,403
Class B shares $632 $712 $813 $1,386
Class C shares $331 $560 $913 $1,906
Class Z shares $56 $176 $307 $689
</TABLE>
You would pay the following expenses on the same investment if you did not sell
your shares:
<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $478 $656 $848 $1,403
Class B shares $132 $412 $713 $1,386
Class C shares $231 $560 $913 $1,906
Class Z shares $56 $176 $307 $689
</TABLE>
5
<PAGE> 9
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 that will increase in value. 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 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.
MEDIUM TO LOWER-RATE 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 OBLIGATIONS or JUNK
BONDS. The Fund will normally invest in securities rated below B by both Moody's
and Standard & Poor's or comparable unrated securities only if we believe that
the rating underestimates the quality of the securities.
6 PRUDENTIAL HIGH YIELD FUND, INC. [PHONE GRAPHIC] (800) 225-1852
<PAGE> 10
HOW THE FUND INVESTS
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, 1999, the monthly dollar-weighted
average ratings of the debt securities held by the Fund, expressed as a
percentage of the Fund's total investments, were as follows:
<TABLE>
<CAPTION>
RATINGS PERCENTAGE OF TOTAL INVESTMENTS
- ------- -------------------------------
<S> <C>
BBB/Baa 1.08%
BB/Ba 17.27%
B/B 61.64%
CCC/Caa 6.51%
Unrated/Other 13.50%
</TABLE>
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 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, 1999, the Fund's average weighted maturity was 7.89
years.
The types of fixed-income securities in which the Fund may invest include
both CONVERTIBLE and NONCONVERTIBLE DEBT SECURITIES. We can exchange convertible
debt securities, such as corporate bonds, notes and preferred stocks, for other
types of securities, typically common stock, at a preset price. They provide a
fixed-income stream (usually lower than regular bonds), but also offer greater
appreciation potential than regular bonds.
7
<PAGE> 11
HOW THE FUND INVESTS
For more information, see "Investment Risks" below 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 AND STRATEGIES
In addition to the principal strategies, we also may use the following
investment strategies to increase the Fund's returns or protect its assets if
market conditions warrant.
FOREIGN 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,
including 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 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.
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.
8 PRUDENTIAL HIGH YIELD FUND, INC. [PHONE GRAPHIC] (800) 225-1852
<PAGE> 12
HOW THE FUND INVESTS
DISTRESSED SECURITIES
The Fund may 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.
LOAN PARTICIPATIONS AND ASSIGNMENTS
The Fund may invest in fixed and floating rate loans (secured or unsecured) made
to financially troubled companies by banks, insurance companies and government
institutions. The Fund may invest in a portion of a loan (participations) and
assignments of all or a portion of a loan (assignments).
Participations and assignments are high-yield, non-convertible corporate
debt instruments of varying maturities. With participations, the Fund has the
right to receive payments of principal, interest and fees from the lender
conditioned upon the lender's receipt of payment from the borrower. With
assignments, the Fund has direct rights against the borrower on the loan, but
its rights may be more limited than the lender's.
TEMPORARY DEFENSIVE INVESTMENTS
In response to adverse market, economic or political conditions, the Fund may
take a temporary defensive position and invest up to 100% of the Fund's assets
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 can help to preserve the Fund's assets.
9
<PAGE> 13
HOW THE FUND INVESTS
WHEN-ISSUED AND DELAYED - DELIVERY SECURITIES
The Fund may 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.
REPURCHASE AGREEMENTS
The Fund may use REPURCHASE AGREEMENTS, where a party agrees to sell a security
to the Fund and then repurchases 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 various DERIVATIVE STRATEGIES to try to improve the Fund's returns or
protect its assets. We cannot guarantee that these strategies will work, that
the instruments necessary to implement these strategies will be available or
that the Fund will not lose money. Derivatives -- such as futures contracts,
including interest rate futures contracts, [options], options on futures and
foreign currency forward contracts -- involve costs and can be volatile. With
derivatives, the investment adviser tries to predict if the underlying
investment, whether a security, market index, currency, interest rate, or some
other investment, 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.
FUTURES CONTRACTS AND RELATED OPTIONS
FOREIGN CURRENCY FORWARD CONTRACTS
The Fund may purchase and sell financial futures contracts and related options
on financial futures. An OPTION is the right to buy or sell a security, or in
the case of an option on a futures contract, the right to buy or sell a futures
contract, in exchange for a premium. A FUTURES CONTRACT is an agreement to buy
or sell a set quantity of an underlying product at a future date, or to make or
receive a cash payment based on the value of a securities index.
The Fund also may enter into foreign currency forward contracts to protect
10 PRUDENTIAL HIGH YIELD FUND, INC. [PHONE GRAPHIC] (800) 225-1852
<PAGE> 14
HOW THE FUND INVESTS
the value of its assets against future changes in the level of foreign exchange
rates. A FOREIGN CURRENCY FORWARD CONTRACT is an obligation to buy or to sell a
given currency on a future date at a set price.
For more information about these strategies, see the SAI, "Description of
the Fund, Its Investments and Risks."
ADDITIONAL STRATEGIES
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 assets in such
securities, which entail duplicate management and advisory fees to
shareholders); LENDS ITS SECURITIES to others (the Fund can lend up to 100% of
the value of its total assets); 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 on resale, 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.
11
<PAGE> 15
HOW THE FUND INVESTS
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
indexes, performance of the Fund can deviate from performance of the indexes.
This chart outlines the key risks and potential rewards of the Fund's principal
investments and certain other non-principal investments the Fund may make. See,
too, "Description of the Fund, Its Investments and Risks" in the SAI.
<TABLE>
<CAPTION>
INVESTMENT TYPE RISKS POTENTIAL REWARDS
% OF FUND'S TOTAL ASSETS
<S> <C> <C>
HIGH-YIELD DEBT - Credit risk -- the risk that - May offer higher interest
SECURITIES the borrower can't pay back the income and higher potential gains
(JUNK BONDS) money borrowed or make interest than higher-quality debt securities
Up to 100% payments (particularly high)
- Market risk -- the risk that - Most bonds rise in value when
the obligations may lose value in interest rates fall
the market because interest rates
rise or there is a lack of
confidence in the borrower
(particularly high)
- Illiquidity risk -- the risk
that bonds may be difficult to
value precisely and sell at a time
or price desired, in which case
valuation would depend more on
investment adviser's judgment than
is generally the case with
higher-rated securities
</TABLE>
12 PRUDENTIAL HIGH YIELD FUND, INC. [PHONE GRAPHIC] (800) 225-1852
<PAGE> 16
HOW THE FUND INVESTS
<TABLE>
<CAPTION>
INVESTMENT TYPE (CONT'D)
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
<S> <C> <C>
FOREIGN FIXED-INCOME - Foreign markets, economies and - Investors can participate
SECURITIES political systems may not be as in the growth of foreign
stable as those in the U.S., markets and companies operating
Up to 20% of U.S. currency denominated particularly those in developing in those markets
securities; up to 10% of non-U.S. currency countries - Opportunities for diversification
denominated securities - May be less liquid than U.S. - Changing value of foreign
fixed-income securities currencies can cause gains (non-
- Differences in foreign laws, U.S. currency denominated
accounting standards,
public securities)
information, custody and
settlement practices
provide less reliable
information on foreign
investments and involve
more risks
- Currency risk -- changing
value of foreign currencies can
cause losses (non-U.S. currency
denominated securities)
U.S. GOVERNMENT - Limits potential for capital - Regular interest income
SECURITIES OR HIGH-QUALITY appreciation - Generally more secure than
BANK OR CORPORATE - See credit risk and market lower quality debt securities
OBLIGATIONS risk and equity securities
- Not all U.S. Government - The U.S. Government
Up to 20%; up to 100% securities are insured or guarantees interest and
on a temporary basis guaranteed by the U.S. principal payments on
Government - some are backed by certain securities
the issuing agency
ILLIQUID SECURITIES - See illiquidity risk - May offer a more attractive
Up to 15% of net assets yield or potential for growth
than more widely traded
securities
DISTRESSED SECURITIES - Equity securities could lose value
up to 10%
- See credit risk (particularly - May offer greater capital appreciation
high), and market risk and a higher rate of return if companies
(particularly high) and fulfill their anticipated potential
illiquidity risk
- More likely to default,
especially during economic
downturn
</TABLE>
13
<PAGE> 17
HOW THE FUND INVESTS
<TABLE>
<CAPTION>
INVESTMENT TYPE (CONT'D)
% OF FUND'S TOTAL ASSETS RISKS POTENTIAL REWARDS
<S> <C> <C>
DISTRESSED SECURITIES - Subject to greater
(CONT.) volatility than securities of
more stable companies
- Fund may be subject to
litigation risks and costs
- Derivatives such as futures, - The Fund could make money and
DERIVATIVES options on futures and foreign protect against losses if the
Percentage varies currency forward contracts that investment analysis proves
are used for hedging purposes may correct
not fully offset the underlying - One way to manage the Fund's
positions and this could result risk/return balance is to lock
in losses to the Fund that would in the value of an investment
not have otherwise occurred ahead of time
- Derivatives used for risk
management may not have the
intended effects and may result
in losses or missed
opportunities
- The other party to a derivatives
contract could default
- Certain types of derivatives
involve costs to the Fund that
can reduce returns
- Typically subject to greater - Value rises when interest
ZERO COUPON BONDS, volatility and less liquidity in rates fall
PIK AND DEFERRED adverse markets than other debt
PAYMENT SECURITIES securities
- See credit risk and market
Percentage varies risk
</TABLE>
14 PRUDENTIAL HIGH YIELD FUND, INC. [PHONE GRAPHIC] (800) 225-1852
<PAGE> 18
HOW THE FUND INVESTS
<TABLE>
<CAPTION>
INVESTMENT TYPE (CONT'D) RISKS POTENTIAL REWARDS
% OF FUND'S TOTAL ASSETS
<S> <C> <C>
LOAN PARTICIPATIONS - See credit risk and market - May offer the right to receive
AND ASSIGNMENTS risk principal, interest and fees without
Percentage varies - In participations, the Fund has no as much risk as a lender
rights against borrower in the event
borrower does not repay the loan
- In participations, the Fund
is also subject to the credit
risk of the lender
WHEN-ISSUED AND - May magnify underlying investment gains
DELAYED-DELIVERY - May magnify underlying
SECURITIES investment losses
Percentage varies - Investment costs may exceed
potential underlying investment gains
</TABLE>
15
<PAGE> 19
HOW THE FUND IS MANAGED
BOARD OF DIRECTORS
The Fund's Board of Directors oversees the actions of the Manager, investment
adviser and Distributor and decides on general policies. The Board also oversees
the Fund's officers, who conduct and supervise the daily business operations of
the Fund.
MANAGER
PRUDENTIAL INVESTMENTS 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. PIFM also is
responsible for supervising the Fund's investment adviser. For the fiscal year
ended December 31, 1999, the Fund paid PIFM management fees of .41% of the
Fund's average daily net assets.
PIFM and its predecessors have served as manager or administrator to
investment companies since 1987. As of December 31, 1999, PIFM served as the
Manager to all 42 of the Prudential mutual funds, and as manager or
administrator to 22 closed-end investment companies, with aggregate assets of
approximately $75.6 billion.
INVESTMENT ADVISER
The Prudential Investment Corporation, called Prudential Investments, is the
Fund's investment adviser and has served as an investment adviser to investment
companies since 1984. Its address is Prudential Plaza, 751 Broad Street, Newark,
NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and pays Prudential Investments for its
services.
Prudential Investments' Fixed Income Group manages more than $135 billion
for Prudential's retail investors, institutional investors, and policyholders.
Senior Managing Directors James J. Sullivan and Jack W. Gaston head the Group,
which is organized into teams specializing in different market sectors.
Top-down, broad investment decisions are made by the Fixed Income Policy
Committee, whereas bottom-up security selection is made by the sector teams.
16 PRUDENTIAL HIGH YIELD FUND, INC. [PHONE GRAPHIC] (800) 225-1852
<PAGE> 20
HOW THE FUND IS MANAGED
Mr. Sullivan has overall responsibility for overseeing portfolio management
and credit research. Prior to joining Prudential Investments in 1998, he was a
managing director in Prudential's Capital Management Group, where he oversaw
portfolio management and credit research for Prudential's General Account and
subsidiary fixed-income portfolios. He has more than 16 years of experience in
risk management, arbitrage trading, and corporate bond investing.
Mr. Gaston has overall responsibility for overseeing quantitative research
and risk management. Prior to this appointment in 1999, he was senior managing
director of the Capital Management Group where he was responsible for the
investment performance and risk management for Prudential's General Account and
subsidiary fixed-income portfolios. He has more than 20 years of experience in
investment management, including extensive experience applying quantitative
techniques to portfolio management.
The Fixed Income Investment Policy Committee is comprised of key senior
investment managers. Members include seven sector team leaders, the chief
investment strategist, and the head of risk management. The Committee uses a
top-down approach to investment strategy, asset allocation, and general risk
management, identifying sectors in which to invest.
The High Yield Team, headed by Casey Walsh, is primarily responsible for
overseeing the day-to-day management of the Fund. This Team uses a bottom-up
approach, which focuses on individual securities, while staying within the
guidelines of the Investment Policy Committee and the Fund's investment
restrictions and policies. In addition, the Credit Research team of analysts
supports the sector teams using bottom-up fundamentals, as well as economic and
industry trends. Other sector teams may contribute to securities selection when
appropriate.
HIGH YIELD
ASSETS UNDER MANAGEMENT: $9.4 billion (as of December 31, 1999).
TEAM LEADER: Casey Walsh. GENERAL INVESTMENT EXPERIENCE: 17 years.
PORTFOLIO MANAGERS: 7. AVERAGE GENERAL INVESTMENT EXPERIENCE: 17 years,
which includes team members with significant mutual fund experience.
SECTOR: Below-investment-grade corporate securities.
17
<PAGE> 21
HOW THE FUND IS MANAGED
INVESTMENT STRATEGY: Focus is generally on bonds with high total return
potential, given existing risk parameters. They also seek securities with high
current income, as appropriate. The team uses a relative value approach.
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.
18 PRUDENTIAL HIGH YIELD FUND, INC. [PHONE GRAPHIC] (800) 225-1852
<PAGE> 22
FUND DISTRIBUTIONS AND TAX ISSUES
Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the Fund distributes DIVIDENDS of ordinary income and
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 or tax-deferred plan
or account. Dividends and distributions from the Fund also may be subject to
state and local income tax in the state where you live.
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 or tax-deferred plan or account.
The following briefly discusses some of the important tax issues you should
be aware of, but is not meant to be tax advice. For tax advice, please speak
with your tax adviser.
DISTRIBUTIONS
The Fund distributes DIVIDENDS 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 or not they are reinvested in the Fund.
Corporate shareholders are not eligible for the 70% dividends-received deduction
on dividends paid by the Fund.
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, Fund distributions of dividends and capital gains are
AUTOMATICALLY REINVESTED in the Fund. If you ask us to pay the distributions in
cash, we will send you a check if your account is with the Transfer Agent.
Otherwise, if your account is with a 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 or tax-deferred plan or account. For more
information about automatic reinvestment and other shareholder services, see
"Step 4: Additional Shareholder Services" in the next section.
19
<PAGE> 23
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 or tax-deferred plan or account,
your taxes are deferred, so you will not receive a Form 1099. However, you will
receive a Form 1099 when you take any distributions from your qualified or
tax-deferred plan or account.
Fund distributions are generally taxable to you in the calendar year 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 law requires you to provide the Fund with your taxpayer
identification number and certifications as to your tax status, and you fail to
do this, or if you are otherwise subject to backup withholding, we will withhold
and pay to the U.S. Treasury 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.
20 PRUDENTIAL HIGH YIELD FUND, INC. [PHONE GRAPHIC] (800) 225-1852
<PAGE> 24
FUND DISTRIBUTIONS AND TAX ISSUES
IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of the Fund just before the record date for a distribution
(the date that determines who receives the distribution), 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 thereafter received a distribution. That is not so because when
dividends are paid out, the value of each share of the Fund decreases by the
amount of the dividend to reflect the payout although this may not be apparent
because the value of each share of the Fund also will be affected by market
changes, if any. The distribution you received 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 OR TAX-DEFERRED RETIREMENT PLANS
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts, contributions are not tax deductible, but
distributions from the plan may be tax-free. Please contact your financial
adviser for information on a variety of Prudential mutual funds that are
suitable for retirement plans offered by Prudential.
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of the Fund for a profit, you have REALIZED A CAPITAL
GAIN, which is subject to tax, unless the shares are held in a qualified or
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.
[GRAPHIC]
21
<PAGE> 25
FUND DISTRIBUTIONS AND TAX ISSUES
If you sell shares and realize a loss, you will not be permitted to use the
loss to the extent you replace the shares (including pursuant to the
reinvestment of a dividend) within a 61-day period (beginning 30 days before the
sale of the shares). If you acquire shares of the Fund and sell your shares
within 90 days, you may not be allowed to include certain charges incurred in
acquiring the shares for purposes of calculating gain or loss realized upon the
sale of the shares.
Exchanging your shares of the Fund for the shares of another Prudential
mutual fund is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the taxes
described above.
Any gain or loss you may have from selling or exchanging Fund shares will
not be reported on 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 or tax-deferred plan or account, you or your financial adviser should
keep track of the dates on which you buy and sell -- or exchange -- Fund shares,
as well as the amount of any gain or loss on each transaction. For tax advice,
please see your tax adviser.
AUTOMATIC CONVERSION OF CLASS B SHARES
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares -- which happens automatically approximately seven years after
purchase -- is not a "taxable event" because it does not involve an actual sale
of your Class B shares. This opinion, however, is not binding on the Internal
Revenue Service. 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.
22 PRUDENTIAL HIGH YIELD FUND, INC. [PHONE GRAPHIC] (800) 225-1852
<PAGE> 26
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
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.
23
<PAGE> 27
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
When choosing a share class, you should consider the following:
- The amount of your investment
- The length of time you expect to hold the shares and the impact of the
varying distribution fees
- 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
- Whether you qualify for any reduction or waiver of sales charges
- The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase
- Whether you qualify to purchase Class Z shares.
See "How to Sell Your Shares" for a description of the impact of CDSCs.
24 PRUDENTIAL HIGH YIELD FUND, INC. [PHONE GRAPHIC] (800) 225-1852
<PAGE> 28
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 amount(1) $1,000 $1,000 $5,000 None
Minimum amount for
subsequent purchases(1) $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 None If sold during: 1% on None
Charge (CDSC)(2) Year 1 5% sales made
Year 2 4% within 18
Year 3 3% months of
Year 4 2% purchase(2)
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 Charge (cdsc)." Class C
shares bought before November 2, 1998 have a 1% cdsc if sold within one
year.
(3) These distribution and service (12b-1) 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.
Class A shares may pay a service fee of up to .25 of 1%. Class B and Class
C shares will pay a service fee of .25 of 1%. The distribution fee for
Class A shares is limited to .30 of 1% (including up to .25 of 1% as a
service fee), is .50 of 1% for Class B shares and is .75 of 1% for Class C
shares. For the fiscal year ending December 31, 2000, the Distributor of
the Fund has contractually agreed to reduce its distribution and service
(12b-1) fees for the Fund's 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.
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.
25
<PAGE> 29
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 how the
sales charge decreases as the amount of your investment increases.
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE
AS % OF AS % OF DEALER
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED REALLOWANCE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
* 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:
- Invest with an eligible group of related investors
- Buy Class A shares of two or more Prudential mutual funds at the same
time
- Use your Rights of Accumulation, which allow you to combine the
current 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)
- 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.
The Distributor may reallow Class A's sales charge to dealers.
Benefit Plans. Certain group retirement and savings plans may purchase Class A
shares without the initial sales charge if they meet the required minimum for
amount of assets, average account balance or number of eligible employees. For
more information about these requirements, call Prudential at (800) 353-2847.
26 PRUDENTIAL HIGH YIELD FUND, INC. [PHONE GRAPHIC] (800) 225-1852
<PAGE> 30
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
Mutual Fund Programs. The initial sales charge will be waived for investors in
certain programs sponsored by broker-dealers, investment advisers and financial
planners who have agreements with Prudential Investments Advisory Group relating
to:
- Mutual fund "wrap" or asset allocation programs, where the sponsor
places Fund trades and charges its clients a management consulting or
other fee for its services
- Mutual fund "supermarket" programs, where the sponsor links its
clients' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
Other Types of Investors. Other investors may pay no sales charges, including
certain officers, employees or agents of Prudential and its affiliates, the
Prudential mutual funds, the subadvisers of the Prudential mutual funds and
registered representatives and employees of brokers that have entered into a
selected dealer agreement with the Distributor. To qualify for a reduction or
waiver of the sales charge, you must notify the Transfer Agent or your broker at
the time of purchase. For more information, see the SAI, "Purchase, Redemption
and Pricing of Fund Shares -- Reduction and Waiver of Initial Sales Charge --
Class A Shares."
WAIVING CLASS C'S INITIAL SALES CHARGE
Benefit Plans. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at (800)
353-2847.
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 (Prudential Securities) or one of its affiliates.
27
<PAGE> 31
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
These purchases must be made within 60 days of the redemption. To qualify for
this waiver, you must do one of the following:
- Purchase your shares through an account at Prudential Securities
- Purchase your shares through an ADVANTAGE Account or an Investor
Account with Pruco Securities Corporation
- Purchase your shares through another broker.
This waiver is not available to investors who purchase shares directly from
the Transfer Agent. If you are entitled to the waiver, you must notify 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
Benefit Plans. Certain group retirement plans may purchase Class Z shares if
they meet the required minimum for amount of assets, average account balance or
number of eligible employees. For more information about these requirements,
call Prudential at (800) 353-2847.
Mutual Fund Programs. Class Z shares also can be purchased by participants in
any fee-based program or trust program sponsored by Prudential or an affiliate
that includes the Fund as an available option. Class Z shares also can be
purchased by investors in certain programs sponsored by broker-dealers,
investment advisers and financial planners who have agreements with Prudential
Investments Advisory Group relating to:
- Mutual fund "wrap" or asset allocation programs where the sponsor
places Fund trades, links its clients' accounts to a master account in
the sponsor's name and charges its clients a management, consulting or
other fee for its services
- Mutual fund "supermarket" programs, where the sponsor links its
clients' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
28 PRUDENTIAL HIGH YIELD FUND, INC. [PHONE GRAPHIC] (800) 225-1852
<PAGE> 32
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
Other Types of Investors. Class Z shares also can be purchased by any of the
following:
- Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available option
- Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund)
- Prudential, 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 A or 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
29
<PAGE> 33
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
example, if the value of the investments held by Fund XYZ (minus its
liabilities) is $1,000 and there are 100 shares of Fund XYZ owned by
shareholders, the price of one share of the fund -- or the NAV -- is $10 ($1,000
divided by 100). 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.
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
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 (NYSE) is open for trading.
The NYSE is closed on national holidays and Good Friday. We do not determine the
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.
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
30 PRUDENTIAL HIGH YIELD FUND, INC. [PHONE GRAPHIC] (800) 225-1852
<PAGE> 34
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
income and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Fund at NAV, without any 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. Eligible investors who apply for PruTector coverage after the
initial 6-month enrollment period will need to provide satisfactory evidence of
insurability. This insurance is subject to other restrictions and is not
available in all states.
Systematic Withdrawal Plan. A systematic withdrawal plan is available that will
provide you with monthly, quarterly, semi-annual or annual redemption checks.
Remember, the sale of Class B and Class C shares may be subject to a CDSC.
31
<PAGE> 35
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
Reports to Shareholders. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Fund. To reduce Fund expenses, we 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, your broker 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."
32 PRUDENTIAL HIGH YIELD FUND, INC. [PHONE GRAPHIC] (800) 225-1852
<PAGE> 36
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
If you are selling more than $100,000 of shares, if you want the check
payable to or 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 will need to have the signature on your sell order signature
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker-dealer or credit union. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares --
Sale of Shares -- Signature Guarantee."
CONTINGENT DEFERRED SALES CHARGE (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:
- Amounts representing shares you purchased with reinvested dividends
and distributions
- Amounts representing the increase in NAV above the total amount of
payments for shares made during the past six years for Class B shares
and 18 months for Class C shares (one year for Class C shares
purchased before November 2, 1998)
- 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 (one year for Class C
33
<PAGE> 37
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
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 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 purchase, excluding any time
shares were held in a money market fund.
WAIVER OF THE CDSC -- CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
- After a shareholder is deceased or disabled (or, in the case of a
trust account, the death or disability of the grantor). This waiver
applies to individual shareholders, as well as shares owned in joint
tenancy, provided the shares were purchased before the death or
disability
- To provide for certain distributions -- made without IRS penalty --
from a qualified or tax-deferred retirement plan, IRA or Section
403(b) custodial account
- 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 -- Contingent Deferred Sales
Charge -- Waiver of Contingent Deferred Sales Charge -- Class B Shares."
WAIVER OF THE CDSC -- CLASS C SHARES
Benefit Plans. The CDSC will be waived for redemptions by certain group
retirement plans for which Prudential or brokers not affiliated with Prudential
provide administrative or recordkeeping services. The CDSC also will be waived
for certain redemptions by benefit plans sponsored by Prudential and its
affiliates. For more information, call Prudential at (800) 353-2847.
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.
34 PRUDENTIAL HIGH YIELD FUND, INC. [PHONE GRAPHIC] (800) 225-1852
<PAGE> 38
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
SMALL ACCOUNTS
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your account.
We would do this to minimize the Fund's expenses paid by other shareholders. We
will give you 60 days' notice, during which time you can purchase additional
shares to avoid this action. This involuntary sale does not apply to
shareholders who own their shares as part of a 401(k) plan, an IRA or some other
qualified or tax-deferred plan or account.
90-DAY REPURCHASE PRIVILEGE
After you redeem your shares, you have a 90-day period during which you may
reinvest back into your account 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 account with the appropriate
number of shares to reflect the amount of the CDSC you paid on that reinvested
portion of your redemption proceeds. 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.
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
35
<PAGE> 39
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
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 period 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, we will automatically exchange your
Class B or Class C shares that are not subject to a CDSC for Class A shares. We
make such 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. This 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
36 PRUDENTIAL HIGH YIELD FUND, INC. [PHONE GRAPHIC] (800) 225-1852
<PAGE> 40
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE FUND
manage the Fund's investments. When market timing occurs, the Fund may have to
sell portfolio securities to have the cash necessary to redeem the market
timer's shares. This can happen at a time when it is not advantageous to sell
any securities, so the Fund's performance may be hurt. When large dollar amounts
are involved, market timing can also make it difficult to use long-term
investment strategies because we cannot predict how much cash the Fund will have
to invest. When, in our opinion, such activity would have a disruptive effect on
portfolio management, the Fund reserves the right to refuse purchase orders and
exchanges into the Fund by any person, group or commonly controlled account. The
decision may be based upon dollar amount, volume and frequency of trading. The
Fund may notify a market timer of rejection of an exchange or purchase order
after 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.
TELEPHONE REDEMPTIONS AND EXCHANGES
You may redeem or exchange your shares in any amount by calling the Fund at
(800) 225-1852. In order to redeem or exchange your shares by telephone, you
must complete an authorization form for telephone transactions. If you have
elected telephone redemption and exchange privileges and you call the Fund
before 4:15 p.m., New York time, you will receive a redemption amount based on
that day's NAV.
The Fund's Transfer Agent will record your telephone instructions and
request specific account information before redeeming or exchanging shares. The
Fund will not be liable if it follows instructions that it reasonably believes
are made by the shareholder. If the Fund does not follow reasonable procedures,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions.
In the event of drastic economic or market changes, you may have difficulty
in redeeming or exchanging your shares by telephone. If this occurs, you should
consider redeeming or exchanging your shares by mail.
The telephone redemption and exchange privileges may be modified or
terminated at any time. If this occurs, you will receive a written notice from
the Fund.
37
<PAGE> 41
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 the report of the
independent accountants, 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 were audited by PricewaterhouseCoopers LLP,
independent accountants, whose report was unqualified.
<TABLE>
<CAPTION>
CLASS A SHARES (FISCAL YEARS ENDED 12-31)
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 7.88 $ 8.65 $ 8.39 $ 8.19 $ 7.68
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(2) .71 .76 .73 .75 .81
Net realized and unrealized gain
(loss) on investment and foreign
currency transactions (.45) (.76) .30 .22 .53
TOTAL FROM INVESTMENT OPERATIONS .26 -- 1.03 .97 1.34
LESS DISTRIBUTIONS:
Dividends from net investment income (.71) (.76) (.73) (.75) (.81)
Distributions in excess of
net investment income (.01) (.01) (.04) (.02) (.02)
Tax return of capital distributions (.04) -- -- -- --
TOTAL DISTRIBUTIONS (.76) (.77) (.77) (.77) (.83)
NET ASSET VALUE, END OF YEAR $ 7.38 $ 7.88 $ 8.65 $ 8.39 $ 8.19
TOTAL RETURN(1) 3.38% (0.13)% 12.81% 12.60% 18.17%
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $ 1,750,618 $ 1,677,605 $ 1,730,473 $ 1,564,429 $ 1,336,354
Average net assets (000) $ 1,746,123 $ 1,712,531 $ 1,635,480 $ 1,385,143 $ 1,056,555
RATIOS TO AVERAGE NET ASSETS:(2)
Expenses, including distribution
and service (12b-1) fees .80% 0.67% .69% .72% .75%
Expenses, excluding distribution
and service (12b-1) fees .55% 0.52% .54% .57% .60%
Net investment income 9.30% 9.04% 8.59% 9.20% 10.13%
Portfolio turnover rate 70% 103% 113% 89% 78%
</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
year reported.
(2) Net of expense subsidy and/or fee waiver.
38 PRUDENTIAL HIGH YIELD FUND, INC. [PHONE GRAPHIC] (800) 225-1852
<PAGE> 42
FINANCIAL HIGHLIGHTS
CLASS B SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP, independent
accountants, whose report was unqualified.
<TABLE>
<CAPTION>
CLASS B SHARES (FISCAL YEARS ENDED 12-31)
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 7.86 $ 8.63 $ 8.38 $ 8.18 $ 7.67
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .67 .71 .68 .71 .76
Net realized and unrealized gain
(loss) on investment and foreign
currency transactions (.45) (.76) .29 .22 .53
TOTAL FROM INVESTMENT OPERATIONS .22 (.05) .97 .93 1.29
LESS DISTRIBUTIONS:
Dividends from net investment income (.66) (.71) (.68) (.71) (.76)
Distributions in excess of
net investment income (.02) (.01) (.04) (.02) (.02)
Tax return of capital distributions (.04) -- -- -- --
TOTAL DISTRIBUTIONS (.72) (.72) (.72) (.73) (.78)
NET ASSET VALUE, END OF YEAR $ 7.36 $ 7.86 $ 8.63 $ 8.38 $ 8.18
TOTAL RETURN(1) 2.86% (0.70)% 12.07% 11.97% 17.49%
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $ 1,867,620 $ 2,381,793 $ 2,640,491 $ 2,596,207 $ 2,730,903
Average net assets (000) $ 2,180,904 $ 2,557,252 $ 2,589,122 $ 2,652,883 $ 2,725,385
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
and service (12b-1) fees 1.30% 1.27% 1.29% 1.32% 1.35%
Expenses, excluding distribution
and service (12b-1) fees .55% 0.52% .54% .57% .60%
Net investment income 8.78% 8.41% 7.99% 8.62% 9.56%
Portfolio turnover rate 70% 103% 113% 89% 78%
</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
year reported.
39
<PAGE> 43
FINANCIAL HIGHLIGHTS
CLASS C SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP, independent
accountants, whose report was unqualified.
<TABLE>
<CAPTION>
CLASS C SHARES (FISCAL YEARS ENDED 12-31)
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 7.86 $ 8.63 $ 8.38 $ 8.18 $ 7.67
INCOME FROM INVESTMENT OPERATIONS:
Net investment income(2) .67 .71 .68 .71 .76
Net realized and unrealized gain
(loss) on investment and foreign
currency transactions (.45) (.76) .29 .22 .53
TOTAL FROM INVESTMENT OPERATIONS .22 (.05) .97 .93 1.29
LESS DISTRIBUTIONS:
Dividends from net investment income (.67) (.71) (.68) (.71) (.76)
Distributions in excess of
net investment income (.01) (.01) (.04) (.02) (.02)
Tax return of capital distributions (.04) -- -- -- --
TOTAL DISTRIBUTIONS (.72) (.72) (.72) (.73) (.78)
NET ASSET VALUE, END OF YEAR $ 7.36 $ 7.36 $ 8.63 $ 8.38 $ 8.18
TOTAL RETURN(1) 2.86% (0.70)% 12.07% 11.97% 17.49%
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $ 98,347 $ 83,687 $ 55,879 $ 43,374 $ 24,021
Average net assets (000) $ 95,443 $ 67,296 $ 45,032 $ 28,647 $ 12,063
RATIOS TO AVERAGE NET ASSETS:(2)
Expenses, including distribution
and service (12b-1) fees 1.30% 1.27% 1.29% 1.32% 1.35%
Expenses, excluding distribution
and service (12b-1) fees .55% 0.52% .54% .57% .60%
Net investment income 8.81% 8.49% 7.99% 8.60% 9.49%
Portfolio turnover rate 70% 103% 113% 89% 78%
</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
year reported.
(2) Net of expense subsidy and/or fee waiver.
40 PRUDENTIAL HIGH YIELD FUND, INC. [PHONE GRAPHIC] (800) 225-1852
<PAGE> 44
FINANCIAL HIGHLIGHTS
CLASS Z SHARES
The financial highlights 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 1999 1998 1997 1996(1)
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 7.88 $ 8.65 $ 8.39 $ 8.34
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .73 .76 .74 .63
Net realized and unrealized gain
(loss) on investment and foreign
currency transactions (.44) (.75) .30 .07
TOTAL FROM INVESTMENT OPERATIONS .29 .01 1.04 .70
LESS DISTRIBUTIONS:
Dividends from net investment income (.73) (.76) (.74) (.63)
Distributions in excess of
net investment income (.01) (.02) (.04) (.02)
Tax return of capital distributions (.04) -- -- --
TOTAL DISTRIBUTIONS (.78) (.78) (.78) (.65)
NET ASSET VALUE, END OF YEAR $ 7.39 $ 7.88 $ 8.65 $ 8.39
TOTAL RETURN(2) 3.79% 0% 12.96% 8.77%
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996
<S> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $ 50,330 $ 65,068 $ 41,625 $ 31,748
Average net assets (000) $ 60,652 $ 57,453 $ 35,808 $ 28,978
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
and service (12b-1) fees .55% 0.52% .54% .57%(3)
Expenses, excluding distribution
and service (12b-1) fees .55% 0.52% .54% .57%(3)
Net investment income 9.53% 9.23% 8.74% 9.31%(3)
Portfolio turnover rate 70% 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 returns for year of less
than a full year are not annualized.
(3) Annualized.
41
<PAGE> 45
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 advisor or call
us at (800) 225-1852. Read the prospectus carefully before you invest or send
money.
STOCK FUNDS
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 SECTOR FUNDS, INC.
Prudential Financial Services Fund
Prudential Health Sciences Fund
Prudential Technology Fund
Prudential Utility Fund
PRUDENTIAL SMALL-CAP QUANTUM
FUND, INC.
PRUDENTIAL SMALL COMPANY VALUE
FUND, INC.
PRUDENTIAL TAX-MANAGED FUNDS
Prudential Tax-Managed Equity Fund
PRUDENTIAL 20/20 FOCUS FUND
NICHOLAS-APPLEGATE FUND, INC.
Nicholas-Applegate Growth
Equity Fund
TARGET FUNDS
Large Capitalization Growth Fund
Large Capitalization Value Fund
Small Capitalization Growth Fund
Small Capitalization Value 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.
Prudential Global Growth Fund
Prudential International Value Fund
Prudential Jennison International
Growth Fund
THE PRUDENTIAL MUTUAL FUND FAMILY
GLOBAL UTILITY FUND, INC.
TARGET FUNDS
International Equity Fund
GLOBAL BOND FUNDS
PRUDENTIAL GLOBAL TOTAL RETURN
FUND, INC.
PRUDENTIAL INTERNATIONAL BOND
FUND, INC.
42 PRUDENTIAL HIGH YIELD FUND, INC. [PHONE GRAPHIC] (800) 225-1852
<PAGE> 46
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 Fund
PRUDENTIAL STRUCTURED MATURITY
FUND, INC.
Income Portfolio
TARGET FUNDS
Total Return Bond Fund
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
THE PRUDENTIAL MUTUAL FUND FAMILY
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
43
<PAGE> 47
APPENDIX A
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
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
<PAGE> 48
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-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of 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 PRUDENTIAL HIGH YIELD FUND, INC. [PHONE GRAPHIC] (800) 225-1852
<PAGE> 49
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-1: 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-1.
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
<PAGE> 50
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 PRUDENTIAL HIGH YIELD FUND, INC. [PHONE GRAPHIC] (800) 225-1852
<PAGE> 51
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) 482-7555 (Calling 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 website 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 20549-0102
BY ELECTRONIC REQUEST
[email protected]
(The SEC charges a fee to copy documents.)
IN PERSON
Public Reference Room in Washington, DC
(For hours of operation, call
1-202-942-8090)
VIA THE INTERNET
on the EDGAR Database at http://www.sec.gov
<TABLE>
<CAPTION>
CUSIP Numbers Nasdaq Symbols
<S> <C>
Class A Shares -- 74435F-10-6 PBHAX
Class B Shares -- 74435F-20-5 PBHYX
Class C Shares -- 74435F-30-4 PRHCX
Class Z Shares -- 74435F-40-3 PHYZX
</TABLE>
Investment Company Act File No. 811-2896
MF110A
[RECYCLE LOGO] Printed on Recycled Paper
<PAGE> 52
PRUDENTIAL HIGH YIELD FUND, INC.
Statement of Additional Information
March 3, 2000
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 3, 2000, a copy of
which may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Fund History................................................ B-2
Description of the Fund, Its Investments and Risks.......... B-2
Investment Restrictions..................................... B-17
Management of the Fund...................................... B-19
Control Persons and Principal Holders of Securities......... B-22
Investment Advisory and Other Services...................... B-23
Year 2000 Readiness Disclosure.............................. B-28
Brokerage Allocation and Other Practices.................... B-29
Capital Shares, Other Securities and Organization........... B-30
Purchase, Redemption and Pricing of Fund Shares............. B-31
Shareholder Investment Account.............................. B-41
Net Asset Value............................................. B-45
Taxes, Dividends and Distributions.......................... B-46
Performance Information..................................... B-49
Financial Statements........................................ B-52
Report of Independent Accountants........................... B-79
Appendix I -- General Investment Information................ I-1
Appendix II -- Historical Performance Data.................. II-1
- -------------------------------------------------------------------
</TABLE>
MF 110 B
<PAGE> 53
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 "Risks Relating 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.
B-2
<PAGE> 54
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
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.
RISKS RELATING TO INVESTING IN HIGH YIELD SECURITIES
Fixed-income securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and general
market liquidity (market risk). Lower rated or 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 and, from time to time, it
may be more difficult to value high-yield securities than 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 NAV.
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's Board of Directors has authorized the
Fund to invest up to 10% of its total assets in foreign currency denominated
fixed-income securities of foreign or domestic issuers. "Foreign government
securities" include debt securities issued or guaranteed, as to payment of
principal and interest, by governments, semi-governmental entities, governmen-
B-3
<PAGE> 55
tal agencies, supranational entities and other governmental entities
(collectively, Government Entities) of foreign countries denominated in the
currencies of such countries or in U.S. dollars (including debt securities of a
Government Entity in any such country denominated in the currency of another
such country).
A "supranational entity" is an entity constituted by the national
governments of several countries to promote economic development. Examples of
such supranational entities include, among others, the World Bank (International
Bank for Reconstruction and Development), the European Investment Bank and the
Asian Development Bank. Debt securities of "semi-governmental entities" are
issued by entities owned by a national, state, or equivalent government or are
obligations of a political unit that are not backed by the national government's
"full faith and credit" and general taxing powers. Examples of semi-government
issuers include, among others, the Province of Ontario and the City of
Stockholm.
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.
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN FOREIGN
SECURITIES. 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, the possibility of imposition of exchange controls
and the risk of foreign currency fluctuations. 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 issuer than about a domestic company. Foreign
issuers generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic issuers. 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.
Additional costs could be incurred in connection with the Fund's
international investment activities. Foreign brokerage commissions are generally
higher than U.S. brokerage commissions. Increased custodian costs as well as
administrative difficulties (such as the applicability of foreign laws to
foreign custodians in various circumstances) may be associated with the
maintenance of assets in foreign jurisdictions.
If the security is denominated in a foreign currency, it will be affected
by changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversions between currencies. A
change in the value of any such currency against the U.S. dollar will result in
a corresponding change in the U.S. dollar value of the Fund's securities
denominated in that currency. Such changes also will affect the Fund's income
and distributions to shareholders. In addition, although the Fund will receive
income in such currencies, the Fund will be required to compute and distribute
its income in U.S. dollars. Therefore, if the exchange rate for any such
currency declines after the Fund's income has been accrued and translated into
U.S. dollars, the Fund could be required to liquidate portfolio securities to
make such distributions, particularly in instances in which the amount of income
the Fund is required to distribute is not immediately reduced by the decline in
such currency. Similarly, if an exchange rate declines between the time the Fund
incurs expenses in U.S. dollars and the time such expenses are paid, the amount
of such currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in any such
currency of such expenses at the time they were incurred.
The Fund may, but need not, enter into foreign currency forward contracts
and futures contracts on foreign currencies and related options, for hedging
purposes, including, locking-in the U.S. dollar price of the purchase or sale of
securities denominated in a foreign currency; locking-in the U.S. dollar
equivalent of dividends to be paid on such securities which are held by the
Fund; and protecting the U.S. dollar value of such securities which are held by
the Fund.
B-4
<PAGE> 56
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
changes in the behavior of investors, all of which will impact the Fund's
investments and its net asset value. In addition, although U.S. Treasury
regulations generally provide that the euro conversion will not, in itself,
cause a U.S. taxpayer to realize a gain or loss, other changes may occur at the
time of the conversion, such as accrual periods, holiday conventions, indexes
and other features that may require the realization of a gain or a loss by the
Fund as determined under existing tax law.
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.
B-5
<PAGE> 57
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 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 its investors, may
lose money through any unsuccessful use of these strategies. These strategies
currently include the use of foreign currency forward contracts, 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
various factors, such as market conditions, regulatory limits and tax
considerations, and there can be no assurance that any of these strategies will
succeed. New financial products and risk management techniques continue to be
developed and the Fund may use these new investments and techniques to the
extent consistent with its investment objectives and policies.
FOREIGN CURRENCY FORWARD CONTRACTS
The Fund may but need not enter into foreign currency forward contracts to
protect the value of its portfolio against future changes in the level of
currency exchange rates. The Fund may enter into such contracts on a spot, that
is, cash, basis at the rate then prevailing in the currency exchange market or
on a forward basis, by entering into a forward contract to purchase or sell
currency. A forward contract on foreign currency is an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
agreed upon by the parties from the date of the contract at a price set on the
date of the contract.
The Fund's dealings in forward contracts will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio
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securities and accruals of interest or dividends receivable and Fund expenses.
Position hedging is the sale of a foreign currency with respect to portfolio
security positions denominated or quoted in that currency or in a different
currency (cross hedge). Although there are no limits on the number of forward
contracts which the Fund may enter into, the Fund may not position hedge
(including cross hedges) with respect to a particular currency for an amount
greater than the aggregate market value (determined at the time of making any
sale of forward currency) of the securities being hedged.
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 1 1/2% to 5% of the contract amount, called
initial margin. Thereafter, the futures contract will be valued daily and the
payment in cash of maintenance or variation margin may be required, resulting in
the Fund paying or receiving cash that reflects any decline or increase in the
contract's value, a process known as marking-to-market.
Some futures contracts by their terms may call for the actual delivery or
acquisition of the underlying assets and other futures contracts must be cash
settled. In most cases the contractual obligation is extinguished before the
expiration of the contract by buying (to offset an earlier sale) or selling (to
offset an earlier purchase) an identical futures contract calling for delivery
or acquisition in the same month. The purchase (or sale) of an offsetting
futures contract is referred to as a closing transaction.
Although futures prices themselves have the potential to be extremely
volatile, in the case of any strategy involving interest rate futures contracts
and options thereon when the 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 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
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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.
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.) Duration is described in Appendix I under "Duration." This
should lessen the risks associated with a rise in interest rates. In some
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circumstances, this may serve as a hedge against a loss of principal, but is
usually referred to as an aspect of risk management.
The Fund might buy interest rate futures contracts covering bonds with a
longer maturity than its portfolio average. This would tend to increase the
duration and should increase the gain in the overall portfolio if interest rates
fall. This is often referred to as risk management rather than hedging but, if
it works as intended, has the effect of increasing principal value. If it does
not work as intended because interest rates rise instead of fall, the loss will
be greater than would otherwise have been the case. Futures contracts used for
these purposes are not considered bona fide hedges and, therefore, are subject
to the 5% CFTC limit.
OPTIONS ON FUTURES CONTRACTS
The Fund may enter into options on futures contracts for certain bona fide
hedging, risk management and return enhancement purposes. This includes the
ability to purchase put and call options and write (that is, sell) covered put
and call options on futures contracts that are traded on commodity and futures
exchanges.
If the Fund 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
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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 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.
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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 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 was closed. In the event futures contracts have been
sold to hedge portfolio securities, such securities will not be sold until the
offsetting futures contracts can be executed. Similarly, in the event futures
have been bought to hedge anticipated securities purchases, such purchases will
not be executed until the offsetting futures contracts can be sold.
Exchanges on which futures and related options trade may impose limits on
the positions that the Fund may take in certain circumstances. In addition, the
hours of trading of financial futures contracts and options thereon may not
conform to the hours during which the Fund may trade the underlying securities.
To the extent the futures markets close before the securities markets,
significant price and rate movements can take place in the securities markets
that cannot be reflected in the futures markets.
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act are exempt from the definition of
commodity pool operator, subject to compliance with certain conditions. The Fund
may enter into futures or related options contracts for return enhancement
purposes if the aggregate initial margin and option premiums do not exceed 5% of
the liquidation value of the Fund's total assets, after taking into account
unrealized profits and unrealized losses on any such contracts, provided,
however, that in the case of an option that is in-the-money, the in-the-money
amount may be excluded in computing such 5%. The above restriction does not
apply to the purchase and sale of futures and related options contracts for bona
fide hedging purchases within the meaning of the regulations of the CFTC.
In order to determine that the Fund is entering into transactions in
futures contracts for hedging purposes as such term is defined by the CFTC,
either: (1) a substantial majority (that is, approximately 75%) of all
anticipatory hedge transactions (transactions in which the Fund does not own at
the time of the transaction,
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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.
RISKS RELATED TO FOREIGN CURRENCY FORWARD CONTRACTS. The Fund may enter
into foreign currency forward contracts in several circumstances. When the Fund
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, or when the Fund anticipates the receipt in a foreign currency
of interest payments on a security which it holds, the Fund may desire to
"lock-in" the U.S. dollar price of the security or the U.S. dollar equivalent of
such interest payment, as the case may be. By entering into a forward contract
for a fixed amount of dollars, for the purchase or sale of the amount of foreign
currency involved in the underlying transactions, the Fund may be able to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date on which the security is purchased or sold, or on which
the interest payment is declared, and the date on which such payment is made or
received.
Additionally, when the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract for a fixed amount of
dollars, to sell the amount of foreign currency approximating the value of some
or all of the Fund's portfolio securities denominated in such foreign currency.
The precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the forward
contract is entered into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the successful execution of
a short-term hedging strategy is highly uncertain. If the Fund enters into a
position hedging transaction, the transaction will be "covered" by the position
being hedged, or the Fund will place cash or other liquid assets in a segregated
account of the Fund (less the value of the "covering" positions, if any) in an
amount equal to the value of the Fund's total assets committed to the
consummation of the given forward contract. The assets placed in the segregated
account will be marked-to-market daily, and if the value of the securities
placed in the segregated account declines, additional cash or securities will be
placed in the account on a daily basis so that
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the value of the account will, at all times, equal the amount of the Fund's net
commitment with respect to the forward contract.
The Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency, or
it may retain the security and terminate its contractual obligation to deliver
the foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the same
amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the forward contract.
Accordingly, it may be necessary for the Fund to purchase additional foreign
currency on the spot market (and bear the expense of such purchase) if the
market value of the security is less than the amount of foreign currency that
the Fund is obligated to deliver and if a decision is made to sell the security
and make delivery of the foreign currency.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. Should forward contract prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent that the price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward contract prices increase,
the Fund will suffer a loss to the extent that the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in foreign currency forward contracts will generally be
limited to the transactions described above. Of course, the Fund is not required
to enter into such transactions with regard to its foreign currency-denominated
securities. Also this method of protecting the value of the Fund's portfolio
securities against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities which are unrelated to
exchange rates. Additionally, although such contracts tend to minimize the risk
of loss due to a decline in the value of the hedged currency, they also tend to
limit any potential gain which might result should the value of such currency
increase. The Fund's ability to enter into foreign currency forward contracts
may be limited by certain requirements for qualification as a regulated
investment company under the Internal Revenue Code. See "Taxes, Dividends and
Distributions" below.
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors should
be aware of the costs of currency conversion. Although foreign exchange dealers
do not charge a fee for conversion, they do realize a profit based on the
difference (the spread) between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to the
Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer.
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.
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
B-13
<PAGE> 65
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 (that is, 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 investment
adviser. The Fund's investment adviser will monitor the creditworthiness of such
parties, under the general supervision of the Board of Directors. The
B-14
<PAGE> 66
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.
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.
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of its total assets in securities of other
non-affiliated investment companies. If the Fund does invest in securities of
other investment companies, shareholders of the Fund may be subject to duplicate
management and advisory fees. See "Investment Restrictions" below.
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
B-15
<PAGE> 67
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 fluctuations.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities. If
the Fund were to exceed this limit, the investment adviser would take prompt
action to reduce the Fund's holdings in illiquid securities to no more than 15%
of its net assets, as required by applicable law. Illiquid securities include
repurchase agreements 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 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 Board of Directors. The investment adviser will monitor the
liquidity of such restricted securities subject to the supervision of the Board
of Directors. In reaching liquidity decisions, the investment adviser will
consider, inter alia, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security and (4) the nature of the security
and the nature of the marketplace trades (for example, the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer). In addition, in order for commercial paper that is issued in
reliance on Section 4(2) of the Securities Act to be considered liquid, (i) it
must be rated in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations (NRSRO), or if only one
NRSRO rates the securities, by that NRSRO, or, if unrated, be of comparable
quality in the view of the investment adviser; and (ii) it must not be traded
flat (that is, without accrued interest) or in default as to principal or
interest. Repurchase agreements subject to demand are deemed to have a maturity
equal to the notice period.
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<PAGE> 68
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" in the Prospectus.
BORROWING
The Fund may borrow up to 20% of the value of its total assets (calculated
when the loan is made) from banks for temporary, extraordinary or emergency
purposes or for the clearance of transactions. The Fund may pledge up to 20% of
its total assets to secure these borrowings. If the Fund's asset coverage for
borrowings falls below 300%, the Fund will take prompt action (within 3 days) to
reduce its borrowings. If the 300% asset coverage should decline as a result of
market fluctuations or other reasons, the Fund may be required to sell portfolio
securities to reduce the debt and restore the 300% asset coverage, even though
it may be disadvantageous from an investment standpoint to sell securities at
that time. The Fund will not purchase portfolio securities when borrowings
exceed 5% of the value of 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 up to 100% of the Fund's assets 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. Investing heavily in these securities limits the Fund's
ability to achieve a high level of income, but can help to preserve the Fund's
assets.
(e) PORTFOLIO TURNOVER
Although the Fund does not intend to engage in substantial short-term
trading, it may sell portfolio securities without regard to the length of time
that they have been held in order to take advantage of new investment
opportunities or yield differentials, or because the Fund desires to preserve
gains or limit losses due to changing economic conditions or the financial
condition of the issuer. 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, 1998, and 1999, the Fund's portfolio turnover
rate was 103% and 70%, 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
B-17
<PAGE> 69
"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 securities which are
payable in currencies other than
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<PAGE> 70
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>
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; former Director of
the Advisory Board of Chase Manhattan Bank of
Rochester.
Delayne Dedrick Gold (61) Director Marketing and Management Consultant.
*Robert F. Gunia (53) Director and Vice Executive Vice President and Chief Administrative
President Officer (since June 1999) of Prudential Investments;
Corporate Vice President (September 1997-March 1999)
of The Prudential Insurance Company of America
(Prudential); Executive Vice President and Treasurer
(since December 1996) of Prudential Investments Fund
Management LLC (PIFM); President (since April 1999)
of Prudential Investment Management Services LLC
(PIMS); former Senior Vice President (March 1987-May
1999) and former Chief Administrative Officer (July
1990-September 1996) of Prudential Securities
Incorporated (Prudential Securities); Director
(January 1989-September 1996), Executive Vice
President, Treasurer and Chief Financial Officer
(June 1987-December 1996) of Prudential Mutual Fund
Management, Inc. (PMF); Vice President and Director
(since May 1989) of The Asia Pacific Fund, Inc.
Thomas T. Mooney (58) Director President of the Greater Rochester Metro Chamber of
Commerce; former Rochester City Manager; former
Deputy Monroe County Executive; Trustee of Center
for Governmental Research, Inc.; Director of Blue
Cross of Rochester, Monroe County Water Authority,
Executive Service Corps of Rochester.
Stephen P. Munn (57) Director Chairman (since January 1994), Director and President
(since 1988) and Chief Executive Officer (since
1988) of Carlisle Companies Incorporated
(manufacturer of industrial products).
</TABLE>
B-19
<PAGE> 71
<TABLE>
<CAPTION>
NAME, ADDRESS** POSITION(S) HELD PRINCIPAL OCCUPATIONS
AND AGE WITH THE FUND DURING PAST 5 YEARS
--------------- ------------------- ---------------------
<S> <C> <C>
*David R. Odenath, Jr. (42) Director Officer in Charge, President, Chief Executive Officer
and Chief Operating Officer (since June 1999) of
PIFM; Senior Vice President (since June 1999) of
Prudential; Senior Vice President (August 1993-May
1999) of PaineWebber Group, Inc.
Richard A. Redeker (56) Director Former Employee of Prudential Investments (October
1996-December 1998); prior thereto, President, Chief
Executive Officer and Director (October 1993-
September 1996) of 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.; Executive Vice President,
The Prudential Investment Corporation (July 1994-
September 1996); Director (January 1994-September
1996) of Prudential Mutual Fund Distributors, Inc.
and Prudential Mutual Fund Services Inc.; former
Senior Executive Vice President and Director of
Kemper Financial Services, Inc. (September
1978-September 1993).
*John R. Strangfeld, Jr. (45) President and Chief Executive Officer, Chairman, President and
Director Director (since January 1990) of The Prudential
Investment Corporation; Executive Vice President
(since February 1998) of Prudential Global Asset
Management Group of Prudential, and Chairman (since
August 1989) of Pricoa Capital Group; formerly
various positions to Chief Executive Officer
(November 1994-December 1998) of Private Asset
Management Group of Prudential and Senior Vice
President (January 1986-August 1989) of Prudential
Capital Group, a unit of Prudential.
Nancy H. Teeters (69) Director Economist; former Vice President and Chief Economist
(March 1986-June 1990) of International Business
Machines Corporation; former Governor of Federal
Reserve System (1978-1984); former Director of
Inland Steel Industries (July 1991-1999).
Louis A. Weil, III (58) 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 (August 1991-
December 1995) of Phoenix Newspapers, Inc.; former
Publisher of Time Magazine (May 1989-March 1991);
former President, Publisher and Chief Executive
Officer of The Detroit News (February 1986-August
1989); member of the Advisory Board, Chase Manhattan
Bank-Westchester.
</TABLE>
B-20
<PAGE> 72
<TABLE>
<CAPTION>
NAME, ADDRESS** POSITION(S) HELD PRINCIPAL OCCUPATIONS
AND AGE WITH THE FUND DURING PAST 5 YEARS
--------------- ------------------- ---------------------
<S> <C> <C>
Grace C. Torres (40) Treasurer and First Vice President (since December 1996) of PIFM;
Principal Financial former First Vice President (March 1993-May 1999) of
and Accounting Prudential Securities; First Vice President (March
Officer 1994-September 1996) of Prudential Mutual Fund
Management, Inc.
Stephen M. Ungerman (46) Assistant Treasurer Tax Director of Prudential Investments (since March
1996); former First Vice President of Prudential
Mutual Fund Management, Inc. (February
1993-September 1996).
Deborah A. Docs (42) Secretary Vice President (since December 1996) of PIFM; former
Vice President and Associate General Counsel (June
1991-May 1999) of Prudential Securities; Vice
President and Associate General Counsel (June 1991-
September 1996) of Prudential Mutual Fund
Management, Inc.
</TABLE>
- ---------------
* "Interested" director, as defined in the Investment Company Act, by reason of
his affiliation with Prudential, Prudential Securities, or PIFM.
** 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.
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 $8,125, 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 75.
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.
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<PAGE> 73
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended December 31, 1999 to the Directors who are not
affiliated with the Manager and the aggregate compensation paid to such
Directors for service on the Board and that of all other funds managed by PIFM
(Fund Complex) for the calendar year ended December 31, 1999.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION
AGGREGATE BENEFITS ESTIMATED FROM FUND
COMPENSATION ACCRUED ANNUAL AND FUND
FROM AS PART OF BENEFITS UPON COMPLEX PAID
NAME AND POSITION FUND FUND EXPENSES RETIREMENT TO DIRECTORS
- ----------------- ------------ ------------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
Edward D. Beach*** -- Director............ $8,125 None N/A $142,500 (43/70)*
Eugene C. Dorsey -- Director**............ 8,125 None N/A 81,000 (17/48)*
Delayne Dedrick Gold -- Director.......... 8,900 None N/A 144,500 (43/70)*
Robert F. Gunia -- Director and Vice
President(1)............................ -- -- -- --
Thomas T. Mooney -- Director**............ 8,125 None N/A 129,500 (35/75)*
Stephen P. Munn -- Director............... 4,750 None N/A 62,250 (29/53)
Thomas H. O'Brien*** -- Director.......... 8,125 None N/A 47,500 (11/26)*
David R. Odenath, Jr.(1) -- Director...... -- -- -- --
Richard A. Redeker -- Director............ 8,125 None N/A 95,000 (29/53)
John R. Strangfeld, Jr.(1) -- Director and
President............................... -- -- -- --
Nancy H. Teeters -- Director.............. 8,125 None N/A 97,000 (25/43)*
Louis A. Weil, III -- Director............ 8,550 None N/A 96,000 (29/53)*
</TABLE>
- ---------------
(1) Directors who are "interested" do not receive compensation from the Fund
Complex (including the Fund).
* Indicates number of funds/portfolios in Fund Complex (including the Funds)
to which aggregate compensation relates.
** Total compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1999, includes amounts deferred at the
election of Directors under the Fund's deferred compensation plans.
Including accrued interest, total compensation amounted to $103,574 and
$135,102 for Messrs. Dorsey and Mooney, respectively.
*** Messrs. Beach and O'Brien retired on December 31, 1999.
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 4, 2000, 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 4, 2000, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of beneficial interest were:
Pru Defined Contributions SVCS, FBO Pru-Non-Trust Accounts, Attn: John Surdy, 30
Scranton Office Park, Moosic, PA 18507, who held 514,954 Class Z shares of the
Fund (7.7% 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 677,449 Class Z shares of the Fund (10.2% of the outstanding
Class Z shares) .
As of February 4, 2000, Prudential Securities was the record holder for
other beneficial owners of 86,794,723 Class A shares (or 37.8% of the
outstanding Class A shares), 133,717,868 Class B shares (or 53.9% of the
outstanding Class B shares) 11,244,592 Class C shares (or 86.6% of the
outstanding Class C shares) and 2,485,640 Class Z shares (or 37.3% 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.
B-22
<PAGE> 74
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 December 31, 1999, PIFM
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $75.6 billion. According to the
Investment Company Institute, as of September 30, 1999, Prudential Mutual Funds
were the 20th 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 and dividend distribution 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 has hired The Prudential Investment Corporation, doing business as
Prudential Investments (PI, the investment adviser or the Subadviser), to
provide subadvisory services to 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 Subadviser, pursuant to the
subadvisory agreement between PIFM and the Subadviser (the Subadvisory
Agreement).
Under the terms of the Management Agreement, the Fund is responsible for
the payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Directors who are not affiliated persons of the Manager
or the Fund's Subadviser, (c) the fees and certain expenses of the Custodian and
Transfer and Dividend Disbursing Agent, including the cost of providing records
to the Manager in connection with its obligation of maintaining required records
of the Fund and of pricing the Fund's shares, (d) the charges and expenses of
legal counsel and independent accountants for the Fund, (e) brokerage
commissions and any issue or transfer taxes chargeable to the Fund in connection
with its securities transactions,
B-23
<PAGE> 75
(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, 1997, 1998 and 1999, the Fund paid
PIFM a management fee of $17,569,047, $17,880,859 and $16,790,927 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. Effective January 1, 2000, PI is paid by PIFM at an
annual rate of .250 of 1% of the Fund's average daily net assets up to and
including $250 million, .226 of 1% of the next $500 million, .203 of 1% of the
next $750 million, .181 of 1% of the next $500 million, .160 of 1% of the next
$500 million, .141 of 1% of the next $500 million and .123 of 1% over $3 billion
of the Fund's average daily net assets. The fee is computed daily and payable
monthly.
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.
Prudential Investment's Fixed Income Group includes the following sector
teams which may contribute towards security selection in addition to the sector
team described in the Prospectus (assets under management are as of December 31,
1999):
U.S. LIQUIDITY
ASSETS UNDER MANAGEMENT: $22.6 billion.
TEAM LEADER: Michael Lillard CFA. GENERAL INVESTMENT EXPERIENCE: 12 years.
PORTFOLIO MANAGERS: 9. AVERAGE GENERAL INVESTMENT EXPERIENCE: 10 years, which
includes team members with significant mutual fund experience.
SECTOR: U.S. Treasuries, agencies and mortgages.
INVESTMENT STRATEGY: Focus is on high quality, liquidity and controlled risk.
CORPORATE
ASSETS UNDER MANAGEMENT: $47.3 billion.
TEAM LEADER: Steven Kellner CFA. GENERAL INVESTMENT EXPERIENCE: 13 years.
B-24
<PAGE> 76
PORTFOLIO MANAGERS: 8. AVERAGE GENERAL INVESTMENT EXPERIENCE: 13 years, which
includes team members with significant mutual fund experience.
SECTOR: U.S. investment-grade corporate securities.
INVESTMENT STRATEGY: Focus is on identifying spread, credit quality and
liquidity trends to capitalize on changing opportunities in the market.
Ultimately, they seek the highest expected return with the least risk.
GLOBAL BOND
ASSETS UNDER MANAGEMENT: $2.0 billion.
TEAM LEADER: Gabriel Irwin. GENERAL INVESTMENT EXPERIENCE: 18 years.
PORTFOLIO MANAGERS: 5. AVERAGE GENERAL INVESTMENT EXPERIENCE: 11 years, which
includes team members with significant mutual fund experience.
SECTOR: Corporate and government securities of foreign issuers.
INVESTMENT STRATEGY: Focus is on a top-down, geographic-allocation process.
They seek to add value by exploiting yield variances between different countries
and credit qualities.
EMERGING MARKETS
ASSETS UNDER MANAGEMENT: $1.9 billion.
TEAM LEADER: David Bessey. GENERAL INVESTMENT EXPERIENCE: 10 years.
PORTFOLIO MANAGERS: 3. AVERAGE GENERAL INVESTMENT EXPERIENCE: 9 years, which
includes team members with significant mutual fund experience.
SECTOR: Government and corporate securities issued by developing markets and
countries.
INVESTMENT STRATEGY: Focus is on a fundamental investment approach that uses a
strong technical and value overlay to make country selections.
MONEY MARKETS
ASSETS UNDER MANAGEMENT: $36.0 billion.
TEAM LEADER: Joseph Tully. GENERAL INVESTMENT EXPERIENCE: 16 years.
PORTFOLIO MANAGERS: 9. AVERAGE GENERAL INVESTMENT EXPERIENCE: 10 years, which
includes team members with significant mutual fund experience.
SECTOR: High-quality short-term securities, including both taxable and
tax-exempt instruments.
INVESTMENT STRATEGY: Focus is on safety of principal, liquidity and controlled
risk.
CODE OF ETHICS
The Board of Directors/Trustees of the Fund, or the Duly Appointed
Officer-In-Charge of each of the Fund, Manager, Subadviser and the Distributor,
has adopted a Code of Ethics under Rule 17j-1 of the Investment Company Act of
1940, (the "Codes"). The Codes significantly restrict the personal investing
activities of all employees of the Manager, Subadviser and Distributor and as
described below, impose additional, more onerous, restrictions on Fund
investment personnel.
The Codes require that all access persons of the Manager, Subadviser and
Distributor preclear any personal securities investments (with limited
exceptions, such as unit investment trusts). The preclearance requirement and
associated procedures are designed to identify any substantive prohibition or
limitation applicable to the proposed investment. The substantive restrictions
applicable to all investment personnel of the Manager, Subadviser and
Distributor include a ban on acquiring any securities in an initial public
offering and a prohibition from profiting on short-term trading in securities.
In addition, no access person may purchase or sell any security which at the
time is being purchased or sold (as the case may be), or to the knowledge of the
access person is being considered for purchase or sale, by any fund advised by
the Subadviser. Furthermore, the Code provides for trading "blackout periods"
which prohibit trading by investment personnel of a Fund within 7 days of
trading by the Fund in the same (or equivalent) security. The Codes are on
public file with, and are available from, the Commission.
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<PAGE> 77
(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. The Distributor is a subsidiary 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 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.
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 agreed to limit 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 ended December 31, 1999, the Distributor received
payments of approximately $4,365,306 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, 1999, the Distributor also received approximately $947,100 in initial sales
charges attributable to Class A shares.
CLASS B AND CLASS C PLANS. Under the Class B and Class C Plans, the Fund
pays the Distributor for its distribution-related activities with respect to
Class B and Class C shares at an annual rate of up to 1% of the average daily
net assets of each of the Class B and Class C shares. The Class B Plan provides
that (1) up to .25 of 1% of the average daily net assets of the Class B shares
may be paid as a service fee and (2) up to .75 of 1% (not including the service
fee) of the average daily net assets of the Class B shares (asset-based sales
charge) may be paid for distribution-related expenses with respect to the Class
B shares. The Class C Plan provides that (1) up to .25 of 1% of the average
daily net assets of the Class C shares may be paid as a service fee for
providing personal service and/or maintaining shareholder accounts and (2) up to
.75 of 1% of the average daily net assets of the Class C shares may be paid for
distribution-related expenses with respect to Class C shares. The service fee
(.25 of 1% of average daily net assets) is used to pay for personal service
and/or the maintenance of shareholder accounts. The Distributor also receives
contingent deferred sales charges from certain redeeming shareholders 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.
B-26
<PAGE> 78
CLASS B PLAN. For the fiscal year ended December 31, 1999, the Distributor
received $16,356,784 from the Fund under the Class B Plan and spent
approximately $778,683 in distributing the Fund's Class B shares. It is
estimated that of the amount spent, approximately 0.1% ($536) was spent on
printing and mailing of prospectuses to other than current shareholders; 10.2%,
($79,057), 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 148.5%, ($1,156,652), on the aggregate of (1) payments of
commissions and account servicing fees to financial advisers (47.2%, or
$367,543) and (2) an allocation of overhead and other branch office
distribution-related expenses for payments of related expenses (101.3%, or
$789,109). 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 also receives the proceeds of contingent deferred sales
charges paid by holders of Class B shares upon certain redemptions of Class B
shares. See "How to Buy, Sell and Exchange Shares of the Fund -- How to Sell
Your Shares -- Contingent Deferred Sales Charge (CDSC)" in the Prospectus. For
the fiscal year ended December 31, 1999, the Distributor received approximately
$3,831,100 in contingent deferred sales charges attributable to Class B shares.
CLASS C PLAN. For the fiscal year ended December 31, 1999, the Distributor
received $715,823 under the Class C Plan and spent approximately $51,761 in
distributing Class C shares. It is estimated that of the amount spent,
approximately 0%, ($18) was spent on printing and mailing of prospectuses to
other than current shareholders; 3.9% ($98) 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 111.4% ($57,651) on the aggregate of (1)
payments of commissions and account servicing fees to financial advisers (31.9%
or $133,503) and (2) an allocation of overhead and other branch office
distribution-related expenses for payments of related expenses (63.6% or
$266,413).
The Distributor also receives an initial sales charge and the proceeds of
contingent deferred sales charges paid by investors upon certain redemptions of
Class C shares. See "How to Buy, Sell and Exchange Shares of the Fund -- How to
Sell Your Shares -- Contingent Deferred Sales Charge (CDSC)" in the Prospectus.
For the year ended December 31, 1999, the Distributor received approximately
$60,000 in contingent deferred sales charges and $386,200 in initial sales
charges with respect to sales of Class C shares.
Distribution expenses attributable to the sale of Class A, Class B and
Class C shares of the Fund are allocated to each such class based upon the ratio
of each such class to the sales of Class A, Class B and Class C shares of the
Fund other than expenses allocable to a particular class. The distribution fee
and sales charge of one class will not be used to subsidize the sale of another
class.
* * *
The Class A, Class B and Class C Plans continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority vote of the Directors who
are not interested persons of the Fund and who have no direct or indirect
financial interest in the Class A, Class B or Class C Plan or on any agreement
related to the Plans (Rule 12b-1 Directors) cast in person at a meeting called
for the purpose of voting on such continuance. A Plan may be terminated at any
time, without penalty, by the vote of a majority of the Rule 12b-1 Directors or
by the vote of the holders of a majority of the outstanding shares of the
applicable class on not more than 30 days' written notice to any other party to
the Plan. The Plans may not be amended to increase materially the amounts to be
spent for the services described therein without approval by the shareholders of
the applicable class (by both Class A and Class B shareholders, voting
separately, in the case of material amendments to the Class A Plan), and all
material amendments are required to be approved by the Board of Directors in the
manner described above. Each Plan will automatically terminate in the event of
its assignment. The Fund will not be contractually obligated to pay expenses
incurred under any Plan if it is terminated or not continued.
Pursuant to each Plan, the Board of Directors will review at least
quarterly a written report of the distribution expenses incurred on behalf of
each class of shares of the Fund by the Distributor. The report will
B-27
<PAGE> 79
include an itemization of the distribution expenses and the purposes of such
expenditures. In addition, as long as the Plans remain in effect, the selection
and nomination of the Rule 12b-1 Directors shall be committed to the Rule 12b-1
Directors.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify
the Distributor to the extent permitted by applicable law against certain
liabilities under federal securities law.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons which distribute shares of the Fund (including
Class Z shares). Such payments may be calculated by reference to the net asset
value of shares sold by such persons or otherwise.
FEE WAIVERS/SUBSIDIES
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. In addition,
the Distributor has contractually agreed to waive a portion of its distribution
fees for the Class A and Class C shares as described above. Fee waivers and
subsidies will increase the Fund's total return.
NASD MAXIMUM SALES CHARGE RULE
Pursuant to rules of the NASD, the Distributor is required to limit
aggregate initial sales charges, deferred sales charges and asset-based sales
charges to 6.25% of total gross sales of each class of shares. Interest charges
on unreimbursed distribution expenses equal to the prime rate plus one percent
per annum may be added to the 6.25% limitation. Sales from the reinvestment of
dividends and distributions are not included in the calculation of the 6.25%
limitation. The annual asset-based sales charge on shares of the Fund may not
exceed .75 of 1% per class. The 6.25% limitation applies to each class of the
Fund rather than on a per shareholder basis. If aggregate sales charges were to
exceed 6.25% of total gross sales of any class, all sales charges on shares of
that class would be suspended.
(c) OTHER SERVICE PROVIDERS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Subcustodians provide custodial
services for the Fund's foreign assets held outside the United States.
Prudential Mutual Fund Services LLC (PMFS), 194 Wood Avenue South, Iselin,
New Jersey 08830 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.
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.
Although the Fund has not experienced any material problems with the services
provided by the Manager, the Distributor, the Transfer Agent or the Custodian as
a result of the change from 1999 to 2000, there remains a possibility that
computer software systems in use might be impaired or unavailable because of the
way dates are encoded and calculated. Such an 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
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no assurance that there will be no future adverse impact on the Fund, the
Manager, the Distributor, the Transfer Agent and the Custodian have advised the
Fund that they have completed necessary changes to their computer systems in
connection with the year 2000. The Fund's service providers (or other securities
market participants) may experience future material problems in connection with
the year 2000. The Fund and its Board have instructed the Fund's principal
service providers to monitor and report year 2000 problems.
Additionally, issuers of securities generally as well as those purchased by
the Fund may confront year 2000 compliance issues at some later time which, if
material and not resolved, could have an adverse impact on securities markets
and/or a specific issuer's performance and could result in a decline in the
value of the securities held by the Fund.
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 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 a 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
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<PAGE> 81
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 a 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 affiliate 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, 1997, 1998, and 1999.
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 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 (5) Class Z shares are offered
exclusively for sale to a limited group of 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.
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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 charges 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" 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"
above and "Shareholder Investment Account -- Exchange Privilege" below.
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, fund and 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 investing (Class A, Class B,
Class C or Class Z shares).
If you arrange for receipt by State Street of federal funds prior to the
calculation of NAV (4:15 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 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 purchases
utilizing federal funds. The minimum amount which may be invested by wire is
$1,000.
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (1) reorganizations, (2) statutory mergers, or (3)
other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (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.
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<PAGE> 83
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%, 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, 1999, 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.... $7.38
-----
Maximum sales charge (4% of offering price)............... .31
-----
Offering price to public.................................. $7.69
=====
CLASS B
Net asset value, offering price and redemption price per
Class B share*......................................... $7.36
=====
CLASS C
Net asset value and redemption price per Class C share*... $7.36
-----
Maximum sales charge (1% of offering price)............... $ .07
-----
Offering Price to Public.................................. $7.43
=====
CLASS Z
Net asset value, offering price and redemption price per
Class Z share.......................................... $7.39
=====
</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.
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<PAGE> 84
REDUCTION AND WAIVER OF INITIAL SALES CHARGE -- CLASS A SHARES
BENEFIT PLANS. Certain group retirement and savings plans may purchase
Class A shares without the initial sales charge, if they meet the required
minimum for amount of assets, average account balance or number of eligible
employees. For more information about these requirements, call Prudential at
(800) 353-2847.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV through
the Distributor or the Transfer Agent, by:
- officers of the Prudential mutual funds (including the Fund)
- 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
- employees of subadvisers of the Prudential mutual funds provided that
purchases at NAV are permitted by such person's employer
- Prudential, employees and special agents of Prudential and its
subsidiaries and all persons who have retired directly from active
service with Prudential or one of its subsidiaries
- members of the Board of Directors of Prudential
- real estate brokers, agents and employees of real estate brokerage
companies affiliated with The Prudential Real Estate Affiliates who
maintain an account at Prudential Securities, Prusec or with the Transfer
Agent
- registered representatives and employees of brokers who have entered into
a selected dealer agreement with the Distributor provided that purchases
at NAV are permitted by such person's employer
- investors who have a business relationship with a financial adviser who
joined 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
- 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
- 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)
- orders placed by clients of broker dealers, investment advisers or
financial planners who place trades for customer accounts if the accounts
are linked to the master account of such broker-dealer, investment
adviser or financial planner and the broker dealer, investment adviser or
financial planner charges its clients a separate fee for its services
(for example, mutual fund "supermarket programs").
Broker-dealers, investment advisers or financial planners sponsoring
fee-based programs (such as mutual fund "wrap" or asset allocation programs and
mutual fund "supermarket" programs) may offer their clients more than one class
of shares in the Fund in connection with different pricing options for their
programs. Investors should consider carefully any separate transaction and other
fees charged by these programs in connection with investing in each available
share class before selecting a share class.
For an investor to obtain any reduction or waiver of the initial sales
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
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<PAGE> 85
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 -- Step 2: Choose a Share Class -- Reducing or Waiving Class A's
Initial Sales Charge" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
- an individual
- the individual's spouse, their children and their parents
- the individual's and spouse's Individual Retirement Account (IRA)
- any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a company will
be deemed to control the company, and a partnership will be deemed to be
controlled by each of its general partners)
- a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children
- a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse
- 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.
LETTERS OF INTENT. Reduced sales charges are also available to investors
(or an eligible group of related investors) 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 no longer qualify to purchase Class A shares
at NAV by entering into a Letter of Intent.
For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of other Prudential mutual funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent or
its affiliates, and through your broker will not be aggregated to determine the
reduced sales charge.
An Investment Letter of Intent permits an investor to establish a total
investment goal to be achieved by any number of investments over a
thirteen-month period. Each investment made during the period will receive the
reduced sales charge applicable to the amount represented by the goal, as if it
were a single investment. Escrowed Class A shares totaling 5% of the dollar
amount of the Letter of Intent will be held by the Transfer Agent in the name of
the investor. The effective date of an Investment Letter of Intent may be
back-dated up to 90 days, in order that any investments made during this 90-day
period, valued at the investor's cost, can be applied to the fulfillment of the
Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the investor 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
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<PAGE> 86
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 be granted
subject to confirmation of the investor's holdings. Letters of Intent are not
available to individual participants in any retirement or group plans.
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 broker or the
Distributor. Although there is no sales charge imposed at the time of purchase,
redemptions of Class B shares may be subject to a CDSC. See "Contingent Deferred
Sales Charge" below.
The Distributor will pay, from its own resources, sales commissions of up
to 4% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell Class B shares at the time of sale. This facilitates the
ability of the Fund to sell the Class B shares without an initial sales charge
being deducted at the time of purchase. The Distributor anticipates that it will
recoup its advancement of sales commissions from the combination of the CDSC and
the distribution fee.
CLASS C SHARES
The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, brokers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 2% of the purchase
price at the time of the sale.
WAIVER OF INITIAL SALES CHARGE -- CLASS C SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at (800)
353-2847.
INVESTMENTS OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT
COMPANIES. Investors may purchase Class C shares at NAV, without the initial
sales charge, with the proceeds from the redemption of shares of any
unaffiliated registered investment company which were not held through an
account with any Prudential affiliate. Such purchases must be made within 60
days of the redemption. Investors eligible for this waiver include: (i)
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 through other brokers. This waiver is not available to investors who
purchase shares directly from the Transfer Agent. You must notify the Transfer
Agent directly or through your broker if you are entitled to this waiver and
provide the Transfer Agent with such supporting documents as it may deem
appropriate.
CLASS Z SHARES
Benefit Plans. Certain group retirement plans may purchase Class Z shares
if they meet the required minimum for amount of assets, average account balance
or number of eligible employees. For more information about these requirements,
call Prudential at (800) 353-2847.
Mutual Fund Programs. Class Z shares also can be purchased by participants
in any fee-based program or trust program sponsored by Prudential or an
affiliate that includes mutual funds as investment options and the Fund as an
available option. Class Z shares also can be purchased by investors in certain
programs sponsored by broker-dealers, investment advisers and financial planners
who have agreements with Prudential Investments Advisory Group relating to:
- Mutual fund "wrap" or asset allocation programs where the sponsor places
Fund trades, links its clients' accounts to a master account in the
sponsor's name and charges its clients a management, consulting or other
fee for its services
- Mutual fund "supermarket" programs, where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor
charges a fee for its services.
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<PAGE> 87
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
Other Types of Investors. Class Z shares also are available for purchase
by the following categories of investors:
- Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available investment option
- Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund)
- Prudential, with an investment of $10 million or more.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay brokers, 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.
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.
Rights of accumulation may be applied across the classes of the Prudential
mutual funds. However, the value of shares held directly with the Transfer Agent
and through your broker will not be aggregated to determine the reduced sales
charge. The value of existing holdings for purposes of determining the reduced
sales charge is calculated using the maximum offering price (net asset value
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 shareholder is entitled to a reduced sales charge. The reduced
sales charge will be granted subject to confirmation of the investor's holdings.
Rights of accumulation are not available to individual participants in any
retirement or group plans.
SALE OF SHARES
You can redeem your shares at any time for cash at NAV next determined
after the redemption request is received in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent, the Distributor or your broker. In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable CDSC, as described below. See "Contingent Deferred Sales Charge"
below. If you are redeeming your shares through a 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.
In order to redeem shares, a written request for redemption signed by you
exactly as the account is registered is required. If you hold certificates, the
certificates must be received by 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
$100,000, (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
B-36
<PAGE> 88
Agent's records, or (4) are to be paid to a corporation, partnership, trust or
fiduciary, the signature(s) on the redemption request or stock power must be
signature guaranteed by an "eligible guarantor institution." An "eligible
guarantor institution" includes any bank, broker, dealer or credit union. The
Transfer Agent reserves the right to request additional information from, and
make reasonable inquiries of, any eligible guarantor institution. 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 written request, and certificates, if issued, 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 Securities and Exchange
Commission (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 Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the Commission. Securities will be readily marketable and will be valued in the
same manner as 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 Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any such
involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest back into your
account any portion or all of the proceeds of such redemption in shares of the
same 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 or 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 Charge" below. Exercise of the repurchase privilege may affect the federal
tax treatment of the redemption.
CONTINGENT DEFERRED SALES CHARGE
Redemptions of Class B shares will be subject to a contingent deferred
sales charge of CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within 18 months of purchase (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
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<PAGE> 89
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" below.
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS
YEAR SINCE PURCHASE PAYMENT MADE INVESTED OR REDEMPTION PROCEEDS
-------------------------------- --------------------------------
<S> <C>
First.................................................... 5.0%
Second................................................... 4.0%
Third.................................................... 3.0%
Fourth................................................... 2.0%
Fifth.................................................... 1.0%
Sixth.................................................... 1.0%
Seventh.................................................. None
</TABLE>
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 CHARGE -- CLASS B SHARES. The CDSC
will be waived in the case of a redemption following the death or disability of
a shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint
tenancy, at the time of death or initial determination of disability, provided
that the shares were purchased prior to death or disability.
The CDSC will also be waived in the case of a total or partial redemption
in connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. For more information, call Prudential at (800) 353-2847.
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.
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<PAGE> 90
In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Fund.
You must notify the Fund's Transfer Agent either directly or through your
broker at the time of redemption that you are entitled to waiver of the CDSC and
provide the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement.
In connection with these waivers, the Transfer Agent will require you to
submit the supporting documentation set forth below.
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
------------------ ----------------------
<S> <C>
Death A copy of the shareholder's death certificate or,
in the case of a trust, a copy of the grantor's
death certificate, plus a copy of the trust
agreement identifying the grantor.
Disability -- An individual will be considered A copy of the Social Security Administration award
disabled if he or she is unable to engage in any letter or a letter from a physician on the
substantial gainful activity by reason of any physician's letterhead stating that the
medically determinable physical or mental shareholder (or, in the case of a trust, the
impairment which can be expected to result in grantor (a copy of the trust agreement identifying
death or to be of long-continued and indefinite the grantor will be required as well) is
duration. permanently disabled. The letter must also
indicate the date of disability.
Distribution from an IRA or 403(b) Custodial A copy of the distribution form from the custodial
Account firm indicating (i) the date of birth of the
shareholder and (ii) that the shareholder is over
age 59 1/2 and is taking a normal
distribution-signed by the shareholder.
Distribution from Retirement Plan A letter signed by the plan administrator/trustee
indicating the reason for the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or the
plan administrator/trustee on company letterhead
indicating the amount of the excess and whether or
not taxes have been paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on
certain redemptions effected through the Systematic Withdrawal Plan. On an
annual basis, up to 12% of the total dollar amount subject to the CDSC may be
redeemed without charge. The Transfer Agent will calculate the total amount
available for this waiver annually on the anniversary date of your purchase or,
for 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.
B-39
<PAGE> 91
The quantity discount will be imposed at the following rates depending on
whether the aggregate value exceeded $500,000 or $1 million:
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS INVESTED
OR REDEMPTION PROCEEDS
<TABLE>
<CAPTION>
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 entitlement.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE -- CLASS C SHARES
BENEFIT PLANS. The CDSC will be waived for redemptions by certain group
retirement plans for which Prudential or brokers not affiliated with Prudential
provide administrative or recordkeeping services. The CDSC also will be waived
for certain redemptions by benefit plans sponsored by Prudential and its
affiliates. For more information, call Prudential at (800) 353-2847.
CONVERSION FEATURE -- CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (that is, $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equal 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than that
of the Class B shares at the time of conversion. Thus, although the aggregate
dollar value will be the same, you may receive fewer Class A shares than Class B
shares converted.
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during the month will be deemed to have been
made on the last day of the month, or for Class B shares acquired through
exchange, or a series of exchanges, on the last day of the month in which the
original
B-40
<PAGE> 92
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 net asset
value per share. An investor may direct the Transfer Agent in writing not less
than 5 full business days prior to the record date to have subsequent dividends
and/or distributions sent to him or her in cash rather than reinvested. In the
case of recently purchased shares for which registration instructions have not
been received by the record date, cash payment will be made directly to the
broker. Any shareholder who receives dividends or distributions in cash may
subsequently reinvest any such distribution at NAV by returning the check to the
Transfer Agent within 30 days after the payment date. Such reinvestment will be
made at the NAV per share next determined after receipt of the check by the
Transfer Agent. Shares purchased with reinvested dividends and/or distributions
will not be subject to CDSC upon redemption.
EXCHANGE PRIVILEGE. The Fund makes available to its shareholders the
privilege of exchanging their shares of the Fund for shares of certain other
Prudential mutual funds, including one or more specified money market funds,
subject in each case to the minimum investment requirements of such funds.
Shares of such other Prudential mutual funds may also be exchanged for shares,
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 8:00 p.m., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. Neither
the Fund nor its agents will be liable for any loss, liability or cost which
results from acting upon instructions reasonably believed to be genuine under
the foregoing procedures. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order.
B-41
<PAGE> 93
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 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, shares of Prudential Government Securities Trust
(Short-Intermediate Term Series) and shares of the money market funds specified
below. No fee or sales load will be imposed upon the exchange. Shareholders of
money market funds who acquired such shares upon exchange of Class A shares may
use the exchange privilege only to acquire Class A shares of the Prudential
mutual funds participating in the exchange privilege.
The following money market funds participate in the Class A exchange
privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc.
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B
and Class C shares of the Fund for Class B and Class C shares, respectively, of
certain other Prudential mutual funds and shares of Prudential Special Money
Market Fund, a money market mutual 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
an eligible money market fund without imposition of any CDSC at the time of
exchange. Upon subsequent redemption from such money market fund or after
re-exchange into the Fund, such shares will be subject to the CDSC calculated 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
B-42
<PAGE> 94
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. See "How to Buy, Sell and Exchange Shares of the Fund -- How to
Exchange Your Shares -- Frequent Trading" in the Prospectus.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college 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-43
<PAGE> 95
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 for subsequent investment into 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, quarterly, semi-annual or annual redemption checks in any amount,
except as provided below, up to the value of the shares in the shareholder's
account. Systematic withdrawals of Class B or Class C shares may be subject to a
CDSC. See "How to Buy, Sell and Exchange Shares of the Fund -- How to Sell Your
Shares -- Contingent Deferred Sales Charge (CDSC)" in the Prospectus.
In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account value applies, (2) systematic withdrawals may not be for less than $100
and (3) all dividends and/or distributions must be automatically reinvested in
additional full and fractional shares of the Fund in order for the shareholder
to participate in the plan. See "Automatic Reinvestment of Dividends and/or
Distributions" above.
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 systematic 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.
Systematic withdrawal payments should not be considered as dividends, yield
or income. If systematic withdrawals exceed reinvested dividends and
distributions, the shareholder's original investment may be correspondingly
reduced and ultimately exhausted.
Furthermore, each systematic withdrawal constitutes a redemption of shares,
and any gain or loss realized must be recognized for federal income tax
purposes. In addition, 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 tax-deferred retirement plans, including 401(k) plans,
self-directed Individual Retirement Accounts and tax sheltered accounts under
Section 403(b)(7) of the Internal Revenue Code are available
B-44
<PAGE> 96
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
establishment, administration and custodial fees, as well as other plan details,
are available from the Distributor or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
INDIVIDUAL RETIREMENT ACCOUNTS. An Individual Retirement Account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn. The following chart represents a comparison of the
earnings in a personal savings account with those in an IRA, assuming a $2,000
annual contribution, an 8% rate of return and a 39.6% federal income tax bracket
and shows how much more retirement income can accumulate within an IRA as
opposed to a taxable individual savings account.
TAX-DEFERRED COMPOUNDING(1)
<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, such as pursuit of 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 is 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.
B-45
<PAGE> 97
Government securities that are actively traded in the over-the-counter market,
including listed securities for which the primary market is believed to be
over-the-counter, are valued on the basis of valuations provided by a pricing
service which uses information with respect to transactions in bonds, quotations
from bond dealers, agency ratings, market transactions in comparable securities
and various relationships between securities in determining value. Convertible
debt securities that are actively traded in the over-the-counter market,
including listed securities for which the primary market is believed to be
over-the-counter, are valued at the mean between the last reported bid and asked
prices provided by principal market makers. Options on stock and stock indices
traded on an exchange are valued at the mean between the most recently quoted
bid and asked prices on the respective exchange and futures contracts and
options thereon are valued at their last sale prices as of the close of trading
on the applicable commodities exchange. Quotations of foreign securities in a
foreign currency are converted to U.S. dollar equivalents at the current rate
obtained from a recognized bank or dealer, and forward currency exchange
contracts are valued at the current cost of covering or offsetting such
contacts. Should an extraordinary event, which is likely to affect the value of
the security, occur after the close of an exchange on which a portfolio security
is traded, such security will be valued at fair value considering factors
determined in good faith by the investment adviser under procedures established
by and under the general supervision of the Fund's Board of Directors.
Securities or other assets for which reliable market quotations are not
readily available or for which the pricing agent or principal market maker does
not provide a valuation or methodology or provides a valuation or methodology
that, in the judgment of the Manager or Subadviser (or Valuation Committee or
Board of Directors) does not represent fair value, are valued by the Valuation
Committee or Board of Directors in consultation with the Manager or Subadviser.
Short-term debt securities are valued at cost, with interest accrued or discount
amortized to the date of maturity, if their original maturity was 60 days or
less, unless this is determined by the Directors not to represent fair value.
Short-term securities with remaining maturities of more than 60 days, for which
market quotations are readily available, are valued at their current market
quotations as supplied by an independent pricing agent or principal market
maker. 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 dividends 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
carryforwards from prior years will be offset against capital gains. The Fund
had a capital loss carryforward for federal income tax purposes at December 31,
1999 of approximately $442,409,300, of which $110,441,500 expires in 2000,
$162,249,600 expires in 2003 and $169,718,100 expires in 2007. Approximately
$77,895,200 of the Fund's capital loss carryforward expired as of December 31,
1999. In addition, the Fund will elect to treat net capital losses of
approximately $28,323,000 incurred in the two month period ended December 31,
1999 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
B-46
<PAGE> 98
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 stock, securities or foreign currencies or other income
(including gains from options, futures and forward contracts) derived with
respect to the Fund's business of investing in stock, securities or currencies;
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 and market
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 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
B-47
<PAGE> 99
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" above.
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 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 will not be able to make
any ordinary dividend distributions, or distributions made before the losses
were realized will 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
B-48
<PAGE> 100
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, 1999 for the Fund's
Class A, Class B, Class C and Class Z shares was 9.91%, 9.62%, 9.73% and 10.56%,
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
<TABLE>
<S> <C> <C> <C>
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
</TABLE>
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.
B-49
<PAGE> 101
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, 1999 was (0.76)%, 8.27% and 9.26%, 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, 1999 was (2.14)%, 8.39% and 9.04%, respectively.
The average annual total return for Class C shares for the one year, five year
and since inception (August 1, 1994) periods ended December 31, 1999 was 0.83%,
8.31% and 7.49%, respectively. The average annual total return for Class Z
shares for the one year and since inception (March 1, 1996) periods ended
December 31, 1999 was 3.79% and 6.55%, 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, 1999 was 3.38%, 54.98% and 151.17%, 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, 1999 was 2.86%, 50.57% and 137.50%, respectively.
The aggregate total return for Class C shares for the one year, five year and
since inception (August 1, 1994) periods ended December 31, 1999 was 2.86%,
50.57% and 49.39%, respectively. The aggregate total return for the Class Z
shares for the one year and since inception (March 1, 1996) periods ended
December 31, 1999 were 3.79% and 27.53%.
ADVERTISING. Advertising materials for the Fund may include biographical
information relating to its portfolio manager(s), and may include or refer to
commentary by the Fund's manager(s) concerning investment style, investment
discipline, asset growth, current or past business experience, business
capabilities, political, economic or financial conditions and other matters of
general interest to investors. Advertising materials for the Fund also may
include mention of The Prudential Insurance Company of America, its affiliates
and subsidiaries, and reference the assets, products and services of those
entities.
From time to time, advertising materials for the Fund may include
information concerning retirement and investing for retirement, may refer to the
approximate number of Fund interest holders and may refer to Lipper rankings or
Morningstar ratings, other related analyses supporting those ratings, other
industry publications, business periodicals and market indices. In addition,
advertising materials may reference studies or analyses performed by the Manager
or its affiliates. Advertising materials for sector funds, funds that focus on
market capitalizations, index funds and international/global funds may discuss
the potential benefits and risks of that investment style. Advertising materials
for fixed income funds may discuss the benefits and risks of investing in the
bond market including discussions of credit quality, duration and maturity.
B-50
<PAGE> 102
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)
[Bar Graph]
<TABLE>
<CAPTION>
COMMON STOCKS LONG TERM GOV'T. BONDS INFLATION
- ------------- ---------------------- ---------
<S> <C> <C>
11.4 5.10 3.10
</TABLE>
- ---------------
(1) Source: Ibbotson Associates. Used with permission. All rights reserved.
Common stock returns are based on the Standard & Poor's 500 Composite Stock
Price Index, a market-weighted, unmanaged index of 500 common stocks in a
variety of industry sectors. It is a commonly used indicator of broad stock
price movements. This chart is for illustrative purposes only, and is not
intended to represent the performance of any particular investment or fund.
Investors cannot invest directly in an index. Past performance is not a
guarantee of future results.
B-51
<PAGE> 103
Portfolio of Investments as of
December 31, 1999 PRUDENTIAL HIGH YIELD FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--96.7%
CORPORATE BONDS--90.3%
- ------------------------------------------------------------------------------------------------------------------------------
Aerospace--0.2%
BE Aerospace, Inc.,
Sr. Sub. Notes B1 8.00% 3/01/08 $ 2,500 $ 2,156,250
Sr. Sub. Notes B1 9.50 11/01/08 3,500 3,272,500
Compass Aerospace Corp., Sr. Sub. Notes B3 10.125 4/15/05 3,250 1,787,500
--------------
7,216,250
- ------------------------------------------------------------------------------------------------------------------------------
Automotive Parts--2.8%
Foamex JPS Automotive LLC., Sr. Notes B1 11.125 6/15/01 18,405 18,312,975
Hayes Wheels Int'l., Inc.,
Sr. Sub. Notes B2 11.00 7/15/06 32,000 33,440,000
Sr. Sub. Notes B2 9.125 7/15/07 3,000 2,902,500
Sr. Sub. Notes B3 9.125 7/15/07 1,875 1,804,687
Lear Corp.,
Sr. Notes Ba1 7.96 5/15/05 4,900 4,753,000
Sr. Notes Ba1 8.11 5/15/09 12,350 11,856,000
Paragon Corporate Holdings, Inc., Sr. Notes B3 9.625 4/01/08 7,500 2,250,000
Standyne Automotive Corp., Sr. Sub. Notes B(a) 10.25 12/15/07 10,550 8,545,500
Tenneco Automotive, Inc., Sr. Sub. Notes B2 11.625 10/15/09 9,860 10,007,900
Venture Holdings, Sr. Notes B2 9.50 7/01/05 15,150 13,786,500
--------------
107,659,062
- ------------------------------------------------------------------------------------------------------------------------------
Broadcasting & Other Media--4.7%
American Lawyer Media, Inc.,
Sr. Disc. Notes, Zero Coupon (until 12/15/02) CCC+(a) 12.25 12/15/08 10,500 7,271,250
Sr. Sub. Notes B1 9.75 12/15/07 3,700 3,598,250
AMSC Acquisition, Inc., Sr. Notes NR 12.25 4/01/08 10,000 8,200,000
Capstar Radio Broadcasting,
Sr. Disc. Notes, Zero Coupon (until 2/1/02) B2 12.75 2/01/09 16,675 14,903,281
Sr. Sub. Notes B2 9.25 7/01/07 12,000 12,210,000
Chancellor Media Corp., Sr. Sub. Notes B1 9.00 10/01/08 4,275 4,446,000
Garden State Newspapers, Inc., Sr. Sub. Notes B1 8.75 10/01/09 600 558,000
Globo Communicacoes, Sr. Notes (Brazil) B2 10.50 12/20/06 6,000(i) 4,980,000
Grupo Televisa S.A., Sr. Disc. Notes (Mexico),
Zero Coupon (until 5/15/01) Ba2 13.25 5/15/08 4,705(g)(i) 4,293,313
Lamar Advertising Co., Sr. Sub. Notes B1 9.625 12/01/06 8,500(g) 8,733,750
Liberty Group Publishing, Inc.,
Sr. Disc. Deb., Zero Coupon (until 2/1/03) CCC+(a) 11.625 2/01/09 5,625 2,812,500
Sr. Sub. Notes CCC+(a) 9.375 2/01/08 6,550 5,829,500
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-52
<PAGE> 104
Portfolio of Investments as of
December 31, 1999 PRUDENTIAL HIGH YIELD FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Broadcasting & Other Media (cont'd.)
Lin Holdings Corp., Sr. Disc. Notes, Zero Coupon (until
3/1/03) B3 10.00 3/01/08 $ 17,400(g) $ 11,745,000
Mail-Well Corp., Sr. Sub. Notes B1 8.75% 12/15/08 8,000 7,600,000
Paxson Communications Corp., Sr. Sub. Notes B3 11.625 10/01/02 5,295 5,467,087
Production Resource LLC., Sr. Sub. Notes B-(a) 11.50 1/15/08 15,000 13,350,000
SFX Broadcasting, Inc., Sr. Sub. Notes B3 9.125 2/01/08 19,000 17,907,500
Spectrasite Holdings, Inc., Sr. Disc. Notes,
Zero Coupon (until 4/15/04) NR 11.25 4/15/09 5,500 2,915,000
Sun Media Corp., Sr. Sub. Notes (Canada) B2 9.50 5/15/07 9,522(i) 9,450,585
Transwestern Publishing Co., Sr. Sub. Notes B2 9.625 11/15/07 5,250 5,223,750
World Color Press, Inc.,
Sr. Sub. Notes Baa3 8.375 11/15/08 4,750 4,643,125
Sr. Sub. Notes Baa3 7.75 2/15/09 13,500 12,892,500
Young America Corp., Sr. Sub. Notes B3 11.625 2/15/06 9,400 7,050,000
--------------
176,080,391
- ------------------------------------------------------------------------------------------------------------------------------
Building & Related Industries--2.7%
Ainsworth Lumber Ltd., Sr. Notes B3 12.50 7/15/07 15,500 17,127,500
American Builders, Sr. Sub. Notes B3 10.625 5/15/07 5,000 4,600,000
Building Materials Corp., Sr. Notes Ba3 8.00 12/01/08 1,750 1,579,375
Congoleum Corp., Sr. Notes B1 8.625 8/01/08 6,000 5,280,000
D.R. Horton, Inc., Sr. Notes Ba1 8.375 6/15/04 5,420 5,230,300
Del Webb Corp., Sr. Sub. Deb. B2 9.375 5/01/09 6,950 6,359,250
Falcon Holdings Group, L.P.,
Sr. Disc. Notes, Zero Coupon (until 4/15/03) B2 9.285 4/15/10 13,500 10,125,000
Sr. Notes B2 8.375 4/15/10 5,000 5,050,000
Kaufman & Broad Home Corp., Sr. Sub. Notes Ba3 9.625 11/15/06 27,750 28,443,750
Kevco, Inc., Sr. Sub. Notes B3 10.375 12/01/07 11,000 2,970,000
Nortek, Inc.,
Sr. Notes B1 9.25 3/15/07 11,405 11,119,875
Sr. Notes B1 9.125 9/01/07 500 485,000
Standard Pacific Corp., Sr. Sub. Notes Ba2 8.50 4/01/09 4,000 3,740,000
--------------
102,110,050
- ------------------------------------------------------------------------------------------------------------------------------
Cable--6.8%
Adelphia Communications Corp.,
Sr. Notes B1 8.125 7/15/03 3,120 2,979,600
Sr. Notes B+(a) 9.50 2/15/04 342 345,221
Sr. Notes B1 10.50 7/15/04 11,300 11,780,250
Avalon Cable Holdings LLC., Sr. Disc. Notes,
Zero Coupon (until 12/1/03) B2 11.875 12/01/08 8,000 5,220,000
Century Communications Corp. Sr. Notes, B1 Zero 3/15/03 2,000 1,425,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-53
<PAGE> 105
Portfolio of Investments as of
December 31, 1999 PRUDENTIAL HIGH YIELD FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Cable (cont'd.)
Charter Communications Holdings LLC.,
Sr. Disc. Notes, Zero Coupon (until 4/1/04) B2 9.92 % 4/01/11 $ 10,755 $ 6,399,225
Sr. Notes B2 8.625 4/01/09 15,750(g) 14,686,875
Classic Cable, Inc., Sr. Sub. Notes B3 9.375 8/01/09 6,150 5,934,750
Coaxial Communications, Inc., Sr. Notes B3 10.00 8/15/06 5,750 5,635,000
Comcast UK Cable Corp., Sr. Disc. Deb., Zero Coupon
(until 11/15/00) B2 11.20 11/15/07 17,000 16,150,000
Diamond Cable Co., (United Kingdom)
Sr. Disc. Notes B3 13.25 9/30/04 10,010(i) 10,748,238
Sr. Disc. Notes, Zero Coupon (until 12/15/00) B3 11.75 12/15/05 9,275(i) 8,764,875
International Cabletel, Inc.,
Sr. Def'd. Coupon Notes, Ser. B, Zero Coupon (until
2/1/01) B3 11.50 2/01/06 2,900 2,610,000
Sr. Disc. Notes, Zero Coupon (until 4/15/00) B3 12.75 4/15/05 19,450 19,450,000
Mediacom LLC./Capital Corp., Sr. Notes B2 7.875 2/15/11 11,250 9,900,000
Multicanal S.A., Notes (Argentina) B1 13.125 4/15/09 5,750(g)(i) 5,663,750
NTL, Inc.,
Sr. Notes Zero Coupon (until 10/1/03) B3 12.375 10/01/08 5,750 4,053,750
Sr. Notes, Zero Coupon (until 4/1/03) B3 9.75 4/01/08 25,500 17,595,000
Rogers Cablesystems, Inc., (Canada) Sr. Sec'd. Notes Ba3 10.00 3/15/05 13,750(i) 14,712,500
Rogers Cantel, Inc., (Canada) Sr. Sub. Notes B2 8.80 10/01/07 4,750(i) 4,750,000
Telewest Plc, Sr. Disc. Deb., (United Kingdom)
Zero Coupon (until 10/1/00) B1 11.00 10/01/07 5,900(i) 5,501,750
TVN Entertainment Corp., Sr. Notes NR 14.00 8/01/08 15,000 5,250,000
United Int'l. Holdings, Inc., Sr. Disc. Notes, Zero
Coupon
(until 2/15/03) B3 10.75 2/15/08 56,500(g) 36,160,000
United Pan-Europe Communications, Inc.,
Sr. Disc. Notes B2 Zero 8/01/09 21,585 12,195,525
Sr. Notes B2 10.875 8/01/09 26,390 26,785,850
--------------
254,697,159
- ------------------------------------------------------------------------------------------------------------------------------
Capital Goods--1.9%
Allied Waste North America, Inc.,
Sr. Notes Ba3 7.625 1/01/06 9,000 8,100,000
Sr. Notes Ba3 7.875 1/01/09 25,500 22,440,000
Sr. Sub. Notes B2 10.00 8/01/09 41,200 36,668,000
Continental Global Group, Inc., Sr. Notes B2 11.00 4/01/07 10,000 4,900,000
--------------
72,108,000
- ------------------------------------------------------------------------------------------------------------------------------
Casinos--2.4%
Aladdin Gaming, Sr. Disc. Notes, Zero Coupon (until
3/1/03) CCC-(a) 13.50 3/01/10 14,000 5,600,000
Alliance Gaming Corp., Sr. Sub. Notes B3 10.00 8/01/07 2,075 1,156,813
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-54
<PAGE> 106
Portfolio of Investments as of
December 31, 1999 PRUDENTIAL HIGH YIELD FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Casinos (cont'd.)
Aztar Corp., Sr. Sub. Notes B1 8.875% 5/15/07 $ 5,950(g) $ 5,712,000
Casino Magic Corp., First Mtge. Notes B1 13.00 8/15/03 3,500 3,850,000
Circus Circus Enterprises, Inc.,
Sr. Sub. Deb. Ba2 7.625 7/15/13 2,850 2,440,312
Sr. Sub. Deb. Baa3 6.70 11/15/96 3,580 3,341,250
Coast Hotels & Casinos, Inc., Sr. Sub. Notes B3 9.50 4/01/09 5,155 4,948,800
Fitzgeralds Gaming Corp., Sr. Notes, (cost $13,838,440;
purchased 12/22/97) B3 12.25 12/15/04 14,000(b)(e) 7,700,000
Harrahs Operating, Inc., Gtd. Sr. Sub. Notes Ba2 7.875 12/15/05 12,250(g) 11,943,750
Horseshoe Gaming LLC.,
Sr. Sub. Notes B3 9.375 6/15/07 7,100 7,064,500
Sr. Sub. Notes B2 8.625 5/15/09 13,450 12,945,625
Isle Capri Casinos, Inc., Sr. Sub. Notes B3 8.75 4/15/09 3,915 3,611,587
Mohegan Tribal Gaming Auth.,
Sr. Notes Ba2 8.125 1/01/06 4,000 3,880,000
Sr. Sub. Notes Ba3 8.75 1/01/09 5,125(g) 5,048,125
Station Casinos, Inc., Sr. Sub. Notes B2 10.125 3/15/06 2,800 2,856,000
Trump Atlantic City Assocs.,
First Mtge. Notes B2 11.25 5/01/06 6,195 5,017,950
First Mtge. Notes B2 11.25 5/01/06 5,000 3,750,000
--------------
90,866,712
- ------------------------------------------------------------------------------------------------------------------------------
Chemicals--2.9%
Georgia Gulf Corp., Sr. Sub. Notes B1 10.375 11/01/07 2,000 2,087,500
Huntsman ICI Chemicals LLC.,
Sr. Sub. Notes B2 9.50 7/01/07 14,500 13,847,500
Sr. Sub. Notes B2 10.125 7/01/09 17,125(g) 17,553,125
Lyondell Chemical Co.,
Sr. Sec'd Notes Ba3 9.625 5/01/07 5,750 5,879,375
Sr. Sec'd Notes Ba3 9.875 5/01/07 23,995(g) 24,474,900
Sr. Sub. Notes B2 10.875 5/01/09 3,750 3,881,250
Polymer Group, Inc., Sr. Sub. Notes B2 8.75 3/01/08 13,000 12,480,000
Sterling Chemical Holdings, Inc., Sr. Sub. Notes B3 11.75 8/15/06 6,380 4,785,000
Sterling Chemicals, Inc., Sr. Sec'd Notes B3 12.375 7/15/06 5,180 5,335,400
ZSC Specialty Chemical Plc, Sr. Notes B2 11.00 7/01/09 17,335 17,941,725
--------------
108,265,775
- ------------------------------------------------------------------------------------------------------------------------------
Consumer Products--2.8%
Borden, Inc., Notes Ba1 9.20 3/15/21 13,500 12,140,010
Consumers Int'l., Inc., Sr. Sec'd. Notes Ba3 10.25 4/01/05 16,375 13,100,000
Corning Consumer Prod. Co., Sr. Sub. Notes B3 9.625 5/01/08 16,000 12,560,000
Desa Int'l., Inc., Sr. Sub. Notes B3 9.875 12/15/07 11,500 8,395,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-55
<PAGE> 107
Portfolio of Investments as of
December 31, 1999 PRUDENTIAL HIGH YIELD FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Consumer Products (cont'd.)
Holmes Prod. Corp., Sr. Sub. Notes B3 9.875% 11/15/07 $ 8,000 $ 5,800,000
Intersil Corp., Sr. Sub. Notes B3 13.25 8/15/09 4,475 4,877,750
Pierce Leahy Command Co., Sr. Notes B3 8.125 5/15/08 4,250 3,888,750
Revlon Consumer Prod. Corp., Sr. Notes B2 9.00 11/01/06 14,150 10,754,000
Sealy Mattress Co., Sr. Sub. Disc. Notes,
Zero Coupon (until 12/15/02) NR 10.875 12/15/07 2,135 1,494,500
Verio, Inc.,
Sr. Notes B3 11.25 12/01/08 1,125 1,181,250
Sr. Notes B3 10.625 11/15/09 13,140 13,468,500
Waste Systems Int'l., Inc., Sr. Notes Caa 11.50 1/15/06 11,000 10,656,250
Windmere Durable Holdings, Inc., Sr. Notes B3 10.00 7/31/08 7,000(g) 6,825,000
--------------
105,141,010
- ------------------------------------------------------------------------------------------------------------------------------
Drugs & Health Care--5.4%
Abbey Healthcare Group, Inc., Sr. Sub. Notes B3 9.50 11/01/02 8,000 7,840,000
Biovail Corp. Int'l., Sr. Notes B2 10.875 11/15/05 3,405 3,575,250
Columbia/HCA Healthcare Corp.,
Deb. Ba2 7.50 11/15/95 3,630 3,012,900
Deb. Ba2 7.05 12/01/27 9,160 6,824,200
Notes Ba2 7.69 6/15/25 6,140 5,034,800
Notes Ba2 7.75 7/15/36 5,350 4,199,750
Concentra Operating Corp., Sr. Sub. Notes B3 13.00 8/15/09 14,000(g) 12,740,000
Dade Int'l., Inc., Sr. Sub. Notes B2 11.125 5/01/06 27,950 27,391,000
Fresenius Med. Care Capital Trust, Gtd. Notes NR 9.00 12/01/06 37,365 36,617,700
Genesis Health Ventures, Inc., Sr. Sub. Notes B2 9.875 1/15/09 500 210,000
Harborside Healthcare Corp., Sr. Sub. Disc. Notes,
Zero Coupon (until 8/1/03) B3 11.00 8/01/08 11,750 3,760,000
Healthsouth Corp., Sr. Notes Baa3 6.875 6/15/05 9,265 8,021,637
Iasis Healthcare Corp., Sr. Sub. Notes B3 13.00 10/15/09 8,810 9,074,300
ICN Pharmaceuticals, Inc.,
Sr. Notes Ba3 8.75 11/15/08 13,000 12,415,000
Sr. Notes Ba3 8.75 11/15/08 4,700 4,488,500
Integrated Health Svcs., Inc., Sr. Sub. Notes C 10.25 4/30/06 11,350(e) 936,375
Lifepoint Hospitals Holdings, Inc.,
Sr. Sub. Notes B3 10.75 5/15/09 3,135 3,260,400
Sr. Sub. Notes B3 10.75 5/15/09 5,720(g) 5,948,800
Magellan Health Svcs, Inc., Sr. Sub. Notes B3 9.00 2/15/08 34,000 27,540,000
Mariner Post Acute Network, Inc.,
Sr. Sub. Disc. Notes, Zero Coupon (until 11/1/02) C 10.50 11/01/07 14,240(e) 71,200
Sr. Sub. Notes C 9.50 11/01/07 3,000(e) 15,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-56
<PAGE> 108
Portfolio of Investments as of
December 31, 1999 PRUDENTIAL HIGH YIELD FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Drugs & Health Care (cont'd.)
Meditrust, Notes Ba2 7.82% 9/10/26 $ 1,675 $ 1,423,750
Triad Hospitals Holdings, Inc., Sr. Sub. Notes B3 11.00 5/15/09 17,260(g) 17,950,400
--------------
202,350,962
- ------------------------------------------------------------------------------------------------------------------------------
Energy--9.6%
AES Corp.,
Sr. Notes Ba1 9.50 6/01/09 40,075 40,876,500
Sr. Sub. Notes Ba3 10.25 7/15/06 28,000(g) 28,420,000
Anker Coal Group, Inc., Sr. Sec'd. Notes, PIK NR 14.25 9/01/07 8,600(b) 6,278,000
Applied Power, Inc., Sr. Sub. Notes B1 8.75 4/01/09 6,750 6,598,125
Benton Oil & Gas Co., Sr. Notes B3 11.625 5/01/03 9,500 6,650,000
Calpine Corp., Sr. Notes Ba1 7.75 4/15/09 5,000 4,665,000
Chesapeake Energy Corp., Sr. Notes B3 9.625 5/01/05 15,285(g) 14,444,325
Cliffs Drilling Co., Sr. Notes Ba2 10.25 5/15/03 12,800 13,164,000
CMS Energy Corp.,
Sr. Notes Ba3 8.375 7/01/03 5,000(g) 4,896,000
Sr. Notes Ba3 7.50 1/15/09 5,550 5,106,000
DI Industies, Inc., Sr. Notes B1 8.875 7/01/07 12,925 11,955,625
Eott Energy Partners, Sr. Notes Ba2 11.00 10/01/09 4,420 4,596,800
Gothic Prod. Corp., Sr. Sec'd Notes B3 11.125 5/01/05 3,900 3,276,000
Gulf Canada Resources Ltd.,
Sr. Notes Ba1 8.35 8/01/06 1,100 1,082,125
Sr. Sub. Deb. Ba2 9.625 7/01/05 3,900 3,997,500
Houston Expl. Co., Sr. Sub. Notes B2 8.625 1/01/08 7,000 6,720,000
Key Energy Group, Inc., Sr. Sub. Notes NR 5.00 9/15/04 4,000 2,820,000
Leviathan Gas Pipeline/Finance Corp., Sr. Sub. Notes Ba2 10.375 6/01/09 4,400 4,576,000
Nuevo Energy Co.,
Sr. Sub. Notes B1 9.50 4/15/06 23 23,000
Sr. Sub. Notes B1 9.50 6/01/08 752 752,000
P & L Coal Holdings Corp.,
Sr. Notes Ba3 8.875 5/15/08 19,415 18,978,162
Sr. Sub. Notes B2 9.625 5/15/08 6,500 6,321,250
Parker Drilling Co., Sr. Notes B1 9.75 11/15/06 15,550 15,044,625
Plains Resources, Inc., Sr. Sub. Notes B2 10.25 3/15/06 10,165 9,910,875
Pogo Producing Co., Sr. Sub. Notes B2 8.75 5/15/07 15,600 15,015,000
R & B Falcon Corp., Sr. Notes Ba3 12.25 3/15/06 7,290(b) 8,055,450
RBF Finance Co.,
Sr. Sec'd Notes Ba3 11.00 3/15/06 12,935(b) 13,969,800
Sr. Sec'd Notes Ba3 11.375 3/15/09 10,000(b) 10,750,000
Snyder Oil Corp., Sr. Sub. Notes Ba3 8.75 6/15/07 11,000 10,945,000
Swift Energy Co., Sr. Sub. Notes B2 10.25 8/01/09 10,430 10,508,225
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-57
<PAGE> 109
Portfolio of Investments as of
December 31, 1999 PRUDENTIAL HIGH YIELD FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Energy (cont'd.)
Tesoro Petroleum Corp., Sr. Sub. Notes B1 9.00% 7/01/08 $ 16,000 $ 15,240,000
Universal Compression Holdings,
Sr. Disc. Notes, Zero Coupon (until 2/15/03) B2 9.875 2/15/08 22,850 14,167,000
Sr. Disc. Notes, Zero Coupon (until 2/15/04) B3 11.375 2/15/09 7,300 3,942,000
Veritas DGC, Inc., Sr. Notes Ba3 9.75 10/15/03 6,300 6,363,000
Vintage Petroleum, Inc.,
Sr. Sub. Notes B1 9.00 12/15/05 10,000(g) 9,975,000
Sr. Sub. Notes B1 8.625 2/01/09 14,185(g) 13,794,913
York Power Funding, Sr. Sec'd. Notes (Cayman Islands) NR 12.00 10/30/07 10,000(g)(i) 10,300,000
--------------
364,177,300
- ------------------------------------------------------------------------------------------------------------------------------
Financial Services--1.5%
Americredit Corp.,
Gtd. Sr. Sub. Notes Ba1 9.25 2/01/04 14,450 14,450,000
Sr. Notes Ba1 9.875 4/15/06 5,500 5,555,000
Amresco Mtg., Inc., Sr. Sub. Notes (cost $4,900,000
purchased 2/24/98) B2 9.875 3/15/05 4,275 2,821,500
Delta Financial Corp., Sr. Notes B3 9.50 8/01/04 7,320 4,758,000
Metris Cos., Inc., Sr. Notes Ba3 10.125 7/15/06 9,750 9,262,500
Octagon Investment Participating Ltd., Sr. Sec'd Notes NR 6.25 12/14/11 5,000 5,000,000
Sovereign Bancorp, Inc.,
Notes Ba1 6.625 3/15/01 3,850 3,724,875
Sr. Notes Ba3 10.50 11/15/06 10,000 10,200,000
--------------
55,771,875
- ------------------------------------------------------------------------------------------------------------------------------
Food & Beverage--3.4%
Advantica Restaurant Group, Inc., Sr. Notes B2 11.25 1/15/08 10,375 7,833,125
Agrilink Foods, Inc., Sr. Sub. Notes B3 11.875 11/01/08 5,325 5,378,250
Ameriking, Inc., Sr. Notes B3 10.75 12/01/06 3,200 2,960,000
Ameriserve Food Dist., Inc.,
Sr. Notes B2 8.875 10/15/06 8,210 4,515,500
Sr. Sub. Notes B2 10.125 7/15/07 17,260 5,868,400
Carrols Corp., Sr. Sub. Notes B2 9.50 12/01/08 14,910(g) 13,568,100
CKE Restaurants, Inc., Sr. Sub. Notes B2 9.125 5/01/09 8,500 6,460,000
Cott Corp., Sr. Notes B1 8.50 5/01/07 5,000 4,650,000
Del Monte Foods Co., Sr. Disc. Notes, Zero Coupon
(until 12/15/02) B-(a) 12.50 12/15/07 650 503,750
Dominos, Inc., Sr. Sub. Notes B3 10.375 1/15/09 2,620(g) 2,515,200
Fresh Foods, Inc., Sr. Sub. Notes B3 10.75 6/01/06 9,200(g) 8,671,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-58
<PAGE> 110
Portfolio of Investments as of
December 31, 1999 PRUDENTIAL HIGH YIELD FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Food & Beverage (cont'd.)
Grupo Azucarero, S.A., Sr. Notes (Mexico) B3 11.50% 1/15/05 $ 7,250(i) $ 2,972,500
Packaged Ice, Inc., Sr. Notes B3 9.75 2/01/05 9,640 8,820,600
Pilgrim's Pride Corp., Sr. Sub. Notes B1 10.875 8/01/03 1,460 1,470,950
PSF Holdings, LLC., Sr. Sec'd. Notes (cost $11,658,267;
purchased 5/20/94 through 3/15/99) NR 11.00 9/17/03 12,299(b) 12,668,456
Purina Mills, Inc., Sr. Sub. Notes B2 9.00 3/15/10 19,500(b) 4,875,000
Sbarro, Inc., Sr. Notes Ba3 11.00 9/15/09 6,530 6,758,550
SFC New Holdings, Inc., Sr. Notes NR 11.25 8/15/01 2,630 2,505,075
Stater Brothers Holdings, Inc., Sr. Notes B2 10.75 8/15/06 17,875 18,053,750
Vlasic Foods Int'l., Inc., Sr. Sub. Notes B2 10.25 7/01/09 8,080(g) 7,696,200
--------------
128,744,406
- ------------------------------------------------------------------------------------------------------------------------------
Industrials--1.5%
Anchor Lamina, Inc., Sr. Sub. Notes B3 9.875 2/01/08 9,800 7,840,000
Collins & Aikman Products Co.,
Sr. Sub. Notes B2 11.50 4/15/06 2,100 2,073,750
Sr. Sub. Notes B3 10.00 1/15/07 1,665 1,640,025
Eagle Picher Holdings, Inc., Sr. Sub. Notes B3 9.375 3/01/08 11,000(g) 9,790,000
Gentek, Inc., Sr. Sub. Notes B2 11.00 8/01/09 9,050 9,412,000
Great Lakes Carbon Corp.,
Sr. Disc. Deb., Zero Coupon (until 5/15/03) B-(a) 13.125 5/15/09 5,680 3,010,400
Sr. Sub. Notes B3 10.25 5/15/08 5,000 4,750,000
Sun World Int'l., Inc., First Mtge. B2 11.25 4/15/04 1,440 1,468,800
Thermadyne Mfg.,
Sr. Disc. Notes, Zero Coupon (until 6/1/03) CCC+(a) 12.50 6/01/08 2,000 910,000
Sr. Sub. Notes B3 9.875 6/01/08 9,000 7,560,000
Trench Electric S.A., Gtd. Sr. Sub. Notes (Netherlands) B3 10.25 12/15/07 10,000(i) 7,400,000
--------------
55,854,975
- ------------------------------------------------------------------------------------------------------------------------------
Leisure & Tourism--4.1%
Alliance Atlantis Commerce, Inc., Sr. Sub. Notes B2 13.00 12/15/09 8,920 8,920,000
Ballys Total Fitness Holdings Corp., Sr. Sub. Notes,
Ser. C B3 9.875 10/15/07 22,000 21,285,000
Extended Stay America, Inc., Sr. Sub. Notes B2 9.15 3/15/08 11,050 9,945,000
Felcor Suites L.P., Gtd. Sr. Notes Ba1 7.375 10/01/04 17,435 16,040,200
Hedstrom Holdings, Inc.,
Sr. Disc. Notes, Zero Coupon (until 6/1/02) Caa 12.00 6/01/09 3,400 34,000
Sr. Sub. Notes B3 10.00 6/01/07 9,400 564,000
Hilton Hotels Corp., Sr. Notes Baa3 7.50 12/15/17 6,695(g) 5,589,789
HMH Properties, Inc., Sr. Notes Ba2 7.875 8/01/08 19,875 17,788,125
Hollywood Park, Inc., Gtd. Notes B2 9.25 2/15/07 18,800(g) 18,659,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-59
<PAGE> 111
Portfolio of Investments as of
December 31, 1999 PRUDENTIAL HIGH YIELD FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Leisure & Tourism (cont'd.)
Imax Corp., Sr. Notes Ba2 7.875% 12/01/05 $ 5,250 $ 4,935,000
Louisiana Quinta Inns, Inc.,
Sr. Notes Ba1 7.25 3/15/04 6,900 5,520,690
Sr. Notes Ba1 7.40 9/15/05 1,700 1,368,772
Premier Parks, Inc.,
Sr. Disc. Notes, Zero Coupon (until 4/1/03) B3 10.00 4/01/08 12,250 8,391,250
Sr. Notes B3 9.75 6/15/07 3,075 3,090,375
PX Escrow Corp., Sr. Sub. Disc. Notes, Zero Coupon
(until 2/1/02) B3 9.625 2/01/06 10,215 5,005,350
Six Flags Entertainment Corp., Gtd. Sr. Notes B2 8.875 4/01/06 7,300 7,135,750
Town Sports Int'l., Inc., Sr. Notes B2 9.75 10/15/04 10,900 10,518,500
Vail Resorts, Inc., Sr. Sub. Notes B1 8.75 5/15/09 9,750 9,116,250
--------------
153,907,051
- ------------------------------------------------------------------------------------------------------------------------------
Miscellaneous Services--1.8%
Ball Corp., Sr. Sub. Notes B1 8.25 8/01/08 1,500 1,440,000
Coinstar, Inc., Sr. Disc. Notes NR 13.00 10/01/06 5,050 5,201,500
Color Spot Nurseries, Sr. Sub. Notes CCC(a) 10.50 12/15/07 8,000 5,600,000
Iron Mountain, Inc., Sr. Sub. Notes B2 8.25 7/01/11 7,400 6,734,000
Kindercare Learning Center, Inc., Sr. Sub. Notes B3 9.50 2/15/09 13,355 12,854,188
La. Petite Academy, Inc., Sr. Notes B3 10.00 5/15/08 6,500 4,777,500
United Rentals, Inc., Sr. Sub. Notes B1 8.80 8/15/08 7,330 6,835,225
United Stationer Supply Co., Sr. Sub. Notes B1 12.75 5/01/05 8,600 9,266,500
Viasystems, Inc., Sr. Sub. Notes B3 9.75 6/01/07 26,750 14,712,500
--------------
67,421,413
- ------------------------------------------------------------------------------------------------------------------------------
Paper & Forest Products--2.0%
Doman Industries Ltd.,
Sr. Notes (Canada) B1 8.75 3/15/04 9,395(i) 8,079,700
Sr. Notes, Ser. B B1 9.25 11/15/07 1,690 1,352,000
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 6,864,000
Indah Kiat Fin Mauritius Ltd., Gtd. Sr. Notes
(Indonesia) B3 10.00 7/01/07 10,000(i) 7,300,000
Repap New Brunswick, Inc., Sr. Sec'd. Notes Caa 10.625 4/15/05 5,750(g) 5,347,500
Riverwood Int'l. Corp.,
Sr. Notes B3 10.625 8/01/07 1,460 1,503,800
Sr. Notes B3 10.25 4/01/06 4,000(g) 4,060,000
Sr. Sub. Notes Caa 10.875 4/01/08 11,460(g) 11,230,800
Stone Container Corp.,
Sr. Notes B2 12.58 8/01/16 200 213,000
Sr. Sub. Deb., Zero Coupon (until 3/9/00) B3 12.25 4/01/02 3,500 3,543,750
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-60
<PAGE> 112
Portfolio of Investments as of
December 31, 1999 PRUDENTIAL HIGH YIELD FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Paper & Forest Products (cont'd.)
Tekni Plex, Inc., Sr. Sub. Notes B3 9.25% 3/01/08 $ 14,550 $ 14,768,250
--------------
75,251,050
- ------------------------------------------------------------------------------------------------------------------------------
Real Estate--0.5%
CB Richards Ellis Svcs., Inc., Sr. Sub. Notes Ba3 8.875 6/01/06 8,800 7,832,000
Saul B F Real Estate Investment Trust, Sr. Sec'd. Notes B-(a) 9.75 4/01/08 13,000 11,830,000
--------------
19,662,000
- ------------------------------------------------------------------------------------------------------------------------------
Retail--1.9%
Big 5 Corp., Sr. Notes B2 10.875 11/15/07 14,900 14,676,500
Big 5 Holdings Corp., Sr. Disc. Notes, Zero Coupon
(until 11/30/02) NR 13.45 11/30/08 10,000 5,100,000
Burlington Industries, Inc.,
Deb. Ba1 7.25 8/01/27 6,045 4,594,200
Notes Ba1 7.25 9/15/05 5,250 4,200,000
Cluett American Corp., Sr. Sub. Notes B3 10.125 5/15/08 8,250 5,857,500
Franks Nursery & Crafts, Inc., Sr. Sub. Notes B3 10.25 3/01/08 15,400 10,472,000
French Fragrances, Inc.,
Sr. Notes, Ser. B B2 10.375 5/15/07 15,030 14,579,100
Sr. Notes, Ser. D B2 10.375 5/15/07 3,550 3,443,500
Musicland Group, Inc., Sr. Sub. Notes B3 9.875 3/15/08 705 638,025
Phar-Mor, Inc., Sr. Notes B3 11.72 9/11/02 2,211 2,100,450
Specialty Retailers, Inc., Sr. Notes B1 8.50 7/15/05 4,890 3,618,600
Steel Heddle Manufacturing Co., Sr. Sub. Notes B3 10.625 6/01/08 4,500 1,800,000
--------------
71,079,875
- ------------------------------------------------------------------------------------------------------------------------------
Steel & Metals--3.2%
AK Steel Corp., Sr. Notes Ba2 7.875 2/15/09 4,750(g) 4,488,750
Algoma Steel, Inc., First Mtge. Notes B1 12.375 7/15/05 1,085 1,017,188
California Steel Inds., Inc., Sr. Notes Ba3 8.50 4/01/09 3,400 3,238,500
Great Central Mines Ltd., Sr. Notes Ba2 8.875 4/01/08 5,010 4,621,725
International Wire Group, Inc., Sr. Sub. Notes B3 11.75 6/01/05 18,500 19,101,250
Kaiser Aluminum & Chemical Corp., Sr. Sub. Notes B3 12.75 2/01/03 12,650 12,650,000
LTV Corp., Sr. Notes Ba3 11.75 11/15/09 9,345(g) 9,812,250
Lukens, Inc.,
Sr. Notes Ba3 7.625 8/01/04 3,500 3,336,025
Sr. Notes Ba3 6.50 2/01/06 5,000 4,350,000
National Steel Corp., Gtd. Sec'd. First Mtge. Ba3 9.875 3/01/09 3,750(g) 3,825,000
Neenah Corp., Sr. Sub. Notes B3 11.125 5/01/07 1,500 1,387,500
Owens Illinois, Inc., Sr. Deb. Ba1 7.50 5/15/10 1,955 1,718,875
Renco Steel Holdings, Inc., Sr. Sec'd. Notes B-(a) 10.875 2/01/05 7,450 6,481,500
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-61
<PAGE> 113
Portfolio of Investments as of
December 31, 1999 PRUDENTIAL HIGH YIELD FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Steel & Metals (cont'd.)
RMI USA LLC, Sr. Notes B1 10.00% 6/01/09 $ 1,900 $ 1,890,500
Russel Metals, Inc., Sr. Notes B1 10.00 6/01/09 2,850 2,835,750
Sheffield Steel Corp., First Mtge. B-(a) 11.50 12/01/05 6,650 5,652,500
Silgan Holdings, Inc., Sr. Sub. Deb. B1 9.00 6/01/09 12,000 11,520,000
Wheeling Pittsburgh Corp., Sr. Notes Aaa 9.25 11/15/07 9,400 8,883,000
WHX Corp., Sr. Notes B3 10.50 4/15/05 14,750 14,455,000
--------------
121,265,313
- ------------------------------------------------------------------------------------------------------------------------------
Supermarkets--1.1%
Pantry, Inc., Sr. Sub. Notes B3 10.25 10/15/07 20,250 19,743,750
Pathmark Stores, Inc., Sr. Sub. Notes B3 9.625 5/01/03 14,565(g) 10,632,450
Southland Corp., Sr. Sub. Deb. Ba3 5.00 12/15/03 15,000 12,900,000
--------------
43,276,200
- ------------------------------------------------------------------------------------------------------------------------------
Technology--1.4%
Details Holding Corp., Sr. Disc. Notes, Zero Coupon
(until 11/15/02) NR 12.50 11/15/07 10,185 5,296,200
Details, Inc., Sr. Sub. Notes B3 10.00 11/15/05 6,625 6,095,000
DII Group, Inc., Sr. Sub. Notes B1 8.50 9/15/07 11,500 11,442,500
MCMS, Inc., Sr. Sub. Notes B3 9.75 3/01/08 14,000 7,420,000
Metromedia Fiber Network, Inc., Sr. Notes B2 10.00 12/15/09 15,805(g) 16,160,613
Pioneer-Standard Electronics, Inc., Sr. Notes Baa3 8.50 8/01/06 6,000 5,702,460
--------------
52,116,773
- ------------------------------------------------------------------------------------------------------------------------------
Telecommunications--22.8%
21st Century Telecom Group, Inc., Sr. Disc. Notes, Zero
Coupon (until 2/15/03) NR 12.25 2/15/08 11,500 7,705,000
Allegiance Telecom, Inc.,
Sr. Disc. Notes, Zero Coupon (until 2/15/03) B(a) 11.75 2/15/08 14,275 10,206,625
Sr. Notes B(a) 12.875 5/15/08 9,500 10,640,000
Arch Escrow Corp., Sr. Notes B3 13.75 4/15/08 8,000 6,480,000
Barak ITC Int'l. Telecom, Sr. Disc. Notes (Israel) Zero
Coupon
(until 11/15/02) B3 12.50 11/15/07 36,500(i) 19,710,000
Bestel S.A. De CV, Sr. Disc. Notes (Mexico) Zero Coupon
(until 5/15/01) NR 12.75 5/15/05 11,000(i) 6,930,000
Birch Telecom, Inc., Sr. Notes NR 14.00 6/15/08 5,000 5,050,000
Call-Net Enterprises, Inc., Sr. Disc. Notes, Zero
Coupon
(until 8/15/03) B2 8.94 8/15/08 2,800 1,372,000
Caprock Communications Corp., Sr. Notes B3 12.00 7/15/08 5,000 5,175,000
Cellnet Data Systems, Inc., Sr. Disc. Notes, Zero
Coupon (until 10/1/02) (cost $14,757,683; purchased
9/24/97 and 10/13/97) NR 14.00 10/01/07 13,069(b) 1,437,590
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-62
<PAGE> 114
Portfolio of Investments as of
December 31, 1999 PRUDENTIAL HIGH YIELD FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Telecommunications (cont'd.)
Cencall Communications Corp., Sr. Disc. Notes B2 10.125% 1/15/04 $ 500 $ 517,500
Clearnet Communications, Inc., Sr. Disc. Notes,
Zero Coupon (until 5/1/04) B3 10.125 5/01/09 3,105(g) 1,886,288
Comunicacion Cellular, S.A., Sr. Def'd. Bonds
(Columbia),
Zero Coupon (until 9/29/00) B3 14.125 3/01/05 34,750(i) 17,375,000
Dialog Corp., Sr. Sub. Notes (United Kingdom) B3 11.00 11/15/07 13,500(i) 6,480,000
DTI Holdings, Inc., Sr. Disc. Notes, Zero Coupon (until
3/1/03) NR 12.50 3/01/08 7,250 2,610,000
Exodus Communications, Inc., Sr. Notes B-(a) 10.75 12/15/09 8,675(g) 8,805,125
Firstworld Communications, Inc., Sr. Notes, Zero Coupon
(until 4/1/03) NR 13.00 4/15/08 12,400 8,308,000
Global Crossing Holdings Ltd.,
Sr. Notes Ba2 9.125 11/15/06 8,925 8,824,594
Sr. Notes Ba2 9.50 11/15/09 16,535 16,348,981
Gtd. Notes Ba2 9.625 5/15/08 1,820 1,815,450
Global Telesystems, Sr. Notes NR 10.50 12/01/06 25,000 25,375,000
Globix Corp., Sr. Notes NR 13.00 5/01/05 8,500 8,585,000
Grupo Iusacell S.A. De CV, Sr. Notes (Mexico) B2 10.00 7/15/04 4,000(i) 3,800,000
GST Equipment, Inc., Sr. Sec'd. Notes NR 13.25 5/01/07 10,000 9,800,000
GST Telecommunications, Inc.,
Conv. Sr. Disc. Notes, Zero Coupon (until 12/15/00) NR 13.875 12/15/05 2,262 2,601,300
Sr. Sub. Notes NR 12.75 11/15/07 6,000 5,760,000
GST USA, Inc., Sr. Disc. Notes, Zero Coupon (until
12/15/00) NR 13.875 12/15/05 17,096 12,608,300
Hyperion Telecommunications, Inc.,
Sr. Disc. Notes, Zero Coupon (until 4/15/01) B3 13.00 4/15/03 8,525(b)(g) 7,587,250
Sr. Sec. Notes B3 12.25 9/01/04 2,300(g) 2,461,000
ICG Holdings, Inc.,
Sr. Disc. Notes, Zero Coupon (until 9/15/00) B-(a) 13.50 9/15/05 1,100 951,500
Sr. Disc. Notes, Zero Coupon (until 3/15/02) B-(a) 11.625 3/15/07 5,000 3,262,500
Impsat Corp.,
Sr. Notes B1 12.125 7/15/03 12,870 12,097,800
Sr. Notes B(a) 12.375 6/15/08 12,000 10,800,000
Intermedia Communications of Florida,
Sr. Disc. Notes, Zero Coupon (until 5/15/01) B2 12.50 5/15/06 22,500 19,687,500
Sr. Disc. Notes, Zero Coupon (until 7/15/02) B2 11.25 7/15/07 17,750(e) 13,046,250
International Wireless Communications, Inc., Sr. Disc.
Notes,
(cost $5,300,862; purchased 8/9/96 and 9/13/96) NR Zero 8/15/01 8,000(b)(d) 480,000
IPC Information Systems, Inc., Sr. Disc. Notes,
Zero Coupon (until 11/1/01) B3 10.87 5/01/08 16,000 12,000,000
Jordan Telecommunication Prod., Sr. Sub. Notes B3 9.875 8/01/07 10,750 11,610,000
Level 3 Communications, Inc.,
Sr. Disc. Notes, Zero Coupon (until 12/1/03) B3 10.50 12/01/08 8,285(g) 4,991,712
Sr. Notes B3 9.125 5/01/08 17,125(g) 16,183,125
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-63
<PAGE> 115
Portfolio of Investments as of
December 31, 1999 PRUDENTIAL HIGH YIELD FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Telecommunications (cont'd.)
Long Distance Int'l, Inc., Sr. Notes NR 12.25% 4/15/08 $ 6,500(b)(e) $ 2,925,000
Mastec, Inc., Sr. Sub. Notes Ba3 7.75 2/01/08 19,500 18,330,000
McLeodUSA, Inc.,
Sr. Notes B1 9.25 7/15/07 9,500 9,523,750
Sr. Notes B1 8.125 2/15/09 6,495 6,040,350
Microcell Telecommunications, Sr. Disc. Notes,
Zero Coupon (until 6/1/04) B3 12.00 6/01/09 6,250 4,015,625
Netia Holdings BV, (Poland)
Gtd. Sr. Disc. Notes, Zero Coupon (until 11/1/01) B3 11.25 11/01/07 12,500(i) 7,812,500
Gtd. Sr. Notes B3 10.25 11/01/07 10,150(i) 8,526,000
Nextel Communications, Inc.,
Sr. Disc. Notes, Zero Coupon (until 9/15/02) B1 10.65 9/15/07 3,365(g) 2,515,337
Sr. Notes B1 9.375 11/15/09 95,810(g) 94,133,325
Nextel Partners, Inc., Sr. Disc. Notes B3 Zero 2/01/09 18,000 11,790,000
Nextlink Communications, Inc.,
Sr. Disc. Notes, Zero Coupon (until 12/1/04) B2 12.125 12/01/09 17,965 10,464,612
Sr. Notes B(a) 10.75 11/15/08 10,000 10,300,000
Sr. Notes B3 10.75 6/01/09 5,010(g) 5,160,300
Sr. Notes B(a) 10.50 12/01/09 13,970 14,424,025
Northeast Optic Network, Inc., Sr. Notes NR 12.75 8/15/08 10,415 11,039,900
Omnipoint Corp.,
Sr. Notes B2 11.625 8/15/06 3,300 3,498,000
Sr. Notes B2 11.50 9/15/09 6,250 6,750,000
Pagemart Nationwide, Inc., Sr. Disc. Notes, Zero Coupon
(until 2/1/00) B3 15.00 2/01/05 21,900 19,217,250
Price Communications Wireless,
Sr. Sec'd. Notes Ba2 9.125 12/15/06 3,700 3,792,500
Sr. Sub. Notes B3 11.75 7/15/07 12,500(g) 13,750,000
Primus Telecommunications Group, Inc., Sr. Notes B3 12.75 10/15/09 10,755 11,131,425
PsiNet, Inc., Sr. Notes B3 11.00 8/01/09 25,000 25,687,500
PTC Int'l. Fin BV, Gtd. Sr. Sub. Disc. Notes (Poland),
Zero Coupon
(until 7/1/02) B3 10.75 7/01/07 13,250(i) 8,877,500
RCN Corp.,
Sr. Notes B3 10.00 10/15/07 1,515 1,507,425
Sr. Notes B3 10.125 1/15/10 10,000(g) 9,975,000
RSL Communications,
Sr. Notes B2 12.25 11/15/06 3,500 3,552,500
Sr. Notes B2 12.00 11/01/08 5,750 5,793,125
Rural Cellular Corp., Sr. Sub. Notes B3 9.625 5/15/08 11,000 11,220,000
SCG Holding & Semiconductor Corp., Sr. Sub. Notes B2 12.00 8/01/09 9,365(g) 9,950,313
Splitrock Services, Inc., Sr. Note NR 11.75 7/15/08 6,250 5,750,000
Star Choice Communications, Sr. Sec'd. Notes B3 13.00 12/15/05 5,000 5,087,500
Telewest Communications, Sr. Disc. Notes, Zero Coupon
(until 4/15/04) B1 9.25 4/15/09 9,350 5,937,250
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-64
<PAGE> 116
Portfolio of Investments as of
December 31, 1999 PRUDENTIAL HIGH YIELD FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Telecommunications (cont'd.)
Time Warner Telecom LLC., Sr. Notes B2 9.75% 7/15/08 $ 8,900 $ 9,122,500
Tritel PCS, Inc., Sr. Sub. Disc. Notes, Zero Coupon
(until 5/15/04) B3 12.75 5/15/09 18,000 11,340,000
Triton PCS, Inc., Sr. Sub. Disc. Notes, Zero Coupon
(until 5/1/03) B3 11.00 5/01/08 5,225 3,696,688
US Exchange LLC., Sr. Notes NR 15.00 7/01/08 7,000 6,370,000
US Unwired, Inc., Sr. Sub. Disc. Notes, Zero Coupon
(until 11/1/04) CCC+(a) 13.375 11/01/09 14,815 8,666,775
Versatel Telecom BV, (Netherlands)
Sr. Notes B-(a) 13.25 5/15/08 9,000(i) 9,585,000
Sr. Notes B-(a) 11.875 7/15/09 5,375(i) 5,482,500
Viatel, Inc.,
Sr. Disc. Notes, Zero Coupon (until 4/15/03) B-(a) 12.50 4/15/08 8,400 5,376,000
Sr. Notes B-(a) 11.25 4/15/08 5,050 5,024,750
Sr. Notes NR 11.50 3/15/09 10,976 10,976,480
Voicestream Wireless Corp.,
Sr. Notes NR 10.375 11/15/09 20,480(g) 21,094,400
Sr. Disc. Notes, Zero Coupon (until 11/15/04) B2 11.875 11/15/09 16,390 9,874,975
WamNet, Inc., Sr. Disc. Notes, Zero Coupon (until
3/1/02) CCC+(a) 13.25 3/01/05 6,000 3,465,000
Williams Communications Group, Inc., Sr. Notes B2 10.875 10/01/09 31,020 32,454,675
Worldwide Fiber, Inc.,
Sr. Notes B3 12.00 8/01/09 4,880 5,038,600
Sr. Notes B3 12.50 12/15/05 10,000 10,450,000
--------------
857,861,745
- ------------------------------------------------------------------------------------------------------------------------------
Textiles--0.8%
Foamex L.P., Sr. Sub. Notes B3 9.875 5/15/07 12,550(d) 10,416,500
Phillips Van Heusen Corp., Sr. Sub. Notes B1 9.50 5/01/08 8,050 7,486,500
Worldtex, Inc., Sr. Notes B1 9.625 12/15/07 15,000 12,150,000
--------------
30,053,000
- ------------------------------------------------------------------------------------------------------------------------------
Transportation/Trucking/Shipping--2.1%
American Commercial Lines, Sr. Notes B1 10.25 6/30/08 17,000 16,320,000
Autopistas Del Sol S.A., Sr. Notes (Argentina) BB-(a) 10.25 8/01/09 3,500(g)(i) 2,695,000
Continental Airlines, Inc., Sr. Notes Ba2 8.00 12/15/05 9,100 8,323,406
Holt Group, Inc., Sr. Notes B+(a) 9.75 1/15/06 8,320 5,200,000
Kitty Hawk, Inc., Gtd. Notes B1 9.95 11/15/04 22,505 22,054,900
MRS Logistica S.A., Sr. Notes (Brazil) B(a) 10.625 8/15/05 10,000(i) 8,100,000
Stena AB, (Sweden)
Sr. Notes Ba2 8.75 6/15/07 5,250(i) 4,305,000
Sr. Notes B1 10.625 6/01/08 1,230(i) 738,000
USAir, Inc.
Sr. Notes B3 9.625 2/01/01 2,850 2,835,750
Pass-through Certs. Ba3 10.375 3/01/13 7,030 6,748,800
--------------
77,320,856
--------------
Total corporate bonds (cost $3,723,717,163) 3,400,259,203
--------------
- ------------------------------------------------------------------------------------------------------------------------------
Sovereign Bonds--0.1%
Republic of Brazil (cost $2,972,100) 11.625% 4/15/04 3,000(g)(i) 2,977,500
--------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-65
<PAGE> 117
Portfolio of Investments as of
December 31, 1999 PRUDENTIAL HIGH YIELD FUND, INC.
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Description Shares (Note 1)
<S> <C> <C>
- ----------------------------------------------------------------
PREFERRED STOCKS--5.3%
Adelphia Communications Corp.,
$13.00 74,000 $ 8,436,000
California Fed. Corp., $9.125 1,822,245 41,114,403
Chesapeake Energy Corp., $7.00 110,000 2,887,500
CSC Holdings, Inc.,
Ser. 1995K-1, $11.125 214,753 23,408,116
Ser. 1995K-2, $11.125 3,632 39,679,600
Ser. 1995K-4, $11.75 152,691 16,796,057
Eagle Picher Holdings, Inc., 1,530
$11.75 7,114,500
Global Crossing Holdings Ltd., 10,000 1,000,000
GPA Group Plc, Conv., 7.00% 13,200 6,336,000
Harborside Healthcare Corp., 2,951 885,300
Intermedia Communications of
Florida, $7.00 280,000 6,545,000
Packaging Corp. of America, Ser.
B Exchng, 12.375% 47,614 5,213,733
Paxon Communications Corp., Jr.,
$13.25 1,683 17,208,675
Primedia, Inc., $8.625 129,681 11,282,247
R & B Falcon Corp., 13.875% 4,833 5,098,815
Rural Cellular Corp., $11.375 102 104,040
Texas Utilities Co., $9.25 95,000 4,144,375
Viasystems Group, Inc., 8.00% 175,749 1,054,493
--------------
Total preferred stocks
(cost $192,684,546) 198,308,854
--------------
COMMON STOCKS(c)--0.3%
Charter Communications, Inc.,
Delaware Cl. A 61,000 $ 1,334,375
Dr. Pepper Bottling Holdings,
Inc.,
Cl. B 68,580 1,714,500
Envirosource, Inc. 61,190 47,116
Gaylord Container Corp., Cl. A 15,200 103,550
Hedstrom Holdings, Inc. 206,223 2,062
Intermedia Communications of 18,545
Florida 719,778
Peachtree Cable Assoc., Ltd. 31,559 (f) 320,971
Premier Cruise Line 888,704 (b) 2,999,376
Primus Telecomm Group, Inc. 24,700 944,775
Splitrock Services, Inc. 45,602 906,340
Viatel, Inc. 54,894 2,943,691
--------------
Total common stocks
(cost $19,724,549) 12,036,534
--------------
- ------------------------------------------------------------
Units
----------
COMMON TRUST UNITS(c)--0.3%
PSF Holdings, LLC (cost
$15,959,021; purchased 5/20/94) 951,717 (b)(f) 10,468,887
--------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-66
<PAGE> 118
Portfolio of Investments as of
December 31, PRUDENTIAL HIGH YIELD FUND, INC.
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Expiration Value
Date Warrants (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
WARRANTS(c)--0.4%
- ------------------------------------------------------------------------------------------------------------------------------
Aladdin Gaming 3/1/10 170,000 $ 1,700
Allegiance Telecom, Inc. 2/3/08 14,200 710,000
American Banknote Corp. 12/1/02 3,750 38
American Mobile Satellite Corp. 4/1/08 10,000 400,000
Anker Coal Group, Inc. 10/30/03 201 302
Bell Technology Group Ltd. 5/1/05 8,500 212,500
Bestel S.A. De CV, 5/15/05 11,000 55,000
Birch Telecom, Inc. 6/15/08 5,000 27,500
Cellnet Data Systems, Inc. 9/15/07 44,455 0
Clearnet Communications, Inc. 9/15/05 66,495 398,970
Comcel 11/15/03 29,000 1,450,000
DTI Holdings, Inc. 3/1/08 36,250 362
Firstworld Communications, Inc. 4/15/08 12,400 1,488,000
Intelcom Group, Inc., expiring 9/15/05 127,809 1,278,090
Intermedia Communications of Florida 6/1/00 11,250 1,260,000
International Wireless Communications, Inc. 8/15/01 8,000(d) 0
Intersil Holding Corp. 8/15/09 4,475 671,250
Long Distance Int'l., Inc. 4/15/08 6,500(d) 0
Price Communications Wireless 8/1/07 17,200 2,872,400
Primus Telecommunications Group 8/1/04 12,250 612,500
R & B Falcon Corp. 5/1/09 4,500 1,125,000
Star Choice Communications 12/15/05 115,800 451,620
Sterling Chemical Holdings, Inc. 8/15/08 5,450 87,200
TVN Entertainment Corp. 8/1/08 15,000(d) 0
USN Communications, Inc. 10/15/04 92,500 925
Versatel Telecom BV 5/15/08 9,000 3,600,000
WamNet, Inc. 3/1/05 22,500 511,875
Waste Systems Int'l, Inc. 1/15/06 165,000 123,750
--------------
Total warrants
(cost $533,750) 17,338,982
--------------
Total long-term investments
(cost $3,955,591,129) 3,641,389,960
--------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-67
<PAGE> 119
Portfolio of Investments as of
December 31, 1999 PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Interest Maturity Amount Value
Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--4.1%
- ---------------------------------------------------------------------------------------------------------------------------------
Countrywide Home Loan, Inc., commercial paper 5.40 % 1/03/00 $39,423 $ 39,411,172
Market Street Funding Corp., commercial paper 5.00 1/05/00 10,000 9,994,444
Market Street Funding Corp., commercial paper 5.00 1/06/00 11,591 11,582,951
Banque Nationale, time deposit 2.00 1/3/00 3,985(h) 3,985,000
Barton Cap Corp., commercial paper 6.00 1/18/00 17,200(h) 17,151,267
Barton Cap Corp., commercial paper 6.00 1/21/00 12,559(h) 12,517,555
Coca Cola Enterprises, commercial paper 5.25 1/3/00 7,939(h) 7,936,684
Deutsche Bank, time deposit 5.00 1/3/00 17,000(h) 17,000,000
Falcon Asset Securities, commercial paper 6.00 1/11/00 20,000(h) 19,966,667
Keyspan Corp., commercial paper 6.50 1/12/00 7,000(h) 6,986,098
PHH Corp, commercial paper 6.95 1/27/00 7,000(h) 6,964,864
--------------
Total short-term investments
(cost $153,496,702) 153,496,702
--------------
- ------------------------------------------------------------------------------------------------------------------------------
Total Investments, Before Outstanding Options Written--100.7%
(cost $4,109,087,831; Note 4) 3,794,886,662
Contracts
---------
OUTSTANDING CALL OPTIONS WRITTEN(c)
Jordan Telecommunications Prod., Sr. Sub. Notes,
9.875% 8/1/07 expiring 3/20/2000 @ $1,116
(premium received $215,000) 10,750 (0)
--------------
Total Investments, Net of Outstanding Options Written
(cost $4,108,872,831) 3,794,886,662
Liabilities in excess of other assets--(0.7)% (27,971,463)
--------------
Net Assets--100% $3,766,915,199
--------------
--------------
</TABLE>
- ------------------------------
(a) Standard & Poor's Rating.
(b) Indicates a restricted security; the aggregate cost of such securities is
$143,864,448. The aggregate value $90,194,809 is approximately 2.4% of net
assets.
(c) Non-income producing securities.
(d) Consists of more than one class of securities traded together as a unit;
generally bonds with attached stock or warrants.
(e) Represents issuer in default on interest payments, non-income producing
security.
(f) Fair valued security.
(g) Portion of securities on loan, see Note 4.
(h) Represents security, or portion thereof, purchased with cash collateral
received for securities on loan.
(i) US$--Denominated foreign bonds.
NR--Not rated by Moody's or Standard & Poor's.
PIK--Payment in kind securities.
L.P.--Limited Partnership.
LLC.--Limited Liability Company.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-68
<PAGE> 120
Statement of Assets and Liabilities PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets December 31, 1999
<S> <C>
Investments, at value (cost $4,109,087,831)............................................................. $ 3,794,886,662
Foreign currency, at value (cost $177).................................................................. 175
Cash.................................................................................................... 93,355
Interest receivable..................................................................................... 76,101,716
Receivable for investments sold......................................................................... 2,929,151
Receivable for Fund shares sold......................................................................... 2,260,068
Forward currency contracts - net amount receivable from counterparties.................................. 662,900
Deferred expenses and other assets...................................................................... 93,605
Receivable for securities lending....................................................................... 2,583
-----------------
Total assets......................................................................................... 3,877,030,215
-----------------
Liabilities
Payable to broker for collateral for securities on loan................................................. 91,872,080
Payable for Fund shares reacquired...................................................................... 12,614,045
Distribution fee payable................................................................................ 1,666,268
Management fee payable.................................................................................. 1,365,221
Accrued expenses........................................................................................ 1,062,023
Dividends payable....................................................................................... 1,049,358
Securities lending rebate payable....................................................................... 486,021
-----------------
Total liabilities.................................................................................... 110,115,016
-----------------
Net Assets.............................................................................................. $ 3,766,915,199
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................................. $ 5,109,629
Paid-in capital in excess of par..................................................................... 4,549,571,754
-----------------
4,554,681,383
Distributions in excess of net investment income..................................................... (1,049,358)
Accumulated net realized loss on investments......................................................... (473,393,095)
Net unrealized depreciation on investments and foreign currencies.................................... (313,323,731)
-----------------
Net assets, December 31, 1999........................................................................... $ 3,766,915,199
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($1,750,618,283 / 237,147,403 shares of common stock issued and outstanding)...................... $7.38
Sales charge (4.00% of offering price)............................................................... .31
Maximum offering price to public..................................................................... $7.69
Class B:
Net asset value, offering price and redemption price per share
($1,867,619,765 / 253,645,892 shares of common stock issued and outstanding)...................... $7.36
Class C:
Net asset value and redemption price per share
($98,347,481 / 13,356,623 shares of common stock issued and outstanding).......................... $7.36
Sales charge (1.00% of offering price)............................................................... .07
Offering price to public............................................................................. $7.43
Class Z:
Net asset value, offering price and redemption price per share
($50,329,670 / 6,813,242 shares of common stock issued and outstanding)........................... $7.39
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-69
<PAGE> 121
PRUDENTIAL HIGH YIELD FUND, INC.
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income December 31, 1999
<S> <C>
Income
Interest.............................. $ 395,873,168
Dividends............................. 15,081,292
Income from securities loaned, net.... 692,500
-----------------
Total Income....................... 411,646,960
-----------------
Expenses
Distribution fee--Class A............. 4,365,306
Distribution fee--Class B............. 16,356,784
Distribution fee--Class C............. 715,823
Management fee........................ 16,790,927
Transfer agent's fees and expenses.... 4,276,000
Reports to shareholders............... 446,000
Custodian's fees and expenses......... 414,000
Legal fees and expenses............... 108,000
Registration fees..................... 101,000
Directors' fees and expenses.......... 70,000
Audit fee and expenses................ 48,000
Miscellaneous......................... 19,417
-----------------
Total expenses..................... 43,711,257
-----------------
Net investment income.................... 367,935,703
-----------------
Realized and Unrealized Gain
(Loss) on Investments and Foreign
Currency Transactions
Net realized gain (loss) on:
Investment transactions............... (178,145,980)
Foreign currency transactions......... 125,313
-----------------
(178,020,667)
-----------------
Net change in unrealized appreciation
(depreciation) of:
Investments........................... (54,465,075)
Foreign currencies.................... 662,438
Options written....................... 215,000
-----------------
(53,587,637)
-----------------
Net loss on investments and foreign
currencies............................ (231,608,304)
-----------------
Net Increase in Net Assets
Resulting from Operations................ $ 136,327,399
-----------------
-----------------
</TABLE>
PRUDENTIAL HIGH YIELD FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended December 31,
in Net Assets 1999 1998
<S> <C> <C>
Operations
Net investment income...... $ 367,935,703 $ 380,890,729
Net realized gain (loss) on
investment and foreign
currency transactions... (178,020,667) 36,353,107
Net change in unrealized
depreciation of
investments and foreign
currencies.............. (53,587,637) (422,696,898)
----------------- ----------------
Net increase (decrease) in
net assets resulting
from operations......... 136,327,399 (5,453,062)
----------------- ----------------
Dividends and distributions (Note 1)
Dividends from net
investment income
Class A................. (162,305,602) (154,810,882)
Class B................. (191,445,987) (215,059,672)
Class C................. (8,404,338) (5,714,430)
Class Z................. (5,779,776) (5,305,745)
----------------- ----------------
(367,935,703) (380,890,729)
----------------- ----------------
Dividends in excess of net
investment income
Class A................. (1,490,144) (3,143,618)
Class B................. (1,757,685) (4,367,041)
Class C................. (77,161) (116,038)
Class Z................. (53,065) (107,739)
----------------- ----------------
(3,378,055) (7,734,436)
----------------- ----------------
Tax return of capital
distributions
Class A................. (9,305,993) --
Class B................. (10,976,792) --
Class C................. (481,873) --
Class Z................. (331,391) --
----------------- ----------------
(21,096,049) --
----------------- ----------------
Fund share transactions (Net
of
share conversions) (Note 5)
Net proceeds from shares
sold.................... 2,944,859,997 2,963,551,012
Net asset value of shares
issued in reinvestment
of dividends and
distributions........... 193,970,292 194,305,581
Cost of shares
reacquired.............. (3,323,984,917) (3,024,094,927)
----------------- ----------------
Net increase (decrease) in
net assets from Fund
share transactions...... (185,154,628) 133,761,666
----------------- ----------------
Total decrease................ (441,237,036) (260,316,561)
Net Assets
Beginning of year............. 4,208,152,235 4,468,468,796
----------------- ----------------
End of year(a)................ $ 3,766,915,199 $ 4,208,152,235
----------------- ----------------
----------------- ----------------
- ---------------
(a) Includes undistributed net
investment income of:..... $ -- $ 349,779
----------------- ----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-70
<PAGE> 122
Notes to Financial Statements PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
Prudential High Yield Fund, Inc. (the 'Fund') is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company.
The primary investment objective of the Fund is to maximize current income
through investment in a diversified portfolio of high yield fixed-income
securities which, in the opinion of the Fund's investment adviser, do not
subject the Fund to unreasonable risks. As a secondary investment objective, the
Fund will seek capital appreciation but only when consistent with its primary
objective. Lower rated or unrated (i.e., high yield) securities are more likely
to react to developments affecting market risk (general market liquidity) and
credit risk (an issuer's inability to meet principal and interest payments on
its obligations) than are more highly rated securities, which react primarily to
movements in the general level of interest rates. The ability of issuers of debt
securities held by the Fund to meet their obligations may be affected by
economic developments in a specific industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Security Valuation: Portfolio securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at prices provided by
principal market makers and pricing agents. Any security for which the primary
market is on an exchange is valued at the last sales price on such exchange on
the day of valuation or, if there was no sale on such day, the last bid price
quoted on such day. Securities issued in private placements are valued at the
bid price or the mean between the bid and asked prices, if available, provided
by principal market makers. Any security for which a reliable market quotation
is unavailable is valued at fair value as determined in good faith by or under
the direction of the Fund's Board of Directors.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost, which approximates market value.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians, under triparty repurchase
agreements as the case may be, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest and, to the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
The Fund may hold up to 15% of its net assets in illiquid securities, including
those which are restricted as to disposition under securities law ('restricted
securities'). Certain issues of restricted securities held by the Fund at
December 31, 1999 include registration rights under which the Fund may demand
registration by the issuer, of which the Fund may bear the cost of such
registration. Restricted securities, sometimes referred to as private
placements, are valued pursuant to the valuation procedures noted above.
Forward Currency Contracts: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign portfolio
holdings or on specific receivables and payables denominated in a foreign
currency. The contracts are valued daily at current exchange rates and any
unrealized gain or loss is included in net unrealized appreciation or
depreciation on investments and foreign currencies. Gain or loss is realized on
the settlement date of the contract equal to the difference between the
settlement value of the original and renegotiated forward contracts. This gain
or loss, if any, is included in net realized gain (loss) on foreign currency
transactions. Risks may arise upon entering into these contracts from the
potential inability of the counterparties to meet the terms of their contracts.
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.
- --------------------------------------------------------------------------------
B-71
<PAGE> 123
Notes to Financial Statements PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
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.
Options: The Fund may either purchase or write options in order to hedge against
adverse market movements or fluctuations in value caused by changes in
prevailing interest rates or foreign currency exchange rates with respect to
securities or currencies which the Fund currently owns or intends to purchase.
When the Fund purchases an option, it pays a premium and an amount equal to that
premium is recorded as an investment. When the Fund writes an option, it
receives a premium and an amount equal to that premium is recorded as a
liability. The investment or liability is adjusted daily to reflect the current
market value of the option. If an option expires unexercised, the Fund realizes
a gain or loss to the extent of the premium received or paid. If an option is
exercised, the premium received or paid is an adjustment to the proceeds from
the sale or the cost basis of the purchase in determining whether the Fund has
realized a gain or loss. The difference between the premium and the amount
received or paid on effecting a closing purchase or sale transaction is also
treated as a realized gain or loss. Gain or loss on purchased options is
included in net realized gain (loss) on investment transactions. Gain or loss on
written options is presented separately as net realized gain (loss) on written
option transactions.
The Fund, as writer of an option, has no control over whether the underlying
securities or currencies may be sold (called) or purchased (put). As a result,
the Fund bears the market risk of an unfavorable change in the price of the
security or currency underlying the written option. The Fund, as purchaser of an
option, bears the risk of the potential inability of the counterparties to meet
the terms of their contracts.
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 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 year ended December 31, 1999, PSI has been compensated
approximately $179,000.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with AICPA Statement of Position
93-2: Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. The
effect of applying this statement was to decrease distributions in excess of net
investment income by $1,978,918, decrease accumulated net realized loss on
investments by $75,902,012 and decrease paid in capital in excess of par by
$77,880,930. 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, 1999. 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 has a distribution agreement with Prudential Investment Management
Services LLC ('PIMS'), which acts as the distributor of the Class A, B, C and Z
shares of the Fund. The Fund compensates PIMS for distributing and servicing the
Fund's Class A, B and C shares, pursuant to plans of distribution (the 'Class A,
B and C Plans'), regardless of expenses actually incurred by PIMS. The
distribution fees are accrued daily and payable monthly. No distribution or
service fees are paid to PIMS as distributor of the Class Z shares of the Fund.
- --------------------------------------------------------------------------------
B-72
<PAGE> 124
Notes to Financial Statements PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
Pursuant to the Class A, B and C Plans, the Fund compensates 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
.25 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, 1999.
PIMS has advised the Fund that it has received approximately $947,100 and
$386,200 in front-end sales charges resulting from sales of Class A and Class C
shares, respectively, during the year ended December 31, 1999. From these fees,
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.
PIMS has advised the Fund that for the year ended December 31, 1999, it received
approximately $3,831,100 and $60,000 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PIMS, PIFM and PIC are indirect, wholly owned subsidiaries of The Prudential
Insurance Company of America.
As of March 11, 1999, the Fund, along with other affiliated registered
investment companies (the 'Funds'), entered into a syndicated credit agreement
('SCA') with an unaffiliated lender. The maximum commitment under the SCA is $1
billion. The Funds pay a commitment fee at an annual rate of .065 of 1% on the
unused portion of the credit facility, which is accrued and paid quarterly on a
pro rata basis by the Funds. The SCA expires on March 9, 2000. Prior to March
11, 1999, the Funds had a credit agreement with a maximum commitment of
$200,000,000. The commitment fee was .055 of 1% on the unused portion of the
credit facility. The Fund did not borrow any amounts pursuant to either
agreement during the year ended December 31, 1999. The purpose of the agreements
is to serve as an alternative source of funding for capital share redemptions.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC, ('PMFS'), a wholly owned subsidiary of
PIFM, serves as the Fund's transfer agent and during the year ended December 31,
1999, the Fund incurred fees of approximately $3,660,600 for the services of
PMFS. As of December 31, 1999, $297,200 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended December 31, 1999 were $2,721,669,770 and $2,986,104,199,
respectively.
At December 31, 1999 the Fund had outstanding forward currency contracts to sell
foreign currencies, as follows:
<TABLE>
<CAPTION>
Value at
Foreign Currency Settlement Current
Sale Contracts Date Receivable Value Appreciation
- ------------------------ --------------- ----------- --------------
<S> <C> <C> <C>
Euro,
expiring 1/18/2000 $26,812,603 $26,149,703 $ 662,900
--------------- ----------- --------------
--------------- ----------- --------------
</TABLE>
Transactions in options written during the year ended December 31, 1999, were
as follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
--------- ---------
<S> <C> <C>
Options outstanding at
December 31, 1998................ -- $ --
Options written.................... 10,750 215,000
<CAPTION>
--------- ---------
Options outstanding at
December 31, 1999................ 10,750 $215,000
--------- ---------
--------- ---------
</TABLE>
The federal income tax basis of the Fund's investments, including short-term
investments, as of December 31, 1999 was $4,111,085,742; accordingly, net
unrealized depreciation for federal income tax purposes was $316,199,080 (gross
unrealized appreciation--$94,048,355; gross unrealized
depreciation--$410,247,435).
For federal income tax purposes, the Fund has a capital loss carryforward as of
December 31, 1999 of approximately $442,409,300 of which $110,441,500 expires in
2000, $162,249,600 expires in 2003 and $169,718,100 expires in 2007. In
addition, the Fund will elect to treat net capital losses of approximately
$28,323,000 incurred in the two month period ended December 31, 1999 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, 1999, the Fund has securities on loan with an aggregate
market value of $87,848,594. The Fund received $91,872,080 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.
- --------------------------------------------------------------------------------
B-73
<PAGE> 125
Notes to Financial Statements PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
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 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. Of the 510,963,160 shares of common stock issued and outstanding at
December 31, 1999, Prudential owned 1,166,093.
The Fund has 3 billion shares of $.01 par value common stock authorized; equally
divided into four classes, designated Class A, Class B, Class C and Class Z
shares.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------ ------------ ---------------
<S> <C> <C>
Year ended December 31, 1999:
Shares sold................... 271,460,456 $ 2,090,617,324
Shares issued in reinvestment
of dividends and
distributions............... 12,007,130 92,000,070
Shares reacquired............. (276,197,826) (2,130,432,426)
------------ ---------------
Net increase in shares
outstanding before
conversions................. 7,269,760 52,184,968
Shares issued upon conversion
from Class B................ 16,897,149 128,328,242
------------ ---------------
Net increase in shares
outstanding................. 24,166,909 $ 180,513,210
------------ ---------------
------------ ---------------
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
------------ ---------------
------------ ---------------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Amount
- ------------------------------ ------------ ---------------
<S> <C> <C>
Year ended December 31, 1999:
Shares sold................... 92,533,010 $ 712,091,062
Shares issued in reinvestment
of dividends and
distributions............... 11,958,428 91,619,587
Shares reacquired............. (137,029,543) (1,051,143,533)
------------ ---------------
Net decrease in shares
outstanding before
conversion.................. (32,538,105) (247,432,884)
Shares reacquired upon
conversion into Class A..... (16,936,033) (128,328,242)
------------ ---------------
Net decrease in shares
outstanding................. (49,474,138) $ (375,761,126)
------------ ---------------
------------ ---------------
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)
------------ ---------------
------------ ---------------
<CAPTION>
Class C
- ------------------------------
<S> <C> <C>
Year ended December 31, 1999:
Shares sold................... 9,197,134 $ 70,833,321
Shares issued in reinvestment
of dividends and
distributions............... 640,878 4,895,941
Shares reacquired............. (7,131,689) (54,661,514)
------------ ---------------
Net increase in shares
outstanding................. 2,706,323 $ 21,067,748
------------ ---------------
------------ ---------------
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
------------ ---------------
------------ ---------------
<CAPTION>
Class Z
- ------------------------------
<S> <C> <C>
Year ended December 31, 1999:
Shares sold................... 9,225,121 $ 71,318,290
Shares issued in reinvestment
of dividends and
distributions............... 710,369 5,454,694
Shares reacquired............. (11,376,862) (87,747,444)
------------ ---------------
Net decrease in shares
outstanding................. (1,441,372) $ (10,974,460)
------------ ---------------
------------ ---------------
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
------------ ---------------
------------ ---------------
</TABLE>
- --------------------------------------------------------------------------------
B-74
<PAGE> 126
Financial Highlights PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------
1999 1998 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year................................. $ 7.88 $ 8.65 $ 8.39 $ 8.19
---------- ---------- ---------- ----------
Income from investment operations
Net investment income.............................................. .71 .76 .73 .75
Net realized and unrealized gain (loss) on investments............. (.45) (.76) .30 .22
---------- ---------- ---------- ----------
Total from investment operations................................ .26 -- 1.03 .97
---------- ---------- ---------- ----------
Less distributions
Dividends from net investment income............................... (.71) (.76) (.73) (.75)
Distributions in excess of net investment income................... (.01) (.01) (.04) (.02)
Tax return of capital distributions................................ (.04) -- -- --
---------- ---------- ---------- ----------
Total distributions............................................. (.76) (.77) (.77) (.77)
---------- ---------- ---------- ----------
Net asset value, end of year....................................... $ 7.38 $ 7.88 $ 8.65 $ 8.39
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
TOTAL RETURN(a).................................................... 3.38% (0.13)% 12.81% 12.60%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)...................................... $1,750,618 $1,677,605 $1,730,473 $1,564,429
Average net assets (000)........................................... $1,746,123 $1,712,531 $1,635,480 $1,385,143
Ratios to average net assets:
Expenses, including distribution fees........................... .80% .67% .69% .72%
Expenses, excluding distribution fees........................... .55% .52% .54% .57%
Net investment income........................................... 9.30% 9.04% 8.59% 9.20%
For Classes A, B, C and Z shares:
Portfolio turnover rate......................................... 70% 103% 113% 89%
<CAPTION>
<S> <C>
1995
----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year................................. $ 7.68
----------
Income from investment operations
Net investment income.............................................. .81
Net realized and unrealized gain (loss) on investments............. .53
----------
Total from investment operations................................ 1.34
----------
Less distributions
Dividends from net investment income............................... (.81)
Distributions in excess of net investment income................... (.02)
Tax return of capital distributions................................ --
----------
Total distributions............................................. (.83)
----------
Net asset value, end of year....................................... $ 8.19
----------
----------
TOTAL RETURN(a).................................................... 18.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)...................................... $1,336,354
Average net assets (000)........................................... $1,056,555
Ratios to average net assets:
Expenses, including distribution fees........................... .75%
Expenses, excluding distribution fees........................... .60%
Net investment income........................................... 10.13%
For Classes A, B, C and Z shares:
Portfolio turnover rate......................................... 78%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-75
<PAGE> 127
Financial Highlights PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
-------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------
1999 1998 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year................................. $ 7.86 $ 8.63 $ 8.38 $ 8.18
---------- ---------- ---------- ----------
Income from investment operations
Net investment income.............................................. .67 .71 .68 .71
Net realized and unrealized gain (loss) on investments............. (.45) (.76) .29 .22
---------- ---------- ---------- ----------
Total from investment operations................................ .22 (.05) .97 .93
---------- ---------- ---------- ----------
Less distributions
Dividends from net investment income............................... (.66) (.71) (.68) (.71)
Distributions in excess of net investment income................... (.02) (.01) (.04) (.02)
Tax return of capital distributions................................ (.04) -- -- --
---------- ---------- ---------- ----------
Total distributions............................................. (.72) (.72) (.72) (.73)
---------- ---------- ---------- ----------
Net asset value, end of year....................................... $ 7.36 $ 7.86 $ 8.63 $ 8.38
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
TOTAL RETURN(a).................................................... 2.86% (.70)% 12.07% 11.97%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)...................................... $1,867,620 $2,381,793 $2,640,491 $2,596,207
Average net assets (000)........................................... $2,180,904 $2,557,252 $2,589,122 $2,652,883
Ratios to average net assets:
Expenses, including distribution fees........................... 1.30% 1.27% 1.29% 1.32%
Expenses, excluding distribution fees........................... .55% .52% .54% .57%
Net investment income........................................... 8.78% 8.41% 7.99% 8.62%
<CAPTION>
<S> <C>
1995
----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year................................. $ 7.67
----------
Income from investment operations
Net investment income.............................................. .76
Net realized and unrealized gain (loss) on investments............. .53
----------
Total from investment operations................................ 1.29
----------
Less distributions
Dividends from net investment income............................... (.76)
Distributions in excess of net investment income................... (.02)
Tax return of capital distributions................................ --
----------
Total distributions............................................. (.78)
----------
Net asset value, end of year....................................... $ 8.18
----------
----------
TOTAL RETURN(a).................................................... 17.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)...................................... $2,730,903
Average net assets (000)........................................... $2,725,385
Ratios to average net assets:
Expenses, including distribution fees........................... 1.35%
Expenses, excluding distribution fees........................... .60%
Net investment income........................................... 9.56%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-76
<PAGE> 128
Financial Highlights PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
-------------------------------------------------------
Year Ended December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year................................. $ 7.86 $ 8.63 $ 8.38 $ 8.18 $ 7.67
------- ------- ------- ------- -------
Income from investment operations
Net investment income.............................................. .67 .71 .68 .71 .76
Net realized and unrealized gain (loss) on investments............. (.45) (.76) .29 .22 .53
------- ------- ------- ------- -------
Total from investment operations................................ .22 (.05) .97 .93 1.29
------- ------- ------- ------- -------
Less distributions
Dividends from net investment income............................... (.67) (.71) (.68) (.71) (.76)
Distributions in excess of net investment income................... (.01) (.01) (.04) (.02) (.02)
Tax return of capital distributions................................ (.04) -- -- -- --
------- ------- ------- ------- -------
Total distributions............................................. (.72) (.72) (.72) (.73) (.78)
------- ------- ------- ------- -------
Net asset value, end of year....................................... $ 7.36 $ 7.86 $ 8.63 $ 8.38 $ 8.18
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN(a).................................................... 2.86% (0.70)% 12.07% 11.97% 17.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)...................................... $98,347 $83,687 $55,879 $43,374 $24,021
Average net assets (000)........................................... $95,443 $67,296 $45,032 $28,647 $12,063
Ratios to average net assets:
Expenses, including distribution fees........................... 1.30% 1.27% 1.29% 1.32% 1.35%
Expenses, excluding distribution fees........................... .55% .52% .54% .57% .60%
Net investment income........................................... 8.81% 8.49% 7.99% 8.60% 9.49%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-77
<PAGE> 129
Financial Highlights PRUDENTIAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class Z
------------------------------------------------
March 1,
1996(c)
Year Ended December 31, Through
------------------------------- December 31,
1999 1998 1997 1996
------- ------- ------- ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................... $ 7.88 $ 8.65 $ 8.39 $ 8.34
------- ------- ------- ------
Income from investment operations
Net investment income.............................................. .73 .76 .74 .63
Net realized and unrealized gain (loss) on investments............. (.44) (.75) .30 .07
------- ------- ------- ------
Total from investment operations................................ .29 .01 1.04 .70
------- ------- ------- ------
Less distributions
Dividends from net investment income............................... (.73) (.76) (.74) (.63)
Distributions in excess of net investment income................... (.01) (.02) (.04) (.02)
Tax return of capital distributions................................ (.04) -- -- --
------- ------- ------- ------
Total distributions............................................. (.78) (.78) (.78) (.65)
------- ------- ------- ------
Net asset value, end of period..................................... $ 7.39 $ 7.88 $ 8.65 $ 8.39
------- ------- ------- ------
------- ------- ------- ------
TOTAL RETURN(a).................................................... 3.79% 0.00% 12.96% 8.77%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................................... $50,330 $65,068 $41,625 $ 31,748
Average net assets (000)........................................... $60,652 $57,453 $35,808 $ 28,978
Ratios to average net assets:
Expenses, including distribution fees........................... .55% .52% .54% 57%(b)
Expenses, excluding distribution fees........................... .55% .52% .54% .57%(b)
Net investment income........................................... 9.53% 9.23% 8.74% 9.31%(b)
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-78
<PAGE> 130
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, 1999, 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 accounting principles generally accepted in the
United States. 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 auditing standards generally accepted in the
United States, 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, 1999 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 17, 2000
- --------------------------------------------------------------------------------
B-79
<PAGE> 131
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).
Under normal conditions, the Fund's average maturity range is expected to
be between 7 and 12 years.
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> 132
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.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
[LINE CHART]
Small Stocks $6,640.79
Common Stocks $2,845.63
Long-Term Bonds $40.22
Treasury Bills $15.64
Inflation $9.40
- ---------------
Source: Ibbotson Associates. Used with permission. All rights reserved. This
chart is for illustrative purposes only and is not indicative of the past,
present or future performance of any asset class or any Prudential mutual fund.
Generally, stock returns are due to capital appreciation and 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> 133
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 1989
through 1999. 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
these historical total returns, including the compounded effect over time, could
be substantial.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
<TABLE>
<CAPTION>
YTD
-------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Treasury
Bonds(1) 14.4% 8.5% 15.3% 7.2% 10.7% (3.4%) 18.4% 2.7% 9.6% 10.0% (2.56%)
U.S. Government Mortgage
Securities(2) 15.4% 10.7% 15.7% 7.0% 6.8% (1.6%) 16.8% 5.4% 9.5% 7.0% 1.86%
U.S. Investment Grade
Corporate Bonds(3) 14.1% 7.1% 18.5% 8.7% 12.2% (3.9%) 22.3% 3.3% 10.2% 8.6% (1.96%)
U.S. High Yield Corporate
Bonds(4) 0.8% (9.6%) 46.2% 15.8% 17.1% (1.0%) 19.2% 11.4% 12.8% 1.6% 2.39%
World Government Bonds(5) (3.4%) 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3%) 5.3% (5.07%)
Difference between highest
and lowest returns
percent 18.8% 24.9% 30.9% 11.0% 10.3% 9.9% 5.5% 8.7% 17.1% 8.4% 7.46%
</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. Source: Lipper Inc.
(4) LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or
Fitch Investors Service). All bonds in the index have maturities of at
least one year.
(5) SALOMON SMITH BARNEY WORLD GOVERNMENT INDEX (NON U.S.) includes over 800
bonds issued by various foreign governments or agencies, excluding those in
the U.S., but including those in Japan, Germany, France, the U.K., Canada,
Italy, Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and
Austria. All bonds in the index have maturities of at least one year.
II-2
<PAGE> 134
The chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
[LINE GRAPH]
- ---------------
Source: Ibbotson Associates. Used with permission. All rights reserved. This
chart illustrates the historical yield of the long-term U.S. Treasury Bond from
1926-1999. Yields represent that of an annually renewed one-bond portfolio with
a remaining maturity of approximately 20 years. This chart is for illustrative
purposes and should not be construed to represent the yields of any Prudential
mutual fund.
This chart illustrates the performance of major world stock markets for the
period from 1985 through 1999. It does not represent the performance of any
Prudential mutual fund.
AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS
[BAR CHART] (12/31/1985 - 12/31/1999)(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
<S> <C>
Sweden 22.7
Hong Kong 20.37
Spain 20.11
Netherland 18.63
Belgium 18.41
France 17.69
USA 17.39
U.K. 16.41
Europe 16.28
Switzerland 15.58
Sing/Mlysia 15.07
Denmark 14.72
Germany 13.29
Australia 11.68
Italy 11.39
Canada 11.10
Japan 9.59
Norway 8.91
Austria 7.09
</TABLE>
Source: Morgan Stanley Capital International (MSCI) and Lipper Inc. as of
12/31/99. Used with permission. Morgan Stanley Country indexes are unmanaged
indexes which include those stocks making up the largest two-thirds of each
country's total stock market capitalization. Returns reflect the reinvestment of
all distributions. This chart is for illustrative purposes only and is not
indicative of the past, present or future performance of any specific
investment. Investors cannot invest directly in stock indexes.
II-3
<PAGE> 135
This chart shows the growth of a hypothetical $10,000 investment made in
the stocks representing the S&P 500 Stock Index with and without reinvested
dividends.
[Line Graph]
- ---------------
Source: Lipper Inc. Used with permission. All rights reserved. This chart is
used for illustrative purposes only and is not intended to represent the past,
present or future performance of any Prudential mutual fund. Common stock total
return is based on the Standard & Poor's 500 Composite Stock Price Index, a
market-value-weighted index made up of 500 of the largest stocks in the U.S.
based upon their stock market value. Investors cannot invest directly in
indexes.
[PIE GRAPH]
CANADA 2.1%
U.S. 49.0%
EUROPE 32.5%
PACIFIC BASIN 16.4%
- ---------------
Source: Morgan Stanley Capital International, December 31, 1999. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of approximately
1577 companies in 22 countries (representing approximately 60% of the aggregate
market value of the stock exchanges). This chart is for illustrative purposes
and does not represent the allocation of any Prudential mutual fund.
II-4
<PAGE> 136
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
<TABLE>
<C> <C> <S>
(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) (1) 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).
(2) Amendment to By-Laws of the Registrant.*
(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).
(3) Amendment to Subadvisory Agreement dated as of November 18,
1999, between Prudential Investments Fund Management LLC and
The Prudential Investment Corporation.*
(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) (1) 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).
(2) Amendment to Custodian Contract/Agreement dated as of
February 22, 1999 by and between the Registrant and State
Street Bank and Trust Company.*
(h) (1) 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).
(2) Amendment to Transfer Agency and Service Agreement dated as
of August 24, 1999 by and between the Registrant and
Prudential Mutual Fund Services LLC (successor to Prudential
Mutual Fund Services, Inc.)*
(i) (1) 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).
(2) Consent of Counsel.*
</TABLE>
C-1
<PAGE> 137
<TABLE>
<C> <C> <S>
(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).
(n) 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).
(p) (1) Code of Ethics of Registrant.*
(2) Code of Ethics of Prudential Investment Management LLC,
Prudential Investments Fund Management LLC and Prudential
Corporation.*
</TABLE>
- ---------------
* 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.
C-2
<PAGE> 138
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.
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 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).
C-3
<PAGE> 139
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>
David R. Odenath, Jr...................... Officer in Charge, President, Chief Officer in Charge, President,
Executive Officer and Chief Chief Executive Officer and
Operating Officer Chief Operating Officer,
PIFM; Senior Vice President,
The Prudential Insurance
Company of America
(Prudential)
Robert F. Gunia........................... Executive Vice President and Chief Executive Vice President and
Administrative Officer Chief Administrative
Officer, PIFM; Vice
President, Prudential;
President, Prudential
Investment Management
Services LLC (PIMS)
William V. Healey......................... Executive Vice President, Chief Executive Vice President,
Legal Officer and Secretary Chief Legal Officer and
Secretary, PIFM; Vice
President and Associate
General Counsel, Prudential;
Senior Vice President, Chief
Legal Officer and Secretary,
PIMS
Brian W. Henderson........................ Executive Vice President Executive Vice President,
PIFM; Senior Vice President
and Chief Operating Officer,
PIMS
Stephen Pelletier......................... Executive Vice President Executive Vice President, PIFM
Judy A. Rice.............................. Executive Vice President Executive Vice President, PIFM
Lynn M. Waldvogel......................... Executive Vice President 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.
C-4
<PAGE> 140
The business and other connections of PIC's directors and executive
officers are as set forth below. Except as otherwise indicated, the address of
each person is Gateway Center Three, Newark, New Jersey 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
---------------- ----------------- ---------------------
<S> <C> <C>
Jeffrey Hiller......................... Chief Compliance Officer Chief Compliance Officer, Prudential
Global Asset Management
John R. Strangfeld, Jr................. Chairman of the Board, President of Prudential Global Asset
President, Chief Management Group of Prudential; Senior
Executive Officer and Vice President, Prudential; Chairman of
Director the Board, President, Chief Executive
Officer and Director, PIC
Bernard Winograd....................... Senior Vice President Chief Executive Officer, Prudential Real
and Director Estate Investors; Senior Vice President
and Director, PIC
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Prudential Investment Management Services LLC (PIMS)
PIMS is distributor for the following open-end management companies: Cash
Accumulation Trust, COMMAND Money Fund, COMMAND Government Fund, COMMAND
Tax-Free Fund, Global Utility Fund, Inc., Nicholas-Applegate Fund, Inc.
(Nicholas-Applegate Growth Equity Fund), Prudential Balanced Fund, Prudential
California Municipal Fund, Prudential Diversified Bond Fund, Inc., Prudential
Diversified Funds, 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 Total Return 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 International Bond Fund, Inc., Prudential Mid-Cap Value Fund,
Prudential MoneyMart Assets, Inc., Prudential Municipal Bond Fund, Prudential
Municipal Series Fund, Prudential National Municipals Fund, Inc., Prudential
Natural Resources Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential
Real Estate Securities Fund, Prudential Sector Funds, Inc., Prudential Small-Cap
Quantum Fund, Inc., Prudential Small Company Value Fund, Inc., Prudential
Special Money Market Fund, Inc., Prudential Structured Maturity Fund, Inc.,
Prudential 20/20 Focus Fund, Prudential Tax-Free Money Fund, Inc., Prudential
Tax-Managed Funds, Prudential World Fund, Inc., The Prudential Investment
Portfolios, Inc., Strategic Partners Series, Target Funds and The Target
Portfolio Trust.
PIMS is also distributor of the following unit investment trusts: Separate
Accounts: Prudential's Gibraltar Fund, Inc., The Prudential Variable Contract
Account-2, The Prudential Variable Contract Account-10, The Prudential Variable
Contract Account-11, The Prudential Variable Contract Account-24, The Prudential
Variable Contract G1-2, The Prudential Discovery Select Group Variable Contract
Account, The Pruco Life Flexible Premium Variable Annuity Account, The Pruco
Life of New Jersey Flexible Premium Variable Annuity Account, The Prudential
Individual Variable Contract Account and The Prudential Qualified Individual
Variable Contract Account.
C-5
<PAGE> 141
(b) Information concerning the directors and officers of PIMS is set forth
below:
<TABLE>
<CAPTION>
POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME(1) WITH UNDERWRITER WITH REGISTRANT
------- --------------------- ---------------------
<S> <C> <C>
Margaret Deverell......................... Vice President and Chief Financial Officer None
Robert F. Gunia........................... President Vice President and
Director
Kevin Frawley............................. Senior Vice President and Compliance None
213 Washington Street Officer
Newark, NJ 07102
William V. Healey......................... Senior Vice President, Secretary and Chief None
Legal Officer
Brian W. Henderson........................ Senior Vice President and Officer None
John R. Strangfeld, Jr.................... Advisory Board Member President and Director
</TABLE>
- ---------------
(1) The address of each person named is Prudential Plaza, 751 Broad Street,
Newark, New Jersey 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, 194 Wood Avenue South, Iselin, New Jersey 08830.
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 -- Manager" and "How the Fund is Managed -- 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-6
<PAGE> 142
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 25th day of February, 2000.
PRUDENTIAL HIGH YIELD FUND, INC.
By /s/ JOHN R. STRANGFELD, JR.
------------------------------------------
John R. Strangfeld, Jr., 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
--------- ----- ----
<C> <S> <C>
/s/ EUGENE C. DORSEY Director February 25, 2000
- ---------------------------------------------------
Eugene C. Dorsey
/s/ DELAYNE DEDRICK GOLD Director February 25, 2000
- ---------------------------------------------------
Delayne Dedrick Gold
/s/ ROBERT F. GUNIA Vice President and Director February 25, 2000
- ---------------------------------------------------
Robert F. Gunia
/s/ THOMAS T. MOONEY Director February 25, 2000
- ---------------------------------------------------
Thomas T. Mooney
/s/ STEPHEN P. MUNN Director February 25, 2000
- ---------------------------------------------------
Stephen P. Munn
/s/ DAVID R. ODENATH, JR. Director February 25, 2000
- ---------------------------------------------------
David R. Odenath, Jr.
/s/ RICHARD A. REDEKER Director February 25, 2000
- ---------------------------------------------------
Richard A. Redeker
/s/ JOHN R. STRANGFELD, JR. President and Director February 25, 2000
- ---------------------------------------------------
John R. Strangfeld, Jr.
/s/ NANCY HAYS TEETERS Director February 25, 2000
- ---------------------------------------------------
Nancy Hays Teeters
/s/ LOUIS A. WEIL, III Director February 25, 2000
- ---------------------------------------------------
Louis A. Weil, III
/s/ GRACE C. TORRES Treasurer and Principal Financial and February 25, 2000
- --------------------------------------------------- Accounting Officer
Grace C. Torres
</TABLE>
C-7
<PAGE> 143
EXHIBIT INDEX
<TABLE>
<C> <S>
(b)(2) Amendment to By-Laws of Registrant.
(d)(3) Amendment to Subadvisory Agreement dated as of November 18,
1999, between Prudential Investments Fund Management LLC and
The Prudential Investment Corporation.
(g)(2) Amendment to Custodian Contract/Agreement dated as of
February 22, 1999 by and between the Registrant and State
Street Bank and Trust Company.
(h)(2) Amendment to Transfer Agency and Service Agreement dated as
of August 24, 1999 by and between the Registrant and
Prudential Mutual Fund Services LLC (successor to Prudential
Mutual Fund Services, Inc.)
(i)(2) Consent of Counsel.
(j) Consent of Independent Accountants.
(p)(1) Code of Ethics of Registrant.
(2) Code of Ethics of Prudential Investment Management LLC,
Prudential Investments Fund Management LLC and Prudential
Corporation.
</TABLE>
<PAGE> 1
Exhibit 23(b)(2)
The first paragraph of Article 1, Section 7 of the By-Laws of the
Corporation is hereby replaced as follows:
Section 7. VOTING AND INSPECTORS. At all meetings, stockholders of record
entitled to vote thereat shall have one vote for each share of common stock
outstanding in his/her name on the books of the Corporation (and such
stockholders of record holding fractional shares, if any, shall have
proportionate voting rights) on the date for the determination of stockholders
entitled to vote at such meeting, either in person or by proxy. A stockholder
may sign a writing authorizing another person to act as proxy. Signing may be
accomplished by the stockholder or the stockholder's authorized agent signing
the writing or causing the stockholder's signature to be affixed to the writing
by any reasonable means, including facsimile signature. A stockholder may
authorize another person to act as proxy by transmitting, or authorizing the
transmission of, a telegram, cablegram, datagram, or other means of electronic
transmission to the person authorized to act as proxy or to a proxy solicitation
firm, proxy support service organization, or other person authorized by the
person who will act as proxy to receive the transmission.
<PAGE> 1
Exhibit 23(d)(3)
AMENDMENT TO SUBADVISORY AGREEMENT
PRUDENTIAL HIGH YIELD FUND, INC.
AMENDMENT made as of this 18 th day of November, 1999, between
Prudential Investments Fund Management LLC ("PIFM"), and The Prudential
Investment Corporation ("PIC").
WHEREAS, PIFM, either itself or as successor to Prudential Investments
Fund Management, Inc., and PIC have entered into a Subadvisory Agreement (the
"Agreement") dated May 2nd , 1988, with respect to the management of Prudential
High Yield Fund, Inc. (the "Fund"); and
WHEREAS, the Agreement provides that PIC shall provide investment
advisory services to the Fund, subject to oversight by PIFM; and
WHEREAS, PIFM and PIC desire to amend the Agreement with respect to the
compensation to be paid by PIFM to PIC for services provided by PIC pursuant to
the Agreement.
NOW, THEREFORE, for and in consideration of the continuation of the
Agreement for its current term, and other good and valuable consideration, PIFM
and PIC hereby amend the Agreement to provide for the compensation to be paid by
PIFM to PIC as described on the attached schedule, effective as of January 1,
2000, for the same term, including renewals, as the Agreement and upon the same
terms and conditions as described in the Agreement.
IN WITNESS WHEREOF, PIMS and PIC have signed this Amendment as of the
day and year first above written.
<TABLE>
<S> <C>
PRUDENTIAL INVESTMENTS THE PRUDENTIAL INVESTMENT
FUND MANAGEMENT LLC CORPORATION
By: /s/Robert F. Gunia By: /s/John R. Strangfeld, Jr.
Name: Robert F. Gunia Name: John R. Strangfeld, Jr.
Title: Executive Vice President Title: Chairman of the Board,
and Chief Administrative President, Chief Executive
Officer Officer and Director
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
Fund Name Contractual Compensation
Mgmt Fee to PGAM
<S> <C> <C>
EQUITY FUNDS
Prudential 20/20 Focus Fund* 0.75% 0.375%
Prudential Balanced Fund 0.65% 0.325%
Prudential Developing Markets Fund -Developing Markets Equity Fund 1.25% 0.625%
Prudential Developing Markets Fund -Latin America Equity Fund 1.25% 0.625%
Prudential Diversified Conservative Growth Fund* 0.75% 0.375%
Prudential Diversified Moderate Growth Fund* 0.75% 0.375%
Prudential Diversified High Growth Fund* 0.75% 0.375%
Prudential Distressed Securities Fund, Inc. 0.75% 0.375%
Prudential Emerging Growth Fund, Inc. 0.60% 0.300%
Prudential Equity Fund, Inc. .50% to $500 mil 0.250%
.475% next $500 mil 0.226%
.45% over 1 bil 0.203%
Prudential Equity Income Fund .60% to $500 mil 0.300%
.50% next $500 mil 0.238%
.475% next $500 mil 0.214%
.45% over 1.5 bil 0.191%
Prudential Bond Market Index Fund 0.25% 0.125%
Prudential Europe Index Fund 0.40% 0.200%
Prudential Pacific Index Fund 0.40% 0.200%
Prudential Small Cap Index Fund 0.30% 0.195%
Prudential Stock Index Fund 0.30% 0.150%
Prudential Active Balanced Fund 0.65% 0.325%
Prudential Mid-Cap Value Fund 0.70% 0.350%
Prudential Natural Resources Fund 0.75% 0.375%
Prudential Real Estate Securities Fund 0.75% .45% to $250mil
.40% next $250mil
.35% next $250mil
.30% over $750mil
Prudential Financial Services Fund 0.75% 0.375%
Prudential Health Sciences Fund* 0.75% 0.375%
Prudential Technology Fund 0.75% 0.375%
Prudential Utility Fund .60% to $250 mil 0.300%
.50% next $500 mil 0.238%
.45% next $750 mil 0.203%
.40% next $500 mil 0.170%
.35% next $2 bil 0.140%
.325% next $2 bil 0.122%
.30% over $6 bil 0.105%
Prudential Small-Cap Quantum Fund, Inc. 0.60% 0.390%
Prudential Small Company Value Fund, Inc. 0.70% 0.455%
Prudential Tax-Managed Equity Fund 0.65% 0.325%
Prudential World Fund, Inc., Global Series 0.75% 0.375%
Prudential Europe Growth Fund 0.75% 0.375%
Prudential Global Genesis Fund 1.00% 0.500%
Prudential Pacific Growth Fund 0.75% 0.375%
TAXABLE FIXED INCOME FUNDS
Prudential Diversified Bond Fund, Inc. 0.50% 0.250%
Prudential Global Limited Maturity Fund, Inc. 0.55% 0.275%
Prudential Government Income Fund, Inc. .50% to $3 bil 0.250%
.35% over $3 bil 0.166%
Prudential Government Securities Trust Short Intermediate Term Series 0.40% 0.200%
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
The High Yield Income Fund, Inc. 0.70% 0.350%
Prudential High Yield Fund, Inc. .50% to $250 mil 0.250%
.475% next $500 mil 0.226%
.45% next $750 mil 0.203%
.425% next $500 mil 0.181%
.40% next $500 mil 0.160%
.375% next $500 mil 0.141%
.35% over $3 bil 0.123%
Prudential High Yield Total Return Fund, Inc. 0.65% 0.325%
Prudential Intermediate Global Income Fund, Inc. 0.75% 0.375%
Prudential International Bond Fund, Inc, .75% to 1 bil 0.375%
.70% over 1 bil 0.333%
Prudential Structured Maturity Fund, Inc. 0.40% 0.200%
Prudential Global Total Return Fund, Inc. .75% to $500 mil 0.375%
.70% next $500 mil 0.333%
.65% over $1 bil 0.293%
TAX-EXEMPT FIXED INCOME FUNDS
Prudential California Municipal Fund - California Series 0.50% 0.250%
Prudential California Municipal Fund - California Income 0.50% 0.250%
Prudential National Municipals Fund, Inc. .50% to $250 mil 0.250%
.475% next $250 mil 0.226%
.45% next $500 mil 0.203%
.425% next $250 mil 0.181%
.40% next $250 mil 0.160%
.375% over $1.5 bil 0.141%
Prudential Municipal Bond Fund - High Income Series .50% to 1 bil 0.250%
.45% over 1 bil 0.214%
Prudential Municipal Bond Fund - Insured Series .50% to 1 bil 0.250%
.45% over 1 bil 0.214%
Prudential Municipal Series Fund - Florida Series 0.50% 0.250%
Prudential Municipal Series Fund - Massachusetts Series 0.50% 0.250%
Prudential Municipal Series Fund - New Jersey Series 0.50% 0.250%
Prudential Municipal Series Fund - New York Series 0.50% 0.250%
Prudential Municipal Series Fund - North Carolina Series 0.50% 0.250%
Prudential Municipal Series Fund - Ohio Series 0.50% 0.250%
Prudential Municipal Series Fund - Pennsylvania Series 0.50% 0.250%
MONEY MARKET FUNDS
Command Money Fund .50% to $500 mil 0.250%
.425% next $500 mil 0.191%
.375% next $500 mil 0.150%
.35% over $1.5 bil 0.123%
Command Government Money Market Fund .40%to $1 bil 0.200%
.375% over $1 bil 0.169%
Command Tax-Free Fund .50% to $500 mil 0.250%
.425% next $500 mil 0.191%
.375% over $1 bil 0.150%
Prudential Government Securities Trust - Money Market Series .40% to $1 bil 0.200%
.375% next $500 mil 0.169%
.35% over $1.5 bil 0.140%
Prudential Government Securities Trust - U.S. Treasury Money Market Series 0.40% 0.200%
Prudential Institutional Liquidity Portfolio, Inc. 0.20% 0.100%
Prudential Tax-Free Money Market Fund, Inc. .50% to $750 mil 0.250%
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C>
.425% next $750 mil 0.191%
.375% over $1.5 bil 0.150%
Prudential California Municipal Fund - California Money Market Series 0.50% 0.250%
Prudential MoneyMart Assets, Inc. Fund .50% to $50 mil 0.250%
.30% over $50 mil 0.135%
Prudential Municipal Series Fund - Connecticut Money Market Series 0.50% 0.250%
Prudential Municipal Series Fund - Massachusetts Money Market Series 0.50% 0.250%
Prudential Municipal Series Fund - New Jersey Money Market Series 0.50% 0.250%
Prudential Municipal Series Fund - New York Money Market Series 0.50% 0.250%
Prudential Special Money Fund - Money Market Series 0.50% 0.250%
Cash Accummulated Trust Fund: Liquid Assets 0.07% 0.035%
Cash Accummulated Trust Fund: National Money Market .39% to $1 bil 0.195%
.375% next $500 mil 0.169%
.35% next $500 mil 0.140%
.325% over $2 bil 0.114%
</TABLE>
*Compensation to PGAM based on Prudential advised assets only.
<PAGE> 1
Exhibit 23(g)(2)
AMENDMENT TO CUSTODIAN CONTRACT/AGREEMENT
This Amendment to the respective Custodian Contract/Agreement is made
as of February 22, 1999 by and between each of the funds listed on Schedule D
(including any series thereof, each, a "Fund") and State Street Bank and Trust
Company (the "Custodian"). Capitalized terms used in this Amendment without
definition shall have the respective meanings given to such terms in the
Custodian Contract/Agreement referred to below.
WHEREAS, each Fund and the Custodian have entered into a Custodian
Contract/Agreement dated as of the dates set forth on Schedule D (each contract,
as amended, a "Contract"); and
WHEREAS, each Fund and the Custodian desire to amend certain provisions
of the Contract to reflect revisions to Rule 17f-5 ("Rule 17f-5") promulgated
under the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, each Fund and the Custodian desire to amend and restate
certain other provisions of the Contract relating to the custody of assets of
each of the Funds held outside of the United States.
NOW THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements hereinafter contained, the parties hereby agree to
amend the Contract, to add the following new provisions which supersede the
provisions in the existing contracts relating to the custody of assets of the
Funds outside the United States.
3. THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
3.1. DEFINITIONS.
Capitalized terms in this Article 3 shall have the following meanings:
"Country Risk" means all factors reasonably related to the systemic risk of
holding Foreign Assets in a particular country including, but not limited to,
such country's political environment; economic and financial infrastructure;
systemic custody and securities settlement practices; and laws and regulations
applicable to the safekeeping and recovery of Foreign Assets held in custody in
that country.
"Eligible Foreign Custodian" has the meaning set forth in section (a)(1) of Rule
17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank (as
defined in Rule 17f-5), a bank holding company meeting the requirements of an
Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other appropriate
action of the U.S. Securities and Exchange Commission (the "SEC")), or a foreign
branch of a Bank (as defined in Section 2(a)(5) of the 1940 Act) meeting the
requirements of a custodian under Section 17(f) of the 1940 Act, except that the
term does not include Mandatory Securities Depositories.
1
<PAGE> 2
"Foreign Assets" means any of the Funds' investments (including foreign
currencies) for which the primary market is outside the United States and such
cash and cash equivalents as are reasonably necessary to effect the Funds'
transactions in such investments.
"Foreign Custody Manager" has the meaning set forth in section (a)(2) of Rule
17f-5.
"Mandatory Securities Depository" means a foreign securities depository or
clearing agency that, either as a legal or practical matter, must be used if the
Fund determines to place Foreign Assets in a country outside the United States
(i) because required by law or regulation; (ii) because securities cannot be
withdrawn from such foreign securities depository or clearing agency; or (iii)
because maintaining or effecting trades in securities outside the foreign
securities depository or clearing agency is not consistent with systemic
custodial or market practices.
3.2. DELEGATION TO THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
Each Fund, by resolution adopted by its Board of Trustees/Directors (the
"Board"), hereby delegates to the Custodian subject to Section (b) of Rule
17f-5, the responsibilities set forth in this Article 3 with respect to Foreign
Assets of the Fund held outside the United States, and the Custodian hereby
accepts such delegation, as Foreign Custody Manager with respect to the Funds.
3.3. COUNTRIES COVERED.
The Foreign Custody Manager shall be responsible for performing the delegated
responsibilities defined below only with respect to the countries and custody
arrangements for each such country listed on Schedule A to this Contract, which
list of countries may be amended from time to time by the Fund with the
agreement of the Foreign Custody Manager. The Foreign Custody Manager shall list
on Schedule A the Eligible Foreign Custodians selected by the Foreign Custody
Manager to maintain the assets of the Funds which list of Eligible Foreign
Custodians may be amended from time to time in the sole discretion of the
Foreign Custody Manager. Mandatory Securities Depositories are listed on
Schedule B to this Contract, which Schedule B may be amended from time to time
by the Foreign Custody Manager upon reasonable notice to the Fund. The Foreign
Custody Manager will provide amended versions of Schedules A and B in accordance
with Section 3.7 of this Article 3.
Upon the receipt by the Foreign Custody Manager of Proper Instructions to open
an account or to place or maintain Foreign Assets in a country listed on
Schedule A, and the fulfillment by a Fund of the applicable account opening
requirements for such country, the Foreign Custody Manager shall be deemed to
have been delegated by that Fund's Board responsibility as Foreign Custody
Manager with respect to that country and to have accepted such delegation.
Execution of this Amendment by the Fund shall be deemed to be a Proper
Instruction to open an account, or to place or maintain Foreign Assets, in each
country listed on Schedule A in which the Custodian has previously placed or
currently maintains Foreign Assets pursuant to the terms of the
2
<PAGE> 3
Contract. Following the receipt of Proper Instructions directing the Foreign
Custody Manager to close the account of a Fund with the Eligible Foreign
Custodian selected by the Foreign Custody Manager in a designated country, the
delegation by that Fund's Board to the Custodian as Foreign Custody Manager for
that country shall be deemed to have been withdrawn and the Custodian shall
immediately cease to be the Foreign Custody Manager of the Fund with respect to
that country.
The Foreign Custody Manager may withdraw its acceptance of delegated
responsibilities with respect to a designated country upon written notice to the
Fund. Thirty days (or such longer period as to which the parties agree in
writing) after receipt of any such notice by the Fund, the Custodian shall have
no further responsibility as Foreign Custody Manager to the Fund with respect to
the country as to which the Custodian's acceptance of delegation is withdrawn.
3.4. SCOPE OF DELEGATED RESPONSIBILITIES.
3.4.1. SELECTION OF ELIGIBLE FOREIGN CUSTODIANS.
Subject to the provisions of this Article 3, the Fund's Foreign Custody Manager
may place and maintain the Foreign Assets in the care of the Eligible Foreign
Custodian selected by the Foreign Custody Manager in each country listed on
Schedule A, as amended from time to time.
In performing its delegated responsibilities as Foreign Custody Manager to place
or maintain Foreign Assets with an Eligible Foreign Custodian, the Foreign
Custody Manager shall determine that the Foreign Assets will be subject to
reasonable care, based on the standards applicable to custodians in the country
in which the Foreign Assets will be held by that Eligible Foreign Custodian,
after considering all factors relevant to the safekeeping of such assets,
including, without limitation the factors specified in Rule 17f-5(c)(1).
3.4.2. CONTRACTS WITH ELIGIBLE FOREIGN CUSTODIANS.
The Foreign Custody Manager shall determine that the contract (or the rules or
established practices or procedures in the case of an Eligible Foreign Custodian
that is a foreign securities depository or clearing agency) governing the
foreign custody arrangements with each Eligible Foreign Custodian selected by
the Foreign Custody Manager will satisfy the requirements of Rule 17f-5(c)(2).
3.4.3. MONITORING.
In each case in which the Foreign Custody Manager maintains Foreign Assets with
an Eligible Foreign Custodian selected by the Foreign Custody Manager, the
Foreign Custody Manager shall establish a system to monitor (i) the
appropriateness of maintaining the Foreign Assets with such Eligible Foreign
Custodian and (ii) the contract governing the custody arrangements established
by the Foreign Custody Manager with the Eligible Foreign Custodian (or the rules
or established practices and procedures in the case of an Eligible Foreign
Custodian selected by the Foreign
3
<PAGE> 4
Custody Manager which is a foreign securities depository or clearing agency that
is not a Mandatory Securities Depository). The Foreign Custody Manager shall
provide the Board at least annually with information as to the factors used in
such monitoring system. If the Foreign Custody Manager determines that the
custody arrangements with an Eligible Foreign Custodian it has selected are no
longer appropriate, the Foreign Custody Manager shall notify the Board in
accordance with Section 3.7 hereunder and withdraw the Foreign Assets from such
Eligible Foreign Custodian as soon as reasonably practicable.
3.5. GUIDELINES FOR THE EXERCISE OF DELEGATED AUTHORITY.
For purposes of this Article 3, the Foreign Custody Manager shall have no
responsibility for Country Risk as is incurred by placing and maintaining the
Foreign Assets in each country for which the Custodian is serving as Foreign
Custody Manager of the Portfolios. The Fund and the Custodian each expressly
acknowledge that the Foreign Custody Manager shall not be delegated any
responsibilities under this Article 3 with respect to Mandatory Securities
Depositories.
3.6. STANDARD OF CARE AS FOREIGN CUSTODY MANAGER OF A PORTFOLIO.
In performing the responsibilities delegated to it, the Foreign Custody Manager
agrees to exercise reasonable care, prudence and diligence such as a person
having responsibility for the safekeeping of assets of management investment
companies registered under the 1940 Act would exercise.
3.7. REPORTING REQUIREMENTS.
The Foreign Custody Manager shall report the placement of Foreign Assets with an
Eligible Foreign Custodian, the withdrawal of the Foreign Assets from an
Eligible Foreign Custodian and the placement of such Foreign Assets with another
Eligible Foreign Custodian by providing to the Board amended Schedules A or B at
the end of the calendar quarter in which an amendment to either Schedule has
occurred. The Foreign Custody Manager shall make written reports notifying the
Board of any other material change in the foreign custody arrangements of the
Funds described in this Article 3 promptly after the occurrence of the material
change.
3.8. REPRESENTATIONS WITH RESPECT TO RULE 17f-5.
The Foreign Custody Manager represents to the Fund that it is a U.S. Bank as
defined in section (a)(7) of Rule 17f-5.
3.9. EFFECTIVE DATE AND TERMINATION OF THE CUSTODIAN AS FOREIGN CUSTODY
MANAGER.
The Board's delegation to the Custodian as Foreign Custody Manager of the Funds
shall be effective as of the date hereof and shall remain in effect until
terminated at any time, without penalty, by written notice from the terminating
party to the non-terminating party. Termination will become effective sixty (60)
days after receipt by the non-terminating party of such notice.
4
<PAGE> 5
The provisions of Section 3.3 hereof shall govern the delegation to and
termination of the Custodian as Foreign Custody Manager of the Funds with
respect to designated countries.
3.10. MOST FAVORED CLIENT.
If at any time prior to termination of this Amendment, the Custodian, as a
matter of standard business practice, accepts delegation as Foreign Custody
Manager for its U.S. mutual fund clients on terms of materially greater benefit
to the Funds than set forth in this Amendment, the Custodian hereby agrees to
negotiate with the Funds in good faith with respect thereto.
4. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUNDS HELD
OUTSIDE THE UNITED STATES.
4.1 DEFINITIONS.
Capitalized terms in this Article 4 shall have the following meanings:
"Foreign Securities System" means either a clearing agency or a securities
depository listed on Schedule A hereto or a Mandatory Securities Depository
listed on Schedule B hereto.
"Foreign Sub-Custodian" means a foreign banking institution (including a foreign
branch of the Custodian or another Bank (as defined in Section 2(a)(5) of the
1940 Act)) serving as an Eligible Foreign Custodian.
4.2. HOLDING SECURITIES.
The Custodian shall identify on its books as belonging to the Funds the foreign
securities held by each Foreign Sub-Custodian or Foreign Securities System. The
Custodian may hold foreign securities for all of its customers, including the
Funds, with any Foreign Sub-Custodian in an account that is identified as
belonging to the Custodian for the benefit of its customers, provided however,
that (i) the records of the Custodian with respect to foreign securities of the
Funds which are maintained in such account shall identify those securities as
belonging to the Funds and (ii), to the extent permitted and customary in the
market in which the account is maintained, the Custodian shall require that
securities so held by the Foreign Sub-Custodian be held separately from any
assets of such Foreign Sub-Custodian or of other customers of such Foreign
Sub-Custodian.
4.3. FOREIGN SECURITIES SYSTEMS.
Foreign securities shall be maintained in a Foreign Securities System in a
designated country only through arrangements implemented by the Foreign
Sub-Custodian in such country pursuant to the terms of this Contract.
4.4. TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT.
5
<PAGE> 6
4.4.1. DELIVERY OF FOREIGN ASSETS.
The Custodian or a Foreign Sub-Custodian shall release and deliver foreign
securities of the Funds held by such Foreign Sub-Custodian, or in a Foreign
Securities System account, only upon receipt of Proper Instructions, which may
be continuing instructions when deemed appropriate by the parties, and only in
the following cases:
(i) upon the sale of such foreign securities for the Fund in
accordance with customary market practice in the country where
such foreign securities are held or traded, including, without
limitation: (A) delivery against expectation of receiving
later payment; or (B) in the case of a sale effected through a
Foreign Securities System, in accordance with the rules
governing the operation of the Foreign Securities System;
(ii) in connection with any repurchase agreement related to foreign
securities;
(iii) to the depository agent in connection with tender or other
similar offers for foreign securities of the Portfolios;
(iv) to the issuer thereof or its agent when such foreign
securities are called, redeemed, retired or otherwise become
payable;
(v) to the issuer thereof, or its agent, for transfer into the
name of the Custodian (or the name of the respective Foreign
Sub-Custodian or of any nominee of the Custodian or such
Foreign Sub-Custodian) or for exchange for a different number
of bonds, certificates or other evidence representing the same
aggregate face amount or number of units;
(vi) to brokers, clearing banks or other clearing agents for
examination or trade execution in accordance with reasonable
market custom; provided that in any such case the Foreign
Sub-Custodian shall have no responsibility or liability for
any loss arising from the delivery of such securities prior to
receiving payment for such securities except as may arise from
the Foreign Sub-Custodian's own negligence or willful
misconduct;
(vii) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
(viii) in the case of warrants, rights or similar foreign securities,
the surrender thereof in the exercise of such warrants, rights
or similar securities or the surrender of interim receipts or
temporary securities for definitive securities;
6
<PAGE> 7
(ix) for delivery as security in connection with any borrowing by
the Funds requiring a pledge of assets by the Funds;
(x) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(xi) in connection with the lending of foreign securities; and
(xii) for any other proper purpose, but only upon receipt of Proper
Instructions specifying the foreign securities to be
delivered, setting forth the purpose for which such delivery
is to be made, declaring such purpose to be a proper
trust\corporate purpose, and naming the person or persons to
whom delivery of such securities shall be made.
4.4.2. PAYMENT OF FUND MONIES.
Upon receipt of Proper Instructions, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall pay out, or direct the
respective Foreign Sub-Custodian or the respective Foreign Securities System to
pay out, monies of a Fund in the following cases only:
(i) upon the purchase of foreign securities for the Fund, unless
otherwise directed by Proper Instructions, in accordance with
reasonable market settlement practice in the country where
such foreign securities are held or traded, including, without
limitation, (A) delivering money to the seller thereof or to a
dealer therefor (or an agent for such seller or dealer)
against expectation of receiving later delivery of such
foreign securities; or (B) in the case of a purchase effected
through a Foreign Securities System, in accordance with the
rules governing the operation of such Foreign Securities
System;
(ii) in connection with the conversion, exchange or surrender of
foreign securities of the Fund;
(iii) for the payment of any expense or liability of the Fund,
including but not limited to the following payments: interest,
taxes, investment advisory fees, transfer agency fees, fees
under this Contract, legal fees, accounting fees, and other
operating expenses;
(iv) for the purchase or sale of foreign exchange or foreign
exchange contracts for the Fund, including transactions
executed with or through the Custodian or its Foreign
Sub-Custodians;
(v) in connection with trading in options and futures contracts,
including delivery as
7
<PAGE> 8
original margin and variation margin;
(vi) for payment of part or all of the dividends received in
respect of securities sold short;
(vii) in connection with the borrowing or lending of foreign
securities; and
(viii) for any other proper purpose, but only upon receipt of Proper
Instructions specifying the amount of such payment, setting
forth the purpose for which such payment is to be made,
declaring such purpose to be a proper trust\corporate purpose,
and naming the person or persons to whom such payment is to be
made.
4.4.3. MARKET CONDITIONS; MARKET INFORMATION.
Notwithstanding any provision of this Contract to the contrary, settlement and
payment for Foreign Assets received for the account of the Funds and delivery of
Foreign Assets maintained for the account of the Funds may be effected in
accordance with the customary established securities trading or processing
practices and procedures in the country or market in which the transaction
occurs generally accepted by Institutional Clients, including, without
limitation, delivering Foreign Assets to the purchaser thereof or to a dealer
therefor (or an agent for such purchaser or dealer) with the expectation of
receiving later payment for such Foreign Assets from such purchaser or dealer.
For purposes of this Agreement, the term "Institutional Clients" means U.S.
registered investment companies or major U.S. commercial banks, insurance
companies, pension funds or substantially similar institutions which, as a part
of their ordinary business operations, purchase or sell securities and make use
of global custody services.
The Custodian shall provide to the Board information with respect to material
changes in the custody and settlement practices in countries in which the
Custodian employs a Foreign Sub-Custodian. The Custodian shall provide, without
limitation, information relating to Foreign Securities Systems and other
information described in Schedule C. The Custodian may revise Schedule C from
time to time, provided that no such revision shall result in the Board being
provided with substantively less information than had previously been provided
hereunder and provided further that the Custodian shall in any event provide to
the Board at least annually the following information and opinions with respect
to the Board approved countries listed on Schedule A:
(i) legal opinions relating to whether local law restricts with
respect to U.S. registered mutual funds (a) access of a fund's
independent public accountants to books and records of a
Foreign Sub-Custodian or Foreign Securities System, (b) a
fund's ability to recover in the event of bankruptcy or
insolvency of a Foreign Sub-Custodian or Foreign Securities
System, (c) a fund's ability to recover in the event of a loss
by a Foreign Sub-Custodian or Foreign Securities System, and
(d)
8
<PAGE> 9
the ability of a foreign investor to convert cash and cash
equivalents to U.S. dollars;
(ii) summary of information regarding Foreign Securities Systems;
and
(iii) country profile information containing market practice for (a)
delivery versus payment, (b) settlement method, (c) currency
restrictions, (d) buy-in practices, (e) foreign ownership
limits, and (f) unique market arrangements.
4.5. REGISTRATION OF FOREIGN SECURITIES.
The foreign securities maintained in the custody of a Foreign Sub-Custodian
(other than bearer securities) shall be registered in the name of the applicable
series or in the name of the Custodian or in the name of any Foreign
Sub-Custodian or in the name of any nominee of the foregoing, and the Fund
agrees to hold any such nominee harmless from any liability as a holder of
record of such foreign securities, except to the extent that the Fund incurs
loss or damage due to failure of such nominee to meet its standard of care set
forth in the Contract. The Custodian or a Foreign Sub-Custodian shall not be
obligated to accept securities on behalf of a Fund under the terms of this
Contract unless the form of such securities and the manner in which they are
delivered are in accordance with reasonable market practice.
4.6. BANK ACCOUNTS.
The Custodian shall identify on its books as belonging to the Fund cash
(including cash denominated in foreign currencies) deposited with the Custodian.
Where the Custodian is unable to maintain, or market practice does not
facilitate the maintenance of, cash on the books of the Custodian, a bank
account or bank accounts opened and maintained outside the United States on
behalf of a Fund with a Foreign Sub-Custodian shall be subject only to draft or
order by the Custodian or such Foreign Sub-Custodian, acting pursuant to the
terms of this Contract to hold cash received by or from or for the account of
the Portfolio.
4.7. COLLECTION OF INCOME.
The Custodian shall use reasonable commercial efforts to collect all income and
other payments with respect to the Foreign Assets held hereunder to which the
Funds shall be entitled and shall credit such income, as collected, to the
applicable Fund. In the event that extraordinary measures are required to
collect such income, the Fund and the Custodian shall consult as to such
measures and as to the compensation and expenses of the Custodian relating to
such measures.
4.8. SHAREHOLDER RIGHTS.
With respect to the foreign securities held pursuant to this Article 4, the
Custodian will use
9
<PAGE> 10
reasonable commercial efforts to facilitate the exercise of voting and other
shareholder rights, subject always to the laws, regulations and practical
constraints that may exist in the country where such securities are issued. The
Fund acknowledges that local conditions, including lack of regulation, onerous
procedural obligations, lack of notice and other factors may have the effect of
severely limiting the ability of the Fund to exercise shareholder rights.
4.9. COMMUNICATIONS RELATING TO FOREIGN SECURITIES.
The Custodian shall transmit promptly to the Fund written information
(including, without limitation, pendency of calls and maturities of foreign
securities and expirations of rights in connection therewith) received by the
Custodian via the Foreign Sub-Custodians from issuers of the foreign securities
being held for the account of the Funds. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund written information so
received by the Custodian from issuers of the foreign securities whose tender or
exchange is sought or from the party (or its agents) making the tender or
exchange offer. Subject to the standard of care to which the Custodian is held
under this Agreement, the Custodian shall not be liable for any untimely
exercise of any tender, exchange or other right or power in connection with
foreign securities or other property of the Funds at any time held by it unless
(i) the Custodian or the respective Foreign Sub-Custodian is in actual
possession of such foreign securities or property and (ii) the Custodian
receives Proper Instructions with regard to the exercise of any such right or
power, and both (i) and (ii) occur at least three business days prior to the
date on which the Custodian is to take action to exercise such right or power.
4.10. LIABILITY OF FOREIGN SUB-CUSTODIANS AND FOREIGN SECURITIES SYSTEMS.
Each agreement pursuant to which the Custodian employs a Foreign Sub-Custodian
shall, to the extent possible, require the Foreign Sub-Custodian to exercise
reasonable care in the performance of its duties and, to the extent possible, to
indemnify, and hold harmless, the Custodian from and against any loss, damage,
cost, expense, liability or claim arising out of or in connection with the
Foreign Sub-Custodian's performance of such obligations. At each Fund's
election, a Fund shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a Foreign Sub-Custodian as a
consequence of any such loss, damage, cost, expense, liability or claim if and
to the extent that a Fund and any applicable series have not been made whole for
any such loss, damage, cost, expense, liability or claim.
4.11. TAX LAW.
Except to the extent that imposition of any tax liability arises from the
Custodian's failure to perform in accordance with the terms of this Section 4.11
or from the failure of any Foreign Sub-Custodian to perform in accordance with
the terms of the applicable subcustody agreement, the Custodian shall have no
responsibility or liability for any obligations now or hereafter imposed on a
Fund, a series thereof or the Custodian as custodian of the Fund by the tax law
of the United States or of any state or political subdivision thereof. It shall
be the responsibility of each Fund to notify the Custodian of the obligations
imposed on the Fund or the Custodian as custodian of
10
<PAGE> 11
the Fund by the tax law of countries other than those mentioned in the above
sentence, including responsibility for withholding and other taxes, assessments
or other governmental charges, certifications and governmental reporting. The
sole responsibility of the Custodian with regard to such tax law shall be to use
reasonable efforts to assist the Fund with respect to any claim for exemption or
refund under the tax law of countries for which the Fund has provided such
information.
4.12. LIABILITY OF CUSTODIAN.
Except as may arise from the Custodian's own negligence or willful misconduct or
the negligence or willful misconduct of a Sub-Custodian, the Custodian shall be
without liability to a Fund for any loss, liability, claim or expense resulting
from or caused by anything which is (A) part of Country Risk or (B) part of the
"prevailing country risk" of the Fund, as such term is used in SEC Release Nos.
IC-22658; IS-1080 (May 12, 1997) or as such term or other similar terms are now
or in the future interpreted by the SEC or by the staff of the Division of
Investment Management of the SEC.
The Custodian shall be liable for the acts or omissions of a Foreign
Sub-Custodian to the same extent as set forth with respect to sub-custodians
generally in the Contract and, regardless of whether assets are maintained in
the custody of a Foreign Sub-Custodian or a Foreign Securities System, the
Custodian shall not be liable for any loss, damage, cost, expense, liability or
claim resulting from nationalization, expropriation, currency restrictions, or
acts of war or terrorism, or any other loss where the Sub-Custodian has
otherwise acted with reasonable care.
III. Except as specifically superseded or modified herein, the terms and
provisions of the Contract shall continue to apply with full force and
effect. In the event of any conflict between the terms of the Contract
prior to this Amendment and this Amendment, the terms of this Amendment
shall prevail. If the Custodian is delegated the responsibilities of
Foreign Custody Manager pursuant to the terms of Article 3 hereof, in
the event of any conflict between the provisions of Articles 3 and 4
hereof, the provisions of Article 3 shall prevail.
11
<PAGE> 12
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be
executed in its name and behalf by its duly authorized representative as of the
date first above written.
<TABLE>
<CAPTION>
WITNESSED BY: STATE STREET BANK AND TRUST
COMPANY
<S> <C>
/s/Marc L. Parsons By: /s/Ronald E. Logue
Marc L. Parsons Ronald E. Logue
Associate Counsel Executive Vice President
Cash Accumulation Trust
Command Government Fund
Command Money Fund
Command Tax-Free Fund
Global Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Prudential 20/20 Focus Fund
Prudential Balanced Fund
Prudential California Municipal Fund
Prudential Developing Markets Fund
Prudential Distressed Securities Fund, Inc.
Prudential Diversified Bond Fund, Inc.
Prudential Diversified Funds
Prudential Index Series Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Europe Growth Fund
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 Institutional Liquidity Portfolio, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
The Prudential Investment Portfolios Fund, Inc.
Prudential Mid-Cap Value Fund
Prudential MoneyMart Assets, Inc.
</TABLE>
<PAGE> 13
<TABLE>
<S> <C>
Prudential Mortgage Income Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Municipal Bond Fund
Prudential Municipal Series Fund
Prudential National Municipals Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential 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 Tax-Managed Equity Fund
Prudential Utility Fund, Inc.
Prudential World Fund, Inc.
The Global Total Return Fund, Inc.
The Target Portfolio Trust
The Asia Pacific Fund, Inc.
The High Yield Income Fund, Inc.
</TABLE>
<TABLE>
<CAPTION>
WITNESSED BY:
<S> <C>
By: /s/S. Jane Rose By: /s/Grace Torres
Grace Torres
Treasurer
Prudential Government Income Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Municipal Bond Fund
Prudential California Municipal Fund
The High Yield Income Fund, Inc.
Prudential Municipal Series Fund
Prudential Government Securities Trust
Prudential Diversified Bond Fund, Inc.
Prudential High Yield Fund, Inc.
Prudential National Municipals Fund, Inc.
Prudential Structured Maturity Fund, Inc.
</TABLE>
<PAGE> 14
<TABLE>
<CAPTION>
WITNESSED BY:
<S> <C>
By: /s/Robert Rosselot By: /s/Deborah A. Docs
Deborah A. Docs
Secretary
</TABLE>
<PAGE> 1
Exhibit 23(h)(2)
AMENDMENT TO TRANSFER AGENCY AND SERVICE AGREEMENT
THIS AMENDMENT to the Transfer Agency and Service Agreement by and
between Prudential High Yield Fund, Inc. (the "Fund") and Prudential
Mutual Fund Services LLC (successor to Prudential Mutual Fund Services,
Inc.)("PMFS") is entered into as of August 24, 1999.
WHEREAS, the Fund and PMFS have entered into a Transfer Agency
and Service Agreement (the "Agreement") pursuant to which PMFS serves
as transfer agent, dividend disbursing agent and shareholder servicing
agent for the Fund; and
WHEREAS, the Fund and PMFS desire to amend the Agreement to
confirm the Fund's agreement to pay transfer agency account fees and
expenses for beneficial owners holding shares through omnibus accounts
maintained by The Prudential Insurance Company of America, its
subsidiaries or affiliates.
NOW, THEREFORE, for and in consideration of the continuation
of the Agreement, and other good and valuable consideration, Article 8
of the Agreement is amended by adding the following section to the
Agreement:
8.04 PMFS may enter into agreements with Prudential
or any subsidiary or affiliate of Prudential whereby PMFS will
maintain an omnibus account and the Fund will reimburse PMFS
for amounts paid by PMFS to Prudential, or such subsidiary or
affiliate, in an amount not in excess of the annual
maintenance fee for each beneficial shareholder account and
transactional fees and expenses with respect to such
beneficial shareholder account as if each beneficial
shareholder account were maintained by PMFS on the Fund's
records, subject to the fee schedule attached hereto as
Schedule A. Prudential, its subsidiary or affiliate, as the
case may be, shall maintain records relating to each
beneficial shareholder account that underlies the omnibus
account maintained by PMFS.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed in their names and on their behalf by and
through their duly authorized officers, as of the day and year first
above written.
<TABLE>
<CAPTION>
<S> <C>
PRUDENTIAL HIGH YIELD ATTEST:
FUND, INC.
By: /s/Robert R. Gunia By: /s/Deborah A. Docs
------------------------ -------------------------
Robert F. Gunia Deborah A. Docs
Vice President Secretary
</TABLE>
PRUDENTIAL MUTUAL FUND SERVICES LLC
<TABLE>
<CAPTION>
<S> <C>
ATTEST:
By: ________________________ By: ___________________
Brian W. Henderson William V. Healey
President Secretary
</TABLE>
<PAGE> 1
Exhibit 23(i)(2)
CONSENT OF SWIDLER BERLIN SHEREFF FRIEDMAN, LLP
We hereby consent to the reference to our firm included in the
prospectus and statement of additional information of Prudential High Yield
Fund, Inc. filed as part of Registration Statement No. 2-63394 and to the use
of our opinion of counsel, incorporated by reference to Exhibit 10 to
Post-Effective Amendment No. 30 to the Registration Statement on Form N-1A
(File No. 2-63394).
Swidler Berlin Shereff Friedman, LLP
/s/ Swidler Berlin Shereff Friedman, LLP
New York, New York
February 29, 2000
<PAGE> 1
Exhibit J
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the use in this Registration Statement on Form N-1A of our
report dated February 17, 2000, relating to the financial statements and
financial highlights of Prudential High Yield Fund, Inc., which appears in such
Registration Statement. We also consent to the references to us under the
headings "Investment Advisory and Other Services" and "Financial Highlights" in
such Registration Statement.
PricewaterhouseCoopers LLP
New York, New York
February 28, 2000
<PAGE> 1
Exhibit (p)(1)
PRUDENTIAL HIGH YIELD FUND, INC.
(THE FUND)
CODE OF ETHICS ADOPTED PURSUANT TO RULE 17j-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
(THE CODE)
1. PURPOSES
The Code has been adopted by the Board of Directors/Trustees or the Duly
Appointed Officer-In-Charge of the Fund, the Manager, the Adviser/Subadviser,
and the Principal Underwriter in accordance with Rule 17j-1(c) under the
Investment Company Act of 1940 (the Act) and in accordance with the following
general principles:
(1) THE DUTY AT ALL TIMES TO PLACE THE INTERESTS OF SHAREHOLDERS FIRST.
Investment company personnel should scrupulously avoid serving
their own personal interests ahead of shareholders' interests in any
decision relating to their personal investments.
(2) THE REQUIREMENT THAT ALL PERSONAL SECURITIES TRANSACTIONS BE
CONDUCTED CONSISTENT WITH THE CODE AND IN SUCH A MANNER AS TO AVOID ANY
ACTUAL OR POTENTIAL CONFLICT OF INTEREST OR ANY ABUSE OF AN INDIVIDUAL'S
POSITION OF TRUST AND RESPONSIBILITY.
Investment company personnel must not only seek to achieve
technical compliance with the Code but should strive to abide by its
spirit and the principles articulated herein.
(3) THE FUNDAMENTAL STANDARD THAT INVESTMENT COMPANY PERSONNEL SHOULD
NOT TAKE INAPPROPRIATE ADVANTAGE OF THEIR POSITIONS.
Investment company personnel must avoid any situation that might
compromise, or call into question, their exercise of fully independent
judgment in the interest of shareholders, including, but not limited to
the receipt of unusual investment opportunities, perquisites, or gifts
of more than a de minimis value from persons doing or seeking business
with the
<PAGE> 2
Fund.
Rule 17j-1 under the Act generally proscribes fraudulent or manipulative
practices with respect to a purchase or sale of a security held or to be
acquired (as such term is defined in Section 2.) by an investment company, if
effected by an associated person of such company.
The purpose of the Code is to establish procedures consistent with the Act
and Rule 17j-1 to give effect to the following general prohibitions as set forth
in Rule 17j-1(b) as follows:
(a) It shall be unlawful for any affiliated person of or Principal
Underwriter for a registered investment company, or any affiliated person
of an investment adviser of or principal underwriter for a registered
investment company in connection with the purchase or sale, directly or
indirectly, by such person of a security held or to be acquired, by such
registered investment company:
(1) To employ any device, scheme or artifice to defraud such
registered investment company;
(2) To make to such registered investment company any untrue
statement of a material fact or omit to state to such registered
investment company a material fact necessary in order to make the
statements made, in light of the circumstances under which they are
made, not misleading;
(3) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any such
registered investment company; or
(4) To engage in any manipulative practice with respect to such
registered investment company.
2
<PAGE> 3
2. DEFINITIONS
(a) "Access Person" means any director/trustee, officer, general
partner or Advisory Person (including any Investment Personnel, as
that term is defined herein) of the Fund, the Manager, the
Adviser/Subadviser, or the Principal Underwriter.
(b) "Adviser/Subadviser" means the Adviser or Subadviser of the
Fund or both as the context may require.
(c) "Advisory Person" means (i) any employee of the Fund, Manager
or Adviser/Subadviser (or of any company in a control relationship to
the Fund, Manager or Adviser/Subadviser) who, in connection with his
or her regular functions or duties, makes, participates in, or
obtains information regarding the purchase or sale of a security by
the Fund, or whose functions relate to the making of any
recommendations with respect to such purchases or sales; and (ii) any
natural person in a control relationship to the Fund who obtains
information concerning recommendations made to the Fund with regard
to the purchase or sale of a security.
(d) "Beneficial Ownership" will be interpreted in the same manner
as it would be under Securities Exchange Act Rule 16a-1(a)(2) in
determining which security holdings of a person are subject to the
reporting and short-swing profit provisions of Section 16 of the
Securities Exchange Act of 1934 and the rules and regulations
thereunder, except that the determination of direct or indirect
beneficial ownership will apply to all securities which an Access
Person has or acquires (Exhibit A).
(e) "Complex" means the group of registered investment companies
for which Prudential Investments Fund Management LLC serves as
Manager; provided, however, that with respect to Access Persons of
the Subadviser (including any unit or subdivision thereof), "Complex"
means the group of registered investment companies in the Complex
advised by the Subadviser or unit or subdivision thereof.
(f) "Compliance Officer" means the person designated by the
Manager, the Adviser/Subadviser, or Principal Underwriter (including
his or her designee) as having responsibility for compliance with the
requirements of the Code.
(g) "Control" will have the same meaning as that set forth in
3
<PAGE> 4
Section 2(a)(9) of the Act.
(h) "Disinterested Director/Trustee" means a Director/Trustee of
the Fund who is not an "interested person" of the Fund within the
meaning of Section 2(a)(19) of the Act.
An interested Director/Trustee who would not otherwise be
deemed to be an Access Person, shall be treated as a Disinterested
Director/Trustee for purposes of compliance with the provisions of
the Code.
(i) "Initial Public Offering" means an offering of securities
registered under the Securities Act of 1933, the issuer of which,
immediately before the registration, was not subject to the reporting
requirements of sections 13 or 15(d) of the Securities Exchange Act
of 1934.
(j) "Investment Personnel" means: (a) Portfolio Managers and other
Advisory Persons who provide investment information and/or advice to
the Portfolio Manager(s) and/or help execute the Portfolio
Manager's(s') investment decisions, including securities analysts and
traders; and (b) any natural person in a control relationship to the
Fund who obtains information concerning recommendations made to the
Fund with regard to the purchase or sale of a security.
(k) "Manager" means Prudential Investments Fund Management, LLC.
(l) "Portfolio Manager" means any Advisory Person who has the
direct responsibility and authority to make investment decisions for
the Fund.
(m) "Private placement" means a limited offering that is exempt
from registration under the Securities Act of 1933 pursuant to
section 4(2) or section 4(6) or pursuant to rule 504, rule 505 or
rule 506 under such Securities Act.
(n) "Security" will have the meaning set forth in Section 2(a)(36)
of the Act, except that it will not include shares of registered
open-end investment companies, direct obligations of the Government
of the United
4
<PAGE> 5
States, short-term debt securities which are "government securities"
within the meaning of Section 2(a)(16) of the Act, bankers'
acceptances, bank certificates of deposit, commercial paper and such
other money market instruments as are designated by the Compliance
Officer. For purposes of the Code, an "equivalent Security" is one
that has a substantial economic relationship to another Security.
This would include, among other things, (1) a Security that is
exchangeable for or convertible into another Security, (2) with
respect to an equity Security, a Security having the same issuer
(including a private issue by the same issuer) and any derivative,
option or warrant relating to that Security and (3) with respect to a
fixed-income Security, a Security having the same issuer, maturity,
coupon and rating.
(o) Security held or to be acquired means any Security or any
equivalent Security which, within the most recent 15 days: (1) is or
has been held by the Fund; or (2) is being considered by the Fund or
its investment adviser for purchase by the Fund.
3. APPLICABILITY
The Code applies to all Access Persons and the Compliance Officer
shall provide each Access Person with a copy of the Code. The prohibitions
described below will only apply to a transaction in a Security in which
the designated Access Person has, or by reason of such transaction
acquires, any direct or indirect Beneficial Ownership. The Compliance
Officer will maintain a list of all Access Persons who are currently, and
within the past five years, subject to the Code.
4. PROHIBITED PURCHASES AND SALES
A. INITIAL PUBLIC OFFERINGS
No Investment Personnel may acquire any Securities in an initial public
offering.
5
<PAGE> 6
For purposes of this restriction, "Initial Public Offerings" shall not include
offerings of government and municipal securities.
B. PRIVATE PLACEMENTS
No Investment Personnel may acquire any Securities in a private
placement without prior approval.
(i) Prior approval must be obtained in accordance with the
preclearance procedure described in Section 6 below. Such approval will
take into account, among other factors, whether the investment
opportunity should be reserved for the Fund and its shareholders and
whether the opportunity is being offered to the Investment Personnel by
virtue of his or her position with the Fund. The Adviser/Subadviser
shall maintain a record of such prior approval and reason for same, for
at least 5 years after the end of the fiscal year in which the approval
is granted.
(ii) Investment Personnel who have been authorized to acquire
Securities in a private placement must disclose that investment to the
chief investment officer (including his or her designee) of the
Adviser/Subadviser (or of any unit or subdivision thereof) or the
Compliance Officer when they play a part in any subsequent
consideration of an investment by the Fund in the issuer. In such
circumstances, the Fund's decision to purchase Securities of the issuer
6
<PAGE> 7
will be subject to an independent review by appropriate personnel with
no personal interest in the issuer.
C. BLACKOUT PERIODS
(i) Except as provided in Section 5 below, Access Persons are
prohibited from executing a Securities transaction on a day during
which any investment company in the Complex has a pending "buy" or
"sell" order in the same or an equivalent Security and until such time
as that order is executed or withdrawn; provided, however, that this
prohibition shall not apply to Disinterested Directors/Trustees except
if they have actual knowledge of trading by any fund in the Complex
and, in any event, only with respect to those funds on whose boards
they sit.
This prohibition shall also not apply to Access Persons of the
Subadviser who do not, in the ordinary course of fulfilling his or her
official duties, have access to information regarding the purchase and
sale of Securities for the Fund and are not engaged in the day-to-day
operations of the Fund; provided that Securities investments effected
by such Access Persons during the proscribed period are not effected
with knowledge of the purchase or sale of the same or equivalent
Securities by any fund in the Complex.
A "pending 'buy' or 'sell' order" exists when a decision to purchase
or sell a Security has been made and communicated.
7
<PAGE> 8
(ii) Portfolio Managers are prohibited from buying or selling
a Security within seven calendar days before or after the Fund trades
in the same or an equivalent Security. Nevertheless, a personal trade
by any Investment Personnel shall not prevent a Fund in the same
Complex from trading in the same or an equivalent security. However,
such a transaction shall be subject to independent review by the
Compliance Officer.
(iii) If trades are effected during the periods proscribed in
(i) or (ii) above, except as provided in (iv) below with respect to (i)
above, any profits realized on such trades will be promptly required to
be disgorged to the Fund.
(iv) A transaction by Access Persons (other than Investment
Personnel) inadvertently effected during the period proscribed in (i)
above will not be considered a violation of the Code and disgorgement
will not be required so long as the transaction was effected in
accordance with the preclearance procedures described in Section 6
below and without prior knowledge of trading by any fund in the Complex
in the same or an equivalent Security.
D. SHORT-TERM TRADING PROFITS
Except as provided in Section 5 below, Investment Personnel
are prohibited from profiting from a purchase and sale, or sale and
purchase, of the same or an equivalent Security within any 60 calendar
day period. If trades are effected during the proscribed period, any
profits realized on such trades will be immediately required to be
disgorged to the Fund.
8
<PAGE> 9
E. SHORT SALES
No Access Person may sell any security short which is owned by any Fund
in the Complex. Access Persons may, however make short sales when he/she owns an
equivalent amount of the same security.
F. OPTIONS
No Access Person may write a naked call option or buy a naked put
option on a security owned by any Fund in the Complex. Access Persons may
purchase options on securities not held by any Fund in the Complex, or purchase
call options or write put options on securities owned by any Fund in the
Complex, subject to preclearance and the same restrictions applicable to other
securities. Access Persons may write covered call options or buy covered put
options on a security owned by any Fund in the Complex at the discretion of the
Compliance Officer.
G. INVESTMENT CLUBS
No Access Person may participate in an investment club.
5. EXEMPTED TRANSACTIONS
Subject to preclearance in accordance with Section 6 below with respect
to subitems (b), (e), (f), (g) and (i) hereof, the prohibitions of Sections 4(C)
and 4(D) will not apply to the following:
(a) Purchases or sales of Securities effected in any account
over which the Access Person has no direct or indirect influence or
control or in any account of the Access Person which is managed on a
discretionary basis by a person other than such Access Person and with
respect to which such Access Person does not in fact influence or
control such transactions.
9
<PAGE> 10
(b) Purchases or sales of Securities (or their equivalents)
which are not eligible for purchase or sale by any fund in the Complex.
(c) Purchases or sales of Securities which are non-volitional
on the part of either the Access Person or any fund in the Complex.
(d) Purchases of Securities which are part of an automatic
dividend reinvestment plan.
(e) Purchases effected upon the exercise of rights issued by
an issuer pro rata to all holders of a class of its Securities, to the
extent such rights were acquired from such issuer, and sales of such
rights so acquired.
(f) Any equity Securities transaction, or series of related
transactions effected over a 30 calendar day period, involving 500
shares or less in the aggregate, if (i) the Access Person has no prior
knowledge of activity in such security by any fund in the Complex and
(ii) the issuer is listed on The New York Stock Exchange or has a
market capitalization (outstanding shares multiplied by the current
price per share) greater than $1 billion (or a corresponding market
capitalization in foreign markets).
(g) Any fixed-income Securities transaction, or series of
related transactions effected over a 30 calendar day period, involving
100 units ($100,000 principal amount) or less in the aggregate, if the
Access Person has no prior knowledge of transactions in such Securities
by any fund in the Complex.
(h) Any transaction in index options effected on a broad-based
index (See Exhibit B.)(1)
(i) Purchases or sales of Securities which receive the prior
approval of the Compliance Officer (such person having no personal
interest in such purchases or sales), based on a determination that no
abuse is involved and that such purchases and sales are not likely to
have any economic impact on any fund in the Complex or on its ability
to purchase or sell Securities of the same class or other Securities of
the same issuer.
- --------
(1) Exhibit B will be amended by the Compliance Officer as necessary.
10
<PAGE> 11
(j) Purchases or sales of Unit Investment Trusts.
6. PRECLEARANCE
Access Persons (other than Disinterested Directors/Trustees) must
preclear all personal Securities investments with the exception of those
identified in subparts (a), (c), (d), (h) and (j) of Section 5 above.
All requests for preclearance must be submitted to the Compliance
Officer for approval. All approved orders must be executed no later than 5:00
p.m. local time on the business day following the date preclearance is granted.
If any order is not timely executed, a request for preclearance must be
resubmitted.
7. REPORTING
(a) Disinterested Directors/Trustees shall report to the Secretary of
the Fund or the Compliance Officer the information described in Section 7(b)
hereof with respect to transactions in any Security in which such Disinterested
Director/Trustee has, or by reason of such transaction acquires, any direct or
indirect Beneficial Ownership in the Security only if such Disinterested
Director/Trustee, at the time of that transaction knew or, in the ordinary
course of fulfilling his or her official duties as a Director/Trustee of the
Fund, should have known that, during the 15-day period immediately preceding or
subsequent to the date of the transaction in a Security by such
Director/Trustee, such Security is or was purchased or sold by the Fund or was
being considered for purchase or sale by the Fund, the Manager or
Adviser/Subadviser; provided, however, that a
11
<PAGE> 12
Disinterested Director/Trustee is not required to make a report with respect to
transactions effected in any account over which such Director/Trustee does not
have any direct or indirect influence or control or in any account of the
Disinterested Director/Trustee which is managed on a discretionary basis by a
person other than such Director/Trustee and with respect to which such
Director/Trustee does not in fact influence or control such transactions. The
Secretary of the Fund or the Compliance Officer shall maintain such reports and
such other records to the extent required by Rule 17j-1 under the Act.
(b) Every report required by Section 7(a) hereof shall be made not
later than ten days after the end of the calendar quarter in which the
transaction to which the report relates was effected, and shall contain the
following information:
(i) The date of the transaction, the title and the number of
shares, and the principal amount of each Security involved;
(ii) The nature of the transaction (i.e., purchase, sale or any
other type of acquisition or disposition);
(iii) The price at which the transaction was effected;
(iv) The name of the broker, dealer or bank with or through whom
the transaction was effected; and
(v) The date that the report is submitted.
(c) Any such report may contain a statement that the report shall not
be construed as an admission by the person making such report that he or she has
any direct or indirect Beneficial Ownership in the Security to which the report
relates.
12
<PAGE> 13
8. RECORDS OF SECURITIES TRANSACTIONS AND POST-TRADE REVIEW
Access Persons (other than Disinterested Directors/Trustees) are
required to direct their brokers to supply, on a timely basis, duplicate copies
of confirmations of all personal Securities transactions and copies of periodic
statements for all Securities accounts in which such Access Persons have a
Beneficial Ownership interest to the Compliance Officer. Such instructions must
be made upon becoming an Access Person and promptly as new accounts are
established, but no later than ten days after the end of a calendar quarter,
with respect to any account established by the Access Person in which any
securities were held during the quarter for the direct or indirect beneficial
interest of the Access Person. Notification must be made in writing and a copy
of the notification must be submitted to Compliance. This notification will
include the broker, dealer or bank with which the account was established and
the date the account was established.
Compliance with this Code requirement will be deemed to satisfy the
reporting requirements imposed on Access Persons under Rule 17j-1(d), provided,
however, that such confirmations and statements contain all the information
required by Section 7. b. hereof and are furnished within the time period
required by such section.
The Compliance Officer will periodically review the personal investment
activity and holdings reports of all Access Persons (including Disinterested
Directors/Trustees with respect to Securities transactions reported pursuant to
Section 7 above).
9. DISCLOSURE OF PERSONAL HOLDINGS
13
<PAGE> 14
Within ten days after an individual first becomes an Access Person and
thereafter on an annual basis, each Access Person (other than Disinterested
Directors/Trustees) must disclose all personal Securities holdings. Such
disclosure must be made in writing and be as of the date the individual first
became an Access Person with respect to the initial report and by January 30 of
each year, including holdings information as of December 31, with respect to the
annual report. All such reports shall include the following: title, number of
shares and principal amount of each security held, name of broker, dealer or
bank with whom these securities are held and the date of submission by the
Access Person.
10. GIFTS
Access Persons are prohibited from receiving any gift or other thing of
more than $100 in value from any person or entity that does business with or on
behalf of the Fund. Occasional business meals or entertainment (theatrical or
sporting events, etc.) are permitted so long as they are not excessive in number
or cost.
11. SERVICE AS A DIRECTOR
Investment Personnel are prohibited from serving on the boards of
directors of publicly traded companies, absent prior authorization based upon a
determination that the board service would be consistent with the interests of
the Fund and its shareholders. In the limited instances that such board service
is authorized, Investment Personnel will be isolated from those making
investment decisions affecting
14
<PAGE> 15
transactions in Securities issued by any publicly traded company on whose board
such Investment Personnel serves as a director through the use of "Chinese Wall"
or other procedures designed to address the potential conflicts of interest.
12. CERTIFICATION OF COMPLIANCE WITH THE CODE
Access Persons are required to certify annually as follows:
(i) that they have read and understood the Code;
(ii) that they recognize that they are subject to the Code;
(iii) that they have complied with the requirements of the Code; and
(iv) that they have disclosed or reported all personal Securities
transactions required to be disclosed or reported pursuant to
the requirements of the Code.
13. CODE VIOLATIONS
All violations of the Code will be reported to the Board of
Directors/Trustees of the Fund on a quarterly basis. The Board of
Directors/Trustees may take such action as it deems appropriate.
14. REVIEW BY THE BOARD OF DIRECTORS/TRUSTEES
The Board of Directors/Trustees will be provided with an annual report
which at a minimum:
(i) certifies to the Board that the Fund, Manager, Investment
Adviser/Subadviser, and Principal Underwriter has adopted procedures reasonably
necessary to prevent its Access persons from violating its Code.
15
<PAGE> 16
(ii) summarizes existing procedures concerning personal investing and
any changes in the procedures made during the preceding year;
(iii) identifies material Code or procedural violations and sanctions
imposed in response to those material violations; and
(iv) identifies any recommended changes in existing restrictions or
procedures based upon the Fund's experience under the Code, evolving industry
practices, or developments in applicable laws and regulations.
The Board will review such report and determine if any further action
is required.
16
<PAGE> 17
EXPLANATORY NOTES TO CODE
1. No comparable Code requirements have been imposed upon Prudential
Mutual Fund Services LLC, the Fund's transfer agent, or Prudential Investment
Management Services, LLC, which acts as the Fund's distributor, or those of
their directors or officers who are not Directors/Trustees or Officers of the
Fund since they are deemed not to constitute Access Persons or Advisory Persons
as defined in paragraphs (e)(1) and (2) of Rule 17j-1.
17
<PAGE> 18
Exhibit A
Definition of Beneficial Ownership
The term "beneficial ownership" of securities would include not only
ownership of securities held by an access person for his or her own benefit,
whether in bearer form or registered in his or her own name or otherwise, but
also ownership of securities held for his or her benefit by other (regardless of
whether or how they are registered) such as custodians, brokers, executors,
administrators, or trustees (including trusts in which he or she has only a
remainder interest), and securities held for his or her account by pledges,
securities owned by a partnership in which he or she should regard as a personal
holding corporation. Correspondingly, this term would exclude securities held by
an access person for the benefit of someone else.
Ordinarily, this term would not include securities held by executors or
administrators in estates in which an access person is a legatee or beneficiary
unless there is a specific legacy to such person of such securities or such
person is the sole legatee or beneficiary and there are other assets in the
estate sufficient to pay debts ranking ahead of such legacy, or the securities
are held in the estate more than a year after the decedent's death.
Securities held in the name of another should be considered as
"beneficially" owned by an access person where such person enjoys "benefits
substantially equivalent to ownership". The SEC has said that although the final
determination of beneficial ownership is a question to be determined in the
light of the facts of the particular case, generally a person is regarded as the
beneficial owner of securities held in the name of his or her spouse and their
minor children. Absent special circumstances such relationship ordinarily
results in such person obtaining benefits substantially equivalent to ownership,
e.g., application of the income derived from such securities to maintain a
common home, to meet expenses which such person otherwise would meet from other
sources, or the ability to exercise a controlling influence over the purchase,
sale or voting of such securities.
An access person also may be regarded as the beneficial owner of
securities held in the name of another person, if by reason of any contact,
understanding, relationship, agreement or other arrangement, he obtains
therefrom benefits substantially equivalent to those of ownership. Moreover, the
fact that the holder is a relative or relative of a spouse and sharing the same
home as an access person may in itself indicate that the access person would
obtain benefits substantially equivalent to those of ownership from securities
held in the name of such relative. Thus, absent countervailing facts, it is
expected that securities held by relatives who share the same home as an access
person will be treated as being beneficially owned by the access person.
An access person also is regarded as the beneficial owner of securities
held in the name of a spouse, minor children or other person, even though he
does not obtain therefrom the aforementioned benefits of ownership, if he can
vest or revest title in himself at once or at some future time.
18
<PAGE> 19
Exhibit B
INDEX OPTIONS ON A BROAD-BASED INDEX
<TABLE>
<CAPTION>
TICKER SYMBOL DESCRIPTION
- --------------------------------------------------------------------------------
<S> <C>
NIK Nikkei 300 Index CI/Euro
- --------------------------------------------------------------------------------
OEX S&P 100 Close/Amer Index
- --------------------------------------------------------------------------------
OEW S&P 100 Close/Amer Index
- --------------------------------------------------------------------------------
OEY S&P 100 Close/Amer Index
- --------------------------------------------------------------------------------
SPB S&P 500 Index
- --------------------------------------------------------------------------------
SPZ S&P 500 Open/Euro Index
- --------------------------------------------------------------------------------
SPX S&P 500 Open/Euro Index
- --------------------------------------------------------------------------------
SXZ S&P 500 (Wrap)
- --------------------------------------------------------------------------------
SXB S&P 500 Open/Euro Index
- --------------------------------------------------------------------------------
RUZ Russell 2000 Open/Euro Index
- --------------------------------------------------------------------------------
RUT Russell 2000 Open/Euro Index
- --------------------------------------------------------------------------------
MID S&P Midcap 400 Open/Euro Index
- --------------------------------------------------------------------------------
NDX NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
NDU NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
NDZ NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
NDV NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
NCZ NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
SML S&P Small Cap 600
- --------------------------------------------------------------------------------
TPX U.S. Top 100 Sector
- --------------------------------------------------------------------------------
SPL S&P 500 Long-Term Close
- --------------------------------------------------------------------------------
ZRU Russell 2000 L-T Open./Euro
- --------------------------------------------------------------------------------
VRU Russell 2000 Long-Term Index
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
Exhibit (p)(2)
PRUDENTIAL INVESTMENT MANAGEMENT LLC (PRINCIPAL UNDERWRITER)
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (MANAGER)
PRUDENTIAL INVESTMENT CORPORATION (ADVISER OR SUBADVISER)
CODE OF ETHICS ADOPTED PURSUANT TO RULE 17j-1
UNDER THE INVESTMENT COMPANY ACT OF 1940
(THE CODE)
1. PURPOSES
The Code has been adopted by the Board of Directors/Trustees or the Duly
Appointed Officer-In-Charge of the Fund, the Manager, the Adviser/Subadviser,
and the Principal Underwriter in accordance with Rule 17j-1(c) under the
Investment Company Act of 1940 (the Act) and in accordance with the following
general principles:
(1) THE DUTY AT ALL TIMES TO PLACE THE INTERESTS OF SHAREHOLDERS FIRST.
Investment company personnel should scrupulously avoid serving
their own personal interests ahead of shareholders' interests in any
decision relating to their personal investments.
(2) THE REQUIREMENT THAT ALL PERSONAL SECURITIES TRANSACTIONS BE
CONDUCTED CONSISTENT WITH THE CODE AND IN SUCH A MANNER AS TO AVOID ANY
ACTUAL OR POTENTIAL CONFLICT OF INTEREST OR ANY ABUSE OF AN INDIVIDUAL'S
POSITION OF TRUST AND RESPONSIBILITY.
Investment company personnel must not only seek to achieve
technical compliance with the Code but should strive to abide by its
spirit and the principles articulated herein.
(3) THE FUNDAMENTAL STANDARD THAT INVESTMENT COMPANY PERSONNEL SHOULD
NOT TAKE INAPPROPRIATE ADVANTAGE OF THEIR POSITIONS.
Investment company personnel must avoid any situation that might
compromise, or call into question, their exercise of fully independent
judgment in the interest of shareholders, including, but not limited to
the receipt of unusual investment opportunities, perquisites, or gifts
of more than a de minimis value from persons doing or seeking business
with the
<PAGE> 2
Fund.
Rule 17j-1 under the Act generally proscribes fraudulent or manipulative
practices with respect to a purchase or sale of a security held or to be
acquired (as such term is defined in Section 2.) by an investment company, if
effected by an associated person of such company.
The purpose of the Code is to establish procedures consistent with the Act
and Rule 17j-1 to give effect to the following general prohibitions as set forth
in Rule 17j-1(b) as follows:
(a) It shall be unlawful for any affiliated person of or Principal
Underwriter for a registered investment company, or any affiliated person
of an investment adviser of or principal underwriter for a registered
investment company in connection with the purchase or sale, directly or
indirectly, by such person of a security held or to be acquired, by such
registered investment company:
(1) To employ any device, scheme or artifice to defraud such
registered investment company;
(2) To make to such registered investment company any untrue
statement of a material fact or omit to state to such registered
investment company a material fact necessary in order to make the
statements made, in light of the circumstances under which they are
made, not misleading;
(3) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any such
registered investment company; or
(4) To engage in any manipulative practice with respect to such
registered investment company.
2
<PAGE> 3
2. DEFINITIONS
(a) "Access Person" means any director/trustee, officer, general
partner or Advisory Person (including any Investment Personnel, as
that term is defined herein) of the Fund, the Manager, the
Adviser/Subadviser, or the Principal Underwriter.
(b) "Adviser/Subadviser" means the Adviser or Subadviser of the
Fund or both as the context may require.
(c) "Advisory Person" means (i) any employee of the Fund, Manager
or Adviser/Subadviser (or of any company in a control relationship to
the Fund, Manager or Adviser/Subadviser) who, in connection with his
or her regular functions or duties, makes, participates in, or
obtains information regarding the purchase or sale of a security by
the Fund, or whose functions relate to the making of any
recommendations with respect to such purchases or sales; and (ii) any
natural person in a control relationship to the Fund who obtains
information concerning recommendations made to the Fund with regard
to the purchase or sale of a security.
(d) "Beneficial Ownership" will be interpreted in the same manner
as it would be under Securities Exchange Act Rule 16a-1(a)(2) in
determining which security holdings of a person are subject to the
reporting and short-swing profit provisions of Section 16 of the
Securities Exchange Act of 1934 and the rules and regulations
thereunder, except that the determination of direct or indirect
beneficial ownership will apply to all securities which an Access
Person has or acquires (Exhibit A).
(e) "Complex" means the group of registered investment companies
for which Prudential Investments Fund Management LLC serves as
Manager; provided, however, that with respect to Access Persons of
the Subadviser (including any unit or subdivision thereof), "Complex"
means the group of registered investment companies in the Complex
advised by the Subadviser or unit or subdivision thereof.
(f) "Compliance Officer" means the person designated by the
Manager, the Adviser/Subadviser, or Principal Underwriter (including
his or her designee) as having responsibility for compliance with the
requirements of the Code.
(g) "Control" will have the same meaning as that set forth in
3
<PAGE> 4
Section 2(a)(9) of the Act.
(h) "Disinterested Director/Trustee" means a Director/Trustee of
the Fund who is not an "interested person" of the Fund within the
meaning of Section 2(a)(19) of the Act.
An interested Director/Trustee who would not otherwise be
deemed to be an Access Person, shall be treated as a Disinterested
Director/Trustee for purposes of compliance with the provisions of
the Code.
(i) "Initial Public Offering" means an offering of securities
registered under the Securities Act of 1933, the issuer of which,
immediately before the registration, was not subject to the reporting
requirements of sections 13 or 15(d) of the Securities Exchange Act
of 1934.
(j) "Investment Personnel" means: (a) Portfolio Managers and other
Advisory Persons who provide investment information and/or advice to
the Portfolio Manager(s) and/or help execute the Portfolio
Manager's(s') investment decisions, including securities analysts and
traders; and (b) any natural person in a control relationship to the
Fund who obtains information concerning recommendations made to the
Fund with regard to the purchase or sale of a security.
(k) "Manager" means Prudential Investments Fund Management, LLC.
(l) "Portfolio Manager" means any Advisory Person who has the
direct responsibility and authority to make investment decisions for
the Fund.
(m) "Private placement" means a limited offering that is exempt
from registration under the Securities Act of 1933 pursuant to
section 4(2) or section 4(6) or pursuant to rule 504, rule 505 or
rule 506 under such Securities Act.
(n) "Security" will have the meaning set forth in Section 2(a)(36)
of the Act, except that it will not include shares of registered
open-end investment companies, direct obligations of the Government
of the United
4
<PAGE> 5
States, short-term debt securities which are "government securities"
within the meaning of Section 2(a)(16) of the Act, bankers'
acceptances, bank certificates of deposit, commercial paper and such
other money market instruments as are designated by the Compliance
Officer. For purposes of the Code, an "equivalent Security" is one
that has a substantial economic relationship to another Security.
This would include, among other things, (1) a Security that is
exchangeable for or convertible into another Security, (2) with
respect to an equity Security, a Security having the same issuer
(including a private issue by the same issuer) and any derivative,
option or warrant relating to that Security and (3) with respect to a
fixed-income Security, a Security having the same issuer, maturity,
coupon and rating.
(o) Security held or to be acquired means any Security or any
equivalent Security which, within the most recent 15 days: (1) is or
has been held by the Fund; or (2) is being considered by the Fund or
its investment adviser for purchase by the Fund.
3. APPLICABILITY
The Code applies to all Access Persons and the Compliance Officer
shall provide each Access Person with a copy of the Code. The prohibitions
described below will only apply to a transaction in a Security in which
the designated Access Person has, or by reason of such transaction
acquires, any direct or indirect Beneficial Ownership. The Compliance
Officer will maintain a list of all Access Persons who are currently, and
within the past five years, subject to the Code.
4. PROHIBITED PURCHASES AND SALES
A. INITIAL PUBLIC OFFERINGS
No Investment Personnel may acquire any Securities in an initial public
offering.
5
<PAGE> 6
For purposes of this restriction, "Initial Public Offerings" shall not include
offerings of government and municipal securities.
B. PRIVATE PLACEMENTS
No Investment Personnel may acquire any Securities in a private
placement without prior approval.
(i) Prior approval must be obtained in accordance with the
preclearance procedure described in Section 6 below. Such approval will
take into account, among other factors, whether the investment
opportunity should be reserved for the Fund and its shareholders and
whether the opportunity is being offered to the Investment Personnel by
virtue of his or her position with the Fund. The Adviser/Subadviser
shall maintain a record of such prior approval and reason for same, for
at least 5 years after the end of the fiscal year in which the approval
is granted.
(ii) Investment Personnel who have been authorized to acquire
Securities in a private placement must disclose that investment to the
chief investment officer (including his or her designee) of the
Adviser/Subadviser (or of any unit or subdivision thereof) or the
Compliance Officer when they play a part in any subsequent
consideration of an investment by the Fund in the issuer. In such
circumstances, the Fund's decision to purchase Securities of the issuer
6
<PAGE> 7
will be subject to an independent review by appropriate personnel with
no personal interest in the issuer.
C. BLACKOUT PERIODS
(i) Except as provided in Section 5 below, Access Persons are
prohibited from executing a Securities transaction on a day during
which any investment company in the Complex has a pending "buy" or
"sell" order in the same or an equivalent Security and until such time
as that order is executed or withdrawn; provided, however, that this
prohibition shall not apply to Disinterested Directors/Trustees except
if they have actual knowledge of trading by any fund in the Complex
and, in any event, only with respect to those funds on whose boards
they sit.
This prohibition shall also not apply to Access Persons of the
Subadviser who do not, in the ordinary course of fulfilling his or her
official duties, have access to information regarding the purchase and
sale of Securities for the Fund and are not engaged in the day-to-day
operations of the Fund; provided that Securities investments effected
by such Access Persons during the proscribed period are not effected
with knowledge of the purchase or sale of the same or equivalent
Securities by any fund in the Complex.
A "pending 'buy' or 'sell' order" exists when a decision to purchase
or sell a Security has been made and communicated.
7
<PAGE> 8
(ii) Portfolio Managers are prohibited from buying or selling
a Security within seven calendar days before or after the Fund trades
in the same or an equivalent Security. Nevertheless, a personal trade
by any Investment Personnel shall not prevent a Fund in the same
Complex from trading in the same or an equivalent security. However,
such a transaction shall be subject to independent review by the
Compliance Officer.
(iii) If trades are effected during the periods proscribed in
(i) or (ii) above, except as provided in (iv) below with respect to (i)
above, any profits realized on such trades will be promptly required to
be disgorged to the Fund.
(iv) A transaction by Access Persons (other than Investment
Personnel) inadvertently effected during the period proscribed in (i)
above will not be considered a violation of the Code and disgorgement
will not be required so long as the transaction was effected in
accordance with the preclearance procedures described in Section 6
below and without prior knowledge of trading by any fund in the Complex
in the same or an equivalent Security.
D. SHORT-TERM TRADING PROFITS
Except as provided in Section 5 below, Investment Personnel
are prohibited from profiting from a purchase and sale, or sale and
purchase, of the same or an equivalent Security within any 60 calendar
day period. If trades are effected during the proscribed period, any
profits realized on such trades will be immediately required to be
disgorged to the Fund.
8
<PAGE> 9
E. SHORT SALES
No Access Person may sell any security short which is owned by any Fund
in the Complex. Access Persons may, however make short sales when he/she owns an
equivalent amount of the same security.
F. OPTIONS
No Access Person may write a naked call option or buy a naked put
option on a security owned by any Fund in the Complex. Access Persons may
purchase options on securities not held by any Fund in the Complex, or purchase
call options or write put options on securities owned by any Fund in the
Complex, subject to preclearance and the same restrictions applicable to other
securities. Access Persons may write covered call options or buy covered put
options on a security owned by any Fund in the Complex at the discretion of the
Compliance Officer.
G. INVESTMENT CLUBS
No Access Person may participate in an investment club.
5. EXEMPTED TRANSACTIONS
Subject to preclearance in accordance with Section 6 below with respect
to subitems (b), (e), (f), (g) and (i) hereof, the prohibitions of Sections 4(C)
and 4(D) will not apply to the following:
(a) Purchases or sales of Securities effected in any account
over which the Access Person has no direct or indirect influence or
control or in any account of the Access Person which is managed on a
discretionary basis by a person other than such Access Person and with
respect to which such Access Person does not in fact influence or
control such transactions.
9
<PAGE> 10
(b) Purchases or sales of Securities (or their equivalents)
which are not eligible for purchase or sale by any fund in the Complex.
(c) Purchases or sales of Securities which are non-volitional
on the part of either the Access Person or any fund in the Complex.
(d) Purchases of Securities which are part of an automatic
dividend reinvestment plan.
(e) Purchases effected upon the exercise of rights issued by
an issuer pro rata to all holders of a class of its Securities, to the
extent such rights were acquired from such issuer, and sales of such
rights so acquired.
(f) Any equity Securities transaction, or series of related
transactions effected over a 30 calendar day period, involving 500
shares or less in the aggregate, if (i) the Access Person has no prior
knowledge of activity in such security by any fund in the Complex and
(ii) the issuer is listed on The New York Stock Exchange or has a
market capitalization (outstanding shares multiplied by the current
price per share) greater than $1 billion (or a corresponding market
capitalization in foreign markets).
(g) Any fixed-income Securities transaction, or series of
related transactions effected over a 30 calendar day period, involving
100 units ($100,000 principal amount) or less in the aggregate, if the
Access Person has no prior knowledge of transactions in such Securities
by any fund in the Complex.
(h) Any transaction in index options effected on a broad-based
index (See Exhibit B.)(1)
(i) Purchases or sales of Securities which receive the prior
approval of the Compliance Officer (such person having no personal
interest in such purchases or sales), based on a determination that no
abuse is involved and that such purchases and sales are not likely to
have any economic impact on any fund in the Complex or on its ability
to purchase or sell Securities of the same class or other Securities of
the same issuer.
- --------
(1) Exhibit B will be amended by the Compliance Officer as necessary.
10
<PAGE> 11
(j) Purchases or sales of Unit Investment Trusts.
6. PRECLEARANCE
Access Persons (other than Disinterested Directors/Trustees) must
preclear all personal Securities investments with the exception of those
identified in subparts (a), (c), (d), (h) and (j) of Section 5 above.
All requests for preclearance must be submitted to the Compliance
Officer for approval. All approved orders must be executed no later than 5:00
p.m. local time on the business day following the date preclearance is granted.
If any order is not timely executed, a request for preclearance must be
resubmitted.
7. REPORTING
(a) Disinterested Directors/Trustees shall report to the Secretary of
the Fund or the Compliance Officer the information described in Section 7(b)
hereof with respect to transactions in any Security in which such Disinterested
Director/Trustee has, or by reason of such transaction acquires, any direct or
indirect Beneficial Ownership in the Security only if such Disinterested
Director/Trustee, at the time of that transaction knew or, in the ordinary
course of fulfilling his or her official duties as a Director/Trustee of the
Fund, should have known that, during the 15-day period immediately preceding or
subsequent to the date of the transaction in a Security by such
Director/Trustee, such Security is or was purchased or sold by the Fund or was
being considered for purchase or sale by the Fund, the Manager or
Adviser/Subadviser; provided, however, that a
11
<PAGE> 12
Disinterested Director/Trustee is not required to make a report with respect to
transactions effected in any account over which such Director/Trustee does not
have any direct or indirect influence or control or in any account of the
Disinterested Director/Trustee which is managed on a discretionary basis by a
person other than such Director/Trustee and with respect to which such
Director/Trustee does not in fact influence or control such transactions. The
Secretary of the Fund or the Compliance Officer shall maintain such reports and
such other records to the extent required by Rule 17j-1 under the Act.
(b) Every report required by Section 7(a) hereof shall be made not
later than ten days after the end of the calendar quarter in which the
transaction to which the report relates was effected, and shall contain the
following information:
(i) The date of the transaction, the title and the number of
shares, and the principal amount of each Security involved;
(ii) The nature of the transaction (i.e., purchase, sale or any
other type of acquisition or disposition);
(iii) The price at which the transaction was effected;
(iv) The name of the broker, dealer or bank with or through whom
the transaction was effected; and
(v) The date that the report is submitted.
(c) Any such report may contain a statement that the report shall not
be construed as an admission by the person making such report that he or she has
any direct or indirect Beneficial Ownership in the Security to which the report
relates.
12
<PAGE> 13
8. RECORDS OF SECURITIES TRANSACTIONS AND POST-TRADE REVIEW
Access Persons (other than Disinterested Directors/Trustees) are
required to direct their brokers to supply, on a timely basis, duplicate copies
of confirmations of all personal Securities transactions and copies of periodic
statements for all Securities accounts in which such Access Persons have a
Beneficial Ownership interest to the Compliance Officer. Such instructions must
be made upon becoming an Access Person and promptly as new accounts are
established, but no later than ten days after the end of a calendar quarter,
with respect to any account established by the Access Person in which any
securities were held during the quarter for the direct or indirect beneficial
interest of the Access Person. Notification must be made in writing and a copy
of the notification must be submitted to Compliance. This notification will
include the broker, dealer or bank with which the account was established and
the date the account was established.
Compliance with this Code requirement will be deemed to satisfy the
reporting requirements imposed on Access Persons under Rule 17j-1(d), provided,
however, that such confirmations and statements contain all the information
required by Section 7. b. hereof and are furnished within the time period
required by such section.
The Compliance Officer will periodically review the personal investment
activity and holdings reports of all Access Persons (including Disinterested
Directors/Trustees with respect to Securities transactions reported pursuant to
Section 7 above).
9. DISCLOSURE OF PERSONAL HOLDINGS
13
<PAGE> 14
Within ten days after an individual first becomes an Access Person and
thereafter on an annual basis, each Access Person (other than Disinterested
Directors/Trustees) must disclose all personal Securities holdings. Such
disclosure must be made in writing and be as of the date the individual first
became an Access Person with respect to the initial report and by January 30 of
each year, including holdings information as of December 31, with respect to the
annual report. All such reports shall include the following: title, number of
shares and principal amount of each security held, name of broker, dealer or
bank with whom these securities are held and the date of submission by the
Access Person.
10. GIFTS
Access Persons are prohibited from receiving any gift or other thing of
more than $100 in value from any person or entity that does business with or on
behalf of the Fund. Occasional business meals or entertainment (theatrical or
sporting events, etc.) are permitted so long as they are not excessive in number
or cost.
11. SERVICE AS A DIRECTOR
Investment Personnel are prohibited from serving on the boards of
directors of publicly traded companies, absent prior authorization based upon a
determination that the board service would be consistent with the interests of
the Fund and its shareholders. In the limited instances that such board service
is authorized, Investment Personnel will be isolated from those making
investment decisions affecting
14
<PAGE> 15
transactions in Securities issued by any publicly traded company on whose board
such Investment Personnel serves as a director through the use of "Chinese Wall"
or other procedures designed to address the potential conflicts of interest.
12. CERTIFICATION OF COMPLIANCE WITH THE CODE
Access Persons are required to certify annually as follows:
(i) that they have read and understood the Code;
(ii) that they recognize that they are subject to the Code;
(iii) that they have complied with the requirements of the Code; and
(iv) that they have disclosed or reported all personal Securities
transactions required to be disclosed or reported pursuant to
the requirements of the Code.
13. CODE VIOLATIONS
All violations of the Code will be reported to the Board of
Directors/Trustees of the Fund on a quarterly basis. The Board of
Directors/Trustees may take such action as it deems appropriate.
14. REVIEW BY THE BOARD OF DIRECTORS/TRUSTEES
The Board of Directors/Trustees will be provided with an annual report
which at a minimum:
(i) certifies to the Board that the Fund, Manager, Investment
Adviser/Subadviser, and Principal Underwriter has adopted procedures reasonably
necessary to prevent its Access persons from violating its Code.
15
<PAGE> 16
(ii) summarizes existing procedures concerning personal investing and
any changes in the procedures made during the preceding year;
(iii) identifies material Code or procedural violations and sanctions
imposed in response to those material violations; and
(iv) identifies any recommended changes in existing restrictions or
procedures based upon the Fund's experience under the Code, evolving industry
practices, or developments in applicable laws and regulations.
The Board will review such report and determine if any further action
is required.
16
<PAGE> 17
EXPLANATORY NOTES TO CODE
1. No comparable Code requirements have been imposed upon Prudential
Mutual Fund Services LLC, the Fund's transfer agent, or Prudential Investment
Management Services, LLC, which acts as the Fund's distributor, or those of
their directors or officers who are not Directors/Trustees or Officers of the
Fund since they are deemed not to constitute Access Persons or Advisory Persons
as defined in paragraphs (e)(1) and (2) of Rule 17j-1.
17
<PAGE> 18
Exhibit A
Definition of Beneficial Ownership
The term "beneficial ownership" of securities would include not only
ownership of securities held by an access person for his or her own benefit,
whether in bearer form or registered in his or her own name or otherwise, but
also ownership of securities held for his or her benefit by other (regardless of
whether or how they are registered) such as custodians, brokers, executors,
administrators, or trustees (including trusts in which he or she has only a
remainder interest), and securities held for his or her account by pledges,
securities owned by a partnership in which he or she should regard as a personal
holding corporation. Correspondingly, this term would exclude securities held by
an access person for the benefit of someone else.
Ordinarily, this term would not include securities held by executors or
administrators in estates in which an access person is a legatee or beneficiary
unless there is a specific legacy to such person of such securities or such
person is the sole legatee or beneficiary and there are other assets in the
estate sufficient to pay debts ranking ahead of such legacy, or the securities
are held in the estate more than a year after the decedent's death.
Securities held in the name of another should be considered as
"beneficially" owned by an access person where such person enjoys "benefits
substantially equivalent to ownership". The SEC has said that although the final
determination of beneficial ownership is a question to be determined in the
light of the facts of the particular case, generally a person is regarded as the
beneficial owner of securities held in the name of his or her spouse and their
minor children. Absent special circumstances such relationship ordinarily
results in such person obtaining benefits substantially equivalent to ownership,
e.g., application of the income derived from such securities to maintain a
common home, to meet expenses which such person otherwise would meet from other
sources, or the ability to exercise a controlling influence over the purchase,
sale or voting of such securities.
An access person also may be regarded as the beneficial owner of
securities held in the name of another person, if by reason of any contact,
understanding, relationship, agreement or other arrangement, he obtains
therefrom benefits substantially equivalent to those of ownership. Moreover, the
fact that the holder is a relative or relative of a spouse and sharing the same
home as an access person may in itself indicate that the access person would
obtain benefits substantially equivalent to those of ownership from securities
held in the name of such relative. Thus, absent countervailing facts, it is
expected that securities held by relatives who share the same home as an access
person will be treated as being beneficially owned by the access person.
An access person also is regarded as the beneficial owner of securities
held in the name of a spouse, minor children or other person, even though he
does not obtain therefrom the aforementioned benefits of ownership, if he can
vest or revest title in himself at once or at some future time.
18
<PAGE> 19
Exhibit B
INDEX OPTIONS ON A BROAD-BASED INDEX
<TABLE>
<CAPTION>
TICKER SYMBOL DESCRIPTION
- --------------------------------------------------------------------------------
<S> <C>
NIK Nikkei 300 Index CI/Euro
- --------------------------------------------------------------------------------
OEX S&P 100 Close/Amer Index
- --------------------------------------------------------------------------------
OEW S&P 100 Close/Amer Index
- --------------------------------------------------------------------------------
OEY S&P 100 Close/Amer Index
- --------------------------------------------------------------------------------
SPB S&P 500 Index
- --------------------------------------------------------------------------------
SPZ S&P 500 Open/Euro Index
- --------------------------------------------------------------------------------
SPX S&P 500 Open/Euro Index
- --------------------------------------------------------------------------------
SXZ S&P 500 (Wrap)
- --------------------------------------------------------------------------------
SXB S&P 500 Open/Euro Index
- --------------------------------------------------------------------------------
RUZ Russell 2000 Open/Euro Index
- --------------------------------------------------------------------------------
RUT Russell 2000 Open/Euro Index
- --------------------------------------------------------------------------------
MID S&P Midcap 400 Open/Euro Index
- --------------------------------------------------------------------------------
NDX NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
NDU NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
NDZ NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
NDV NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
NCZ NASDAQ- 100 Open/Euro Index
- --------------------------------------------------------------------------------
SML S&P Small Cap 600
- --------------------------------------------------------------------------------
TPX U.S. Top 100 Sector
- --------------------------------------------------------------------------------
SPL S&P 500 Long-Term Close
- --------------------------------------------------------------------------------
ZRU Russell 2000 L-T Open./Euro
- --------------------------------------------------------------------------------
VRU Russell 2000 Long-Term Index
- --------------------------------------------------------------------------------
</TABLE>
