Prudential IncomeVertible(R) Fund, Inc.
- --------------------------------------------------------------------------------
Prospectus dated March 1, 1995
- --------------------------------------------------------------------------------
Prudential IncomeVertible(R) Fund, Inc. (the Fund) is an open-end, diversified
management investment company, or mutual fund, which seeks both high current
income and capital appreciation. The Fund will seek to achieve its investment
objective by investing primarily in convertible securities and/or in
combinations of securities, comprised of nonconvertible fixed-income securities
and warrants or call options, which resemble convertible securities in some, but
not all, respects (synthetic convertibles). Under normal circumstances, the Fund
intends to invest at least 65% of its total assets in convertible securities
and/or synthetic convertibles. The balance of the Fund's total assets may be
invested in other debt and equity securities. There can be no assurance that the
Fund's investment objective will be achieved. See "How the Fund
Invests-Investment Objective and Policies." The Fund's address is One Seaport
Plaza, New York, New York 10292, and its telephone number is (800) 225-1852.
The Fund may purchase and sell certain derivatives. The Fund may also write
(i.e., sell) covered calls on debt and equity securities and on stock indices
and engage in hedging transactions involving (i) options on debt and equity
securities, on stock indices and on interest rate futures and (ii) stock index
futures and options thereon. These activities may be considered speculative and
may result in higher risks and costs to the Fund. See "How the Fund
Invests-Investment Objective and Policies."
The Fund invests significantly in lower-rated and unrated bonds, commonly known
as "junk bonds." Investments of this type are subject to a greater risk of loss
of principal and interest, including default risk, than higher rated bonds.
Purchasers should carefully assess the risks associated with an investment in
this Fund. See "How the Fund Invests-Investment Objective and Policies-Risk
Factors Relating to Investing in High Yield Securities."
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information
about the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated March 1, 1995, which information is
incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund, at the
address or telephone number noted above.
- --------------------------------------------------------------------------------
Investors are advised to read this Prospectus and retain it for future
reference.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
- --------------------------------------------------------------------------------
What is Prudential IncomeVertible(R) Fund, Inc.?
Prudential IncomeVertible(R) Fund, Inc. is a mutual fund. A mutual fund
pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
diversified management investment company.
What is the Fund's Investment Objective?
The Fund's investment objective is both high current income and appreciation
of capital. It seeks to achieve this objective by investing primarily in
convertible securities, i.e., convertible bonds and convertible preferred
stocks, and/or synthetic convertibles, i.e., combinations of securities
comprised of nonconvertible fixed-income securities and warrants or call
options, which in the opinion of the investment adviser resemble convertible
securities in certain, but not all, respects. Under normal circumstances, the
Fund will invest at least 65% of its total assets (determined at the time of
purchase) in convertible securities and/or synthetic convertibles (including
temporarily unmatched components thereof). The balance of the Fund's total
assets may be invested in common stocks, nonconvertible debt securities,
preferred stocks, money market instruments and in options and futures contracts
and options thereon. There can be no assurance that the Fund's objective will be
achieved. See "How the Fund Invests-Investment Objective and Policies" at page
8.
Risk Factors and Special Characteristics
The Fund may engage in hedging and income enhancement strategies, including
utilizing derivatives such as the purchase of stock, stock index and interest
rate futures call options, and the purchase and sale of listed stock index
futures and options thereon. These activities may be considered speculative and
may result in higher risks and costs to the Fund. See "How the Fund
Invests-Hedging and Income Enhancement Strategies" at page 11. The Fund may
invest in fixed-income obligations rated Baa or lower by Moody's Investors
Service, BBB or lower by Standard & Poor's Ratings Group or in non-rated
fixed-income securities which, in the opinion of the Fund's investment adviser,
are of comparable quality. Lower rated and non-rated bonds are subject to a
greater risk of loss of principal and interest. See "How the Fund
Invests-Investment Objective and Policies" at page 8.
Who Manages the Fund?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager
of the Fund and is compensated for its services at an annual rate of .75 of 1%
of the first $500 million of the Fund's average daily net assets, .70 of 1% of
the next $250 million of the Fund's average daily net assets, .65 of 1% of the
next $250 million of the Fund's average daily net assets, and .60 of 1% of the
Fund's average daily net assets in excess of $1 billion. As of January 31, 1995,
PMF served as manager or administrator to 69 investment companies, including 39
mutual funds, with aggregate assets of approximately $45 billion. The Prudential
Investment Corporation (PIC or the Subadviser) furnishes investment advisory
services in connection with the management of the Fund under a Subadvisory
Agreement with PMF. See "How the Fund is Managed-Manager" at page 16.
Who Distributes the Fund's Shares?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Fund's Class A shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .25 of 1% of the average daily
net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's Class B and Class C shares and is paid an annual
distribution and service fee at the rate of 1% of the average daily net assets
of each of the Class B and Class C shares.
See "How the Fund is Managed-Distributor" at page 16.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
What is the Minimum Investment?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. There is no minimum investment requirement for certain
retirement and employee savings plans or custodial accounts for the benefit of
minors. For purchases made through the Automatic Savings Accumulation Plan, the
minimum initial and subsequent investment is $50. See "Shareholder Guide-How to
Buy Shares of the Fund" at page 23 and "Shareholder Guide-Shareholder Services"
at page 31.
How Do I Purchase Shares?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent) at the
net asset value per share (NAV) next determined after receipt of your purchase
order by the Transfer Agent or Prudential Securities plus a sales charge which
may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). See "How the Fund Values its Shares"
at page 19 and "Shareholder Guide-How to Buy Shares of the Fund" at page 23.
What Are My Purchase Alternatives?
The Fund offers three classes of shares:
*Class A Shares: Sold with an initial sales charge of up to 5% of the
offering price.
*Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from 5%
to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain
redemptions made within six years of purchase. Although
Class B shares are subject to higher ongoing distribution-
related expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are subject
to lower ongoing distribution-related expenses)
approximately seven years after purchase.
*Class C Shares: Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to higher
ongoing distribution-related expenses than Class A shares
but do not convert to another class.
See "Shareholder Guide-Alternative Purchase Plan" at page 24.
How Do I Sell My Shares?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds from redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide-How to Sell Your Shares" at page 26.
How Are the Dividends and Distributions Paid?
The Fund expects to pay dividends of net investment income, if any,
quarterly and make distributions of any net capital gains at least annually.
Dividends and distributions will be automatically reinvested in additional
shares of the Fund at NAV without a sales charge unless you request that they be
paid to you in cash. See "Taxes, Dividends and Distributions" at page 20.
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
FUND EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares Class B Shares Class C Shares
-------------- -------------- --------------
<S> <C> <C> <C>
Shareholder Transaction Expenses\D
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) .... 5% None None
Maximum Sales Load or Deferred Sales Load
Imposed on Reinvested Dividends ........ None None None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, whichever is lower) .......... None 5% during the first year, 1% on redemptions
decreasing by 1% annually made within one year
to 1% in the fifth and sixth of purchase
years and 0% the
seventh year*
Redemption Fees .......................... None None None
Exchange Fee ............................. None None None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Class A Shares Class B Shares Class C Shares**
-------------- -------------- --------------
Management Fees .......................... .75% .75% .75%
12b-1 Fees ............................... .25\D\D 1.00% 1.00%
Other Expenses ........................... .34\D\D .34\D\D .34%
Total Fund Operating Expenses ............ 1.34% 2.09% 2.09%
</TABLE>
<TABLE>
<CAPTION>
Example 1 year 3 years 5 years 10 years
- ------- ------ ------- ------- --------
You would pay the following expenses
on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption
at the end of each time period:
<S> <C> <C> <C> <C>
Class A ..................................... $63 $90 $120 $203
Class B ..................................... $71 $95 $122 $214
Class C** ................................... $31 $65 $112 $242
You would pay the following expenses on
the same investment, assuming no redemption:
Class A ..................................... $63 $90 $120 $203
Class B ..................................... $21 $65 $112 $214
Class C** ................................... $21 $65 $112 $242
</TABLE>
The above example with respect to Class C shares is based on restated data for
the Fund's fiscal year ended December 31, 1994. The above example with respect
to Class A and Class B shares is based on actual data for the Fund's fiscal year
ended December 31, 1994. The example should not be considered a representation
of past or future expenses. Actual expenses may be greater or less than those
shown.
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Fund will bear, whether directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "How the Fund is Managed." "Other Expenses" includes operating expenses of
the Fund, such as Directors' and professional fees, registration fees, reports
to shareholders and transfer agency and custodian fees.
** Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide-Conversion Feature-Class
B Shares."
** Estimated based on expenses expected to have been incurred if Class C
shares had been in existence during the entire fiscal year ended December
31, 1994.
\D Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Fund may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
each class of the Fund rather than on a per shareholder basis. Therefore,
long-term shareholders of the Fund may pay more in total sales charges than
the economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Fund is Managed-Distributor."
\D\D Although the Class A Distribution and Service Plan provides that the Fund
may pay a distribution fee of up to .30 of 1% per annum of the average
daily net assets of the Class A shares, the Distributor has agreed to limit
its distribution fees with respect to Class A shares of the Fund to no more
than .25 of 1% of the average daily net assets of the Class A shares for
the fiscal year ending December 31, 1995. Total Fund Operating Expenses
of Class A shares without such limitation would be 1.39%. See "How the Fund
Is Managed-Distributor."
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the indicated periods)
(Class A Shares)
- --------------------------------------------------------------------------------
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a share of Class A
common stock outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements.
<TABLE>
<CAPTION>
Class A
----------------------------------------------
January 22,
1990*
Year ended December 31, through
------------------------------- December 31,
1994 1993 1992\D 1991 1990
---- ---- ------ ---- ----
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ..... $12.26 $11.33 $11.07 $ 9.87 $10.88
------ ------ ------ ------ ------
Income from investment operations
Net investment income .................... 0.46 0.48 0.59 0.66 0.75
Net realized and unrealized gain (loss)
on investment transactions ............. (0.89) 0.93 0.31 1.31 (0.88)
----- ---- ---- ---- -----
Total from investment operations ......... (0.43) 1.41 0.90 1.97 (0.13)
----- ---- ---- ---- -----
Less distributions
Dividends from net investment income ..... (0.46) (0.48) (0.59) (0.66) (0.75)
Distributions from net realized
capital gains .......................... (0.50) - - - (0.09)
Distributions in excess of net
investment income ...................... - - (0.05) (0.11) (0.04)
----- ----- -----
Total distributions ...................... (0.96) (0.48) (0.64) (0.77) (0.88)
----- ----- ----- ----- -----
Net asset value, end of period ........... $10.87 $12.26 $11.33 $11.07 $ 9.87
====== ====== ====== ====== ======
TOTAL RETURN\D\D: ........................ (3.58)% 12.60% 8.31% 20.55% (1.18)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) .......... $12,364 $15,432 $ 9,422 $11,475 $ 7,397
Average net assets (000) ................. $11,724 $12,954 $11,096 $ 8,486 $ 5,980
Ratios to average net assets:
Expenses, including distribution fees .... 1.34% 1.29% 1.34% 1.30% 1.37%**
Expenses, excluding distribution fees .... 1.09% 1.09% 1.14% 1.10% 1.17%**
Net investment income (loss) ............. 3.45%# 3.85% 5.39% 6.18% 7.05%**
Portfolio turnover rate .................. 70% 84% 109% 82% 76%
<FN>
* Commencement of offering of Class A shares.
** Annualized.
\D Calculated based upon weighted average shares outstanding during the year.
\D\D Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than one full year are not
annualized.
# The net investment income ratio including nonrecurring items is 3.84%.
</TABLE>
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout each of the indicated periods)
(Class B Shares)
- --------------------------------------------------------------------------------
The following financial highlights for the five years ended December 31,
1994 have been audited by Deloitte & Touche LLP, independent accountants, whose
report thereon was unqualified. This information should be read in conjunction
with the financial statements and notes thereto, which appear in the Statement
of Additional Information. The following financial highlights contain selected
data for a share of Class B common stock outstanding, total return, ratios to
average net assets and other supplemental data for the periods indicated. The
information is based on data contained in the financial statements.
<TABLE>
<CAPTION>
December 5,
1985*
through
Year ended December 31, Dec. 31,
-------------------------------------------------------------------------- -----------
1994 1993 1992\D\D 1991 1990 1989 1988*** 1987 1986 1985
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period ....................... $12.27 $11.33 $11.08 $ 9.87 $11.35 $10.08 $ 9.65 $10.94 $10.13 $10.00
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment operations
Net investment income ............ 0.38 0.38 0.51 0.59 0.66 0.72 .64\D .62 .58\D .03\D
Net realized and unrealized gain
(loss) on investment transactions (0.89) 0.94 0.30 1.31 (1.35) 1.38 .51 (.18) .95 .10
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations . (0.51) 1.32 0.81 1.90 (0.69) 2.10 1.15 .44 1.53 .13
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less distributions
Dividends from net investment
income .......................... (0.38) (0.38) (0.51) (0.59) (0.66) (0.72) (.70) (.60) (.58) -
Distributions from net realized
capital gains ................... (0.50) - - - (0.09) (0.10) - (1.13) (.14) -
Distributions in excess of net
investment income ............... - - (0.05) (0.10) (0.04) (0.04) (0.02) - - -
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions .............. (0.88) (0.38) (0.56) (0.69) (0.79) (0.83) (.72) (1.73) (.72) -
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period ... $10.88 $12.27 $11.33 $11.08 $ 9.87 $11.35 $10.08 $ 9.65 $10.94 $10.13
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN\D\D\D: .............. (4.22)% 11.77% 7.43% 19.76% (6.10)% 21.23% 12.06% 3.45% 15.19% 1.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) .. $230,914 $309,854 $334,383 $400,961 $423,390 $571,084 $467,541 $474,733 $310,068 $99,031
Average net assets (000) ......... $270,496 $327,995 $357,956 $412,869 $492,335 $517,267 $492,003 $491,771 $246,998 $93,500
Ratios to average net assets:
Expenses, including
distribution fees ................ 2.09% 2.09% 2.14% 2.10% 2.12% 2.03% 2.05%\D 2.00% 1.99%\D 2.11%**\D
Expenses, excluding
distribution fees ................ 1.09% 1.09% 1.14% 1.10% 1.12% 1.04% 1.05%\D 1.01% 1.03%\D 1.14%**\D
Net investment income (loss) ..... 2.70%# 3.01% 4.64% 5.43% 6.33% 6.39% 6.38%\D 5.36% 5.41%\D 4.06%**\D
Portfolio turnover rate .......... 70% 84% 109% 82% 76% 91% 109% 138% 110% 0%
<FN>
* Recommencement of investment operations.
** Annualized.
*** Prudential Mutual Fund Management, Inc. succeeded The Prudential
Insurance Company of America as investment adviser on May 2, 1988.
\D Net of expense reimbursement.
\D\D Calculated based upon weighted average shares outstanding during the
year.
\D\D\D Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than one
full year are not annualized.
# The net investment income ratio including nonrecurring items is 3.09%.
</TABLE>
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the indicated period)
(Class C Shares)
- --------------------------------------------------------------------------------
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a share of Class C
common stock outstanding, total return, ratios to average net assets and other
supplemental data for the period indicated. The information is based on data
contained in the financial statements.
- --------------------------------------------------------------------------------
Class C
-----------------
August 1, 1994*
through
December 31, 1994
-----------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .......................... $11.90
------
Income from investment operations
Net investment income ......................................... 0.20
Net realized and unrealized gain (loss) on
investment transactions ..................................... (0.49)
------
Total from investment operations .............................. (0.29)
------
Less distributions
Dividends from net investment income .......................... (0.23)
Distributions from net realized capital gains ................. (0.50)
Distributions in excess of net investment income .............. -
Total distributions ........................................... (0.73)
------
Net asset value, end of period ................................ $10.88
======
TOTAL RETURN\D: ............................................... (2.49)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) ............................... $189***
Average net assets (000) ...................................... $200***
Ratios to average net assets:\D\D
Expenses, including distribution fees ......................... 1.27%**
Expenses, excluding distribution fees ......................... 0.27%**
Net investment income (loss) .................................. 2.92%**/#
Portfolio turnover rate ....................................... 70%
* Commencement of offering of Class C shares.
** Annualized.
*** Figures are actual and not rounded to the nearest thousand.
\D 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 the period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than one full year are not
annualized.
\D\D Since the Fund did not commence a public offering of Class C shares until
August 1, 1994, historical expenses and ratios of expenses to average net
assets of Class A and Class B shares are not necessarily indicative of
future expenses and related ratios of Class C shares.
# The net investment income ratio including nonrecurring items is 4.13%.
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
HOW THE FUND INVESTS
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek both high current income and
appreciation of capital. There can be no assurance that such objective will be
achieved. See "Investment Objective and Policies" in the Statement of Additional
Information.
The Fund's investment objective is a fundamental policy and, therefore, may
not be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities as defined in the Investment Company Act of 1940,
as amended (the Investment Company Act). Fund policies that are not fundamental
may be modified by the Board of Directors.
The Fund will seek to achieve its investment objective by investing
primarily in convertible securities, i.e., convertible bonds and convertible
preferred stocks, and/or synthetic convertibles, i.e., combinations of
securities comprised of nonconvertible fixed-income securities and warrants or
call options, which in the opinion of the investment adviser resemble
convertible securities in certain, but not all, respects. The components of
synthetic convertibles are not generally offered in the market as a unit, and
may be purchased by the Fund at different times. Synthetic convertibles may also
include money market instruments. See "Synthetic Convertibles" below. The
portfolio manager expects that the investment portfolio of the Fund will be
primarily comprised of convertibles and not synthetic convertibles.
Under normal circumstances, the Fund will invest at least 65% of its total
assets (determined at the time of purchase) in convertible securities and/or
synthetic convertibles (including temporarily unmatched components thereof). The
balance of the Fund's total assets may be invested in common stocks,
nonconvertible debt securities, preferred stocks, money market instruments
(other than those included in synthetic convertibles) and in options and futures
contracts and options thereon as described below. See "Hedging and Income
Enhancement Strategies."
The Fund is not required to sell securities for the purpose of assuring that
65% of its total assets are invested in convertible securities and synthetic
convertibles. Securities received upon conversion of convertible securities or
upon exercise of call options or warrants forming elements of synthetic
convertibles may be retained temporarily to permit orderly disposition of such
securities or to defer realization of gain or loss for federal income tax
purposes, and will be included in calculating the amount of the Fund's total
assets invested in true and synthetic convertibles.
Under certain other circumstances, where the investment adviser believes
that market conditions warrant a temporary defensive investment posture or
pending investment of proceeds from sales of the Fund's shares, the Fund may
invest without limit in money market instruments, including obligations issued
or guaranteed by the U.S. Government or its agencies or instrumentalities,
commercial paper, certificates of deposit, bankers' acceptances and other
obligations of domestic banks and repurchase agreements.
The Fund may invest in fixed-income securities rated Baa or lower by Moody's
Investors Service (Moody's) or BBB or lower by Standard & Poor's Ratings Group
(Standard & Poor's) or in non-rated fixed-income securities, which, in the
opinion of the Fund's investment adviser, are of comparable quality. 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, commonly known as "junk bonds," are considered speculative. A
description of corporate bond ratings is contained in the Appendix to this
Prospectus. See "Risk Factors Relating to Investing in High Yield Securities"
below.
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 risk associated with investments in securities
which carry medium to lower ratings and in comparable non-rated securities. The
yields and prices of such securities may tend to fluctuate more than those of
higher-rated securities.
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
8
<PAGE>
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 upon the
sale of securities. See "Taxes, Dividends and Distributions."
Convertible Securities
A convertible security is a fixed-income security (a bond or preferred
stock) which may be converted at a stated price within a specified period of
time into a certain quantity of the common stock of the same or a different
issuer. Convertible securities are senior to common stock in a corporation's
capital structure, but are usually subordinated to similar nonconvertible
securities. While providing a fixed income stream (generally higher in yield
than the income derivable from common stock but lower than that afforded by a
nonconvertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant upon a market price advance in the convertible security's
underlying common stock.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security) or
its "conversion value" (i.e., its value upon conversion into its underlying
common stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security is
also influenced by the market value of the security's underlying common stock.
The price of a convertible security tends to increase as the market value of the
underlying stock rises, whereas it tends to decrease as the market value of the
underlying stock declines. While no securities investment is without some risk,
investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer. Synthetic Convertibles
A "synthetic convertible" is created by combining distinct securities which
possess the two principal characteristics of a true convertible, i.e., fixed
income (fixed-income component) and the right to acquire equity securities
(convertibility component). This combination is achieved by investing in
nonconvertible fixed-income securities (nonconvertible bonds, preferred stocks
and money market instruments) and in warrants or call options traded on U.S. or
foreign exchanges or in the over-the-counter markets granting the holder the
right to purchase a specified quantity of securities within a specified period
of time at a specified price or to receive cash in the case of stock index
options.
However, the synthetic convertible differs from the true convertible
security in several respects. Unlike a true convertible, which is a single
security having a unitary market value, a synthetic convertible is comprised of
two distinct securities, each with its own market value. Therefore, the "market
value" of a synthetic convertible is the sum of the values of its fixed-income
component and its convertibility component. For this reason, the values of a
synthetic convertible and a true convertible security will respond differently
to market fluctuations.
More flexibility is possible in the assembly of a synthetic convertible than
in the purchase of a convertible security. For example, different issuers may be
represented in the fixed-income component and the stock underlying the
convertibility component. The character of a synthetic convertible allows the
investment adviser to combine components representing distinct issuers, or to
combine a fixed-income security with a call option on a stock index, when it
determines that such a combination would better promote the Fund's investment
objective and diversification. A synthetic convertible is also a more flexible
investment in that its two components may be purchased separately. For example,
the investment adviser may purchase a listed call option for inclusion in a
synthetic convertible but temporarily hold short-term investments while
postponing purchase of a corresponding bond pending development of more
favorable market conditions.
A holder of a synthetic convertible faces the risk that the price of the
stock, or the level of the market index, underlying the convertibility component
will decline, causing a decline in the value of the call option or warrant;
should the price of the stock or the level of the index fall below the exercise
price and remain there throughout the exercise period, the entire amount paid
for the call option or warrant would be lost. Since a synthetic convertible
includes the fixed-income component as well, the holder of a synthetic
convertible also faces the risk that interest rates will rise, causing a decline
in the value of the fixed-income instrument. In any event, a synthetic
convertible can be expected to have greater transaction costs than a true
convertible security.
9
<PAGE>
An investment policy which emphasizes a combination of convertible
securities and synthetic convertibles may be expected to enjoy certain
advantages over one which allows for only one of these investment vehicles.
Since convertible securities and synthetic convertibles may respond differently
to varying market conditions, it is expected that such a policy will afford
greater flexibility in tailoring the Fund's portfolio to the market. The
portfolio manager expects that the investment portfolio of the Fund will be
primarily comprised of convertibles and not synthetic convertibles.
Risk Factors Relating to Investing in High Yield Securities
Fixed-income securities are subject to the risk of an issuer's inability to
meet its principal and interest payment obligations (credit risk) and may also
be subject to price volatility due to such factors as interest rate sensitivity,
market perception of the creditworthiness of the issuer and general market
liquidity (market risk). Lower-rated or unrated securities of comparable quality
(i.e., high yield securities) are more likely to react to developments affecting
market and credit risk than are more highly rated securities, which react
primarily to movements in the general level of interest rates. The investment
adviser considers both credit risk and market risk in making investment
decisions for the Fund. Investors should carefully consider the relative risks
of investing in high yield securities and understand that such securities are
not generally meant for short-term trading.
The amount of high yield securities outstanding proliferated in the 1980's
in conjunction with the increase in merger and acquisition and leveraged buyout
activity. Under adverse economic conditions, there is a risk that highly
leveraged issuers may be unable to service their debt obligations or to repay
their obligations upon maturity. In addition, the secondary market for high
yield securities, which is concentrated in relatively few market makers, may not
be as liquid as the secondary market for more highly rated securities. Under
adverse market or economic conditions, the secondary market for high yield
securities could contract further, independent of any specific adverse changes
in the condition of a particular issuer. As a result, the investment adviser
could find it more difficult to sell these securities or may be able to sell the
securities only at prices lower than if such securities were widely traded.
Prices realized upon the sale of such lower-rated or unrated securities, under
these circumstances, may be less than the prices used in calculating the Fund's
net asset value.
Federal laws require the divestiture by federally insured savings and loan
associations of their investments in high yield bonds and limit the
deductibility of interest by certain corporate issuers of high yield bonds.
These laws could adversely affect the Fund's net asset value and investment
practices, the secondary market for high yield securities, the financial
condition of issuers of these securities and the value of outstanding high yield
securities.
Lower-rated or unrated debt obligations of comparable quality also present
risks based on payment expectations. If an issuer calls the obligation for
redemption, the Fund may have to replace the security with a lower yielding
security, resulting in a decreased return for investors. If the Fund experiences
unexpected net redemptions, it may be forced to sell its higher-rated
securities, resulting in a decline in the overall credit quality of the Fund's
portfolio and increasing the exposure of the Fund to the risks of high yield
securities.
During the year ended December 31, 1994, the monthly dollar weighted
average ratings of the debt and preferred stock obligations held by the Fund,
expressed as a percentage of the Fund's total investments, were as follows:
Percentage of Total
Ratings Investments
------- -------------------
AAA/Aaa 0.0%
AA/Aa 4.2
A/A 4.3
BBB/Baa 14.5
BB/Ba 24.7
B/B 14.9
Unrated 5.3
10
<PAGE>
Securities of Foreign Issuers
The Fund may invest up to 30% of its total assets in securities of foreign
issuers. Foreign debt securities may provide higher yields than securities of
domestic issuers which have similar maturities and quality. Under certain market
conditions these investments may be less liquid than the securities of U.S.
corporations and are certainly less liquid than securities issued or guaranteed
by the U.S. Government, its instrumentalities or agencies.
Foreign securities involve certain risks, which should be considered
carefully by an investor in the Fund. These risks include political or economic
instability in the country of issue, the difficulty of predicting international
trade patterns, the possibility of imposition of exchange controls and the risk
of currency fluctuations. Such securities may be subject to greater fluctuations
in price than securities issued by U. S. corporations or issued or guaranteed by
the U. S. Government, its instrumentalities or agencies. In addition, there may
be less publicly available information about a foreign company than about a
domestic company. Foreign companies generally are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies. There is generally less government regulation
of securities exchanges, brokers and listed companies abroad than in the United
States, and, with respect to certain foreign countries, there is a possibility
of expropriation, confiscatory taxation or diplomatic developments which could
affect assets of the Fund held 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.
If the security is foreign currency denominated, it may be affected favorably or
unfavorably by changes in currency rates and in exchange control regulations,
and costs may be incurred in connection with conversions between currencies.
HEDGING AND INCOME ENHANCEMENT STRATEGIES
The Fund may also engage in various portfolio strategies, including
derivatives, to reduce certain risks of its investments and to attempt to
enhance return. These strategies include (1) the purchase of stock and stock
index call options for use as components in creating synthetic convertibles, (2)
the purchase of options and the writing (i.e., sale) of covered call options on
debt and equity securities and on stock indices, (3) the purchase of put and
call options on interest rate futures and the writing of covered call options on
interest rate futures for bona fide hedging purposes and (4) the purchase and
sale of listed stock index futures and options thereon. The Fund may engage in
these transactions on U.S. or foreign securities exchanges or, in the case of
debt, equity and stock index options, in the over-the-counter market. The Fund's
ability to use these strategies may be limited by market conditions, regulatory
limits and tax considerations and there can be no assurance that any of these
strategies will succeed. New financial products and risk management techniques
continue to be developed and the Fund may use these new investments and
techniques to the extent consistent with its investment objective and policies.
See "Investment Objective and Policies" in the Statement of Additional
Information.
Options Transactions
A call option is a short-term contract which gives the purchaser, in return
for a premium paid, the right to buy the security subject to the option at a
specified exercise price at any time during the term of the option. The writer
of the call option, in return for the premium, has the obligation, upon exercise
of the option, to deliver, depending on the terms of the option contract, the
underlying securities to the purchaser upon receipt of the exercise price. When
the Fund writes a call option, the Fund gives up the potential for gain on the
underlying securities in excess of the exercise price of the option during the
period that the option is open.
A put option gives the purchaser, in return for a premium, the right, for a
specified period of time, to sell the securities subject to the option to the
writer of the put at the specified exercise price. The writer of the put, in
return for the premium, has the obligation, upon exercise of the option, to
acquire the securities underlying the option at the exercise price. The Fund as
the writer of a put option might, therefore, be obligated to purchase underlying
securities for more than their current market price.
11
<PAGE>
The Fund will write call options only if they are covered. A call option on
debt or equity securities written by the Fund is "covered" if the Fund owns the
security underlying the option or has an absolute and immediate right to acquire
that security without additional cash consideration (or for additional cash
consideration held in a segregated account by its Custodian) upon conversion or
exchange of other securities held in its portfolio. A call option on debt or
equity securities written by the Fund is also covered if the Fund holds, on a
share-for-share basis, a call on the same security as the call written where the
exercise price of the call held is equal to or less than the exercise price of
the call written, or greater than the exercise price of the call written if the
difference is maintained by the Fund in cash, Treasury bills or other high grade
short-term obligations or short-term U.S. Government securities in a segregated
account with its Custodian. The premium paid by the purchaser of an option will
reflect, among other things, the relationship of the exercise price to the
market price and the volatility of the underlying security, the remaining term
of the option, supply and demand and interest rates. For information concerning
the manner in which the Fund may "cover" stock index call options, see
"Investment Objective and Policies-Options on Stock Indices" in the Statement of
Additional Information.
If a call option written by the Fund on debt or equity securities is
exercised, the Fund must sell the underlying security in exchange for the
exercise price. Where the underlying security is common stock, the Fund will
usually not own the stock itself but will be the holder of either a security
convertible into the common stock or a call or warrant constituting an element
of a synthetic convertible and carrying the right to acquire the stock. In such
a case, the Fund will fulfill its obligation under the call by converting the
Fund's convertible security, or exercising the call or warrant in the synthetic
convertible, and delivering the stock received in exchange, or by purchasing the
required stock in the market for delivery to the holder of its call.
The Fund may purchase a "protective put," i.e., a put option acquired for
the purpose of protecting a portfolio security from a decline in market value.
In exchange for the premium paid for the put option, the Fund acquires the right
to sell the underlying security at the exercise price of the put regardless of
the extent to which the underlying security declines in value. The loss to the
Fund is limited to the premium paid for, and transaction costs in connection
with, the put plus the initial excess, if any, of the market price of the
underlying security over the exercise price. However, if the market price of the
security underlying the put rises, the profit the Fund realizes on the sale of
the security will be reduced by the premium paid for the put option less any
amount (net of transaction costs) for which the put may be sold. Similar
principles apply to the purchase of puts on stock indices and interest rate
futures. See "Options on Stock Indices" and "Futures Transactions-Options on
Interest Rate Futures" below.
Options on Stock Indices. Options on stock indices are similar to options on
stock except that, rather than the right to take or make delivery of stock at a
specified price, an option on a stock index gives the holder the right in return
for a premium paid to receive, upon exercise of the option, an amount of cash if
the closing level of the stock index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. The writer of the index option in return for a premium is
obligated to pay the amount of cash due upon exercise of the option.
The Fund's successful use of options on indices depends upon the investment
adviser's ability to predict the direction of the market and is subject to
various additional risks. The correlation between movements in the index and the
price of the securities being written against is imperfect and the risk from
imperfect correlation increases as the composition of the Fund's portfolio
diverges from the composition of the relevant index. Accordingly, a decrease in
the value of the securities being written against may not be wholly offset by a
gain on the exercise of a stock index put option held by the Fund. Likewise, if
a stock index call option written by the Fund is exercised, the Fund may incur a
loss on the transaction which is not offset, wholly or in part, by an increase
in the value of the securities being written against, which securities may,
depending on market circumstances, decline in value. For additional discussion
of risks associated with these transactions, see "Investment Objective and
Policies-Options on Stock Indices" in the Statement of Additional Information.
12
<PAGE>
Futures Transactions
Stock Index Futures. The Fund may purchase and sell stock index futures
contracts and options thereon which are traded on a commodities exchange or
board of trade for certain hedging and risk management purposes in accordance
with regulations of the Commodity Futures Trading Commission.
A stock index futures contract is an agreement in which one party agrees to
deliver to the other an amount of cash equal to a specific dollar amount times
the difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement is made.
No physical delivery of the underlying stocks in the index is made. See
"Investment Objective and Policies-Listed Stock Index Futures and Options
Thereon" in the Statement of Additional Information.
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act of 1940, as amended, are exempt from
the definition of "commodity pool operator", subject to compliance with certain
conditions. The exemption is conditioned upon the Fund's purchasing and selling
futures contracts and options thereon for bona fide hedging transactions, except
that the Fund may purchase and sell futures contracts and options thereon for
any other purpose to the extent that the aggregate initial margin and option
premium do not exceed 5% of the liquidation value of the Fund's total assets.
Although there are no other limits applicable to futures contracts, the value of
all futures contracts sold will not exceed the total market value of the Fund's
portfolio.
Options on Interest Rate Futures. The Fund may purchase put and call options
on interest rate futures to hedge its portfolio against interest rate changes.
The Fund may also write covered call options for bona fide hedging purposes.
An interest rate futures contract is an agreement to purchase or sell an
agreed amount of debt securities at a set price for delivery on a future date.
Upon exercise of an option on a futures contract, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated 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.
A call option written by the Fund on an interest rate futures contract is
"covered" if the Fund owns debt securities in an amount corresponding to the
open short futures position. In the event the Fund is assigned an exercise
notice on a call option it has written or is unable to effect a closing
transaction in an option it has purchased, the Fund may temporarily assume a
position in the related futures contract pending orderly disposal of the
position through an offsetting transaction. For additional discussion of options
on interest rate futures, including certain risks associated with these
transactions, see "Options on Interest Rate Futures" in the Appendix.
The Fund's successful use of futures contracts and options thereon depends
upon the investment adviser's ability to predict the direction of the market and
is subject to various additional risks. The correlation between movements in the
price of a futures contract and the price of the securities being hedged is
imperfect and there is a risk that the value of the securities being hedged may
increase or decrease at a greater rate than the related futures contract,
resulting in losses to the Fund. Certain futures exchanges or boards of trade
have established daily limits on the amount that the price of a futures contract
or options thereon may vary, either up or down, from the previous day's
settlement price. These daily limits may restrict the Fund's ability to purchase
or sell certain futures contracts or options thereon on any particular day. In
addition, if the Fund purchases futures to hedge against market advances before
it can invest in common stock in an advantageous manner and the market declines,
the Fund might create a loss on the futures contract. In addition, the ability
of the Fund to close out a futures position or an option depends on a liquid
secondary market. There is no assurance that liquid secondary markets will exist
for any particular futures contract or option at any particular time. See
"Investment Objective and Policies" in the Statement of Additional Information.
13
<PAGE>
The Fund's ability to enter into futures contracts and options thereon may
also be limited by the requirements of the Internal Revenue Code of 1986, as
amended (the Internal Revenue Code) for qualification as a regulated investment
company. See "Taxes" in the Statement of Additional Information.
Risks of Hedging and Income 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. 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, securities prices and markets; (2) imperfect correlation between
the price of options and futures contracts and options thereon and movements in
the prices of the securities being hedged; (3) the fact that skills needed to
use these strategies are different from those needed to select portfolio
securities; (4) the possible absence of a liquid secondary market for any
particular instrument at any time; (5) the possible need to defer closing out
certain hedged positions to avoid adverse tax consequences; and (6) the possible
inability of the Fund to purchase or sell a portfolio security at a time that
otherwise would be favorable for it to do so, or the possible need for the Fund
to sell a 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. See "Investment Objective and Policies" and "Taxes" in the
Statement of Additional Information.
OTHER INVESTMENTS AND POLICIES
When-Issued and Delayed Delivery Securities
The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place as much as a month or more in the future in order to secure what is
considered to be an advantageous price and yield to the Fund at the time of
entering into the transaction. The Fund's Custodian will maintain, in a
segregated account of the Fund, cash, U.S. Government securities or other liquid
high-grade debt obligations having a value equal to or greater than the Fund's
purchase commitments. The Custodian will likewise segregate securities sold on a
delayed delivery basis. The securities so purchased are subject to market
fluctuation and no interest accrues to the purchaser during the period between
purchase and settlement. At the time of delivery of the securities the value may
be more or less than the purchase price and an increase in the percentage of the
Fund's assets committed to the purchase of securities on a when-issued or
delayed delivery basis may increase the volatility of the Fund's net asset
value.
Short Sales Against-the-Box
The Fund may make short sales of securities or maintain a short position,
provided that at all times when a short position is open, the Fund owns an equal
amount of such securities or securities convertible into or exchangeable for,
without payment of any further consideration, an equal amount of the securities
of the same issuer as the securities sold short (a short sale against-the-box),
and that not more than 25% of the Fund's net assets (determined at the time of
the short sale) may be subject to such sales. Short sales will be made primarily
for hedging purposes, or to defer realization of gain or loss for federal income
tax purposes.
Illiquid Securities
The Fund may invest up to 10% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities markets
either within or outside of the United States. Restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933, as amended
(the Securities Act), and privately placed commercial paper that have a readily
available market are not considered illiquid for purposes of this
14
<PAGE>
limitation. The investment adviser will monitor the liquidity of such restricted
securities under the supervision of the Board of Directors. Repurchase
agreements subject to demand are deemed to have a maturity equal to the
applicable notice period.
The staff of the Securities and Exchange Commission (SEC) has taken the
position that purchased over-the-counter options and the assets used as "cover"
for written over-the-counter options are illiquid securities unless the Fund and
the counterparty have provided for the Fund, at the Fund's election, to unwind
the over-the-counter 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."
Borrowing
The Fund may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes and for the clearance of transactions. The Fund may pledge up
to 20% of its total assets to secure these borrowings. However, the Fund will
not purchase portfolio securities if its borrowings exceed 5% of its net assets.
Securities Lending
The Fund is permitted to lend its portfolio securities. See "Investment
Objective and Policies-Lending of Securities" in the Statement of Additional
Information.
Repurchase Agreements
The Fund may on occasion enter into repurchase agreements, whereby the
seller of a security agrees to repurchase that 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 repurchase agreement. The Fund's repurchase agreements will at
all times be fully collateralized in an amount at least equal to the purchase
price, including accrued interest earned on the underlying securities. The
instruments held as collateral are valued daily, and if the value of the
instruments declines, the Fund will require additional collateral. If the seller
defaults and the value of the collateral securing the repurchase agreement
declines, the Fund may incur a loss. The Fund participates in a joint repurchase
agreement account with other investment companies managed by Prudential Mutual
Fund Management, Inc. pursuant to an order of the SEC. See "Investment Objective
and Policies-Repurchase Agreements" in the Statement of Additional Information.
Portfolio Turnover
As a result of the Fund's investment policies, there may be a substantial
turnover of the Fund's portfolio. The Fund's portfolio turnover rate may exceed
100% but is not expected to exceed 200%. High portfolio turnover may involve
correspondingly greater brokerage commissions and other transaction costs, which
will be borne directly by the Fund. See "Portfolio Transactions and Brokerage"
in the Statement of Additional Information. In addition, high portfolio turnover
may result in increased short-term capital gains, which when distributed to
shareholders are treated as ordinary income. See "Taxes, Dividends and
Distributions."
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's
15
<PAGE>
outstanding voting securities, as defined in the Investment Company Act. See
"Investment Restrictions" in the Statement of Additional Information.
- --------------------------------------------------------------------------------
HOW THE FUND IS MANAGED
- --------------------------------------------------------------------------------
The Fund has a Board of Directors which, in addition to overseeing the
actions of the Fund's Manager, Subadviser and Distributor, as set forth below,
decides upon matters of general policy. The Fund's Manager conducts and
supervises the daily business operations of the Fund. The Fund's Subadviser
furnishes daily investment advisory services.
For the fiscal year ended December 31, 1994, the Fund's total expenses as a
percentage of average net assets for the Fund's Class A, Class B and Class C
shares were 1.34%, 2.09% and 1.27% (annualized), respectively. See "Financial
Highlights."
MANAGER
Prudential Mutual Fund Management, Inc. (PMF or the Manager), One Seaport
Plaza, New York, New York 10292, is the Manager of the Fund and is compensated
for its services at an annual rate of .75 of 1% of the first $500 million of the
Fund's average daily net assets, .70 of 1% of the next $250 million of the
Fund's average daily net assets, .65 of 1% of the next $250 million of the
Fund's average daily net assets, and .60 of 1% of the Fund's average daily net
assets in excess of $1 billion. PMF was incorporated in May 1987 under the laws
of the State of Delaware. For the fiscal year ended December 31, 1994, the Fund
paid management fees to PMF of .75% of the Fund's average net assets. See
"Manager" in the Statement of Additional Information.
As of January 31, 1995, PMF served as the manager to 39 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $45 billion.
Under the Management Agreement with the Fund, PMF manages the investment
operations of the Fund and also administers the Fund's corporate affairs. See
"Manager" in the Statement of Additional Information.
Under a Subadvisory Agreement between PMF and The Prudential Investment
Corporation (PIC or the Subadviser), PIC furnishes investment advisory services
in connection with the management of the Fund and is reimbursed by PMF for its
reasonable costs and expenses incurred in providing such services. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
The current portfolio manager of the Fund is Gregory Goldberg, a Vice
President of Prudential Investment Advisors, a unit of PIC. Mr. Goldberg has
responsibility for the day-to-day management of the Fund's portfolio. Mr.
Goldberg has managed the Fund's portfolio since February 1994. Mr. Goldberg was
previously employed by Daiwa International Capital Management (January
1988-December 1993) as a portfolio manager for institutional clients. Prior
thereto, he was employed by Industrial Bank of Japan (October 1986-January
1988). Mr. Goldberg joined PIC on January 11, 1994.
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance
Company of America (Prudential), a major diversified insurance and financial
services company.
DISTRIBUTOR
Prudential Mutual Fund Distributors, Inc. (PMFD), One Seaport Plaza, New
York, New York 10292, is a corporation organized under the laws of the State of
Delaware and serves as the distributor of the Class A shares of the Fund. It is
a wholly-owned subsidiary of PMF.
16
<PAGE>
Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, is a corporation organized under the
laws of the State of Delaware and serves as the distributor of the Class B and
Class C shares of the Fund. It is an indirect, wholly-owned subsidiary of
Prudential.
Under separate Distribution and Service Plans (the Class A Plan, the Class B
Plan and the Class C Plan, collectively, the Plans) adopted by the Fund under
Rule 12b-1 under the Investment Company Act and separate distribution agreements
(the Distribution Agreements), PMFD and Prudential Securities (collectively, the
Distributor) incur the expenses of distributing the Fund's Class A, Class B and
Class C shares. These expenses include commissions and account servicing fees
paid to, or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of Prudential Securities and Prusec associated with the sale
of Fund shares, including lease, utility, communications and sales promotion
expenses. The State of Texas requires that shares of the Fund may be sold in
that state only by dealers or other financial institutions which are registered
there as broker-dealers.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
Under the Class A Plan, the Fund may pay PMFD for its distribution-related
activities with respect to Class A shares at an annual rate of up to .30 of 1%
of the average daily net assets of the Class A shares. The Class A Plan provides
that (i) up to .25 of 1% of the average daily net assets of the Class A shares
may be used to pay for personal service and/or the maintenance of shareholder
accounts (service fee) and (ii) total distribution fees (including the service
fee of up to .25 of 1%) may not exceed .30 of 1% of the average daily net assets
of the Class A shares. PMFD has 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 ending December 31, 1995.
For the fiscal year ended December 31, 1994, PMFD received payments of
$29,311 under the Class A Plan. This amount was primarily expended for payment
of account servicing fees to finanical advisers and other persons who sell Class
A shares. For the fiscal year ended December 31, 1994, PMFD also received
approximately $24,000 in initial sales charges.
Under the Class B and Class C Plans, the Fund pays Prudential Securities
for its distribution-related activities with respect to Class B and Class C
shares at an annual rate of 1% of the average daily net assets of each of the
Class B and Class C shares. The Class B and Class C Plans provide for the
payment to Prudential Securities of (i) an asset-based sales charge of .75 of 1%
of the average daily net assets of each of the Class B and Class C shares and
(ii) a service fee of .25 of 1% of the average daily net assets of each of the
Class B and Class C shares. The service fee is used to pay for personal service
and/or the maintenance of shareholder accounts. Prudential Securities also
receives contingent deferred sales charges from certain redeeming shareholders.
See "Shareholder Guide-How to Sell Your Shares-Contingent Deferred Sales
Charges."
For the fiscal year ended December 31, 1994, Prudential Securities incurred
distribution expenses of approximately $1,695,400 under the Class B Plan and
received $2,704,958 from the Fund under the Class B Plan. In addition,
Prudential Securities received approximately $354,300 in contingent deferred
sales charges from redemptions of Class B shares during the year.
For the fiscal year ended December 31, 1994, the Fund paid distribution
expenses of .25%, 1% and 1% (annualized) of the average daily net assets of the
Class A, Class B and Class C shares, respectively. The Fund records all
17
<PAGE>
payments made under the Plans as expenses in the calculation of net investment
income. Prior to August 1, 1994, the Class A and Class B Plans operated as
"reimbursement type" plans and, in the case of Class B, provided for the
reimbursement of distribution expenses incurred in current and prior years. See
"Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of shares of the Fund will
be allocated to each class based upon the ratio of sales of each class to the
sales of all shares of the Fund other than expenses allocable to a particular
class. The distribution fee and sales charge of one class will not be used to
subsidize the sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Fund, including a
majority of the Directors who are not "interested persons" of the Fund (as
defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Plan or any agreement related to the
Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each Plan
may be terminated at any time by vote of a majority of the Rule 12b-1 Directors
or of a majority of the outstanding shares of the applicable class of the Fund.
The Fund will not be obligated to pay expenses incurred under any Plan if it is
terminated or not continued.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers and other persons who
distribute shares of the Fund. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition
of a $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI's settlement with the
state securities regulators included an agreement to pay a penalty of $500,000
per jurisdiction. PSI consented to a censure and to the payment of a $5,000,000
fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
18
<PAGE>
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant
for the Fund, provided that the commissions, fees or other remuneration it
receives are fair and reasonable. See "Portfolio Transactions and Brokerage" in
the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Its mailing address is P.O. Box
1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison,
New Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
- --------------------------------------------------------------------------------
HOW THE FUND VALUES ITS SHARES
- --------------------------------------------------------------------------------
The Fund's net asset value per share or NAV is determined by subtracting
its liabilities from the value of its assets and dividing the remainder by the
number of outstanding shares. NAV is calculated separately for each class. The
Board of Directors has fixed the specific time of day for the computation of the
Fund's net asset value to be as of 4:15 P.M., New York time.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Fund or days on which changes in the
value of the Fund's portfolio securities do not materially affect the NAV. The
New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. It is
expected, however, that the NAV of the three classes will tend to converge
immediately after the recording of dividends, if any, which will differ by
approximately the amount of the distribution-related expense accrual
differential among the classes.
19
<PAGE>
- --------------------------------------------------------------------------------
HOW THE FUND CALCULATES PERFORMANCE
- --------------------------------------------------------------------------------
From time to time the Fund may advertise its total return (including
"average annual" total return and "aggregate" total return) and yield in
advertisements or sales literature. Total return and yield are calculated
separately for Class A, Class B and Class C shares. These figures are based on
historical earnings and are not intended to indicate future performance. The
"total return" shows how much an investment in the Fund would have increased
(decreased) over a specified period of time (i.e., one, five or ten years or
since inception of the Fund) assuming that all distributions and dividends by
the Fund were reinvested on the reinvestment dates during the period and less
all recurring fees. The "aggregate" total return reflects actual performance
over a stated period of time. "Average annual" total return is a hypothetical
rate of return that, if achieved annually, would have produced the same
aggregate total return if performance had been constant over the entire period.
"Average annual" total return smooths out variations in performance and takes
into account any applicable initial or contingent deferred sales charges.
Neither "average annual" total return nor "aggregate" total return takes into
account any federal or state income taxes which may be payable upon redemption.
The "yield" refers to the income generated by an investment in the Fund over a
one-month or 30-day period. This income is then "annualized;" that is, the
amount of income generated by the investment during that 30-day period is
assumed to be generated each 30-day period for twelve periods and is shown as a
percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. The Fund also
may include comparative performance information in advertising or marketing the
Fund's shares. Such performance information may include data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. The Fund will include
performance data for each class of shares of the Fund in any advertisement or
information including performance data of the Fund. Further performance
information is contained in the Fund's annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder
Guide-Shareholder Services-Reports to Shareholders."
- --------------------------------------------------------------------------------
TAXES, DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
Taxation of the Fund
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under the Internal Revenue Code. Accordingly, the
Fund will not be subject to federal income taxes on its net investment income
and capital gains, if any, that it distributes to its shareholders. See "Taxes"
in the Statement of Additional Information.
Under the Internal Revenue Code, special rules apply to the treatment of
certain options and futures contracts (Section 1256 contracts). At the end of
each year, such investments 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 market value. Sixty percent of any gain or loss recognized on these
"deemed sales" and on actual dispositions will be treated as long-term capital
gain or loss, and the remainder will be treated as short-term capital gain or
loss. See "Taxes" in the Statement of Additional Information.
The Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). PFICs are foreign corporations which derive a majority of
their income from passive sources. For tax purposes, the Fund's investments in
PFICs may subject the Fund to federal income taxes on certain income and gains
realized by the Fund. To the extent permitted by applicable law, the Fund may
elect to mark-to-market its investments in PFICs rather than subject itself to
such tax.
Certain gains or losses from fluctuations in foreign currency exchange
rates (Section 988 gains and losses) will affect the amount of ordinary income
the Fund will be able to pay as dividends. See "Taxes" in the Statement of
Additional Information.
20
<PAGE>
Taxation of Shareholders
Any dividends out of net investment income, together with distributions of
net short-term gains (i.e., the excess of net short-term capital gains over
long-term capital losses) and net currency gains, will be taxable as ordinary
income to the shareholder whether or not reinvested. Any net capital gains
(i.e., the excess of net long-term capital gains over net short-term capital
losses) distributed to shareholders will be taxable as long-term capital gains
to shareholders, whether or not reinvested and regardless of the length of time
a shareholder has owned his or her shares. The maximum long-term capital gains
rate for individual shareholders is 28%. The maximum long-term capital gains
rate for corporate shareholders is currently the same as the maximum tax rate
for ordinary income.
Dividends and distributions are generally taxable to shareholders in the
year in which received. However, certain dividends declared by the Fund will be
treated as received by shareholders on the record date for such dividends. This
rule applies to dividends declared by the Fund in October, November or December
of a calendar year, payable to shareholders of record on a date in any such
month, if such dividends are paid during January of the following calendar year.
Dividends paid by the Fund will be eligible for a dividends received
deduction of 70% for corporate shareholders to the extent the Fund's income is
derived from qualified dividends paid by domestic corporations. Dividends
attributable to dividends from foreign corporations, interest income, capital
gain net income, gain or loss from Section 1256 contracts and from other sources
are not eligible for the corporate dividends received deduction. See "Taxes" in
the Statement of Additional Information. Corporate shareholders should consult
their tax advisers regarding other requirements applicable to the
dividends-received deduction.
Any gain or loss realized upon a sale or redemption of Fund shares by a
shareholder who is not a dealer in securities will generally be treated as
long-term capital gain or loss if the shares have been held more than one year
and otherwise as short-term capital gain or loss. Any such loss, however, on
shares that are held for six months or less will be treated as long-term capital
loss to the extent of any capital gain distributions received by the shareholder
with respect to those shares.
The Fund has obtained opinions of counsel to the effect that neither (i)
the conversion of Class B shares into Class A shares nor (ii) the exchange of
Class B or Class C shares for Class A shares constitutes a taxable event for
federal income tax purposes. However, such opinions are not binding on the
Internal Revenue Service.
Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes.
Withholding Taxes
Under the Internal Revenue Code, the Fund is required to withhold and remit
to the U.S. Treasury 31% of dividends, capital gain distributions and redemption
proceeds on the accounts of those shareholders who fail to furnish correct tax
identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of certain
foreign shareholders). Withholding at this rate is also required from dividends
and capital gains distributions (but not redemption proceeds) payable to
shareholders who are otherwise subject to backup withholding. Dividends of net
investment income and net short-term capital gains paid to a foreign shareholder
will generally be subject to a U.S. withholding rate of 30% (or lower treaty
rate).
Dividends and Distributions
The Fund expects to pay dividends of net investment income, if any,
quarterly and make distributions at least annually of any net capital gains.
Dividends paid by the Fund with respect to each class of shares, to the extent
any dividends are paid, will be calculated in the same manner, at the same time,
on the same day and will be in the same
21
<PAGE>
amount except that each class will bear its own distribution charges, generally
resulting in lower dividends for Class B and Class C shares. Distributions of
net capital gains, if any, will be in the same amount for each class of shares.
See "How the Fund Values its Shares."
The Fund has utilized its capital loss carryforward of approximately
$8,607,500 to offset taxable gains realized and recognized subsequent to
December 31, 1993.
Dividends and distributions will be paid in additional Fund shares based on
the NAV of each class on the record date, or such other date as the Board of
Directors may determine, unless the shareholder elects in writing not less than
five business days prior to the record date to receive such dividends and
distributions in cash. Such election should be submitted to Prudential Mutual
Fund Services, Inc., Attention: Account Maintenance, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. The Fund will notify each shareholder after
the close of the Fund's taxable year both of the dollar amount and the taxable
status of that year's dividends and distributions on a per share basis. If you
hold shares through Prudential Securities, you should contact your financial
adviser to elect to receive dividends and distributions in cash. To the extent
that, in a given year, distributions to shareholders exceed recognized net
investment income and recognized short-term and long-term capital gains for the
year, shareholders will receive a return of capital in respect of such year and,
in an annual statement, will be notified of the amount of any return of capital
for such year.
When the Fund goes "ex-dividend," the NAV of each class is reduced by the
amount of the dividend or distribution allocable to each class. If you buy
shares just prior to the ex-dividend date (which generally occurs four business
days prior to the record date), the price you pay will include the dividend or
distribution and a portion of your investment will be returned to you as a
taxable dividend or distribution. You should, therefore, consider the timing of
dividends and distributions when making your purchases.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------------
DESCRIPTION OF COMMON STOCK
The Fund was incorporated in Maryland on May 19, 1980. The Fund is
authorized to issue 2 billion shares of common stock, $.10 par value per share,
divided into three classes, designated Class A, Class B and Class C common
stock, each of which consists of 666,666,666-2/3 authorized shares. Each class
of common stock represents an interest in the same assets of the Fund and is
identical in all respects except that (i) each class bears different
distribution expenses, (ii) each class has exclusive voting rights with respect
to its distribution and service plan (except that the Fund has agreed with the
SEC in connection with the offering of a conversion feature on Class B shares to
submit any amendment of the Class A Plan to both Class A and Class B
shareholders), (iii) each class has a different exchange privilege and (iv) only
Class B shares have a conversion feature. See "How the Fund is
Managed-Distributor." The Fund has received an order from the SEC permitting the
issuance and sale of multiple classes of common stock. Currently, the Fund is
offering three classes, designated Class A, Class B and Class C shares. 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 of Directors may determine.
The Board of Directors may increase or decrease the number of authorized
shares without approval by the shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances as described under "Shareholder Guide-How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except as noted above, and each class bears the
expenses related to the distribution of its shares. Except for the conversion
feature applicable to the Class B shares, there are no conversion,
22
<PAGE>
preemptive or other subscription rights. In the event of liquidation, each share
of common stock of the Fund is entitled to its portion of all of the Fund's
assets after all debt and expenses of the Fund have been paid. Since Class B and
Class C shares generally bear higher distribution expenses than Class A shares,
the liquidation proceeds to shareholders of those classes are likely to be lower
than to Class A shareholders. The Fund's shares do not have cumulative voting
rights for the election of Directors.
The Fund does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Fund will not be required to hold meetings of
shareholders unless, for example, the election of Directors is required to be
acted on by shareholders under the Investment Company Act. Shareholders have
certain rights, including the right to call a meeting upon a vote of 10% of the
Fund's outstanding shares for the purpose of voting on the removal of one or
more Directors or to transact any other business.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which
has been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
- --------------------------------------------------------------------------------
SHAREHOLDER GUIDE
- --------------------------------------------------------------------------------
HOW TO BUY SHARES OF THE FUND
You may purchase shares of the Fund through Prudential Securities, Prusec or
directly from the Fund, through its Transfer Agent, Prudential Mutual Fund
Services, Inc. (PMFS or the Transfer Agent), Attention: Investment Services,
P.O. Box 15020, New Brunswick, New Jersey 08906-5020. The minimum initial
investment for Class A and Class B shares is $1,000 per class and $5,000 for
Class C shares. The minimum subsequent investment is $100 for all classes. All
minimum investment requirements are waived for certain retirement and employee
savings plans or custodial accounts for the benefit of minors. For purchases
made through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment is $50. The minimum initial requirement is waived for
purchases of Class A shares effected through an exchange of Class B shares of
The BlackRock Government Income Trust. See "Shareholder Services" below.
The purchase price is the NAV next determined following receipt of an order
by the Transfer Agent or Prudential Securities plus a sales charge which, at
your option, may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). See "Alternative
Purchase Plan" below. See also "How the Fund Values its Shares."
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a stock certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders who
hold their shares through Prudential Securities will not receive stock
certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
23
<PAGE>
Purchase by Wire. For an initial purchase of shares of the Fund by wire,
you must first telephone PMFS at (800) 225-1852 (toll-free) to receive an
account number. The following information will be requested: your name, address,
tax identification number, class election, dividend distribution election,
amount being wired and wiring bank. Instructions should then be given by you to
your bank to transfer funds by wire to State Street Bank and Trust Company
(State Street), Boston, Massachusetts, Custody and Shareholder Services
Division, Attention: Prudential IncomeVertible(R) Fund, Inc., specifying on the
wire the account number assigned by PMFS and your name and identifying the sales
charge alternative (Class A, Class B or Class C shares).
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Fund as
of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential IncomeVertible(R)
Fund, Inc., Class A, Class B or Class C shares and your name and individual
account number. It is not necessary to call PMFS to make subsequent purchase
orders utilizing Federal Funds. The minimum amount which may be invested by wire
is $1,000.
ALTERNATIVE PURCHASE PLAN
The Fund offers three classes of shares (Class A, Class B and Class C
shares) which allows you to choose the most beneficial sales charge structure
for your individual circumstances given the amount of the purchase, the length
of time you expect to hold the shares and other relevant circumstances
(Alternative Purchase Plan).
<TABLE>
<CAPTION>
Annual 12b-1 Fees
(as a % of average daily
Sales Charge net assets) Other information
------------------------------------- ------------------------ --------------------------------------
<S> <C> <C> <C>
Class A Maximum initial sales charge of 5% .30 of 1% (Currently Initial sales charge waived or reduced
of the public offering price being charged at a rate for certain purchases
of .25 of 1%)
Class B Maximum contingent deferred sales 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
Class C Maximum CDSC of 1% of the lesser of 1% Shares do not convert to another class
the amount invested or the redemp-
tion proceeds on redemptions made
within one year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information-Description of Common Stock"), and
(iii) only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
24
<PAGE>
In selecting a purchase alternative, you should consider, among other
things, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares automatically
convert to Class A shares approximately seven years after purchase (see
"Conversion Feature-Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 7 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 5% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 7 years or more and do not
qualify for a reduced sales charge on Class A shares, since Class B shares
convert to Class A shares approximately 7 years after purchase and because all
of your money would be invested initially in the case of Class B shares, you
should consider purchasing Class B shares over either Class A 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 and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and Class C shares for the
higher cumulative annual distribution-related fee on those shares to exceed the
initial sales charge plus cumulative annual distribution-related fee on Class A
shares. This does not take into account the time value of money, which further
reduces the impact of the higher Class B or Class C distribution-related fee on
the investment, fluctuations in net asset value, the effect of the return on the
investment over this period of time or redemptions during which the CDSC is
applicable.
All purchases of $1 million or more, either as part of a single investment
or under Rights of Accumulation or Letters of Intent, must be for Class A
shares. See "Reduction and Waiver of Initial Sales Charges" below.
Class A Shares
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested) as
shown in the following table:
Sales Charge as Sales Charge as Dealer Concession
Percentage of Percentage of as Percentage of
Amount of Purchase Offering Price Amount Invested Offering Price
------------------ --------------- --------------- -----------------
Less than $25,000 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50% 4.71% 4.25%
$50,000 to $99,999 4.00% 4.17% 3.75%
$100,000 to $249,999 3.25% 3.36% 3.00%
$250,000 to $499,999 2.50% 2.56% 2.40%
$500,000 to $999,999 2.00% 2.04% 1.90%
$1,000,000 and above None None None
Selling dealers may be deemed to be underwriters, as that term is defined
in the Securities Act.
25
<PAGE>
Reduction and Waiver of Initial Sales Charges. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares-Reduction and Waiver of Initial Sales Charges-Class A Shares" in the
Statement of Additional Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of
an initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403(b)(7) of the Internal
Revenue Code (Benefit Plans), provided that the plan has existing assets of at
least $1 million invested in shares of Prudential Mutual Funds (excluding money
market funds other than those acquired pursuant to the exchange privilege) or
1,000 eligible employees or participants. In the case of Benefit Plans whose
accounts are held directly with the Transfer Agent or Prudential Securities and
for which the Transfer Agent or Prudential Securities does individual account
recordkeeping (Direct Account Benefit Plans) and Benefit Plans sponsored by PSI
or its subsidiaries (PSI or Subsidiary Prototype Benefit Plans), Class A shares
may be purchased at NAV by participants who are repaying loans made from such
plans to the participant. After a Benefit Plan qualifies to purchase Class A
shares at NAV, all subsequent purchases will be made at NAV.
Other Waivers. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
Directors and officers of the Fund and other Prudential Mutual Funds, (b)
employees of Prudential Securities and PMF and their subsidiaries and members of
the families of such persons who maintain an "employee related" account at
Prudential Securities or the Transfer Agent, (c) employees 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, (d) registered
representatives and employees of dealers who have entered into a selected dealer
agreement with Prudential Securities provided that purchases at NAV are
permitted by such person's employer and (e) investors who have a business
relationship with a financial adviser who joined Prudential Securities from
another investment firm, provided that (i) the purchase is made within 90 days
of the commencement of the financial adviser's employment at Prudential
Securities, (ii) the purchase is made with proceeds of a redemption of shares of
any open-end, non-money market fund sponsored by the financial adviser's
previous employer (other than a fund which imposes a distribution or service fee
of .25 of 1% or less) and (iii) the financial adviser served as the client's
broker on the previous purchases.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or waiver
of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares acquired upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares-Reduction and Waiver of Initial
Sales Charges-Class A Shares" in the Statement of Additional Information.
Class B and Class C Shares
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-Contingent Deferred Sales Charges."
HOW TO SELL YOUR SHARES
You can redeem your shares at any time for cash at the NAV next determined
after the redemption request is received in proper form by the Transfer Agent or
Prudential Securities. See "How the Fund Values Its Shares." In certain cases,
however, redemption proceeds will be reduced by the amount of any applicable
contingent deferred sales charge, as described below. See "Contingent Deferred
Sales Charges" below.
26
<PAGE>
If you hold shares of the Fund through Prudential Securities, you must
redeem your shares by contacting your Prudential Securities financial adviser.
If you hold shares in non-certificate form, a written request for redemption
signed by you exactly as the account is registered is required. If you hold
certificates, the certificates, signed in the name(s) shown on the face of the
certificates, must be received by the Transfer Agent in order 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, Inc., Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power, must be guaranteed by
an "eligible guarantor institution." An "eligible guarantor institution"
includes any bank, broker, dealer or credit union. The Transfer Agent reserves
the right to request additional information from and make reasonable inquiries
of, any eligible guarantor institution. For clients of Prusec, a signature
guarantee may be obtained from the agency or office manager of most Prudential
Insurance and Financial Services or Preferred Services offices.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent of the certificate and/or written
request, except as indicated below. If you hold shares through Prudential
Securities, payment for shares presented for redemption will be credited to your
Prudential Securities account, unless you indicate otherwise. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during any other period when the SEC, by
order, so permits; provided that applicable rules and regulations of the SEC
shall govern as to whether the conditions prescribed in (b), (c) or (d) exist.
Payment for redemption of recently purchased shares will be delayed until
the Fund or its Transfer Agent has been advised that the purchase check has been
honored, up to 10 calendar days from the time of receipt of the purchase check
by the Transfer Agent. Such delay may be avoided by purchasing shares by wire or
by certified or official bank check.
Redemption in Kind. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as a regular redemption. See ``How the Fund Values its Shares." If your
shares are redeemed in kind, you would incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
Involuntary Redemption. In order to reduce expenses of the Fund, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any involuntary redemption.
90-day Repurchase Privilege. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
27
<PAGE>
determined after the order is received, which must be within 90 days after the
date of the redemption. No sales charge will apply to such repurchases. You will
receive pro rata credit for any contingent deferred sales charge paid in
connection with the redemption of Class B or Class C shares. You must notify the
Fund's Transfer Agent, either directly or through Prudential Securities or
Prusec, at the time the repurchase privilege is exercised that you are entitled
to credit for the contingent deferred sales charge previously paid. Exercise of
the repurchase privilege will generally not affect federal income tax treatment
of any gain realized upon redemption. If the redemption resulted in a loss, some
or all of the loss, depending on the amount reinvested, will generally not be
allowed for federal income tax purposes.
Contingent Deferred Sales Charges
Redemptions of Class B shares will be subject to a contingent deferred
sales charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within one year of purchase will be subject to a 1% CDSC. The
CDSC will be deducted from the redemption proceeds and reduce the amount paid to
you. The CDSC will be imposed on any redemption by you which reduces the current
value of your Class B or Class C shares to an amount which is lower than the
amount of all payments by you for shares during the preceding six years, in the
case of Class B shares, and one year, in the case of Class C shares. A CDSC will
be applied on the lesser of the original purchase price or the current value of
the shares being redeemed. Increases in the value of your shares or shares
acquired through reinvestment of dividends or distributions are not subject to a
CDSC. The amount of any contingent deferred sales charge will be paid to and
retained by the Distributor. See "How the Fund is Managed-Distributor" and
"Waiver of the Contingent Deferred Sales Charges-Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
Contingent Deferred Sales
Charge as a Percentage
Year Since Purchase of the Dollars Invested or
Payment Made Redemption Proceeds
------------ -------------------
First 5.0%
Second 4.0%
Third 3.0%
Fourth 2.0%
Fifth 1.0%
Sixth 1.0%
Seventh None
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in net asset value above the total
amount of payments for the purchase of Fund shares made during the preceding six
years (five years for Class B shares purchased prior to January 22, 1990); then
of amounts representing the cost of shares held beyond the applicable CDSC
period; then of amounts representing the cost of shares acquired prior to July
1, 1985; and finally, of amounts representing the cost of shares held for the
longest period of time within the applicable CDSC period.
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
28
<PAGE>
decided to redeem $500 of your investment. Assuming at the time of the
redemption the net asset value had appreciated to $12 per share, the value of
your Class B shares would be $1,260 (105 shares at $12 per share). The CDSC
would not be applied to the value of the reinvested dividend shares and the
amount which represents appreciation ($260). Therefore, $240 of the $500
redemption proceeds ($500 minus $260) would be charged at a rate of 4% (the
applicable rate in the second year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the
gain or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
Waiver of the Contingent Deferred Sales Charges-Class B Shares. The CDSC
will be waived in the case of a redemption following the death or disability of
a shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability.
The CDSC will also be waived in the case of a total or partial redemption
in connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59-1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other than one following a separation from service (i.e.,
following voluntary or involuntary termination of employment or following
retirement). Under no circumstances will the CDSC be waived on redemptions
resulting from the termination of a tax-deferred retirement plan, unless such
redemptions otherwise qualify for a waiver as described above. In the case of
Direct Account and PSI or Subsidiary Prototype Benefit Plans, the CDSC will be
waived on redemptions which represent borrowings from such plans. Shares
purchased with amounts used to repay a loan from such plans on which a CDSC was
not previously deducted will thereafter be subject to a CDSC without regard to
the time such amounts were previously invested. In the case of a 401(k) plan,
the CDSC will also be waived upon the redemption of shares purchased with
amounts used to repay loans made from the account to the participant and from
which a CDSC was previously deducted.
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
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares-Waiver of the Contingent Deferred Sales Charge-Class B Shares" in
the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased
prior to August 1, 1994. See "Purchase and Redemption of Fund Shares-Quantity
Discount-Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE-CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. It is currently anticipated
that conversions will occur during the months of February, May, August and
November. Conversions will be effected at relative net asset value without the
imposition of any additional sales charge. The first conversion of Class B
shares occurred in February 1995, when the conversion feature was first
implemented.
29
<PAGE>
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share net asset value of the Class A shares may be
higher than that of the Class B shares at the time of conversion. Thus, although
the aggregate dollar value will be the same, you may receive fewer Class A
shares than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year will not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase of
such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
As a shareholder of the Fund you have an exchange privilege with certain
other Prudential Mutual Funds (the Exchange Privilege), including one or more
specified money market funds, subject to the minimum investment requirements of
such funds. Class A, Class B and Class C shares may be exchanged for Class A,
Class B and Class C shares, respectively, of another fund on the basis of the
relative NAV. No sales charge will be imposed at the time of the exchange. Any
applicable CDSC payable upon the redemption of shares exchanged will be
calculated from the first day of the month after the initial purchase, excluding
the time shares were held in a money market fund. Class B and
30
<PAGE>
Class C shares may not be exchanged into money market funds other than
Prudential Special Money Market Fund. For purposes of calculating the holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded. See
"Conversion Feature-Class B Shares" above. An exchange will be treated as a
redemption and purchase for tax purposes. See "Shareholder Investment
Account-Exchange Privilege" in the Statement of Additional Information.
In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the Transfer
Agent and hold shares in non-certificate form. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. Neither
the Fund nor its agents will be liable for any loss, liability or cost which
results from acting upon instructions reasonably believed to be genuine under
the foregoing procedures. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order. The Exchange Privilege is available only in states where the
exchange may legally be made.
If you hold shares through Prudential Securities, you must exchange your
shares by contacting your Prudential Securities financial adviser.
If you hold certificates, the certificates, signed in the name(s) shown on
the face of the certificates, must be returned in order for the shares to be
exchanged. See "How to Sell Your Shares" above.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., 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, Inc., at the address noted above.
Special Exchange Privilege. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV. See "Alternative
Purchase Plan-Class A Shares-Reduction and Waiver of Initial Sales Charges"
above. Under this exchange privilege, amounts representing any Class B and Class
C shares (which are not subject to a CDSC) held in such a shareholder's account
will be automatically exchanged for Class A shares on a quarterly basis, unless
the shareholder elects otherwise. It is currently anticipated that this
exchange will occur quarterly in February, May, August and November.
Eligibility for this exchange privilege will be calculated on the business day
prior to the date of the exchange. Amounts representing Class B or Class C
shares which are not subject to a CDSC include the following: (1) amounts
representing Class B or Class C shares acquired pursuant to the automatic
reinvestment of dividends and distributions, (2) amounts representing the
increase in the net asset value above the total amount of payments for the
purchase of Class B or Class C shares and (3) amounts representing Class B or
Class C shares held beyond the applicable CDSC period. Class B and Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities or Prusec that they are eligible for this special exchange
privilege.
The Exchange Privilege may be modified or terminated at any time on 60
days' notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Fund, you
can take advantage of the following services and privileges:
*Automatic Reinvestment of Dividends and/or Distributions Without a Sales
Charge. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
31
<PAGE>
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
*Automatic Savings Accumulation Plan (ASAP). Under ASAP you may make
regular purchases of the Fund's shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account (including a
Command Account). For additional information about this service, you may contact
your Prudential Securities financial adviser, Prusec representative or the
Transfer Agent directly.
*Tax-Deferred Retirement Plans. Various tax-deferred retirement plans,
including a 401(k) plan, self-directed individual retirement accounts and
"tax-sheltered accounts" under Section 403(b)(7) of the Internal Revenue Code
are available through the Distributor. These plans are for use by both
self-employed individuals and corporate employers. These plans permit either
self-direction of accounts by participants, or a pooled account arrangement.
Information regarding the establishment of these plans, the administration,
custodial fees and other details is available from Prudential Securities or the
Transfer Agent. If you are considering adopting such a plan, you should consult
with your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.
*Systematic Withdrawal Plan. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-Contingent Deferred Sales Charges."
*Reports to Shareholders. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at One Seaport
Plaza, New York, New York 10292. In addition, monthly unaudited financial data
are available upon request from the Fund.
*Shareholder Inquiries. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
32
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX
- --------------------------------------------------------------------------------
Exchange Traded Options Transactions
An exchange traded option position may be closed out only on an exchange,
board of trade or other trading facility which provides a secondary market for
an option of the same series. Although the Fund will generally purchase or write
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, board of
trade or other trading facility, will exist for any particular option at any
particular time, and for some options no secondary market may exist. In such
event it might not be possible to effect a closing transaction in a particular
option.
These options on debt and equity securities and on stock indices are traded
on national securities exchanges. Options traded on such exchanges are issued by
The Options Clearing Corporation, a clearing corporation which assumes
responsibility for the completion of options transactions. Options on interest
rate futures are traded on and cleared by two commodities exchanges, the Chicago
Board of Trade and the Chicago Mercantile Exchange.
Because the Fund intends to qualify as a regulated investment company under
the Internal Revenue Code, the extent to which the Fund may write covered call
options and buy protective put options, possibly entering into so-called
"straddle" transactions, may be limited. See "Taxes" in the Statement of
Additional Information.
For further information concerning the characteristics of options and the
risks of option transactions, see "Investment Objective and Policies" in the
Statement of Additional Information.
Writing Covered Call Options. The Fund writes only covered call options.
Such options written by the Fund will normally have expiration dates of not more
than nine months from the date written. The exercise price of the options may be
below, equal to, or above the current market values of the underlying securities
at the times the options are written.
Unless the option has been exercised, the Fund may close out an option it
has written by effecting a closing purchase transaction, whereby it purchases an
option covering the same underlying security and having the same exercise price
and expiration date ("of the same series") as the one it has written. If the
Fund desires to sell a particular security on which it has written a call
option, it will effect a closing purchase transaction prior to or concurrently
with the sale of the security. If the Fund is able to enter into a closing
purchase transaction, the Fund will realize a profit (or loss) from such
transaction if the cost of such transaction is less (or more) than the premium
received from the writing of the option. If the Fund, as the writer of a covered
call option is unable to effect a closing purchase transaction, it will not be
able to sell the underlying securities until the option expires or it delivers
the underlying securities upon exercise.
Purchasing Put Options. The Fund can close out a put option it has
purchased by effecting a closing sale transaction, i.e., by selling a put
option. If, however, a secondary market does not exist at a time the Fund wishes
to effect a closing sale transaction, the Fund will have to exercise the put
option to avoid a loss of the premium.
Over-The-Counter Options
Unlike exchange traded options, over-the-counter options are contracts
between the Fund and its counterparty with no clearing organization guarantee.
Thus, when the Fund purchases an over-the-counter option, it relies on the
dealer from which it has purchased the over-the-counter option to make or take
delivery of the securities underlying the option. Failure by the dealer to do so
would result in the loss of the premium paid by the Fund as well as the loss of
the expected benefit of the transaction. The Directors will approve a list of
dealers with which the Fund may engage in over-the-counter options.
When the Fund writes an over-the-counter option, it generally will be able
to close out the over-the-counter option prior to its expiration only by
entering into a closing purchase transaction with the dealer to which the Fund
originally wrote the over-the-counter option. While the Fund will enter into
over-the-counter options only with dealers which agree to, and which are
expected to be capable of, entering into closing transactions with the Fund,
there can be no assurance that the Fund will be able to liquidate an over-
the-counter option at a favorable price at any time prior to expiration. Until
A-1
<PAGE>
the Fund is able to effect a closing purchase transaction in a covered
over-the-counter call option the Fund has written, it will not be able to
liquidate securities used as cover until the option expires or is exercised or
different cover is substituted. In the event of insolvency of the counterparty,
the Fund may be unable to liquidate an over-the-counter option. See "Investment
Objective and Policies-Options on Securities" in the Statement of Additional
Information.
Options on Stock Indices
The multiplier for an index option determines the total dollar value per
contract represented by each point change in the price of an option. A
multiplier of 100 means that a one-point change will yield $100. Options on
different stock indices may have different multipliers.
Because exercises of index options are settled in cash, a call writer
cannot determine the amount of its settlement obligations in advance and, unlike
call writing on specific stocks, cannot provide in advance for, or cover, its
potential settlement obligations by acquiring and holding the underlying
securities or securities convertible into the underlying securities. In
addition, unless the Fund has other liquid assets which are sufficient to
satisfy the exercise of a call, the Fund would be required to liquidate
portfolio securities or borrow in order to satisfy the exercise.
Options on Interest Rate Futures
Characteristics and Purposes of Interest Rate Futures. Currently, there are
interest rate futures contracts based on U.S. Treasury Bonds, U.S. Treasury
Notes, three-month U.S. Treasury Bills, Eurodollar CDs and GNMA certificates.
Although interest rate futures contracts call for actual delivery or acceptance
of debt securities, in most cases the contracts are closed out before the
settlement date without the making or taking of delivery.
Characteristics and Purposes of Options on Interest Rate Futures.
Currently, there are options on futures contracts on U.S. Treasury Bonds and
U.S. Treasury Notes on the Chicago Board of Trade and on Eurodollar CDs and U.S.
Treasury Bills on the Chicago Mercantile Exchange. Upon exercise of an option on
a futures contract, the delivery of the futures position by the writer of the
option to the holder of the option will be accompanied by delivery of the
accumulated 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.
The Fund may purchase put options on interest rate futures contracts as a
means of hedging the Fund's portfolio of debt securities against the risk of
rising interest rates.
The Fund may also write call options on interest rate futures contracts as
a hedge against a modest decline in prices of debt securities held in the Fund's
portfolio. To the extent that either of these hedging transactions works as
intended, a loss or gain on the Fund's portfolio debt securities will tend to be
offset by gain or loss on the option. If the futures price at expiration of the
option is below the exercise price, the Fund will retain the full amount of the
option premium which provides a partial hedge against any decline that may have
occurred in the Fund's holdings of debt securities. If the futures price when
the option is exercised is above the exercise price, however, the Fund will
incur a loss, which may be wholly or partially offset by the increase of the
value of the security in the Fund's portfolio which was being hedged. The Fund
may also purchase call options on interest rate futures as a hedge against a
rise in the price of debt securities which it intends to purchase in the future.
A change in the price of the debt securities prior to their purchase by the
Fund, due to a rise or fall in interest rates, will tend to be offset wholly or
in part by a gain or loss on the call option.
The Fund will be required to deposit initial and variation margin with
respect to options on futures contracts, pursuant to brokers' requirements
similar to those applicable to futures contracts.
Limitations on the Sale of Call Options, and Purchase of Put and Call
Options, on Interest Rate Futures. The Fund will not engage in transactions
involving options on futures contracts for speculation but only as a hedge
against changes in interest rates which could or would affect the values of debt
securities which are held in the Fund's portfolio or which the Fund intends to
purchase. When the Fund hedges its portfolio by purchasing a put option on or
writing a call option on an
A-2
<PAGE>
interest rate futures contract, it will always own an amount of debt securities
corresponding to the open option position. In instances involving the purchase
of a call option on an interest rate futures contract by the Fund, the Fund will
deposit in a segregated account with its Custodian an amount of cash, U.S.
Government securities or other high-grade debt obligations corresponding to the
market value of the obligation underlying the futures contract. This is designed
to ensure that the Fund's use of such options on interest rate futures is
unleveraged.
Under current regulations of the Commodity Futures Trading Commission (the
CFTC), investment companies such as the Fund are conditionally exempted from the
definition of "commodity pool operator" as defined in the Commodity Exchange
Act. The exemption is conditioned upon the Fund's using futures contracts and
options thereon for bona fide hedging transactions, except that the Fund may
purchase and sell futures and options thereon for any other purpose to the
extent that the aggregate initial margin and option premium do not exceed 5% of
the liquidation value of the Fund's total assets.
Special Risk Considerations. While the use of options on interest rate
futures for hedging is not a speculative technique, certain risks are inherent
in the use of such instruments. One such risk arises because the correlation
between movements in the price of interest rate futures and movements in the
price of debt securities that are the subject of the hedge may be imperfect.
Accordingly, a movement in the price of the debt securities being hedged may not
be completely offset by a gain or loss on the futures option.
The Fund's ability to establish and close out options on futures contracts
will be subject to the development and maintenance of a liquid secondary market.
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 or otherwise, will exist for any futures
contract option at any particular time. In the event no such market exists for a
particular futures contract option, it might not be possible to effect a closing
transaction in such instrument, with the result that the Fund would have to
exercise the option it has purchased in order to realize any profit. In such a
case, as well as in the case of the Fund's being assigned an exercise notice on
a futures contract call option it has written, the Fund may temporarily assume a
position in the related futures contract pending orderly disposal of the
position through an offsetting transaction. See "Investment Objective and
Policies-Options on Futures Contracts" in the Statement of Additional
Information.
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 Aaa bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
A-3
<PAGE>
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.
Bonds rated within the Aa, A, Baa, Ba and B categories which Moody's
believes possesses the strongest credit attributes within those categories are
designated by the symbols Aa1, A1, Baa1, Ba1 and B1.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior-debt obligations which have an original maturity not
exceeding one year.
P-1: The designation "Prime-1" or "P-1" indicates a superior ability for
repayment of senior short-term debt obligations.
P-2: The designation "Prime-2" or "P-2" indicates a strong ability for
repayment of senior short-term debt obligations.
Standard & Poor's Ratings Group
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in a small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC: Debt rated BB, B, CCC and CC is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and
CC the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
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: The A-1 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 the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-4
<PAGE>
- --------------------------------------------------------------------------------
THE PRUDENTIAL MUTUAL FUND FAMILY
- --------------------------------------------------------------------------------
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
Taxable Bond Funds
Prudential Adjustable Rate Securities Fund, Inc.
Prudential Diversified Bond Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
Tax-Exempt Bond Funds
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
Global Funds
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
Equity Funds
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible(R) Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Money Market Funds
* Taxable Money Market Funds
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
* Tax-Free Money Market Funds
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
* Command Funds
Command Money Fund
Command Government Fund
Command Tax-Free Fund
* Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
B-1
<PAGE>
No dealer, sales representative or any other person has
been authorized to give any information or to make any
representations, other than those contained in this
Prospectus, in connection with the offer contained
herein, and, if given or made, such other information or
representations must not be relied upon as having been
authorized by the Fund or the Distributor. This
Prospectus does not constitute and offer by the Fund or
by the Distributor to sell or a solicitation of an offer to
buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make
such offer in such jurisdiction.
___________________________________________________________
TABLE OF CONTENTS
Page
----
FUND HIGHLIGHTS.............................. 2
Risk Factors and Special Characteristics .. 2
FUND EXPENSES................................ 4
FINANCIAL HIGHLIGHTS......................... 5
HOW THE FUND INVESTS......................... 8
Investment Objective and Policies.......... 8
Hedging and Income Enhancement
Strategies .............................. 11
Other Investments and Policies............. 14
Investment Restrictions.................... 15
HOW THE FUND IS MANAGED...................... 16
Manager.................................... 16
Distributor................................ 16
Portfolio Transactions..................... 19
Custodian and Transfer and
Dividend Disbursing Agent................ 19
HOW THE FUND VALUES ITS SHARES............... 19
HOW THE FUND CALCULATES PERFORMANCE.......... 20
TAXES, DIVIDENDS AND DISTRIBUTIONS........... 20
GENERAL INFORMATION.......................... 22
Description of Common Stock................ 22
Additional Information..................... 23
SHAREHOLDER GUIDE............................ 23
How to Buy Shares of the Fund.............. 23
Alternative Purchase Plan.................. 24
How to Sell Your Shares.................... 26
Conversion Feature--Class B Shares ........ 29
How to Exchange Your Shares................ 30
Shareholder Services....................... 31
APPENDIX ....................................A-1
THE PRUDENTIAL MUTUAL FUND FAMILY............B-1
________________________________________________
MF129A 44405HH
________________________________________________
Class A: 743912-20-6
CUSIP Nos.: Class B: 743912-10-7
Class C: 743912-30-5
________________________________________________
Prudential
IncomeVertible(R)
Fund, Inc.
Prudential Mutual Funds (LOGO)
Building Your Future
On Our StrengthSM
PROSPECTUS
March 1, 1995
<PAGE>
PRUDENTIAL INCOMEVERTIBLE(R) FUND, INC.
Statement of Additional Information
dated February 28, 1995
Prudential IncomeVertible(R) Fund, Inc. (the Fund), is an open-end,
diversified management investment company, or mutual fund, which seeks both high
current income and appreciation of capital. The Fund will seek to achieve its
investment objective by investing primarily in convertible securities and/or in
combinations of securities, comprised of nonconvertible fixed-income securities
and warrants or call options, which resemble convertible securities in some, but
not all, respects (synthetic convertibles). The components of synthetic
convertibles are not generally offered in the market as a unit, and therefore
may be acquired by the Fund at different times. Under normal circumstances, the
Fund intends to invest at least 65% of its total assets in convertible
securities and/or synthetic convertibles. The Fund's investment objective and
policies are described in the Fund's Prospectus. This Statement contains
additional information about those policies. There can be no assurance that the
Fund's investment objective will be achieved. See "Investment Objective and
Policies." The Fund is also subject to certain investment restrictions. See
"Investment Restrictions."
The Fund's address is One Seaport Plaza, New York, New York 10292, 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 February 28, 1995, a copy
of which may be obtained from the Fund upon request.
TABLE OF CONTENTS
Cross-reference
to page in
Page Prospectus
---- ---------------
General Information .................................. B-2 22
Investment Objective and Policies .................... B-2 8
Investment Restrictions .............................. B-12 15
Directors and Officers ............................... B-14 16
Manager .............................................. B-16 16
Distributor .......................................... B-18 16
Portfolio Transactions and Brokerage ................. B-20 19
Purchase and Redemption of Fund Shares ............... B-22 23
Shareholder Investment Account ....................... B-25 23
Net Asset Value ...................................... B-28 19
Taxes ................................................ B-29 20
Performance Information .............................. B-30 20
Custodian, Transfer and Dividend Disbursing Agent
and Independent Accountants ........................ B-32 19
Financial Statements ................................. B-33 -
Independent Auditors' Report ......................... B-45 -
- --------------------------------------------------------------------------------
MF129B
B-1
<PAGE>
GENERAL INFORMATION
The Fund was incorporated in Maryland on May 19, 1980, under the name Asset
Reserves Inc. Its name was changed to Chancellor Cash Fund, Inc. on January 29,
1982, to Prudential-Bache IncomeVertible Fund, Inc. on August 2, 1985, and to
Prudential-Bache IncomeVertible Plus Fund, Inc. on October 1, 1985.
On March 15, 1991, the Board of Directors approved an amendment to the
Fund's Articles of Incorporation to change the Fund's name to Prudential
IncomeVertible(R) Plus Fund, Inc. and authorized the Fund to do business under
the name of Prudential IncomeVertible(R) Plus Fund until the next annual or
special meeting of shareholders at which time the amendment would be submitted
to shareholders for their approval. On August 12, 1992, the shareholders of the
Fund approved an amendment to the Fund's Articles of Incorporation to change the
Fund's name to Prudential IncomeVertible(R) Fund, Inc.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek both high current income and
capital appreciation, primarily through investments in convertible securities
and/or synthetic convertibles. There can be no assurance that the Fund's
investment objective will be achieved. See "How the Fund Invests-Investment
Objective and Policies" in the Prospectus.
When-Issued and Delayed Delivery Securities
From time to time, in the ordinary course of business, the Fund may
purchase securities on a when-issued or delayed delivery basis-i.e., delivery
and payment can take place a month or more after the date of the transaction.
The purchase price, and the interest rate payable on debt securities are fixed
on the transaction date. The securities so purchased are subject to market
fluctuation, and no interest or dividend 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. The Fund's Custodian will maintain, in a separate account of the
Fund, cash, U.S. Government securities or other high-grade debt obligations
having a value equal to or greater than such commitments. On delivery dates for
such transactions, the Fund may meet its obligations from maturities or sales of
the securities held in the separate account and/or from then-available cash
flow. If the Fund chooses to dispose of the right to acquire a when-issued
security prior to its acquisition, it could, as with the disposition of other
portfolio acquisitions, incur a gain or loss due to market fluctuation.
Options on Securities
The Fund may purchase put and call options and write covered call options
on equity and debt securities traded on national securities exchanges. It may
also purchase put and call options and write covered put and call options traded
in the over-the-counter market (OTC options). Currently, many options on equity
securities are exchange-traded, whereas options on debt securities are primarily
traded on the over-the-counter market.
When the Fund writes an option, it receives a premium which it retains
whether or not the option is exercised. The Fund's principal objective in
writing options is for bona fide hedging purposes and to realize, through the
receipt of premiums, a greater return than would be realized on the underlying
securities alone.
The purchaser of a call option has the right, for a specified period of
time, to purchase the securities subject to the option at a specified price (the
exercise price or strike price). By writing a call option, the Fund becomes
obligated during the term of the option, upon exercise of the option, to sell,
depending upon the terms of the option contract, the underlying securities or a
specified amount of cash to the purchaser against receipt of the exercise price.
When the Fund writes a call option, the Fund loses the potential for a gain on
the underlying securities in excess of the exercise price of the option during
the period that the option is open.
Conversely, the purchaser of a put option has the right, for a specified
period of time, to sell the securities subject to the option to the writer of
the put at the specified exercise price. By writing a put option, the Fund
becomes obligated during the term of the option, upon exercise of the option, to
purchase the securities underlying the option at the exercise price. The Fund
might, therefore, be obligated to purchase the underlying securities for more
than their current market price.
The Fund may write only "covered" options. This means that so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option or an option to purchase the same underlying
securities,
B-2
<PAGE>
having an exercise price equal to or less than the exercise price of the
"covered" option, or will establish and maintain with its Custodian for the term
of the option a segregated account consisting of cash, U.S. Government
securities or other liquid high-grade debt obligations having a value at least
equal to the fluctuating market value of the optioned securities. A put option
written by the Fund will be considered "covered" if, so long as the Fund is
obligated as the writer of the option, it owns an option to sell the underlying
securities subject to the option having an exercise price equal to or greater
than the exercise price of the "covered" option, or it deposits and maintains
with its Custodian in a segregated account cash, U.S. Government securities or
other liquid high-grade debt obligations having a value equal to or greater than
the exercise price of the option.
The writer of an option has no control over when the underlying securities
must be sold, in the case of a call option, or purchased, in the case of a put
option, since such options may be exercised by the holder at any time prior to
the expiration of the option. Whether or not an option expires unexercised, the
writer retains the amount of the premium. This amount may be offset or exceeded,
in the case of a covered call option, by a decline and, in the case of a covered
put option, by an increase in the market value of the underlying security during
the option period. If a call option is exercised, the writer must fulfill the
obligation to sell the underlying security at the exercise price, which will
usually be lower than the then market value of the underlying security. If a put
option is exercised, the writer must fulfill the obligation to purchase the
underlying security at the exercise price, which will usually exceed the then
market value of the underlying security.
The writer of an exchange-traded option that wishes to terminate its
obligation may effect a "closing purchase transaction." This is accomplished by
buying an option of the same series as the option previously written. (Options
of the same series are options with respect to the same underlying security,
having the same expiration date and the same strike price). The effect of the
purchase is that the writer's position will be canceled by the exchange's
affiliated clearing organization. However, the writer of an option may not
effect a closing purchase transaction after being notified of the exercise of
the option. Likewise, an investor who is the holder of an option may liquidate a
position by effecting a "closing sale transaction." This is accomplished by
selling an option of the same series as the option previously purchased. There
is no guarantee that either a closing purchase or a closing sale transaction can
be effected.
An exchange-traded option position may be closed out only where there
exists a secondary market for an option of the same series. If a secondary
market does not exist, it might not be possible to effect closing transactions
in a particular option the Fund has purchased with the result that the Fund
would have to exercise the option in order to realize any profit. If the Fund is
unable to effect a closing purchase transaction in a secondary market in an
option the Fund has written, it will not be able to sell the underlying security
until the option expires or it delivers the underlying security upon exercise or
it otherwise covers its position. Reasons for the absence of a liquid secondary
market include the following: (i) there may be insufficient trading interest in
certain options; (ii) restrictions may be imposed by a securities exchange
(Exchange) on opening transactions or closing transactions or both; (iii)
trading halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an Exchange; (v)
the facilities of an Exchange or clearing organization may not at all times be
adequate to handle current trading volume; or (vi) one or more Exchanges could,
for economic or other reasons, decide or be compelled at some future date to
discontinue 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 would continue to be
exercisable in accordance with their terms.
Exchange-traded options in the United States are issued by clearing
organizations affiliated with the Exchange on which the option is listed which,
in effect, gives its guarantee to every exchange-traded option transaction. In
contrast, OTC options are contracts between the Fund and its counterparty with
no clearing organization guarantee. Thus, when the Fund purchases an OTC option,
it relies on the dealer from which it has purchased the OTC option to make or
take delivery of the securities underlying the option. Failure by the dealer to
do so would result in the loss of the premium paid by the Fund as well as the
loss of the expected benefit of the transaction. The Board of Directors will
evaluate the creditworthiness of any dealer from which the Fund proposes to
purchase OTC options.
Exchange-traded options generally have a continuous liquid market while OTC
options may not. Consequently, the Fund will generally be able to realize the
value of an OTC option it has purchased only by exercising it or reselling it to
the dealer who issued it. Similarly, when the Fund writes an OTC option, it
generally will be able to close out the OTC option prior to its expiration only
by entering into a closing purchase transaction with the dealer to which the
Fund originally wrote the OTC option. While the Fund will enter into OTC options
only with dealers which agree to, and which are expected to be capable of,
entering into closing transactions with the Fund, there can be no assurance that
the Fund will be able to liquidate an OTC option at a favorable price at any
time prior to expiration. Until the Fund is able to effect a closing purchase
transaction in a covered OTC call option the Fund has written, it will not be
able to liquidate securities used as
B-3
<PAGE>
cover until the option expires or is exercised or different cover is
substituted. In the event of insolvency of the counterparty, the Fund may be
unable to liquidate an OTC option. With respect to options written by the Fund,
inability to enter into a closing purchase transaction may result in material
losses to the Fund. For example, since the Fund must maintain a covered position
with respect to any call option on a security it writes, the Fund may be limited
in its ability to sell the underlying security while the option is outstanding.
This may impair the Fund's ability to sell a portfolio security at a time when
such a sale might be advantageous.
In general, certain state securities commissions may require that, so long
as shares of the Fund are registered in those states, the Fund would not (a)
write puts having aggregate exercise prices greater than 25% of total net
assets; or (b) purchase (i) put options on stocks not held in the Fund's
portfolio, (ii) put options on stock indices, or (iii) call options on stocks,
stock indices or stock index futures and options thereon if, after any such
purchase, the aggregate premiums paid for such options and futures would exceed
10% of the Fund's total assets; provided, however, that the Fund could purchase
put options on stocks held by the Fund if after such purchase the aggregate
premiums paid for such options do not exceed 20% of the Fund's total assets.
The Fund may write options in connection with buy-and-write transactions;
that is, the Fund may purchase a security and concurrently write a call option
against that security. The exercise price of the call the Fund determines to
write will depend upon the expected price movement of the underlying security.
The exercise price of a call option may be below (in-the-money), equal to
(at-the-money) or above (out-of-the-money) the current value of the underlying
security at the time the option is written. Buy-and-write transactions using
in-the-money call options may be used when it is expected that the price of the
underlying security will remain flat or decline moderately during the option
period. Buy-and-write transactions using at-the-money call options may be used
when it is expected that the price of the underlying security will remain fixed
or advance moderately during the option period. A buy-and-write transaction
using an out-of-the-money call option may be used when it is expected that the
premium received from writing the call option plus the appreciation in the
market price of the underlying security up to the exercise price will be greater
than the appreciation in the price of the underlying security alone. If the call
option is exercised in such a transaction, the Fund's maximum gain will be the
premium received by it for writing the option, adjusted upwards or downwards by
the difference between the Fund's purchase price of the security and the
exercise price of the option. If the option is not exercised and the price of
the underlying security declines, the amount of such decline will be offset in
part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close out the position or
take delivery of the underlying security at the exercise price. In that case,
the Fund's return will be the premium received from writing the put option minus
the amount by which the market price of the security is below the exercise
price. Out-of-the-money, at-the-money and in-the-money covered put options may
be written by the Fund in the same market environments in which call options are
written in equivalent buy-and-write transactions.
The Fund may purchase a call option on a security it intends to acquire in
order to hedge against (and thereby benefit from) an anticipated market
appreciation in the price of the underlying security at limited risk and with a
limited cash outlay. If the market price does rise as anticipated, the Fund will
benefit from that rise but only to the extent that the rise exceeds the premium
paid. If the anticipated rise does not occur or if it does not exceed the
premium, the Fund will bear the expense of the option premium without gaining an
offsetting benefit.
The Fund may purchase put options on securities to hedge against a decline
in the value of its portfolio. If the market price of the Fund's portfolio
should increase, however, the profit which the Fund might otherwise have
realized will be reduced by the amount of the premium paid for the put option
and by transaction costs. The Fund may purchase call options on securities to
hedge against an anticipated rise in the price it will have to pay for
securities it intends to buy in the future. If the market price of the
securities should fall instead of rise, however, the benefit the Fund obtains
from purchasing the securities at a lower price will be reduced by the amount of
the premium paid for the call options and by transaction costs.
The Fund may purchase put options if the Fund believes that a defensive
posture is warranted for all or a portion of its portfolio. Protection is
provided during the life of the put because the put gives the Fund the right to
sell the underlying security at the put exercise price, regardless of a decline
in the underlying security's market price below the exercise price. This right
limits the Fund's losses from the security's possible decline in value below the
strike price of the option to the premium paid for the put option and related
transaction costs.
B-4
<PAGE>
The Fund may wish to protect certain portfolio securities against a decline
in market value at a time when put options on those particular securities are
not available for purchase. The Fund may therefore purchase a put option on
other carefully selected securities, the values of which historically have a
high degree of positive correlation to the values of such portfolio securities.
If the Subadviser's judgment is correct, changes in the value of the put options
should generally offset changes in the value of the portfolio securities being
hedged. But the correlation between the two values may not be as close in these
transactions as in transactions in which the Fund purchases a put option on an
underlying security it owns. If the Subadviser's judgment is not correct, the
value of the securities underlying the put option may decrease less than the
value of the Fund's portfolio securities and therefore the put option may not
provide complete protection against a decline in the value of the Fund's
portfolio securities below the level sought to be protected by the put option.
The Fund may similarly wish to hedge against appreciation in the value of
securities that it intends to acquire at a time when call options on such
securities are not available. The Fund may, therefore, purchase call options on
other carefully selected securities, the values of which historically have a
high degree of positive correlation to values of securities that the Fund
intends to acquire. In such circumstances the Fund will be subject to risks
analogous to those summarized immediately above in the event that the
correlation between the value of call options so purchased and the value of the
securities intended to be acquired by the Fund is not as close as anticipated
and the value of the securities underlying the call options increases less than
the value of the securities to be acquired by the Fund.
The hours of trading for options on U.S. Government securities may not
conform to the hours during which the underlying securities are traded. To the
extent that the option markets close before the markets for the underlying
securities, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
Options on Stock Indices
Options on stock indices are similar to options on stock except that,
rather than the right to take or make delivery of stock at a specified price, an
option on a stock index gives the holder the right to receive, upon exercise of
the option, an amount of cash if the closing level of the stock index upon which
the option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option. This amount of cash is equal to
such difference between the closing price of the index and the exercise price of
the option expressed in dollars times a specified multiple (the multiplier). The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Unlike stock options, all settlements are in cash.
The multiplier for an index option performs a function similar to the unit
of trading for a stock option. It determines the total dollar value per contract
of each point in the difference between the exercise price of an option and the
current level of the underlying index. A multiplier of 100 means that a
one-point difference will yield $100. Options on different indices may have
different multipliers.
Limitations on the Writing of Call Options on Stock Indices. Except as
described below, the Fund will write call options on indices only if on such
date it holds a portfolio of stocks at least equal to the value of the index
times the multiplier times the number of contracts. When the Fund writes a call
option on a broadly based stock market index, the Fund will segregate or put
into escrow with its Custodian or pledge to a broker as collateral for the
option one or more "qualified securities" with a market value at the time the
option is written of not less than 100% of the current index value times the
multiplier times the number of contracts. The Fund will write call options on
broadly based stock market indices only if at the time of writing it holds a
diversified portfolio of stocks.
If the Fund has written an option on an industry or market segment index,
it will segregate or put into escrow with its Custodian, or pledge to a broker
as collateral for the option, at least ten "qualified securities," all of which
are stocks of issuers in such industry or market segment, with a market value at
the time the option is written of not less than 100% of the current index value
times the multiplier times the number of contracts. Such stocks will include
stocks which represent at least 50% of the weighting of the industry or market
segment index and will represent at least 50% of the Fund's holdings in that
industry or market segment. No individual security will represent more than 25%
of the amount so segregated, pledged or escrowed.
If, at the close of business on any day, the market value of such qualified
securities so segregated, escrowed or pledged falls below 100% of the current
index value times the multiplier times the number of contracts, the Fund will so
segregate, escrow or pledge an amount in cash, Treasury bills or other
high-grade short-term debt obligations equal in value to the difference. In
addition, when the Fund writes a call option on an index whose exercise price is
below the level of the stock index (in the money) at the time the call is
written, the Fund will segregate with its Custodian or pledge to the
B-5
<PAGE>
broker as collateral cash, U.S. Government or other high-grade short-term debt
obligations equal in value to the amount by which the call option is
in-the-money times the multiplier times the number of contracts. Any amount
segregated pursuant to the foregoing sentence may be applied to the Fund's
obligation to segregate additional amounts in the event that the market value of
the qualified securities falls below 100% of the current index value times the
multiplier times the number of contracts. A "qualified security" is an equity
security which is listed on a national securities exchange or on NASDAQ against
which the Fund has not written a stock call option and which has not been hedged
by the Fund by the sale of stock index futures. However, if the Fund holds a
call option on the same index as the call option written where the exercise
price of the call option held is equal to or less than the exercise price of the
call option written, or greater than the exercise price of the call option
written if the difference is maintained by the Fund in cash, Treasury bills or
other high-grade short-term debt obligations in a segregated account with its
Custodian, it will not be subject to the requirements described in this
paragraph.
Risks of Options on Indices
In addition to the risks generally associated with options, the distinctive
characteristics of options on indices create certain risks that are not present
with stock options.
Because the value of an index option depends upon movements in the level of
the index rather than the price of a particular stock, successful use by the
Fund of options on indices would be subject to the investment adviser's ability
to predict correctly movements in the direction of the stock market generally or
of a particular industry. This requires different skills and techniques than
predicting changes in the price of individual stocks.
Index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading in the index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
stocks included in the index. If this occurred, the Fund would not be able to
close out options which it had purchased or written and, if restrictions on
exercise were imposed, might be unable to exercise an option it held, which
could result in substantial losses to the Fund. However, it is the Fund's policy
to purchase or write options only on indices which include a sufficient number
of stocks so that the likelihood of a trading halt in the index is minimized.
Trading in index options commenced in April 1983 with the S&P 100 option
(formerly called the CBOE 100). Since that time, a number of additional index
option contracts have been introduced including options on industry indices.
Although the markets for certain index option contracts have developed rapidly,
the markets for other index options are still relatively illiquid. The ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain that
this market will develop in all index option contracts. The Fund will not
purchase or sell any index option contract unless and until, in the investment
adviser's opinion, the market for such options has developed sufficiently so
that the risk in connection with such transactions is no greater than the risk
in connection with options on stocks.
Special Risks of Writing Calls on Indices
Unless the Fund has other liquid assets which are sufficient to satisfy the
exercise of a call, the Fund would be required to liquidate portfolio securities
in order to satisfy the exercise. Because an exercise must be settled within
hours after receiving the notice of exercise, if the Fund fails to anticipate an
exercise, it may have to borrow from a bank (in amounts not exceeding 20% of the
Fund's total assets) pending settlement of the sale of securities in its
portfolio and would incur interest charges thereon.
When the Fund has written a call, there is also a risk that the market may
decline between the time the Fund has a call exercised against it, at a price
which is fixed as of the closing level of the index on the date of exercise, and
the time the Fund is able to sell securities in its portfolio. As with stock
options, the Fund will not learn that an index option has been exercised until
the day following the exercise date but, unlike a call on stock where the Fund
would be able to deliver the underlying securities in settlement, the Fund may
have to sell part of its securities portfolio in order to make settlement in
cash, and the price of such securities might decline before they can be sold.
This timing risk makes certain strategies involving more than one option
substantially more risky with index options than with stock options. For
example, even if an index call which the Fund has written is "covered" by an
index call held by the Fund with the same strike price, the Fund will bear the
risk that the level of the index may decline between the close of trading on the
date the exercise notice is filed with the clearing corporation and the closing
of trading on the date the Fund exercises the call it holds or the time the Fund
sells the call, which in either case would occur no earlier than the day
following the day the exercise notice was filed.
B-6
<PAGE>
Futures Contracts
The Fund will enter into futures contracts only for certain bona fide
hedging purposes, yield enhancement and risk management purposes. The Fund may
enter into listed stock index futures contracts and options thereon and options
on interest rate futures contracts.
A "sale" of a futures contract (or a "short" futures position) means the
assumption of a contractual obligation to deliver the securities or currency
underlying the contract at a specified price at a specified future time. A
"purchase" of a futures contract (or a "long" futures position) means the
assumption of a contractual obligation to acquire the securities or currency
underlying the contract at a specified price at a specified future time. Certain
futures contracts are settled on a net cash payment basis rather than by the
sale and delivery of the securities or currency underlying the futures
contracts. U.S. futures contracts have been designed by exchanges that have been
designated as "contract markets" by the Commodity Futures Trading Commission
(the CFTC), an agency of the U.S. Government, and must be executed through a
futures commission merchant (i.e., a brokerage firm) which is a member of the
relevant contract market. Futures contracts trade on these contract markets and
the exchange's affiliated clearing organization guarantees performance of the
contracts as between the clearing members of the exchange.
At the time a futures contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment (initial margin). It is expected that
the initial margin on U.S. exchanges will vary from 3% to 15% of the value of
the securities or the commodities underlying the contract. Under certain
circumstances, however, such as periods of high volatility, the Fund may be
required by an exchange to increase the level of its initial margin payment.
Thereafter, the futures contract is valued daily and the payment in cash of
"variation margin" may be required, a process known as "mark to market." Each
day the Fund is required to provide or is entitled to receive variation margin
in an amount equal to any decline (in the case of a long futures position) or
increase (in the case of short futures position) in the contract's value since
the preceding day.
Although futures contracts by their terms may call for the actual delivery
or acquisition of underlying securities, in most cases the contractual
obligation is extinguished or offset before the expiration of the contract
without having to make or take actual delivery of the securities. The offsetting
of a contractual obligation is accomplished by buying (to offset an earlier
sale) or selling (to offset an earlier purchase) an identical futures contract
calling for delivery in the same month. Such a transaction cancels the
obligation to make or take delivery of the underlying securities. In all
transactions the Fund will incur brokerage fees and related transaction costs
when it purchases or sells futures contracts.
The ordinary spreads between values in the cash and futures markets, due to
differences in the character of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial and
variation margin requirements. Rather than meeting additional variation
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationships between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing price distortions. Third,
from the point of view of speculators, the margin deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Increased participation by speculators in the futures market may cause
temporary price distortions. Due to the possibility of distortion, a correct
forecast of general interest rate trends by the Subadviser may still not result
in a successful transaction.
In addition, futures contracts entail risks. Although the Fund believes
that use of such contracts will benefit the Fund, if the Subadviser's judgment
about the general direction of interest rates is incorrect, the Fund's overall
performances would be poorer than if it had not entered into any such contracts.
For example, if the Fund has hedged against the possibility of an increase in
interest rates which would adversely affect the price of debt securities held in
its portfolio and interest rates decrease instead, the Fund will lose part or
all of the benefit of the increased value of its assets which it has hedged
because it will have offsetting losses in its futures positions. In addition,
particularly in such situations, if the Fund has insufficient cash, it may have
to sell assets from its portfolio to meet daily variation margin requirements.
Any such sale of assets may, but will not necessarily, be at increased prices
which reflect the rising market. Consequently, the Fund may have to sell assets
at a time when it may be disadvantageous to do so.
If the Fund seeks to hedge against a decline in the value of its portfolio
securities and sells futures contracts for that purpose on other securities
which historically have had a high degree of positive correlation to the value
of the portfolio securities, the value of its portfolio securities might decline
more rapidly than the value of a poorly correlated futures contract rises. In
that case, the hedge will be less effective than if the correlation had been
greater. In a similar but more extreme situation, the value of the futures
position might in fact decline while the value of portfolio securities holds
steady or rises. This would result in a loss that would not have occurred but
for the attempt to hedge.
B-7
<PAGE>
Options on Futures Contracts
Characteristics. An option on a futures contract gives the purchaser the
right, but not the obligation, to assume a position in a futures contract (a
long position if the option is a call and a short position if the option is a
put) at a specified price at any time during the option exercise period. The
writer of the option is required, upon exercise, to assume an offsetting futures
position (a short position if the option is a call and long position if the
option is a put). 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 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.
The holder or writer of an option may terminate a position by selling or
purchasing an option of the same series. There is no guarantee that such closing
transactions can be effected.
The Fund will be considered "covered," with respect to a call option it
writes on a futures contract, if the Fund owns the securities which are
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 and having an expiration date not earlier than the expiration
date of the "covered" option, or it segregates and maintains with its Custodian
for the term of the option cash, U.S. Government securities or other liquid
high-grade debt obligations equal to the fluctuating value of the optioned
futures. The 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 and having an expiration date not earlier than the expiration date of the
"covered" option, or if it segregates and maintains with its Custodian for the
term of the option cash, U.S. Government securities or liquid high-grade debt
obligations at all times equal in value to the exercise price of the put (less
any initial margin deposited by the Fund with its Custodian with respect to such
put option). There is no limitation on the amount of the Fund's assets which can
be placed in the segregated account.
Writing a put option on a futures contract serves as a partial hedge
against an increase in the value of securities the Fund intends to acquire. If
the futures price at expiration of the option is above the exercise price, the
Fund will retain the full amount of the option premium which provides a partial
hedge against any increase that may have occurred in the price of the securities
the Fund intends to acquire. If the market price of the underlying futures
contract when the option is exercised is below the exercise price, however, the
Fund will incur as a loss, which may be wholly or partially offset by the
decrease in the value of the securities the Fund intends to acquire.
Writing a call option on a futures contract serves as a partial hedge
against a decrease in the value of the Fund's portfolio securities. If the
market price of the underlying futures contract at expiration of a written call
option is below the exercise price, the Fund will retain the full amount of the
option premium, thereby partially hedging against any decline that may have
occurred in the Fund's holdings of debt securities. If the futures price when
the option is exercised is above the exercise price, however, the Fund will
incur a loss, which may be wholly or partially offset by the increase of the
value of the securities in the Fund's portfolio which were being hedged.
The Fund will purchase put options on 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. The Fund will also purchase call
options on futures contracts as a hedge against an increase in the value of
securities the Fund intends to acquire as a result of declining interest rates.
Listed Options on Interest Rate Futures Contracts
The Fund will purchase put and call options on interest rate futures
contracts to take advantage of or to protect the Fund against fluctuations in
interest rates affecting the value of debt securities which the Fund holds or
intends to acquire. For example, if interest rates are expected to increase, the
Fund might sell covered call options on interest rate futures contracts on debt
securities, the values of which historically have a high degree of positive
correlation 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 options on futures contracts to
the Fund will increase at approximately an equivalent rate thereby keeping the
net asset value of the Fund from declining as much as it otherwise would have.
The Fund could accomplish similar results by selling debt securities with longer
maturities and investing in debt securities with shorter maturities when
interest rates are expected to increase. However, since the futures market may
be more liquid than the cash market, the use of options on interest rate futures
contracts as a risk management technique allows the Fund to maintain a defensive
position without having to sell its portfolio securities.
B-8
<PAGE>
Similarly, the Fund may purchase options on interest rate futures contracts
when it is expected that interest rates may decline. The purchase of options on
futures contracts for this purpose constitutes a hedge against increases in the
price of debt securities (caused by declining interest rates) which the Fund
intends to acquire. Since fluctuations in the value of appropriately selected
futures contracts should approximate that of the debt securities that will be
purchased, the Fund can take advantage of the anticipated rise in the cost of
the debt securities without actually buying them. Subsequently, the Fund can
make the intended purchase of the debt securities in the cash market and
concurrently liquidate its futures position.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the price of the futures
contract upon which it is based or the price of the underlying debt securities,
it may or may not be less risky than ownership of the futures contract or
underlying debt securities. When the Fund is not fully invested it may purchase
a call option on a futures contract to hedge against a market advance due to
declining interest rates.
The purchase of a put option on a futures contract is similar to the
purchase of protective put options on portfolio securities. The Fund will
purchase a put option on a futures contract to hedge the Fund's portfolio
against the risk of rising interest rates and consequent reduction in the value
of portfolio securities.
The writing of a covered call option on a futures contract constitutes a
partial hedge against declining prices of the securities which are deliverable
upon exercise of the futures contract. If the futures price at expiration of the
option is below the exercise price, the Fund will retain the full amount of the
option premium which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings. If a covered call option the Fund has
written is exercised, the Fund will incur a loss which will be reduced by the
amount of the premium it received. Depending on the degree of correlation
between changes in the value of its portfolio securities and changes in the
value of its options on interest rate futures positions, the Fund's losses from
options on futures it has written may to some extent be reduced or increased by
changes in the value of its portfolio securities.
Listed Stock Index Futures and Options Thereon
The Fund may purchase and sell listed stock index futures contracts and
options on stock index futures to reduce the risk of investment in equity
securities by hedging a portion of its portfolio or securities that it intends
to purchase. A stock index futures contract is an agreement in which one party
agrees to deliver to the other an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index is
made. When the futures contract is entered into, each party deposits with a
futures commission merchant or in a segregated custodial account approximately
5% of the contract amount, called "initial margin." Subsequent payments to the
futures commission merchant, called "maintenance" or "variation margin," may
have to be made as the price of the underlying stock index fluctuates, making
the long and short positions in the futures contract more or less valuable. The
value of the futures contracts and the amount of the variation margin which must
be paid is calculated on a daily basis in a process known as "mark to market."
Pursuant to the requirements of the Commodity Exchange Act, as amended, all
futures contracts and options thereon must be traded on an exchange. Therefore,
as with exchange-traded options, a clearing corporation is technically the
counterparty on every futures contract and option transaction.
In the case of options on stock index futures, the holder of the option
pays a premium and receives the rights, upon exercise of the option at a
specified price during the option period, to assume a position in a stock index
futures contract (a long position if the option is a call and a short position
if the option is a put). If the option is exercised by the holder before the
last trading day during the option period, the option writer delivers the
futures position, as well as any balance in the writer's futures margin account,
which represents the amount by which the market price of the stock index 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 stock index future. If it
is exercised on the last trading day, the option writer delivers to the option
holder cash in an amount equal to the difference between the option exercise
price and the closing level of the relevant index on the date the option
expires. The Fund will write put options on indices only if they are covered by
segregating with the Fund's Custodian an amount of cash or short-term
investments equal to the aggregate excercise price of the puts.
Special Risk Considerations Relating to Futures Contracts and Options Thereon
The Fund's ability to establish and close out positions in futures
contracts and options on futures contracts will be subject to the development
and maintenance of a liquid market. Although the Fund generally will purchase or
sell only those
B-9
<PAGE>
futures contracts and options thereon for which there appears 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 thereon 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 will 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 option, wait to sell the underlying
securities until the option expires or is 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 has written and which the Fund is
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.
Successful use of futures contracts and options thereon by the Fund is
subject to the ability of the Fund's Subadviser to predict correctly movements
in the direction of interest rates and other factors affecting markets for
securities. If the Subadviser's expectations are not met, the Fund would be in a
worse position than if a hedging strategy had not been pursued. For example, if
the Fund had hedged against the possiblity of an increase in interest rates
which would adversely affect the price of securities in its portfolio and the
price of such securities increases instead, the Fund will lose part or all of
the benefit of the increased value of its securities because it will have
offsetting losses in its futures positions. In addition, in such situations, if
the Fund has insufficient cash to meet daily variation margin requirements, it
may have to sell securities to meet such requirements. Such sales of securities
may be, but will not necessarily be, at increased prices which reflect the
rising market. The Fund may have to sell securities at a time when it is
disadvantageous to do so.
Limitations on the Purchase and Sale of Futures Contracts and Options on Futures
Contracts
The Fund will engage in transactions in stock index futures contracts and
options thereon and options on interest rate futures contracts only for bona
fide hedging purposes, yield enhancement and risk management purposes, in each
case in accordance with the rules and regulations of the CFTC, and not for
speculation.
In accordance with CFTC regulations, the Fund may purchase or sell futures
contracts or options thereon for bona fide hedging transactions. In addition,
the Fund may use futures contracts and options thereon for any other purpose to
the extent that the aggregate initial margin and option premium does not exceed
5% of the liquidation value of the Fund's total assets. In instances involving
the purchase of futures contracts or call options thereon or the writing of put
options thereon by the Fund, an amount of cash, U.S. Government securities or
other liquid, high-grade debt obligations, equal to the market value of the
futures contracts and options thereon (less any related margin deposits), will
be deposited in a segregated account with its Custodian to cover the position,
or alternative cover will be employed thereby insuring that the use of such
futures contracts and options is unleveraged.
The Fund's purchase and sale of futures contracts and purchase and writing
of options on futures contracts will be for the purpose of protecting its
portfolio against anticipated future changes in interest rates which might
otherwise either adversely affect the value of the Fund's portfolio securities
or adversely affect the price of securities that the Fund intends to purchase at
a later date.
In addition, CFTC regulations may impose limitations on the Fund's ability
to engage in certain return enhancement and risk management strategies. There
are no limitations on the Fund's use of futures contracts and options on futures
contracts beyond the restrictions set forth above and the economic limitations
that are implicit in the use of futures and options on futures.
Although the Fund intends to purchase or sell futures and options on
futures only on exchanges where there appears to be an active market, there is
no guarantee that an active market will exist for any particular contract or at
any particular time. If there is not a liquid market at a particular time, it
may not be possible to close a futures position at such time, and, in the event
of adverse price movements, the Fund would continue to be required to make daily
cash payments of variation margin. However, when futures positions are used to
hedge portfolio securities, such securities will not be sold until the futures
positions can be liquidated. In such circumstances, an increase in the price of
securities, if any, may partially or completely offset losses on the futures
contracts.
Limitations on Purchases of Warrants and Certain Options
The Fund will not purchase put or call options on debt or equity securities
or on stock indices if, after any such purchase, the aggregate premiums paid for
such options would exceed 20% of the Fund's total assets. The Fund may adopt
further restrictions on such purchases in order to comply with limitations
imposed under certain state securities laws.
The Fund will not invest more than 5% of its net assets in warrants, nor
will it invest more than 2% of its net assets in warrants which are not listed
on the New York or American Stock Exchange. In the application of such
limitation, warrants
B-10
<PAGE>
will be valued at the lower of cost or market value, except that warrants
acquired by the Fund in units or attached to other securities will be deemed to
be without value.
Lending of Securities
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and financial institutions, provided
that outstanding loans do not exceed in the aggregate 33% of the value of the
Fund's total assets and provided that such loans are callable at any time by the
Fund and are at all times secured by cash or equivalent collateral that is equal
to at least the market value, determined daily, of the loaned securities. The
advantage of such loans is that the Fund continues to receive payments in lieu
of the interest and dividends on the loaned securities, while at the same time
earning interest either directly from the borrower or on the collateral which
will be invested in short-term obligations.
A loan may be terminated by the borrower on one business 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 determined to be
creditworthy pursuant to procedures approved by the Board of Directors of the
Fund. 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.
Illiquid Securities
The Fund may not invest more than 10% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market (either within or outside of the United States) or
legal or contractual restrictions on resale. Historically, illiquid securities
have included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (Securities Act), securities which are otherwise not readily marketable
and repurchase agreements having a maturity of longer than seven days.
Securities which have not been registered under the Securities Act are referred
to as private placements or restricted securities and are purchased directly
from the issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and a mutual fund might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the
B-11
<PAGE>
Securities Act for resales of certain securities to qualified institutional
buyers. The investment adviser anticipates that the market for certain
restricted securities such as institutional commercial paper and foreign
securities will expand further as a result of this regulation and the
development of automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and commercial paper for which there is a readily available
market will not be deemed to be illiquid. The investment adviser will monitor
the liquidity of such restricted securities subject to the supervision of the
Board of Directors. In reaching liquidity decisions, the investment adviser will
consider, inter alia, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security and (4) the nature of the security
and the nature of the marketplace trades (e.g., the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the
transfer). In addition, in order for commercial paper that is issued in reliance
on Section 4(2) of the Securities Act to be considered liquid, (i) it must be
rated in one of the two highest rating categories by at least two nationally
recognized statistical rating organizations (NRSRO), or if only one NRSRO rates
the securities, by that NRSRO, or, if unrated, be of comparable quality in the
view of the investment adviser; and (ii) it must not be "traded flat" (i.e.,
without accrued interest) or in default as to principal or interest. Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.
Repurchase Agreements
The Fund's repurchase agreements will be collateralized by U.S. Government
obligations. The Fund will enter into repurchase transactions only with parties
meeting creditworthiness standards approved by the Fund's Board of Directors.
The Fund's investment adviser will monitor the creditworthiness of such parties,
under the general supervision of the Board of Directors. In the event of a
default or bankruptcy by a seller, the Fund will promptly seek to liquidate the
collateral. To the extent that the proceeds from any sale of such collateral
upon a default in the obligation to repurchase are less than the repurchase
price, the Fund will suffer a loss.
The Fund participates in a joint repurchase agreement account with other
investment companies managed by Prudential Mutual Fund Management, Inc. (PMF)
pursuant to an order of the SEC. On a daily basis, any uninvested cash balances
of the Fund may be aggregated with those of such investment companies and
invested in one or more repurchase agreements. Each fund participates in the
income earned or accrued in the joint account based on the percentage of its
investment.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. A "majority of the Fund's
outstanding voting securities," when used in this Statement of Additional
Information, means the lesser of (i) 67% of the voting shares represented at a
meeting at which more than 50% of the outstanding voting shares are present in
person or represented by proxy or (ii) more than 50% of the outstanding voting
shares.
The Fund may not:
1. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); the deposit or
payment by the Fund of initial or maintenance margin in connection with options
on futures contracts is not considered the purchase of a security on margin.
2. Make short sales of securities or maintain a short position, except
short sales against-the-box.
3. 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 and for the
clearance of transactions. The Fund may pledge up to 20% of the value of its
total assets to secure such borrowings. For the purpose of this restriction, the
purchase or sale of securities on a when-issued or delayed delivery basis and
the purchase and sale of options, futures contracts and options on futures
contracts and collateral arrangements with respect to the purchase and sale of
options, futures contracts and options on futures contracts are not deemed to be
a pledge of assets; and neither such arrangements nor obligations of the Fund to
Directors pursuant to deferred compensation arrangements are deemed to be the
issuance of a senior security.
4. Purchase any security (other than obligations of the U.S. Government,
its agencies, or instrumentalities) if as a result: (i) with respect to 75% of
the Fund's total assets, more than 5% of the Fund's total assets (determined at
the time of
B-12
<PAGE>
investment) would then be invested in securities of a single issuer, or (ii)
more than 25% of the Fund's total assets (determined at the time of investment)
would be invested in a single industry.
5. Purchase any security if as a result the Fund would then hold more than
10% of the outstanding voting securities of an issuer.
6. Purchase any security if as a result the Fund would then have more than
5% of its total assets (determined at the time of investment) invested in
securities of companies (including predecessors) less than three years old,
except that the Fund may invest in the securities of any U.S. Government agency
or instrumentality, and in any security guaranteed by such an agency or
instrumentality.
7. Buy or sell real estate or interests in real estate, except that the
Fund may purchase and sell securities which are secured by real estate,
securities of companies which invest or deal in real estate and publicly traded
securities of real estate investment trusts.
8. Buy or sell commodities or commodity contracts, except that the Fund may
purchase and sell financial futures contracts and options thereon.
9. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws.
10. Make investments for the purpose of exercising control or management.
11. Invest in securities of other registered investment companies, except
by purchases in the open market involving only customary brokerage commissions
and as a result of which not more than 10% of its total assets (determined at
the time of investment) would be invested in such securities, or except as part
of a merger, consolidation or other acquisition.
12. Invest in interests on oil, gas or other mineral exploration or
development programs, except that the Fund may invest in the securities of
companies which invest in or sponsor such programs.
13. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities (limited to 33% of the Fund's total assets).
In order to comply with certain state "blue sky" restrictions, the Fund
will not as a matter of operating policy:
1. invest in securities of any issuer if, to the knowledge of the Fund, any
officer or Director of the Fund, the Fund's administrator or the Fund's
investment adviser owns more than 1/2 of 1% of the outstanding securities of
such issuer, and such officers and Directors who own more than 1/2 of 1% own in
the aggregate more than 5% of the outstanding securities of such issuer;
2. purchase warrants, if as a result the Fund would then have more than 5%
of its net assets (determined at the time of investment) invested in warrants.
Warrants will be valued at the lower of cost or market and investment in
warrants which are not listed on the New York Stock Exchange or American Stock
Exchange will be limited to 2% of the Fund's net assets (determined at the time
of investment). For the purpose of this limitation, warrants acquired in units
or attached to securities are deemed to be without value;
3. purchase securities which are secured by real estate or securities of
companies which invest or deal in real estate unless such securities are readily
marketable; and
4. invest in oil, gas and mineral leases.
The Fund also undertakes that the writing of puts or the purchase of puts
and calls shall be in compliance with the requirements of Rule 260.140.85(b) of
the California Code of Regulations and, further, represents that (i) OTC option
transactions shall be entered into only when such options are unavailable on
exchanges; (ii) there shall be an active OTC market for such options which will
establish their pricing and liquidity; and (iii) broker-dealers with whom the
Fund shall enter into such transactions shall have a minimum net worth of $20
million.
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.
B-13
<PAGE>
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
Position with Principal Occupations
Name, Address and Age the Fund During Past 5 Years
- --------------------- -------- -------------------
<S> <C> <C>
Thomas R. Anderson (56) Director Retired. Until July 1991, Chairman, President and Chief
c/o Prudential Mutual Fund Executive Officer of Kemper Financial Companies, Inc.;
Management, Inc. Executive Vice President and Director of Kemper Corpo-
One Seaport Plaza ration; Chairman and Chief Executive Officer of Kemper
New York, NY Financial Services, Inc.; and Kemper Investors Life
Insurance Company. Trustee/Director of Kemper Mutual
Funds and Kemper Closed-End Funds; Director of Hinsdale
Financial Corporation, Hinsdale Federal Bank for Savings,
The Real Exchange Corporation and Specialty Equipment
Companies, Inc.
Robert R. Fortune (78) Director Financial Consultant; previously Chairman, President and Chief
c/o Prudential Mutual Fund Executive Officer of Associated Electric & Gas Insurance
Management, Inc. Services Limited and Aegis Insurance Services, Inc.;
One Seaport Plaza Director of Independence Square Income Securities, Inc.,
New York, NY Temporary Investment Fund, Inc. and Portfolios for Di-
versified Investment, Inc.; Trustee of Trust for Short-Term
Federal Securities, Municipal Fund for Temporary Investment
and The PNC Fund; Managing General Partner of Chestnut
Street Exchange Fund.
Delayne Dedrick Gold (56) Director Marketing and Management Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY
*Harry A. Jacobs, Jr. (73) Director Senior Director (since January 1986) of Prudential Securities
One Seaport Plaza Incorporated (Prudential Securities); formerly Interim
New York, NY Chairman and Chief Executive Officer of Prudential Mutual
Fund Management, Inc. (PMF) (June-September 1993);
formerly Chairman of the Board of Prudential Securities
(1982-1985) and Chairman of the Board and Chief Executive
Officer of Bache Group Inc. (1977-1982); Director of the
Center for National Policy, The First Australia Fund, Inc., The
First Australia Prime Income Fund, Inc., The Global Govern-
ment Plus Fund, Inc. and The Global Total Return Fund, Inc.;
Trustee of The Trudeau Institute.
*Lawrence C. McQuade (67) President and Director Vice Chairman of PMF (since 1988); Managing Director,
One Seaport Plaza Investment Banking, Prudential Securities (1988-1991);
New York, NY Director of Czech & Slovak American Enterprise Fund (since
October 1994), Quixote Corporation (since February 1992)
and BUNZL, P.L.C. (since June 1991); formerly Director of
Crazy Eddie Inc. (1987-1990) and Kaiser Tech, Ltd. and
Kaiser Aluminum and Chemical Corp. (March 1987-Novem-
ber 1988); formerly Executive Vice President and Director of
WR Grace & Company; President and Director of The Global
Government Plus Fund, Inc., The Global Total Return Fund,
Inc. and The High Yield Income Fund, Inc.
</TABLE>
B-14
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupations
Name, Address and Age the Fund During Past 5 Years
- --------------------- -------- -------------------
<S> <C> <C>
Thomas A. Owens, Jr. (72) Director Consultant. Director of Emcore Corporation (manufacturer
c/o Prudential Mutual Fund of electronic materials).
Management, Inc.
One Seaport Plaza
New York, NY
*Richard A. Redeker (51) Director President, Chief Executive Officer and Director (since October
One Seaport Plaza 1993), PMF; Executive Vice President, Director and Member
New York, NY of Operating Committee (since October 1993), Prudential
Securities; Director (since October 1993) of Prudential
Securities Group, Inc. PSG; Executive Vice President, The
Prudential Investment Corporation; Director (since January
1994), Prudential Mutual Fund Distributors, Inc. (PMFD);
Director (since January 1994), Prudential Mutual Fund
Services Inc. (PMFS); formerly Senior Executive Vice
President and Director of Kemper Financial Services, Inc.
(September 1978-September 1993); Director of The Global
Government Plus Fund, Inc., The Global Total Return Fund,
Inc. and The High Yield Income Fund, Inc.
Merle T. Welshans (76) Director Adjunct Professor of Finance, Washington University (since
c/o Prudential Mutual Fund July 1983); prior thereto, Vice President-Finance of Union
Management, Inc. Electric Company; Trustee of Hotchkis and Wiley Funds.
One Seaport Plaza
New York, NY
David W. Drasnin (58) Vice President Vice President and Branch Manager of Prudential Securities.
39 Public Square
Wilkes-Barre, PA
Robert F. Gunia (48) Vice President Chief Administrative Officer (since July 1990), Director (since
One Seaport Plaza January 1989), and Executive Vice President, Treasurer and
New York, NY Chief Financial Officer (since June 1987) of PMF; Senior
Vice President (since March 1987) of Prudential Securities;
Director (since March 1991), PMFD; Director (since June
1987), PMFS; Vice President and Director (since May 1989)
of The Asia Pacific Fund, Inc.
Eugene S. Stark (37) Treasurer and First Vice President (since January 1990) of PMF.
One Seaport Plaza Principal Financial and
New York, NY Accounting Officer
S. Jane Rose (49) Secretary Senior Vice President (since January 1991), Senior Counsel
One Seaport Plaza (since June 1987) and First Vice President (June 1987-
New York, NY December 1990) of PMF; Senior Vice President and Senior
Counsel (since July 1992) of Prudential Securities; formerly
Vice President and Associate General Counsel of Prudential
Securities.
Marguerite E.H. Morrison(38) Assistant Secretary Vice President and Associate General Counsel (since June
One Seaport Plaza 1991) of PMF; Vice President and Associate General
New York, NY Counsel of Prudential Securities.
</TABLE>
* "Interested" Director, as defined in the Investment Company Act, by
reason of his affiliation with Prudential Securities or PMF.
B-15
<PAGE>
Directors and officers of the Fund are also trustees, directors and
officers of some or all of the other investment companies distributed by
Prudential Securities or Prudential Mutual Fund Distributors, Inc.
The officers conduct and supervise the daily business operations of the
Fund, while the Directors, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
The Fund pays each of its Directors who is not an affiliated person of PMF
annual compensation of $7,000, in addition to certain out-of-pocket expenses.
Directors may receive their Directors' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of Directors' fees in installments which accrue interest at a
rate equivalent to the prevailing rate applicable to 90-day U.S. Treasury Bills
at the beginning of each calendar quarter or, pursuant to an SEC exemptive
order, at the daily rate of return of the Fund (the Fund Rate). Payment of the
interest so accrued is also deferred and accruals become payable at the option
of the Director. The Fund's obligation to make payments of deferred Directors'
fees, together with interest thereon, is a general obligation of the Fund. Only
Mr. Fortune defers his Director's fees with interest accruing at the Fund Rate.
Pursuant to the terms of the Management Agreement with the Fund, the
Manager pays all compensation of officers and employees of the Fund as well as
the fees and expenses of all Directors of the Fund who are affiliated persons of
the Manager.
The following table sets forth the aggregate compensation paid by the Fund
to the Directors who are not affiliated with the Manager for the fiscal year
ended December 31, 1994 and the aggregate compensation paid to such Directors
for service on the Fund's board and that of all other investment companies
managed by Prudential Mutual Fund Management, Inc. (Fund Complex) for the
calendar year ended December 31, 1994.
<TABLE>
<CAPTION>
Compensation Table
Total
Pension or Compensation
Retirement From Fund
Aggregate Benefits Accrued Estimated Annual and Fund
Compensation As Part of Fund Benefits Upon Complex Paid
Name and Position From Fund Expenses Retirement To Directors
- ----------------- --------- -------- ---------- ------------
<S> <C> <C> <C> <C>
Robert R. Fortune* 7,000 None N/A 22,000(3)**
Director
Delayne Dedrick Gold 7,000 None N/A 185,000(22)**
Director
Thomas A. Owens, Jr. 7,000 None N/A 100,500(12)**
Director
Merle T. Welshans 7,000 None N/A 22,000(3)**
Director
</TABLE>
*All compensation from the Fund for the fiscal year ended December 31, 1994
represents deferred compensation. Aggregate compensation from the Fund and the
Fund Complex for the fiscal year ended December 31, 1994, including accrued
interest, amounted to approximately $7,000 for the Fund and $21,800 for the
Fund Complex for Mr. Fortune.
**Indicates number of Funds in Fund Complex to which aggregate compensation
relates.
As of February 3, 1995, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding common stock of the Fund.
As of February 3, 1995, Prudential Securities was record holder for other
beneficial owners of 9,678,947 Class A shares (or 67% of the outstanding Class A
shares), 5,407,188 Class B shares (or 69% of the outstanding Class B shares)
and 0 Class C shares (or 0% of the outstanding Class C shares) of the Fund. In
the event of any meetings of shareholders, Prudential Securities will forward,
or cause the forwarding of, proxy material to the beneficial owners for which it
is the record holder.
MANAGER
The manager of the Fund is Prudential Mutual Fund Management, Inc. (PMF or
the Manager), One Seaport Plaza, New York, New York 10292. PMF serves as manager
to all of the other investment companies that, together with the Fund,
B-16
<PAGE>
comprise the Prudential Mutual Funds. See "How the Fund Is Managed-Manager" in
the Prospectus. As of January 31, 1994, PMF managed and/or administered
open-end and closed-end management investment companies with assets of
approximately $45 billion. According to the Investment Company Institute, as of
December 31, 1994, the Prudential Mutual Funds were the 12th largest family of
mutual funds in the United States.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Board of Directors and
in conformity with the stated policies of the Fund, manages both the investment
operations of the Fund and the composition of the Fund's portfolio, including
the purchase, retention, disposition and loan of securities. In connection
therewith, PMF is obligated to keep certain books and records of the Fund. PMF
also administers the Fund's corporate affairs and, in connection therewith,
furnishes the Fund with office facilities, together with those ordinary clerical
and bookkeeping services which are not being furnished by State Street Bank and
Trust Company, the Fund's custodian, and Prudential Mutual Fund Services, Inc.
(PMFS or the Transfer Agent), the Fund's transfer and dividend disbursing agent.
The management services of PMF for the Fund are not exclusive under the terms of
the Management Agreement and PMF is free to, and does, render management
services to others.
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .75 of 1% of the first $500 million of the Fund's average
daily net assets, .70 of 1% of the next $250 million of the Fund's average daily
net assets, .65 of 1% of the next $250 million of the Fund's average daily net
assets and .60 of 1% of the Fund's average daily net assets in excess of $1
billion. The fee is computed daily and payable monthly. The Management Agreement
also provides that, in the event the expenses of the Fund (including the fees of
PMF, but excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due to PMF will be
reduced by the amount of such excess. Reductions in excess of the total
compensation payable to PMF will be paid by PMF to the Fund. No such reductions
were required during the fiscal year ended December 31, 1994. Currently, the
Fund believes that the most restrictive expense limitation of state securities
commissions is 2-1/2% of the Fund's average daily net assets up to $30 million,
2% of the next $70 million of such assets and 1-1/2% of such assets in excess of
$100 million.
In connection with its management of the corporate affairs of the Fund, PMF
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Directors who are not affiliated persons of PMF or the
Fund's investment adviser;
(b) all expenses incurred, by PMF or by the Fund in connection with
managing the ordinary course of the Fund's business, other than those assumed by
the Fund as described below; and
(c) the costs and expenses payable to The Prudential Investment Corporation
(PIC) pursuant to the subadvisory agreement between PMF and PIC (the Subadvisory
Agreement).
Under the terms of the Management Agreement, the Fund is responsible for
the payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Directors who are not affiliated persons of the Manager
or the Fund's investment adviser, (c) the fees and certain expenses of the
Custodian and Transfer and Dividend Disbursing Agent, including the cost of
providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities transactions, (f) all taxes and
corporate fees payable by the Fund to governmental agencies, (g) the fees of any
trade associations of which the Fund may be a member, (h) the cost of stock
certificates representing shares of the Fund, (i) the cost of fidelity and
liability insurance, (j) the fees and expenses involved in registering and
maintaining registration of the Fund and of its shares with the Securities and
Exchange Commission, registering the Fund and qualifying its shares under state
securities laws, including the preparation and printing of the Fund's
registration statements and prospectuses for such purposes, (k) allocable
communications expenses with respect to investor services and all expenses of
shareholders' and Directors' meetings and of preparing, printing and mailing
reports, proxy statements and prospectuses to shareholders in the amount
necessary for distribution to the shareholders, (l) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business and (m) distribution fees.
The Management Agreement provides that PMF will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60
B-17
<PAGE>
days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act. The Management Agreement
was last approved by the Board of Directors of the Fund, including a majority of
the Directors who are not parties to the contract or interested persons of any
such party as defined in the Investment Company Act on June 1, 1994 and by
shareholders of the Fund on April 25, 1988.
For the fiscal years ended December 31, 1994, 1993 and 1992, the Fund paid
management fees to PMF of $2,116,651, $2,557,119 and $2,767,889, respectively.
PMF has entered into the Subadvisory Agreement with PIC (the Subadviser).
The Subadvisory Agreement provides that PIC will furnish investment advisory
services in connection with the management of the Fund. In connection therewith,
PIC is obligated to keep certain books and records of the Fund. PMF continues to
have responsibility for all investment advisory services pursuant to the
Management Agreement and supervises PIC's performance of such services. PIC is
reimbursed by PMF for the reasonable costs and expenses incurred by PIC in
furnishing those services.
The Subadvisory Agreement was last approved by the Board of Directors,
including a majority of the Directors who are not parties to the contract or
interested persons of any such party as defined in the investment Company Act on
June 1, 1994, and by shareholders of the Fund on April 25, 1988.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PMF or PIC upon not more than 60 days', nor less than 30
days', written notice. The Subadvisory Agreement provides that it will continue
in effect for a period of more than two years from its execution only so long as
such continuance is specifically approved at least annually in accordance with
the requirements of the Investment Company Act.
The Manager and the Subadviser are subsidiaries of The Prudential Insurance
Company of America (Prudential) which, as of December 31, 1993, is one of the
largest financial institutions in the world and the largest insurance company in
North America. Prudential has been engaged in the insurance business since 1875.
In July 1994, Institutional Investor ranked Prudential the second largest
institutional money manager of the 300 largest money management organizations in
the United States as of December 31, 1993.
DISTRIBUTOR
Prudential Mutual Fund Distributors, Inc. (PMFD), One Seaport Plaza, New
York, New York 10292, acts as the distributor of the Class A shares of the Fund.
Prudential Securities Incorporated (Prudential Securities or PSI), One Seaport
Plaza, New York, New York 10292, acts as the distributor of the Class B and
Class C shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and separate distribution
agreements (the Distribution Agreements), PMFD and Prudential Securities
(collectively, the Distributor) incur the expenses of distributing the Fund's
Class A, Class B and Class C shares. See "How the Fund is Managed-Distributor"
in the Prospectus.
Prior to January 22, 1990, the Fund offered only one class of shares (the
then existing Class B shares). On September 13, 1989, the Board of Directors,
including a majority of the Directors who are not interested persons of the Fund
and who have no direct or indirect financial interest in the operation of the
Class A or Class B Plan or in any agreement related to either Plan (the Rule
12b-1 Directors), at a meeting called for the purpose of voting on each Plan,
adopted a new plan of distribution for the Class A shares of the Fund (the Class
A Plan) and approved an amended and restated plan of distribution with respect
to the Class B shares of the Fund (the Class B Plan). On June 9, 1993, the Board
of Directors, including a majority of the Rule 12b-1 Directors, at a meeting
called for the purpose of voting on each Plan, approved modifications to the
Fund's Class A and Class B Plans and Distribution Agreements to conform them to
recent amendments to the National Association of Securities Dealers, Inc. (NASD)
maximum sales charge rule described below. As so modified, the Class A Plan
provides that (i) up to .25 of 1% of the average daily net assets of the Class A
shares may be used to pay for personal service and the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1%. As so modified, the
Class B Plan provides that (i) up to .25 of 1% of the average daily net assets
of the Class B shares may be paid as a service fee and (ii) up to .75 of 1% (not
including the service fee) of the average daily net assets of the Class B shares
(asset-based sales charge) may be used as reimbursement for distribution-related
expenses with respect to the Class B shares. On June 9, 1993, the Board of
Directors, including a majority of the Rule 12b-1 Directors, at a meeting called
for the purpose of voting on each Plan, adopted a plan of
B-18
<PAGE>
distribution for the Class C shares of the Fund and approved further amendments
to the plans of distribution for the Fund's Class A and Class B shares changing
them from reimbursement type plans to compensation type plans. The Plans were
last approved by the Board of Directors, including a majority of the Rule 12b-1
Directors on June 1, 1994. The Class A Plan, as amended, was approved by Class A
and Class B shareholders, and the Class B Plan, as amended, was approved by
Class B shareholders on July 19, 1994. The Class C Plan was approved by the sole
shareholder of Class C shares on August 1, 1994.
Class A Plan. For the fiscal year ended December 31, 1994, PMFD received
payments of $29,311 under the Class A Plan. This amount was primarily expended
for payment of account servicing fees to financial advisers and other persons
who sell Class A shares. For the fiscal year ended December 31, 1994, PMFD
received approximately $24,000 in initial sales charges.
Class B Plan. For the fiscal year ended December 31, 1994, Prudential
Securities received $2,704,958 from the Fund under the Class B Plan and spent
approximately $1,695,400 in distributing the Fund's Class B shares. It is
estimated that of the latter amount, approximately 10.2% ($173,100) was spent on
compensation to Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, for commissions to its representatives and other expenses,
including an allocation on account of overhead and other branch office
distribution-related expenses, incurred by it for distribution of Fund shares;
approximately 2.9% ($49,600) on prospectus and other printing costs;
approximately 17.4% ($295,000) on interest and/or carrying costs and 69.5%
($1,777,700) on the aggregate of (i) payments of commissions and account
servicing fees to financial advisers 29.8% ($504,480) and (ii) an allocation on
account of overhead and other branch office distribution-related expenses 39.7%
($673,300). The term "overhead and other branch office distribution-related
expenses" represents (a) the expenses of operating branch offices of Prudential
Securities and Prusec 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 coordinator costs, and (d) other incidental expenses relating to branch
promotion of Fund shares.
Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by investors upon certain redemptions of Class B shares. See
"Shareholder Guide-How to Sell Your Shares-Contingent Deferred Sales Charges" in
the Prospectus. For the fiscal year ended December 31, 1994, Prudential
Securities received approximately $354,300 in contingent deferred sales charges.
Class C Plan. For the period August 1, 1994 (inception of Class C shares)
through December 31, 1994, Prudential Securities did not receive compensation
under the Class C Plan and did not incur any expenditures in distributing Class
C shares. Prudential Securities also receives the proceeds of contingent
deferred sales charges paid by investors upon certain redemptions of Class C
shares. See "Shareholder Guide-How to Sell Your Shares-Contingent Deferred Sales
Charges" in the Prospectus.
The Class A, Class B and Class C Plans continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Board of Directors, including a majority vote of the Rule 12b-1
Directors, cast in person at a meeting called for the purpose of voting on such
continuance. The Plans may each be terminated at any time, without penalty, by
the vote of a majority of the Rule 12b-1 Directors or by the vote of the holders
of a majority of the outstanding shares of the applicable class on not more than
30 days' written notice to any other party to the Plans. The Plans may not be
amended to increase materially the amounts to be spent for the services
described therein without approval by the shareholders of the applicable class
(by both Class A and Class B shareholders voting separately, in the case of
material amendments to the Class A Plan), and all material amendments are
required to be approved by the Board of Directors in the manner described above.
Each Plan will automatically terminate in the event of its assignment. The Fund
will not be contractually obligated to pay expenses incurred under any Plan if
it is terminated or not continued.
Pursuant to each Plan, the Board of Directors will review at least
quarterly a written report of the distribution expenses incurred on behalf of
each class of shares of the Fund by the Distributor. The report includes 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 Rule 12b-1 Directors shall be committed to the Rule 12b-1 Directors.
Pursuant to each Distribution Agreement, the Fund has agreed to indemnify
PMFD and Prudential Securities to the extent permitted by applicable law against
certain liabilities under the Securities Act of 1933, as amended. Each
Distribution Agreement was last approved by the Board of Directors, including a
majority of the Rule 12b-1 Directors, on June 1, 1994.
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 required to
be included in
B-19
<PAGE>
the calculation of the 6.25% limitation. The annual asset-based sales charge
on each of the Class B and Class C 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.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the safety, potential returns
and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSI's
conduct violated the federal securities laws and that an order issued by the SEC
in 1986 requiring PSI to adopt, implement and maintain certain supervisory
procedures had not been complied with; (ii) directed PSI to cease and desist
from violating the federal securities laws and imposed a $10 million civil
penalty; and (iii) required PSI to adopt certain remedial measures including the
establishment of a Compliance Committee of its Board of Directors. Pursuant to
the terms of the SEC settlement, PSI established a settlement fund in the amount
of $330,000,000 and procedures, overseen by a court approved Claims
Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend the creation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Dallas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. (PSG) and PSI
entered into agreements with the United States Attorney deferring prosecution
(providing PSI complies with the terms of the agreement for three years) for any
alleged criminal activity related to the sale of certain limited partnership
programs from 1983 to 1990. In connection with these agreements, PSI agreed to
add the sum of $330,000,000 to the fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director will also serve as an independent "ombudsman" whom PSI
employees can call anonymously with complaints about ethics and compliance.
Prudential Securities shall report any allegations or instances of criminal
conduct and material improprieties to the new director. The new director will
submit compliance reports which shall identify all such allegations or instances
of criminal conduct and material improprieties every three months for a
three-year period.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities,
options on securities and futures for the Fund, the selection of brokers,
dealers and futures commission merchants to effect the transactions and the
negotiation of brokerage commissions, if any. For purposes of this section, the
term "Manager" includes the Subadviser. Purchases and sales of futures contracts
on a securities exchange or board of trade are effected through brokers or
futures commission merchants who charge a commission for their services. Orders
may be directed to any broker or futures commission merchant, including, to the
extent and in the manner permitted by applicable law, Prudential Securities and
its affiliates. Brokerage commissions on United States securities, options and
futures exchanges or boards of trade are subject to negotiation between the
Manager and the broker or futures commission merchant.
In the over-the-counter market, securities 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
B-20
<PAGE>
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
an issuer, in which case no commissions or discounts are paid. The Fund will not
deal with Prudential Securities in any transaction in which Prudential
Securities (or any affiliate) acts as principal. Thus, it will not deal in
over-the-counter securities with Prudential Securities acting as market maker,
and it will not execute a negotiated trade with Prudential Securities if
execution involves Prudential Securities acting as principal with respect to any
part of the Fund's order.
In placing orders for portfolio securities or futures contracts of the
Fund, the Manager is required to give primary consideration to obtaining the
most favorable price and efficient execution. Within the framework of this
policy, the Manager will consider the research and investment services provided
by brokers, dealers or futures commission merchants who effect or are parties to
portfolio transactions of the Fund, the Manager or the Manager's other clients.
Such research and investment services are those which brokerage houses
customarily provide to institutional investors and include statistical and
economic data and research reports on particular companies and industries. Such
services are used by the Manager in connection with all of its investment
activities, and some of such services obtained in connection with the execution
of transactions for the Fund may be used in managing other investment accounts.
Conversely, brokers, dealers or futures commission merchants furnishing such
services may be selected for the execution of transactions of such other
accounts, whose aggregate assets are far larger than the Fund, and the services
furnished by such brokers, dealers or futures commission merchants may be used
by the Manager in providing investment management for the Fund. Commission rates
are established pursuant to negotiations with the broker, dealer or futures
commission merchant based on the quality and quantity of execution services
provided by the broker, dealer or futures commission merchant in the light of
generally prevailing rates. The Manager's policy is to pay higher commissions to
brokers, other than Prudential Securities, for particular transactions than
might be charged if a different broker had been selected, on occasions when, in
the Manager's opinion, this policy furthers the objective of obtaining best
price and execution. In addition, the Manager is authorized to pay higher
commissions on brokerage transactions for the Fund to brokers, dealers or future
commission merchants other than Prudential Securities in order to secure
research and investment services described above, 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, dealers or future
commission merchants and the commission rates paid are reviewed periodically by
the Fund's Board of Directors. Portfolio securities may not be purchased from
any underwriting or selling syndicate of which Prudential Securities (or any
affiliate), during the existence of the syndicate, is a principal underwriter
(as defined in the Investment Company Act), except in accordance with rules of
the SEC. This limitation, in the opinion of the Fund, will not significantly
affect the Fund's ability to pursue its present investment objective. However,
in the future in other circumstances, the Fund may be at a disadvantage because
of this limitation in comparison to other funds with similar objectives but not
subject to such limitations.
Subject to the above considerations, the Manager may use Prudential
Securities as a broker or futures commission merchant for the Fund. In order for
Prudential Securities (or any affiliate) to effect any portfolio transactions
for the Fund, the commissions, fees or other remuneration received by Prudential
Securities (or any affiliate) must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers or futures
commission merchants in connection with comparable transactions involving
similar securities or futures being purchased or sold on a securities or
commodities 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 or
futures commission merchant in a commensurate arm's-length transaction.
Furthermore, the Board of Directors of the Fund, including a majority of the
non-interested Directors, has adopted procedures which are reasonably designed
to provide that any commissions, fees or other remuneration paid to Prudential
Securities (or any affiliate) are consistent with the foregoing standard. In
accordance with Section 11(a) of the Securities Exchange Act of 1934, Prudential
Securities may not retain compensation for effecting transactions on a national
securities exchange for the Fund unless the Fund has expressly authorized the
retention of such compensation. Prudential Securities must furnish to the Fund
at least annually a statement setting forth the total amount of all compensation
retained by Prudential Securities from transactions effected for the Fund during
the applicable period. Brokerage and futures 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.
Transactions by the Fund in options on securities, interest rate futures
and stock indices, and in stock index futures and options thereon, will be
subject to limitations established by each of the exchanges, boards of trade or
other trading facilities governing the maximum number of options and futures in
each class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options and futures are
written on the same or different exchanges, boards of trade or other trading
facilities or are held or written in one or more accounts or
B-21
<PAGE>
through one or more brokers. Thus, the number of options which the Fund may
write or purchase may be affected by options written or purchased by other
investment advisory clients of its investment adviser. An exchange, board of
trade or other trading facility may order the liquidations of positions found to
be in excess of these limits, and it may impose certain other sanctions.
The table presented below shows certain information regarding the payment
of commissions by the Fund, including the amount of such commissions paid to
Prudential Securities for the three-year period ended December 31, 1994.
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1994 1993 1992
------------ ------------ ------------
Total brokerage commissions paid
by the Fund ......................... $243,461 $271,740 $946,367
Total brokerage commissions paid to
Prudential Securities ............... 25,700 $ 22,849 $ 52,500
Percentage of total brokerage commissions
paid to Prudential Securities ....... 10.66% 8.41% 5.55%
For the fiscal year ended December 31, 1994, the Fund effected
approximately 12.15% of the aggregate dollar amount of its portfolio
transactions involving the payment of commissions through Prudential Securities.
Of the total brokerage commissions paid during that period, $219,851 (or 90.3%)
were paid to firms which provided research, statistical or other services to
PMF. PMF has not separately identified a portion of such brokerage commissions
as applicable to the provision of such research, statistical or other services.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share, plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis (Class B or Class C shares). See "Shareholder Guide-How
to Buy Shares of the Fund" in the Prospectus.
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except
that the Fund has agreed with the SEC in connection with the offering of a
conversion feature on Class B shares to submit any amendment of the Class A
distribution and service plan to both Class A and Class B shareholders) and
(iii) only Class B shares have a conversion feature. See "Distributor." Each
class also has separate exchange privileges. See "Shareholder Investment
Account-Exchange Privilege."
Specimen Price Make-Up
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of 5%
and Class B* and Class C* shares of the Fund are sold at net asset value. Using
the Fund's net asset value at December 31, 1994, the maximum offering price of
the Fund's shares is as follows:
Class A
Net asset value and redemption price per Class A share .................. $10.87
------
Maximum sales charge (5% of offering price) ............................. .57
------
Maximum offering price to public ........................................ $11.44
======
Class B
Net asset value, offering price and redemption price per Class B share* . $10.88
======
Class C
Net asset value, offering price and redemption price per Class C share* . $10.88
======
- --------------
*Class B and Class C shares are subject to a contingent deferred sales charge on
certain redemptions. See "Shareholder Guide-How to Sell Your Shares-Contingent
Deferred Sales Charges" in the Prospectus.
B-22
<PAGE>
Reduction and Waiver of Initial Sales Charges-Class A Shares
Combined Purchase and Cumulative Purchase Privilege. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See the table of breakpoints under "Shareholder
Guide-Alternative Purchase Plan" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group
that holds 25% or more of the outstanding voting securities of a
company will be deemed to control the company, and a partnership will
be deemed to be controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) 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 Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charges will be granted
subject to confirmation of the investor's holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in any
retirement or group plans.
Rights of Accumulation. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential Securities. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering price (net asset value plus maximum sales charge) as
of the previous business day. See "How the Fund Values its Shares" in the
Prospectus. The Distributor must be notified at the time of purchase that the
investor is entitled to a reduced sales charge. The reduced sales charges will
be granted subject to confirmation of the investor's holdings. Rights of
Accumulation are not available to individual participants in any retirement or
group plans.
Letters of Intent. Reduced sales charges are also available to investors
(or an eligible group of related investors) including retirement and group
plans, who enter into a written Letter of Intent providing for the purchase,
within a thirteen-month period, of shares of the Fund and shares of other
Prudential Mutual Funds. All shares of the Fund and shares of other Prudential
Mutual Funds (excluding money market funds other than those acquired pursuant to
the exchange privilege) which were previously purchased and are still owned are
also included in determining the applicable reduction. However, the value of
shares held directly with the Transfer Agent and through Prudential Securities
will not be aggregated to determine the reduced sales charge. All shares must be
held either directly with the Transfer Agent or through Prudential Securities.
The Distributor must be notified at the time of purchase that the investor is
entitled to a reduced sales charge. The reduced sales charges will be granted
subject to confirmation of the investor's holdings. Letters of Intent are not
available to individual participants in any retirement or group plans.
A Letter of Intent permits a purchaser 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
purchaser, except in the case of retirement and group plans where the employer
or plan sponsor will be responsible for paying any applicable sales charge. The
effective date of a 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 purchaser's
cost, can be applied to the fulfillment of the Letter of Intent goal, except in
the case of retirement and group plans.
B-23
<PAGE>
The 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 purchaser (or employer or
plan sponsor in the case of any retirement or group plan) is required to pay the
difference between the sales charge otherwise applicable to the purchases made
during this period and sales charges actually paid. Such payment may be made
directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain such difference. Investors electing to
purchase Class A shares of the Fund pursuant to a Letter of Intent should
carefully read such Letter of Intent. Waiver of the Contingent Deferred Sales
Charge-Class B Shares
The contingent deferred sales charge is waived under circumstances
described in the Prospectus. See "Shareholder Guide-How to Sell Your
Shares-Waiver of the Contingent Deferred Sales Charges-Class B Shares" in the
Prospectus. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.
Category of Waiver
Death
Disability-An Individual will be
considered disabled if he or she is
unable to engage in any substantial
gainful activity by reason of any
medically determinable physical or
mental impairment which can be expected
to result in death or to be of
long-continued and indefinite duration.
Distribution from an IRA or 403(b)
Custodial Account
Distribution from Retirement Plan
Excess Contributions
Required Documentation
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.
A copy of the Social Security
Administration award letter or a letter
from a physician on the physician's
letterhead stating that the shareholder
(or, in the case of a trust, the
grantor) is permanently disabled. The
letter must also indicate the date of
disability.
A copy of the distribution form from the
custodial firm indicating (i) the date
of birth of the shareholder and (ii)
that the shareholder is over age 59-1/2
and is taking a normal
distribution-signed by the shareholder.
A letter signed by the plan
administrator/trustee indicating the
reason for the distribution.
A letter from the shareholder (for an
IRA) or the plan administrator/trustee
on company letterhead indicating the
amount of the excess and whether or not
taxes have been paid.
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
Quantity Discount-Class B Shares Purchased Prior to August 1, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchase an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares of
the Fund following the second purchase was $550,000, the quantity discount would
be available for the second purchase of $450,000 but not for the first purchase
of $100,000. The quantity discount will be imposed at the following rates
depending on whether the aggregate value exceeded $500,000 or $1 million:
Contingent Deferred Sales Charge
as a Percentage of Dollars Invested
or Redemption Proceeds
Year Since Purchase -----------------------------------------
Payment Made $500,001 to $1 million Over $1 million
------------------- ---------------------- ---------------
First ........................... 3.0% 2.0%
Second .......................... 2.0% 1.0%
Third ........................... 1.0% 0%
Fourth and thereafter ........... 0% 0%
B-24
<PAGE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a stock certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to the
shareholders the following privileges and plans.
Automatic Reinvestment of Dividends and/or Distributions
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund. An investor
may direct the Transfer Agent in writing not less than five full business days
prior to the record date to have subsequent dividends and/or distributions sent
in cash rather than reinvested. In the case of recently purchased shares for
which registration instructions have not been received on the record date, cash
payment will be made directly to the dealer. Any shareholder who receives a cash
payment representing a dividend or distribution may reinvest such distribution
at net asset value by returning the check or the proceeds to the Transfer Agent
within 30 days after the payment date. Such investment will be made at the net
asset value per share next determined after receipt of the check or proceeds by
the Transfer Agent. Such shareholder will receive credit for any contingent
deferred sales charge paid in connection with the amount of proceeds being
reinvested.
Exchange Privilege
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
Mutual Funds may also be exchanged for shares of the Fund. All exchanges are
made on the basis of relative net asset value next determined after receipt of
an order in proper form. An exchange will be treated as a redemption and
purchase for tax purposes. Shares may be exchanged for shares of another fund
only if shares of such fund may legally be sold under applicable state laws. For
retirement and group plans having a limited menu of Prudential Mutual Funds, the
Exchange Privilege is available for those funds eligible for investment in the
particular program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
Class A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential Mutual Funds, shares of Prudential
Government Securities Trust (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
Prudential Tax-Free Money Fund
Class B and Class C. Shareholders of the Fund may exchange their Class B
and Class C shares for Class B and Class C shares, respectively, of certain
other Prudential Mutual Funds and shares of Prudential Special Money Market
Fund, a
B-25
<PAGE>
money market fund. No CDSC will be payable upon such exchange, but a CDSC may be
payable upon the redemption of Class B and Class C shares acquired as a result
of an exchange. The applicable sales charge will be that imposed by the fund in
which shares were initially purchased and the purchase date will be deemed to be
the first day of the month after the initial purchase, rather than the date of
the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of
Prudential Special Money Market Fund without imposition of any CDSC at the time
of exchange. Upon subsequent redemption from such money market fund or after
re-exchange into the Fund, such shares will be subject to the CDSC calculated by
excluding the time such shares were held in the money market fund. In order to
minimize the period of time in which shares are subject to a CDSC, shares
exchanged out of the money market fund will be exchanged on the basis of their
remaining holding periods, with the longest remaining holding periods being
transferred first. In measuring the time period shares are held in a money
market fund and "tolled" for purposes of calculating the CDSC holding period,
exchanges are deemed to have been made on the last day of the month. Thus, if
shares are exchanged into the Fund from a money market fund during the month
(and are held in the Fund at the end of the month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the
Class B or Class C Exchange Privilege, a shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B or Class C
shares of the Fund, respectively, without subjecting such shares to any CDSC.
Shares of any fund participating in the ClassB or Class C Exchange Privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares of other funds, respectively, without
being subject to any CDSC.
Additional details about the Exchange Privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on sixty days' notice, and any fund, including the Fund,
or the Distributor, has the right to reject any exchange application relating to
such fund's shares.
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 $4,800 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2007, the cost of four years at a private
college could reach $163,000 and over $97,000 at a public university.1
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.2
Period of
Monthly investments: $100,000 $150,000 $200,000 $250,000
-------------------- -------- -------- -------- --------
25 Years $ 110 $ 165 $ 220 $ 275
20 Years 176 264 352 440
15 Years 296 444 592 740
10 Years 555 833 1,110 1,388
5 Years 1,371 2,057 2,742 3,428
See "Automatic Savings Accumulation Plan."
- -------------
1 Source information concerning the costs of education at public
universities is available from The College Board Annual Survey of Colleges,
1992. Information about the costs of private colleges is from the Digest of
Education Statistics, 1992; The National Center for Educational Statistics; and
the U.S. Department of Education. 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.
B-26
<PAGE>
Automatic Savings Accumulation Plan (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account or
Prudential Securities account (including a Command Account) to be debited to
invest specified dollar amounts in shares of the Fund. The investor's bank must
be a member of the Automatic Clearing House System. Stock certificates are not
issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
Systematic Withdrawal Plan
A systematic withdrawal plan is available to shareholders through
Prudential Securities or the Transfer Agent. Such withdrawal plan provides for
monthly or quarterly checks in any amount, except as provided below, up to the
value of the shares in the shareholder's account. Withdrawals of Class B or
Class C shares may be subject to a CDSC. See "Shareholder Guide-How to Sell Your
Shares-Contingent Deferred Sales Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment
Account-Automatic Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must generally be recognized for federal income tax
purposes. In addition, withdrawals made concurrently with purchases of
additional shares are inadvisable because of the sales charge applicable to (i)
the purchase of Class A shares and (ii) the withdrawal of Class B and Class C
shares. Each shareholder should consult his or her own tax adviser with regard
to 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 a 401(k) plan,
self-directed individual retirement accounts and "tax sheltered accounts" under
Section 403(b)(7) of the Internal Revenue Code are available through the
Distributor. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information regarding the
establishment of these plans, the administration, custodial fees and other
details is available from Prudential Securities or the Transfer Agent.
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.
Tax-Deferred Retirement Accounts
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.
B-27
<PAGE>
Tax-Deferred Compounding1
Contributions Personal
Made Over: Savings IRA
------------- -------- --------
10 years $ 26,165 $ 31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
1The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
the IRA account will be subject to tax when withdrawn from the account.
NET ASSET VALUE
The net asset value per share is the net worth of the Fund (assets,
including securities at value, minus liabilities) divided by the number of
shares outstanding. Net asset value is calculated separately for each class.
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund.
Any security for which the primary market is on a national securities
exchange or NASDAQ National Market System securities, other than options on
stocks and stock indices are valued at the last price on such exchange on the
day of valuation or, if there was no sale on such day, at the average of readily
available bid and asked prices on such exchange. Corporate bonds (other than
convertible debt securities) and U.S. Government securities that are actively
traded in the over-the-counter market, including listed securiites for which the
primary market is believed to be the over-the-counter, are valued at a price
provided by an independent pricing agent; the independent pricing agent will use
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. Such pricing method is
known as "matrix" pricing. 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 average of
the most recently quoted bid and asked prices. Options on stocks, debt
securities and stock indices traded on a national securities exchange are valued
at the last sale price at the close of options trading on such exchange or, if
there was no sale on the applicable options exchange on such day, at the average
of quoted bid and asked prices as of the close of such exchange. Other
securities are valued at the mean between the most recently quoted bid and asked
prices. Futures contracts and options thereon traded on a commodities exchange
or board of trade shall be valued at the last sale price at the close of trading
on such exchange or board of trade or, if there was no sale on the applicable
commodities exchange or board of trade on such day, at the average of quoted bid
and asked prices as of the close of such exchange or board of trade. Short-term
securities which mature in more than 60 days are valued at current market
quotations. Short-term debt instruments which mature in 60 days or less are
valued at amortized cost. Securities which are otherwise not readily marketable
or securities for which market quotations are not readily available are valued
in good faith at fair value in accordance with procedures adopted by the Fund's
Board of Directors.
The Fund will compute its net asset value once daily as of 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 the net asset value. In the event the New York Stock
Exchange closes early on any business day, the net asset value of the Fund's
shares shall be determined at a time between such closing and 4:15 P.M., New
York time. The New York Stock Exchange is closed on the following holidays: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
In the event that the New York Stock Exchange or the national securities
exchanges on which stock options are traded adopt different trading hours on
either a permanent or temporary basis, the Board of Directors of the Fund will
reconsider the time at which net asset value is computed. In addition, the Fund
may compute its net asset value as of any time permitted pursuant to any
exemption, order or statement of the SEC or its staff.
The net asset value of Class B and Class C shares will generally be lower
than the net asset value of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. It is
expected, however, that
B-28
<PAGE>
the net asset value per share of each class will tend to converge immediately
after the recording of dividends which will differ by approximately the amount
of the distribution-related expense accrual differential among the classes.
TAXES
The Fund has qualified and intends to remain qualified as a regulated
investment company under Subchapter M of the Internal Revenue Code. This
relieves the Fund (but not its shareholders) from paying federal income tax on
income which is distributed to shareholders, and permits net capital gains of
the Fund (i.e., the excess of net long-term capital gains over net short-term
capital losses) to be treated as long-term capital gains of the shareholders,
regardless of how long shares in the Fund are held.
Qualification as a regulated investment company requires, among other
things, that (a) at least 90% of the Fund's gross income from dividends,
interest, proceeds from loans of securities and gains from the sale or other
disposition of securities or foreign currencies, or other income (including, but
not limited to, gains from options, futures or forward contracts) be derived
with respect to its business of investing in such securities or currencies; (b)
the Fund derive less than 30% of its gross income from gains (without offset for
losses) from the sale or other disposition of securities or options thereon held
for less than three months; and (c) the Fund 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 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). In addition, in order not to be subject to federal income tax, the
Fund must distribute to its shareholders at least 90% of its net investment
income and short-term capital gains other than net long-term capital gains
earned in each year. For purposes of the 30% test, the Fund has received a
private letter ruling from the Internal Revenue Service stating that gains
realized by the Fund as a result of marking a "Section 1256 contract" to market
will not be considered gain from the sale of securities held for less than three
months.
In addition to the foregoing, a 4% nondeductible excise tax will be imposed
on the Fund to the extent the Fund does not meet certain minimum distribution
requirements by the end of each calendar year. For this purpose, any income or
gain retained by the Fund which is subject to tax will be considered to have
been distributed by year-end. In addition, dividends declared in October,
November or December payable to shareholders of record on a specified date in
any such month and paid in the following January will be treated as having been
paid by the Fund and received by each shareholder on December 31 of such prior
year. Under this rule, therefore, a shareholder may be taxed in one year on
dividends or distributions actually received in January of the following year.
Gains or losses on sales of securities by the Fund will be treated as
long-term capital gains or losses if the securities have been held by it for
more than one year except in certain cases where the Fund acquires a put or
writes a call thereon or otherwise holds an offsetting position with respect to
the securities. Other gains or losses on the sale of securities will be
short-term capital gains or losses. Gains and losses on the sale, lapse or other
termination of options on securities will generally be treated as gains and
losses from the sale of securities (assuming they do not qualify as "Section
1256 contracts"). If an option written by the Fund on securities lapses or is
terminated through a closing transaction, such as a repurchase by the Fund of
the option from its holder, the Fund will generally realize capital gain or
loss, depending on whether the premium income is greater or less than the amount
paid by the Fund in the closing purchase transaction. If securities are sold by
the Fund pursuant to the exercise of a call option written by it, the Fund will
include the premium received in the sale proceeds of the securities delivered in
determining the amount of gain or loss on the sale. Certain of the Fund's
transactions may be subject to wash sale and short sale provisions of the
Internal Revenue Code. In addition, debt securities acquired by the Fund may be
subject to original issue discount and market discount rules.
"Regulated futures contracts" and certain listed options which are not
"equity options" constitute "Section 1256 contracts" and will be required to be
"marked to market" for federal income tax purposes at the end of the Fund's
taxable year; that is, treated as having been sold at market value. Sixty
percent of any gain or loss recognized on such "deemed sales" and on actual
dispositions will be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss. Gain or loss on
the sale, lapse or other termination of options on narrowly-based stock indexes
will be capital gain or loss and will be long-term or short-term depending on
the holding period of the option.
Ordinarily, gains and losses realized from portfolio transactions will be
treated as capital gain or loss. However, all or a portion of the gain or loss
from the disposition of non-U.S. dollar denominated securities (including debt
instruments, certain financial forward, futures and option contracts, and
certain preferred stock) may be treated as ordinary income or
B-29
<PAGE>
loss under Section 988 of the Internal Revenue Code. In addition, all or a
portion of the gain realized from the disposition of market discount bonds will
be treated as ordinary income under Section 1276 of the Internal Revenue Code.
Generally, a market discount bond is defined as any bond bought by the Fund
after April 30, 1993, and after its original issuance, at a price below its face
or accreted value. Finally, all or a portion of the gain realized from engaging
in "conversion transactions" may be treated as ordinary income under Section
1258 of the Internal Revenue Code. "Conversion transactions" are defined to
include certain forward, futures, option and straddle transactions, transactions
marketed or sold to produce capital gains, or transactions described in Treasury
regulations to be issued in the future.
Offsetting positions held by the Fund involving certain financial forward,
futures or options contracts (including certain foreign currency forward
contracts or options) may constitute "straddles." "Straddles" are defined to
include "offsetting positions" in actively traded personal property. The tax
treatment of "straddles" is governed by Sections 1092 and 1258 of the Internal
Revenue Code, which, in certain circumstances, override or modifies the
provisions of Sections 1256 and 988. If the Fund were treated as entering into
"straddles" by reason of its engaging in certain forward contracts or options
transactions, such "straddles" would be characterized as "mixed straddles" if
the forward contracts or options transactions comprising a part of such
"straddles" were governed by Section 1256. The Fund may make one or more
elections with respect to "mixed straddles." Depending on which election is
made, if any, the results to the Fund may differ. If no election is made to the
extent the "straddle" rules apply to positions established by the Fund, losses
realized by the Fund will be deferred to the extent of unrealized gain in the
offsetting position. Moreover, as a result of the "straddle" rules, short-term
capital loss on "straddle" positions may be recharacterized as long-term capital
loss, and long-term capital gains may be treated as short-term capital gains.
Any loss realized on a sale, redemption or exchange of shares of the Fund
by a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
Shareholders electing to receive dividends and distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share of the Fund on the
reinvestment date.
Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends or distributions. Furthermore,
such dividends or distributions, although in effect a return of capital, are
subject to federal income taxes. Therefore, prior to purchasing shares of the
Fund, the investor should carefully consider the impact of dividends or capital
gains distributions which are expected to be or have been announced.
The per share dividends on Class B and Class C shares, if any, will be
lower than the per share dividends on Class A shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share distributions of net capital gains, if any, will be paid in the same
amount for Class A, Class B and Class C shares. See "Net Asset Value."
Pennsylvania Personal Property Tax. The Fund has received a written letter
of determination from the Pennsylvania Department of Revenue that the Fund will
be subject to the Pennsylvania foreign franchise tax. Accordingly, it is
believed that Fund shares are exempt from Pennsylvania personal property taxes.
The Fund anticipates that it will continue such business activities but reserves
the right to suspend them at any time, resulting in the termination of the
exemption.
PERFORMANCE INFORMATION
Average Annual Total Return. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B and Class C shares. See "How the Fund Calculates
Performance" in the Prospectus.
B-30
<PAGE>
Average annual total return is computed according to the following formula:
P(1+T)n=ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical
$1000 payment made at the beginning of the 1, 5 or 10 year
periods.
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.
The average annual total return for Class A shares for the one year and
since inception (January 22, 1990) periods ended December 31, 1994 was -8.4% and
6.0%, respectively. The average annual total return for Class B shares for the
one, five and since inception periods ended on December 31, 1994 was -9.2%, 5.2%
and 8.7%, respectively. The average annual total return for Class C shares for
the period since inception (August 1, 1994) through December 31, 1994 was -3.5%.
Aggregate Total Return. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B and
Class C shares. See "How the Fund Calculates Performance" in the Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to 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 for Class A shares for the one year and since
inception periods ended on December 31, 1994 was -3.6% and 40.3%,
respectively. The aggregate total return for Class B shares for the one, five
and since inception periods ended on December 31, 1994 was -4.2%, 29.6% and
112.5%, respectively. The aggregate total return for Class C shares for the
period since inception (August 1, 1994) through December 31, 1994 was -2.5%.
Yield. The Fund may from time to time advertise its yield as calculated
over a 30-day period. Yield is calculated separately for Class A, Class B and
Class C shares. This yield will be computed by dividing the Fund's net
investment income per share earned during this 30-day period by the maximum
offering price per share on the last day of this period. Yield is calculated
according to the following formula:
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.
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.
From time to time, the perfomance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investment over the long-term and the rate of inflation.1
B-31
<PAGE>
CHART
1 Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation-1993
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Common stock returns are based on the Standard & Poor's 500 Stock
Index, a market-weighted, unmanaged index of 500 common stocks in a variety of
industry sectors. It is a commonly used indicator of broad stock price
movements. This chart is for illustrative purposes only, and is not intended to
represent the performance of any particular investment or fund.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and in that capacity maintains certain financial and accounting books and
records pursuant to agreements with the Fund. See "How the Fund is
Managed-Custodian and Transfer and Dividend Disbursing Agent" in the Prospectus.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison,
New Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the
Fund. Its mailing address is P.O. Box 15005, New Brunswick, New Jersey
08906-5005. It is a wholly-owned subsidiary of PMF. PMFS provides customary
transfer agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
stockholder account records, payment of dividends and distributions, and related
functions. For these services, PMFS receives an annual fee per stockholder
account in addition to a new account set-up fee for each manually-established
account. PMFS is also reimbursed for its out-of-pocket expenses, including but
not limited to postage, stationery, printing, allocable communications expenses
and other costs. For the year ended December 31, 1994, the Fund incurred fees of
approximately $370,000 for the services of PMFS.
Deloitte & Touche LLP, Two World Financial Center, New York, New York
10281, serves as the Fund's independent accountants and in that capacity audits
the Fund's annual financial statements.
B-32
<PAGE>
<TABLE>
PRUDENTIAL INCOMEVERTIBLE(R) FUND, INC. Portfolio of Investments
December 31,1994
<CAPTION>
Principal
Amount Value
(000) Shares Description (Note 1)
<C> <C> <S> <C>
LONG-TERM INVESTMENTS--92.1%
Aerospace/Defense--1.2%
$ 3,131 GenCorp, Inc., Conv. Sub. Deb., 8.00%, 8/1/02.......................... $ 2,876,606
------------
Airlines--1.6%
5,000 AMR Corp., Conv. Bond, 6.125%, 11/1/24................................. 4,012,500
------------
Automobiles & Trucks--2.5%
2,177 Careline, Inc., Conv. Bond, 8.00%, 5/1/01.............................. 1,654,520
108,000 Ford Motor Co., Conv. Pfd. Stock....................................... 3,024,000
100,000 Masco Tech, Inc., Conv. Pfd. Stock..................................... 1,375,000
------------
6,053,520
------------
Banks--6.4%
3,750 Banco Nacionale de Mexico, Conv. Bond, 7.00%, 12/15/99 (ADR)
(Mexico)............................................................. 2,990,625
38,000 Citicorp, Conv. Pfd. Stock............................................. 4,389,000
63,900 First Commerce Corp., Conv. Pfd. Stock................................. 1,725,300
65,500 Nacional Financiera, Conv. Pfd. Stock (ADR) (Mexico)................... 2,718,250
74,500 Republic New York Corp., Conv. Pfd. Stock.............................. 3,762,250
------------
15,585,425
------------
Communications Equipment--1.6%
2,802 General Instrument Corp., Conv. Bond, 5.00%, 6/15/00................... 3,796,710
------------
Computer Hardware--8.6%
1,392 LSI Logic Corp., Conv. Sub. Deb., 5.50%, 3/15/01....................... 2,423,820
5,530 Quantum Corp., Conv. Bond, 6.375%, 4/1/02.............................. 5,350,275
18,200 Silicon Graphics, Inc., Zero Coupon Conv. Bond, 11/2/13................ 9,555,000
160,000 Verifone, Inc., Common Stock*.......................................... 3,560,000
------------
20,889,095
------------
Computer Software & Services--7.9%
200,000 Cisco Systems, Inc., Common Stock*..................................... 7,025,000
65,000 Computer Associates International, Inc., Common Stock.................. 3,152,500
</TABLE>
See Notes to Financial Statements.
B-33
<PAGE>
PRUDENTIAL INCOMEVERTIBLE(R) FUND, INC.
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Shares Description (Note 1)
<C> <C> <S> <C>
Computer Software & Services (cont'd.)
125,000 Cyrix Corp., Common Stock*............................................. $ 2,453,125
115,000 General Motors Corp., Series E, Conv. Pfd. Stock....................... 6,598,125
------------
19,228,750
------------
Conglomerates--6.2%
250,000 Canadian Pacific Limited, Common Stock (Canada)........................ 3,750,000
75,000 Hanson PLC, Common Stock (ADR) (United Kingdom)........................ 1,350,000
$ 1,717 Mark IV Inds., Inc., Conv. Sub. Deb., 6.25%, 2/15/07................... 2,294,341
3,245 Nippon Denro Ispat, Ltd., Conv. Bond, 3.00%, 4/1/01 (ADR) (India)...... 2,239,050
3,175 Stone Container Corp., Conv. Sub. Deb., 8.875%, 7/15/00................ 5,365,750
------------
14,999,141
------------
Drug & Medical Supplies--1.0%
7,500 Alza Corp., Conv. Bond, 7/14/14........................................ 2,503,125
------------
Engineering & Construction--4.8%
92,000 McDermott International, Inc., Conv. Pfd. Stock........................ 3,772,000
109,600 National Semiconductor Corp., Conv. Pfd. Stock......................... 7,946,000
------------
11,718,000
------------
Exploration & Production--1.5%
2,275 Cross Timbers Oil Co., Conv. Deb., 5.25%, 11/1/03...................... 1,825,687
2,600 Oryx Energy Co., Conv. Bond, 7.50%, 5/15/14............................ 1,807,001
------------
3,632,688
------------
Financial Services--1.2%
125,000 MBNA Corp., Common Stock............................................... 2,921,875
------------
Foods--2.2%
896,000 RJR Nabisco Holdings Corp., Conv. Pfd. Stock*.......................... 5,376,000
------------
</TABLE>
See Notes to Financial Statements.
B-34
<PAGE>
PRUDENTIAL INCOMEVERTIBLE(R) FUND, INC.
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Shares Description (Note 1)
<C> <C> <S> <C>
Gas Pipelines--2.1%
54,900 Tejas Gas Corp., Conv. Pfd. Stock...................................... $ 2,346,975
58,000 Transco Energy Co., Conv. Pfd. Stock................................... 2,639,000
------------
4,985,975
------------
Hospital Management--2.3%
225,000 FHP International Corp., Conv. Pfd. Stock.............................. 5,512,500
------------
Housing Related--1.0%
$ 2,300 Owens-Corning Fiberglass Corp., Conv. Jr. Sub. Deb., 8.00%, 12/30/05... 2,547,250
------------
Industrials--2.3%
3,360 Cemex, Conv. Bond, 4.25%, 11/1/97...................................... 2,688,000
4,300 Empresas Ica Sociedad Control, Conv. Sub. Deb., 5.00%, 3/15/04 (ADR)
(Mexico)............................................................. 2,838,000
------------
5,526,000
------------
Insurance--1.0%
5,375 USF&G Corp., Zero Coupon Conv. Sub. Note, 3/3/09....................... 2,472,500
------------
Integrated Producers--10.8%
8,810 Amoco Canada Petroleum Corp., Conv. Bond, 7.375%, 9/1/13 (Canada)...... 10,131,500
253,500 Atlantic Richfield Co., Conv. Pfd. Stock............................... 6,622,687
89,100 Occidental Petroleum Corp., Conv. Pfd. Stock........................... 4,343,625
4,608 Pennzoil Co., Conv. Sub. Deb., 6.50%, 1/15/03.......................... 5,218,560
------------
26,316,372
------------
Media--3.7%
4,869 Comcast Corp., Conv. Sub. Deb., 3.375%, 9/9/05......................... 3,846,510
10,000 News America Hldgs., Inc., Zero Coupon Conv. Sr. Deb., 3/11/13......... 3,687,500
1,578 Time Warner, Inc., Conv. Sub. Deb., 8.75%, 1/10/15..................... 1,491,210
------------
9,025,220
------------
Non - Ferrous Metals--4.4%
62,400 Alumax, Inc., Conv. Pfd. Stock......................................... 7,534,800
150,000 Pegasus Gold, Inc., Common Stock* (Canada)............................. 1,706,250
31,400 Reynolds Metals Co., Conv. Pfd. Stock.................................. 1,518,975
------------
10,760,025
------------
</TABLE>
See Notes to Financial Statements.
B-35
<PAGE>
PRUDENTIAL INCOMEVERTIBLE(R) FUND, INC
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Shares Description (Note 1)
<C> <C> <S> <C>
Oil Services--2.8%
130,700 BJ Services Co., Common Stock*......................................... $ 2,205,563
89,700 Reading & Bates Corp., Conv. Pfd. Stock................................ 1,850,063
$ 3,038 Seacor Holdings, Inc., Conv. Deb., 6.00%, 7/15/03...................... 2,813,947
------------
6,869,573
------------
Railroads--2.3%
106,600 Burlington Northern, Inc., Conv. Pfd. Stock............................ 5,676,450
------------
Retail--1.9%
1,895 Pier 1 Imports, Inc., Conv. Sr. Sub. Deb., 6.875%, 4/1/02.............. 1,771,825
3,127 Price/Costco, Inc., Conv. Sub. Deb., 6.75%, 3/1/01..................... 2,814,300
------------
4,586,125
------------
Specialty Chemicals--1.1%
7,000 RPM, Inc., Zero Coupon Conv. Deb., 9/30/12............................. 2,660,000
------------
Steel--0.4%
61,900 National Steel Corp., Common Stock*.................................... 897,550
------------
Technology--0.3%
42,000 Aspen Technology, Inc., Common Stock*.................................. 824,250
------------
Telecommunication Services--2.2%
115,000 Comsat Corp., Common Stock............................................. 2,141,875
225,000 NEXTEL Communications, Inc., Common Stock*............................. 3,234,375
------------
5,376,250
------------
Trucking & Shipping--1.5%
140,000 Carolina Freight Corp., Common Stock*.................................. 1,347,500
3,000 China Travel International, Conv. Bond, 4.25%, 11/18/98 (ADR) (Hong
Kong)................................................................ 2,197,500
------------
3,545,000
------------
U. S. Government Securities--5.3%
45,000 Federal National Mortgage Association, Common Stock.................... 3,279,375
10,000 U. S. Treasury Bonds, 7.50%, 11/15/24.................................. 9,565,600
------------
12,844,975
------------
Total long-term investments--92.1%
(cost $232,724,544).................................................... 224,019,450
</TABLE>
See Notes to Financial Statements.
B-36
<PAGE>
PRUDENTIAL INCOMEVERTIBLE(R) FUND, INC.
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <C> <S> <C>
SHORT-TERM INVESTMENT--6.9%
$16,843 Joint Repurchase Agreement Account, 5.82%, due 1/3/95 (Note 5)......... $ 16,843,000
------------
Total Investments--99.0%
(cost $249,567,544; Note 4)............................................ 240,862,450
Other assets in excess of liabilities--1.0%............................ 2,416,654
------------
Net Assets--100%....................................................... $243,279,104
------------
------------
</TABLE>
- ---------------
* Non-income producing security.
ADR--American Depository Receipt.
See Notes to Financial Statements.
B-37
<PAGE>
PRUDENTIAL INCOMEVERTIBLE(R) FUND, INC.
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
December 31,
Assets 1994
-----------------
<S> <C>
Investments, at value (cost $249,567,544)............................................. $ 240,862,450
Receivable for investments sold....................................................... 2,004,922
Dividends and interest receivable..................................................... 1,957,819
Receivable for Fund shares sold....................................................... 81,996
Other assets.......................................................................... 9,139
-----------------
Total assets...................................................................... 244,916,326
-----------------
Liabilities
Payable for Fund shares reacquired.................................................... 1,027,598
Accrued expenses and other liabilities................................................ 246,781
Distribution fee payable.............................................................. 203,867
Management fee payable................................................................ 158,976
-----------------
Total liabilities................................................................. 1,637,222
-----------------
Net Assets............................................................................ $ 243,279,104
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................ $ 2,236,942
Paid-in capital in excess of par.................................................... 245,698,758
-----------------
247,935,700
Undistributed net investment income................................................. 327,996
Accumulated net realized gain on investments........................................ 3,720,502
Net unrealized depreciation on investments.......................................... (8,705,094)
-----------------
Net assets, December 31, 1994......................................................... $ 243,279,104
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($12,364,434 / 1,137,665 shares of common stock issued and outstanding)........... $10.87
Maximum sales charge (5% of offering price)......................................... .57
-----------------
Maximum offering price to public.................................................... $11.44
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($230,914,481 / 21,231,739 shares of common stock issued and outstanding)......... $10.88
-----------------
-----------------
Class C:
Net asset value, offering price and redemption price per share
($188.92 / 17.37 shares of common stock issued and outstanding)................... $10.88
-----------------
-----------------
</TABLE>
See Notes to Financial Statements.
B-38
<PAGE>
PRUDENTIAL INCOMEVERTIBLE(R) FUND, INC.
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
December 31,
Net Investment Income 1994
------------
<S> <C>
Income
Interest (net of foreign
withholding
taxes of $37,926)................ $ 8,474,860
Dividends (net of foreign
withholding
taxes of $16,142)................ 5,093,040
------------
Total income..................... 13,567,900
------------
Expenses
Distribution fee--Class A.......... 29,311
Distribution fee--Class B.......... 2,704,958
Management fee..................... 2,116,651
Transfer agent's fees and
expenses........................... 450,000
Reports to shareholders............ 209,000
Custodian's fees and expenses...... 97,000
Legal fees......................... 55,000
Registration fees.................. 51,000
Franchise taxes.................... 47,000
Audit fee.......................... 41,000
Directors' fees.................... 34,000
Insurance expense.................. 10,000
Miscellaneous...................... 7,585
------------
Total expenses................... 5,852,505
------------
Net investment income before
nonrecurring item.................. 7,715,395
Proceeds from litigation
settlement......................... 1,077,504
------------
Net investment income including
nonrecurring item.................. 8,792,899
------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain on investment
transactions....................... 22,871,648
Net change in unrealized depreciation
of investments..................... (42,907,216)
------------
Net loss on investments.............. (20,035,568)
------------
Net Decrease in Net Assets
Resulting from Operations............ $(11,242,669)
------------
------------
</TABLE>
PRUDENTIAL INCOMEVERTIBLE(R) FUND, INC.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended December 31,
Increase (Decrease) ------------------------------
in Net Assets 1994 1993
------------- -------------
<S> <C> <C>
Operations
Net investment
income............. $ 8,792,899 $ 10,375,444
Net realized gain on
investments........ 22,871,648 20,730,000
Net change in
unrealized
appreciation/depreciation
of investments..... (42,907,216) 8,209,944
------------- -------------
Net increase
(decrease) in net
assets resulting
from operations.... (11,242,669) 39,315,388
------------- -------------
Net equalization
debits............... (381,058) (319,489)
------------- -------------
Dividends and distributions (Note 1)
Dividends to shareholders from
net investment income
Class A............ (374,482) (435,906)
Class B............ (8,218,618) (9,939,538)
Class C............ (3) --
------------- -------------
(8,593,103) (10,375,444)
------------- -------------
Distributions to
shareholders
from net realized
capital gains
Class A............ (402,007) --
Class B............ (10,141,618) --
Class C............ (8) --
------------- -------------
(10,543,633) --
------------- -------------
Distributions to
shareholders in
excess of net
investment income
Class A............ -- (5,217)
Class B............ -- (118,949)
------------- -------------
-- (124,166)
------------- -------------
Fund share transactions
(Note 5)
Proceeds from shares
sold............... 152,308,757 227,053,576
Net asset value of
shares issued in
reinvestment of
dividends and
distributions...... 16,008,785 8,680,364
Cost of shares
reacquired......... (219,563,960) (282,748,610)
------------- -------------
Net decrease in net
assets from Fund
share
transactions....... (51,246,418) (47,014,670)
------------- -------------
Total decrease......... (82,006,881) (18,518,381)
Net Assets
Beginning of year...... 325,285,985 343,804,366
------------- -------------
End of year............ $ 243,279,104 $ 325,285,985
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-39
<PAGE>
PRUDENTIAL INCOMEVERTIBLE(R) FUND, INC.
Notes to Financial Statements
Prudential IncomeVertible(R) Fund, Inc. (the ``Fund'') is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. Investment operations commenced on December 5, 1985. The investment
objective of the Fund is to seek both high current income and appreciation of
capital. The Fund seeks to achieve its investment objective by investing
primarily in convertible securities and/or in combinations of securities,
comprised of non-convertible fixed-income securities and warrants or call
options. The ability of issuers of debt securities held by the Fund to meet
their obligations may be affected by economic and political developments in a
specific industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting pol-
icies followed by the Fund in
the preparation of its financial statements.
Security Valuation: Any security for which the primary market is on an exchange
and NASDAQ National Market System equity securities are valued at the last sale
price on such exchange on the day of valuation or, if there was no sale on such
day, the mean between the last bid and asked prices quoted on such day.
Corporate bonds and U.S. Government securities that are actively traded in the
over-the-counter market 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 and market transactions in comparable securities in
determining value. Other securities are valued at the mean between the most
recently quoted bid and asked prices. Securities which are otherwise not readily
marketable or securities for which market quotations are not readily available
are valued in good faith at fair value in accordance with procedures adopted by
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.
In connection with repurchase agreement transactions, it is the Fund's policy
that its custodian or designated sub-custodians, as the case may be under
triparty repurchase agreements, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. 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.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains or losses on sales of investments are
calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
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 with respect to securities 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 valued 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
added to the proceeds from the sale or the cost 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, may have no control over whether the
underlying securities 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
underlying the written option.
Dividends and Distributions: Dividends from net investment income are declared
and paid quarterly. The Fund will distribute at least annually any net capital
gains in excess of
B-40
<PAGE>
loss carryforwards. Dividends and distributions are recorded on the ex-dividend
date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles.
Equalization: The Fund follows the accounting practice known as equalization by
which a portion of the proceeds from sales and costs of reacquisitions of Fund
shares, equivalent on a per share basis to the amount of distributable net
investment income on the date of the transaction, is credited or charged to
undistributed net investment income. As a result, undistributed net investment
income per share is unaffected by sales or reacquisitions of the Fund's shares.
Taxes: It is the Fund's policy to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to shareholders. Therefore, no federal
income tax provision is required.
Withholding taxes on foreign dividends and interest have been provided for in
accordance with the Fund's understanding of the applicable country's tax rates.
Note 2. Agreements The Fund has a manage-
ment agreement with Pru-
dential Mutual Fund Management, Inc. (``PMF''). Pursuant to this agreement, PMF
has responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PMF has entered into a subadvisory
agreement with The Prudential Investment Corporation (``PIC''); PIC furnishes
investment advisory services in connection with the management of the Fund. PMF
pays for the cost of the subadviser's services, the compensation of officers of
the Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The
Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .75% of the Fund's average daily net assets up to $500 million,
.70% of the next $250 million, .65% of the next $250 million and .60% of the
Fund's average daily net assets in excess of $1 billion.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI''), which
acts as distributor of the Class B shares and Class C shares of the Fund,
(collectively the ``Distributors''). The Fund compensates the Distributors for
distributing and servicing the Fund's Class A, Class B and Class C shares,
pursuant to plans of distribution, (the ``Class A, B and C Plans'') regardless
of expenses actually incurred by them. The distribution fees are accrued daily
and payable monthly.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
and Class B Plans under which the distribution plans became compensation plans,
effective August 1, 1994. Prior thereto, the distribution plans were
reimbursement plans, under which PMFD and PSI were reimbursed for expenses
actually incurred by them up to the amount permitted under the Class A and Class
B Plans, respectively. The Fund is not obligated to pay any prior or future
excess distribution costs (costs incurred by the Distributors in excess of
distribution fees paid by the Fund or contingent deferred sales charges received
by the Distributors). The rate of the distribution fees charged to Class A and
Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, 1% and
1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .25 of 1%, 1% and 1% of the
average daily net assets of the Class A, B and C shares, respectively, for the
fiscal year ended December 31, 1994.
PMFD has advised the Fund that it has received approximately $24,000 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended December 31, 1994. From these fees, PMFD paid such sales charges to
PSI and Pruco Securities Corporation, affiliated broker-dealers, which in turn
paid commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the fiscal year ended December 31, 1994, it
received approximately $354,300 in contingent deferred sales charges imposed
upon certain redemptions by Class B shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's
transfer agent. During the year ended December 31, 1994, the Fund incurred fees
of approximately $370,000 for the services of PMFS. As of December 31, 1994,
approximately $28,000 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations
B-41
<PAGE>
also include certain out-of-pocket expenses paid to non-affiliates.
For the year ended December 31, 1994, PSI earned approximately $25,700 in
brokerage commissions from portfolio transactions executed on behalf of the
Fund.
Note 4. Portfolio Purchases and sales of
Securities investment securities, other
than short-term investments,
for the year ended December 31, 1994, were $195,498,875 and $261,704,193,
respectively.
The cost basis of the Fund's investments for federal income tax purposes, at
December 31, 1994 was substantially the same as for reporting purposes and
accordingly, net unrealized depreciation of investments for federal income tax
purposes was $8,705,094 (gross unrealized appreciation--$15,012,066; gross
unrealized depreciation--$23,717,160).
The Fund utilized its capital loss carryforward of approximately $8,607,500
to offset taxable gains realized and recognized subsequent to December 31, 1993.
Note 5. Joint The Fund, along with other
Repurchase affiliated registered invest-
Agreement ment companies, transfers
Account uninvested cash balances
into a single joint account,
the daily aggregate balance of which is invested in one or more repurchase
agreements collateralized by U.S. Treasury or Federal agency obligations. As of
December 31, 1994, the Fund has a 2.2% undivided interest in the joint account.
The undivided interest for the Fund represents $16,843,000 in the principal
amount. As of such date, each repurchase agreement in the joint account and the
collateral therefor were as follows:
Goldman, Sachs & Co., 5.75%, in the principal amount of $250,000,000,
repurchase price $250,159,722, due 1/3/95. The value of the collateral including
accrued interest is $255,000,108.
Lehman Government Securities, Inc., 5.90%, in the principal amount of
$70,000,000, repurchase price $70,045,889, due 1/3/95. The value of the
collateral including accrued interest is $71,379,084.
Morgan Stanley & Co., 5.75%, in the principal amount of $250,000,000,
repurchase price $250,159,722, due 1/3/95. The value of the collateral including
accrued interest is $255,146,220.
Smith Barney, Inc., 5.95%, in the principal amount of $200,000,000,
repurchase price $200,132,222, due 1/3/95. The value of the collateral including
accrued interest is $204,036,161.
Note 6. Capital The Fund offers Class A,
Class B and Class C shares.
Class A shares are sold with a front-end sales charge of up to 5%. Class B
shares are sold with a contingent deferred sales charge which declines from 5%
to zero depending on the period of time the shares are held. Class C shares are
sold with a contingent deferred sales charge of 1% during the first year. Class
B shares will automatically convert to Class A shares on a quarterly basis
approximately seven
years after purchase commencing on or about February 1995.
The Fund has authorized 2 billion shares of common stock at $.10 par value
per share equally divided into three classes, designated Class A, Class B and
Class C common stock. Transactions in shares of common stock for the years ended
December 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
----------- -------------
<S> <C> <C>
Year ended December 31, 1994:
Shares sold................... 8,319,804 $ 98,336,113
Shares issued in reinvestment
of dividends and
distributions............... 65,244 729,890
Shares reacquired............. (8,505,822) (101,128,946)
----------- -------------
Net decrease in shares
outstanding................. (120,774) $ (2,062,943)
----------- -------------
----------- -------------
Year ended December 31, 1993:
Shares sold................... 7,288,701 $ 87,136,035
Shares issued in reinvestment
of dividends and
distributions............... 35,217 422,950
Shares reacquired............. (6,896,685) (82,819,899)
----------- -------------
Net increase in shares
outstanding................. 427,233 $ 4,739,086
----------- -------------
----------- -------------
</TABLE>
B-42
<PAGE>
<TABLE>
<CAPTION>
Class B Shares Amount
----------- -------------
Year ended December 31, 1994:
<S> <C> <C>
Shares sold................... 4,517,035 $ 53,972,444
Shares issued in reinvestment
of dividends and
distributions............... 1,368,841 15,278,889
Shares reacquired............. (9,907,704) (118,435,014)
----------- -------------
Net decrease in shares
outstanding................. (4,021,828) $ (49,183,681)
----------- -------------
----------- -------------
Year ended December 31, 1993:
Shares sold................... 11,741,389 $ 139,917,541
Shares issued in reinvestment
of dividends and
distributions............... 688,770 8,257,414
Shares reacquired............. (16,702,547) (199,928,711)
----------- -------------
Net decrease in shares
outstanding................. (4,272,388) $ (51,753,756)
----------- -------------
----------- -------------
<CAPTION>
Class C
<S> <C> <C>
August 1, 1994* through
December 31, 1994
Shares sold................... 17 $ 200
Shares issued in reinvestment
of dividends and
distributions............... -- 6
----------- -------------
Net increase in shares
outstanding................. 17 $ 206
----------- -------------
----------- -------------
</TABLE>
- ---------------
* Commencement of offering of Class C shares.
B-43
<PAGE>
PRUDENTIAL INCOMEVERTIBLE(R) FUND, INC.
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B Class C
---------------------------------------------------- ---------------------------------------------------- ------------
January 22, August 1,
PER 1990* 1994@
SHARE Year Ended December 31, Through Year Ended December 31, Through
OPERATING --------------------------------- December 31, ---------------------------------------------------- December 31,
PERFORMANCE: 1994 1993 1992D 1991 1990 1994 1993 1992D 1991 1990 1994
------- ------ ------ ------- ------------ --------- --------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net
asset
value,
beginning
of
period...$ 12.26 $11.33 $11.07 $ 9.87 $10.88 $ 12.27 $ 11.33 $ 11.08 $ 9.87 $ 11.35 $11.90
------- ------ ------ ------- ------------ --------- --------- -------- -------- -------- --------------
Income
from
investment
operations
Net
investment
income... 0.46 0.48 0.59 0.66 0.75 0.38 0.38 0.51 0.59 0.66 0.20
Net
realized
and
unrealized
gain
(loss)
on
investment
trans-
actions.. (0.89) 0.93 0.31 1.31 (0.88) (0.89) 0.94 0.30 1.31 (1.35) (0.49)
------- ------ ------ ------- ------------ --------- --------- -------- -------- -------- --------------
Total
from
investment
oper-
ations.. (0.43) 1.41 0.90 1.97 (0.13) (0.51) 1.32 0.81 1.90 (0.69) (0.29)
------- ------ ------ ------- ------------ --------- --------- -------- -------- -------- --------------
Less
distributions
Dividends
from
net
investment
income... (0.46) (0.48) (0.59) (0.66) (0.75) (0.38) (0.38) (0.51) (0.59) (0.66) (0.23)
Distributions
from net
realized
capital
gains... (0.50) -- -- -- (0.09) (0.50) -- -- -- (0.09) (0.50)
Distributions
to
shareholders
in
excess
of net
investment
income... -- -- (0.05) (0.11) (0.04) -- -- (0.05) (0.10) (0.04) --
------- ------ ------ ------- ------------ --------- --------- -------- -------- -------- --------------
Total
distri-
butions... (0.96) (0.48) (0.64) (0.77) (0.88) (0.88) (0.38) (0.56) (0.69) (0.79) (0.73)
------- ------ ------ ------- ------------ --------- --------- -------- -------- -------- --------------
Net
asset
value,
end
of
period.. $ 10.87 $ 12.26 $ 11.33 $ 11.07 $ 9.87 $ 10.88 $ 12.27 $ 11.33 $ 11.08 $ 9.87 $10.88
------- ------ ------ ------- ------------ --------- --------- -------- -------- -------- --------------
------- ------ ------ ------- ------------ --------- --------- -------- -------- -------- --------------
TOTAL
RETURN#... (3.58)% 12.60% 8.31% 20.55% (1.18)% (4.22)% 11.77% 7.43% 19.76% (6.10)% (2.49)%
RATIOS/SUPPLEMENTAL
DATA:
Net
assets,
end
of
period
(000)... $12,364 $15,432 $ 9,422 $11,475 $7,397 $230,914 $309,854 $334,383 $400,961 $423,390 $189@@
Average
net
assets
(000)... $11,724 $12,954 $11,096 $ 8,486 $5,980 $270,496 $327,995 $357,956 $412,869 $492,335 $200@@
Ratios
to
average
net
assets:##
Expenses,
including
distribution
fees... 1.34% 1.29% 1.34% 1.30% 1.37%** 2.09% 2.09% 2.14% 2.10% 2.12% 1.27%**
Expenses,
excluding
distribution
fees... 1.09% 1.09% 1.14% 1.10% 1.17%** 1.09% 1.09% 1.14% 1.10% 1.12% 0.27%**
Net
investment
income... 3.45%DD 3.85% 5.39% 6.18% 7.05%** 2.70%DD 3.01% 4.64% 5.43% 6.33% 2.92%DD/**
Portfolio
turnover... 70% 84% 109% 82% 76% 70% 84% 109% 82% 76% 70%
<FN>
- ---------------
* Commencement of offering of Class A shares.
** Annualized.
@ Commencement of offering of Class C shares.
@@ Figures are actual and not rounded to the nearest thousand.
D Calculated based upon weighted average shares outstanding during the year.
DD The net investment income ratio including nonrecurring item would be 3.84%, 3.09% and 4.13% for the Class
A, B and C shares, respectively.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase
of shares on the first day and a sale on the last day of each period reported and includes reinvestment
of dividends and distributions. Total returns for periods of less than one full year are not annualized.
## Because of the event referred to in @ and the timing of such, the ratios for Class C shares are not
necessarily comparable to that of Class A or Class B shares and are not necessarily indicative of future
ratios.
</TABLE>
See Notes to Financial Statements.
B-44
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Prudential IncomeVertible(R) Fund, Inc.
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Prudential IncomeVertible(R) Fund,
Inc., as of December 31, 1994, the related statements of operations for the year
then ended and of changes in net assets for each of the years in the two year
period then ended, and the financial highlights for each of the years in the
five year period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
December 31, 1994 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and signficant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential
IncomeVertible(R) Fund, Inc., as of December 31, 1994, the results of its
operations, the changes in its net assets and its financial highlights for the
respective stated periods, in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
New York, New York
February 2, 1995
B-45
